Investors who are just focused on Nifty and Sensex might miss a big opportunity which is there in the small and midcap space, says Veliyath who is MD, Equity Intelligence India.
The eternal bull on Indian markets, Porinju Veliyath said that the bull market has a long way to go as we have just covered 25 percent of the bull market and all eyes are on the small and midcap stocks.
Speaking on the sidelines of Kotak Securities Midcap Conference, Veliyath who is MD, Equity Intelligence India said that investors who are just focused on Nifty and Sensex might miss a big opportunity which is there in the small and midcap space.
If you look at the Sensex and Nifty, it can give 8-10% CAGR for the next 5 to 10 years. If you pick individual stocks you might be able to make 25-30% CAGR for the next 5-10 years. But, smart investors who are looking for turnaround stories in the mid or smallcap space can end up making 45-50% CAGR for a long time to come, said Veliyath.
Speaking on the potential of India, Veliyath said that there is huge potential in India. Demographically, India is a mega-cap, economically India is a midcap with huge potential while looking at the marketcap, we are a smallcap and looking at the per capita income of India, we are a penny cap. But, it is all changing fast.
India is a paradise of stock picking even at so-called high valuations.
Speaking in an exclusive interview with CNBC-TV18, here is excerpt from the interview:
I like Allcargo logistics and we have been buying this company for our portfolio as well. It is a decent midcap company which has a potential to become a largecap company going forward. It will grow along with the economy.
Although this company has been lagging behind in the last couple of years despite a turnaround in the industry. But, this is one stock which is an industry leader and can be differently managed to grow faster and create wealth for shareholders for next 5 years.
Kaya feeds the luxury segment of the society. The stock is already up over 30 percent so far in the year 2017. Kaya Ltd started its journey on 27th March 2003. It now has a range of Kaya Skin Clinics across India and the Middle East.
In the media space, Porinju likes UFO Moviez which is on track to become a large company. The stock rose nearly 20 percent so far in the year 2017. It is India’s largest digital cinema distribution network and in-cinema advertising platform in terms of a number of screens.
UFO operates India’s largest satellite-based, digital cinema distribution network using its UFO-M4 platform, as well as India’s largest D-Cinema network.
Porinju is very positive in selective Tata Group stocks. Tata Global Beverages has actually doubled in the last 6 months because there is a change happening at the group level. The company still has potential to create wealth.
Investors can look at some of the underperformers in the Tata Group because they remained under pressure thanks to not so dynamic management. But, things are now changing under Chandra, said Porinju. The management has also indicated selling of underperforming companies.
Infrastructure in India is going to witness manifold growth in coming years. Plenty of money running into crore is likely to get invested both by the private sector and the government in this space. But, the problem will come with execution.
Porinju sees tremendous potential in GVK when it comes to execution of orders and the segment it caters to – building of airports and almost all the airports are in trouble which means more airports will be required. Going forward, the management is planning to make the company debt free in the next 2-3 years.
Below is the verbatim transcript of the interview.
Prashant: First up, how are you feeling about the market, bullish as always?
A: Yes, markets have been bullish since 2013 and I think we might have covered some 20-25 percent of the bull phase, so, there is long way to go. Now, all the eyes are on midcaps and smallcaps. As you see, the Kotak background, the Midcap Conference is what they have named it, so, this is something very interesting, this is once in a lifetime opportunity in India for small and midcaps with a changing profile of companies, changing culture of promoters and it is an amazing story. We have a very long way to go in that regard.
So, the basic problem is people watching the Nifty and Sensex, the mainline index, there is a possibility that they may miss the big opportunity out there. So I was just telling, if you look at the Nifty and Sensex, you may make 8-10 percent CAGR for next five years’ time. If you buy the market, you may make 10-15 percent CAGR. If you pick stocks, you may make 25-30 percent CAGR for next five years or maybe 10 years’ time. However, very smart people out there who are looking at specific pockets of opportunities like turnarounds in the midcap and smallcap, they may end up making 40-45 and maybe 50 percent CAGR for a long time to come. So that is the kind of opportunity India is looking at now.
I am very excited about that, even though it has started two to three years ago, that midcap and smallcap selective rally, there are a lot more companies, 100s of new companies are going to change the profile and they are going to grow by the market capitalisation. This is going to happen to most of those companies who were earlier syphoning out money and not managing properly, those who are not respecting the minority shareholders, so that scenario, that corrupt kind of a scenario is changing now. So which companies are getting into that first is more important.
Sonia: That was my next question because that is what most of your viewers and followers would want to know, are there any interesting midcap managements that you have met recently, that you have been inspired by, are there any midcap sectors that would interest you, what is on your mind nowadays?
A: This is a season, what I am trying to tell, this is a season of change, changing profiles. So there are 100s of them, there are companies -- I was the other day talking about, looking at the demography, demographically India is a mega-cap, economically we look at the economic GDP, India is a beautiful midcap with huge potential. Looking at the market cap, we are a smallcap, and looking at the per capita income of India, we are a penny-cap. It is pathetic, we are just USD 1,800 GDP per capita whereas China is at USD 8,500 per capita. There is a huge difference. It is not about catching up with China, or China is a benchmark, we don’t need that, but we cannot remain as a penny-cap in the per capita income. So this is definitely going to change.
There are all the symptoms of change in the macro level, the economy, the structure of economy is changing, we are coming to more formal economy, into the white economy, all these things everybody knows theoretically, but people are underestimating the significance of this change. People are underestimating the consumption in this country with 1,300 million people, the magic number. I always talk this number recently, it is very important. Those who do business, those who invest in the equities, in the businesses, this 1,300 million people is an exciting magic number to create wealth in the coming 5-10 years. So that is the big picture on India.
Prashant: Just to press you on any interesting managements you have met, any stocks you have presented at that conference, we have a couple of names we want to discuss specifically, let us start there.
A: I do not meet too many managements, very rarely I meet, that also if there is a small company just to share the vision of the promoters or the management, otherwise I am very lazy to go out and meet managements. Here in the Midcap Conference some small companies, some medium type companies are attending, I did not interact with anybody. So some of the stocks which I have been recently looking at, some of the industry leaders in India, but a smallcap or a midcap, so, I have been recently looking at a company called Allcargo in the logistics, I have been buying in portfolio management which I talked I think sometime back; that looks like decent midcap company, a potential to become a largecap company going forward. It will go along with the economy and the changes happening in the economy, in the structure of the economy.
So there are companies like, leadership companies still at midcap, one company which haven’t gone up which I was bullish earlier is Indian Hotels. So there was industry specific and company specific management issues and they had been lagging behind the last couple of years’ time, they did not grow well even after the industry turning around. So I feel Indian Hotels we are not holding the stock in PMS or personally, but Indian Hotels also is a stock which is an industry leader, which can be differently managed and grow much faster and create wealth for the shareholders for the next five years’ time.
Another stock I am holding still and we are still buying, the company is called Kaya Limited. It is feeding to the luxury segment of the society. So there are some companies, there are a lot of them, I don’t know why people are so – there are so many numbers, too many number of companies in India if you want to invest in the smallcap and midcap. So that way – I think UFO Moviez is another company which I have been talking recently from the media sector, that is also becoming a large company. Perhaps what they are doing is a niche service, they are the leaders in the country. So they can also grow.
There are 100s of stories for people if they are understanding the significance of picking smaller companies and the potential of those companies to create wealth in the coming years. I think it is an amazing place, India is really, truly a paradise for midcap stock picking even today at the so called high valuations in the general market.
Sonia: You spoke about Indian Hotels, so let me just take that theme a little forward. I remember earlier you had spoken about the Tata Group as well and how rather than picking up the largecap stocks, you are looking at some of the non-index Tata Group largecap stocks, say Tata Global for example. Is that still a space that one can invest into despite the rise that we have seen?
A: I think generally there is a change happening in Tata Group, just like change happening in India. So that is the reason even Tata Global Beverages has doubled in the last five to six months, more than doubled. So it is happening, I identified this potential change two years ago, but one year got wasted, now it moved in the last few months. So, that company still has potential to create wealth. We are holding still, we had partly exited to be very frank last week in the portfolio management, otherwise we are still holding a very good quantity in Tata Global Beverages and Tata Coffee.
So I think many companies in Tata Group, investors may have a look at some of the underperformers in Tata Group. If it has happened because of the not so dynamic management from Tata’s, I think things are changing under Chandrasekaran, he is doing a wonderful a job, taking the CEOs and people into confidence and hands-on with almost every business in the group. So I think it is a very positive trend.
I think management has indicated of getting rid of the very insignificant businesses. So, that also could be a trigger, it goes to somebody else, they might manage it better with expertise. So generally investors can have a look at underperforming Tata Group companies and some of them may not be worth it, I am not telling all the companies.
Sonia: I remember this discussion we had at the end of 2015 for one of our shows where we spoke about Biocon and you literally made me eat my words because I was questioning you about how Biocon has not performed for so many years and what makes you bullish, but then we see the huge meteoric rise since then. Any other companies in the pharmaceutical space that you have identified or which look like they could be in the midst of a turnaround?
A: This was about inflection points, if you remember. You can buy good companies with potentially multibagger stocks, but there is a chance that you may waster a lot of time in between before it starts moving. So this happens to even the smartest of investors. So this has happened to a lot of smart investors in Tata Global Beverages earlier. Biocon, it was almost same. It was a big underperformer in comparison with the industry performance in the last 10 years before I bought it two years ago, before we discussed it as a new year pick, I remember 2016. That was a big performer. The stock went up by three times when the pharmaceutical index was slightly negative.
Another stock again, we bought and sold, we are not holding now, Jubilant Life Sciences. It is a stock people can start exploring. It is a very large company. It is not going to be multi-bagger and all, but this can be a decent compounder people can look at themselves. I am not holding the stock, I have no interest. Pharmaceuticals, I do not want to discuss on a sector-wise because India is a stock picking paradise. You need not look into a particular sector because every sector has got levels in this country.
Whatever you make, it gets sold off because of the 1,300 million magic number and it is going to be these people: poor people, very poor people or lower middle class, middle class. People are migrating to the higher levels, the purchasing power is going to go up. Even though we had a disruption in between, last few quarters because of the very important reforms and action by the government, there was intermediate pain so there could be a slow growth in some GDP, in some segments, some industries were suffering, there were challenges, but that is a passing phase.
The macros, we had a lot of many interesting tailwinds in the macros with lower crude oil price, and the lower inflation and interest rates. So that has really helped to make a base for the country in the economy. Now the micros are really going to play it out. When we say micros, the corporate earning visibility. We never had such great visibility in the corporate earnings going forward and the economic growth going forward. So we are heading for much better times in the economic growth and the corporate earnings in the coming quarters and next many years in that respect.
Prashant: You own fairly large part of GVK Power. Is that thesis, your thinking playing out there and anything else there in that segment, be it extremely beaten down distressed equity valuations?
A: Infrastructure in India, it is going to witness manifold growth in the coming years. Lakhs of crores are going to be invested by the private sector and public sector, so there is going to be a big challenge for execution. Many of the execution capable guys, they have become balance sheet heavy and they are in trouble like GVK, GMRs of the world. Some of them have gone sick with the mismanagement also added. So GVK I bet because of the promoter capability and the execution capability of the company itself and the segments they are into, especially the airport infrastructure, creating airports. We are going to have many more airports and almost all the airports are already in trouble. It is suffocating. The capacity is running out and the number of people travelling by flight, by airlines, it is on an increase. We are at a one of the highest growth in the world India is witnessing and we are going to witness.
So this is a very interesting sector where the company has got the capability and India needs to create infrastructure. They have some issues with some over leverage and there are symptoms, the company is rectifying that so, the promoters are very keen about making it a comfortable debt company or they are even thinking, in the annual general meeting (AGM) they were talking about trying to make it a debt free company in the next 2-3 years time. So it is at hardly any market cap. It is true that we have a very large holding in GVK, but it is not 100 percent fool proof. But I strongly believe, my conviction is that this is a survivor and if it is survives, it will be multibagger. So that is the logic I am applying in GVK.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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