- Assessment of Q3 earnings
- RBI Policy's impact on financials
Sajeet Manghat in conversation with Abakkus Asset Manager's Aman Chowhan on 'The Portfolio Manager'.
- RBI Policy's impact on financials
Sajeet Manghat in conversation with Abakkus Asset Manager's Aman Chowhan on 'The Portfolio Manager'.
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TVTranscript
00:00 Hello and welcome to NDTV Profit. You are watching the Portfolio Manager and my guest
00:13 today is Aman Chauhan. He is a Senior Fund Manager at Abacus Asset Manager and he manages
00:19 roughly 25,000 crores in PMS and alternative investments. Aman, thank you very much for
00:24 joining us on NDTV Profit. Let me begin with the current question which we have. We have
00:31 been going through the earnings cycle here. Up to the Q3, nearly 60-65% of the numbers
00:38 have already come in. What is your assessment of Q3 as an earnings?
00:44 The earnings fund, broadly earnings have been in line. We have seen positive surprise coming
00:49 in some of the banking names. We have seen some of the cement companies report better
00:56 than what we are expecting. The infra-pack has been good. So whether it was an EPC company
01:02 or a capital goods company or a manufacturing company, those numbers have come in good.
01:07 There is still some weakness on the rural front. So the bottom of the pyramid demand
01:11 is still stocked. So that segment is still impacted. Chemicals have been, though it was
01:16 expected that it will be weak, it has been weaker than expected. So chemical is clearly
01:21 something that is still, you can say, still on the negative front. IT has been more or
01:27 less neutral. It has been in line with what the market expectation was. So there has been
01:31 a mixed bag. Some sectors have done really well. Some sectors are continuing to struggle.
01:36 And more or less, it has been on expected length. So that 15-16% corporate earnings
01:41 growth, the expectation seems to be on track as of now.
01:45 How do you look at the RBI policy that came in? The street was a little disappointed given
01:50 the fact that it seems the pause would be a little longer than expected. What could
01:55 be the impact of that policy on financials especially? Because the governor is talking
02:02 about transmission being slow and he has given a trajectory of the inflation, but inflation
02:08 for next four quarters are going to be above 4%.
02:13 So we are not bond experts, but from an equity standpoint, what we understand is that if
02:18 the trade cuts, which the equity industry has been expecting, gets slightly pushed back,
02:25 then there is a near-term impact on the NIMS. And if that happens, then there is a near-term
02:29 impact on the earnings. So from an equity standpoint of view, if I am expecting a 20%
02:35 return in the banking stock over the next 12 months, this gets pushed to next 18 months.
02:40 That has, you can say in plain simple terms, the impact of the policy for an equity investor.
02:45 For a bond investor, it is a completely different ballgame. They will have to calculate the
02:49 yield, they will have to calculate their assumptions to what interest rates they are factoring
02:53 in and what is going to be the credit cost and what is going to be the net impact. But
02:57 from an equity standpoint, this is broadly what an equity investor will be looking into
03:01 that we were expecting re-rating to happen in the banking sector once there is a clear
03:06 confirmation that the interest rate cycle has peaked and rates can be headed lower,
03:11 because that is where the re-rating with the sector will happen.
03:14 Today, if a bank is trading, say, at one time book, and I expect for a certain reason this
03:19 one point book can go to 1.2 over the next six months, the next six months get extended
03:24 to next 12 months. So that's what the impact on equity markets will be.
03:29 How do you play the financials in that case? Because you say that, you know, valuations
03:34 are compelling for the banking and financial sector. And if the returns are going to get
03:39 pushed or the re-rating is going to get pushed, how do you play it?
03:42 Sure. For us, there is no change in stance. See, at the current Nifty levels where we
03:48 are, market is near all-time high levels, not many sectors are there where the risk-reward
03:54 equation is favourable, where the valuations are still comfortable. Financial is one space
03:59 where we feel valuations are still comfortable. We have large banks trading closer to two
04:04 times book. We have smaller banks trading around one, one and a half times book. PSU
04:09 banks are also somewhere close to those levels. So in a situation in the market where most
04:15 of the sectors, most of the companies are trading above the 10-year average P/E multiple,
04:20 banking is something where stocks are still closer to the 10-year P/E multiple, in many
04:24 cases even below that. For that reason, we find that valuations for the banking sector
04:28 is compelling. Now, there is no change in stance for this because the valuation remains
04:33 compelling just that the expected returns over the next 12 months gets pushed over the
04:38 next 18 months. So we continue to hold what we have in the portfolio. We will continue
04:42 to stay invested. Just that the time gets a bit pushed up in all the decisions that
04:48 we make. But there is no, you can just talk specific change in stance per se in this sector.
04:54 And how do you play between the public sector and the private sector banks because we have
04:58 seen a good run-up happening in public sector. Private sector has been little sluggish in
05:02 that sense, HDFC bank being one of them. How do you see, how do you play between public
05:08 sector, private sector and within the banking you have the mid-caps banks as well. How do
05:14 you play them? The way our portfolio structure is that we
05:18 have a preference towards private banks versus PSU banks. Within private banks also we do
05:23 not have the top names or the obvious names because there the valuation is full. So we
05:26 never own them over the last several years now. Even now they do not feature in our portfolio.
05:33 They do not also feature because we run completely un-benchmarked portfolios. So if somebody
05:37 is hugging the benchmark then he has no choice but to buy the top private banks or top two
05:41 or three names. For us that is not the case. So we will be owning among the top say five
05:46 private banks, we will be owning two or three of them in our portfolios. And that is where
05:50 the preference is. As far as the PSU banks are concerned, at the portfolio level we have
05:55 restricted ourselves to the top two or three names. So we are not in the mid-cap space
05:59 for the PSU banks because that is where we feel that though valuation is still lower,
06:04 it's more of a tactical opportunity, it's more of a trade than a sustainable investment
06:09 to look into a mid-sized PSU bank because they continue to face the challenges of manpower,
06:14 they continue to face challenges of NPS. So right now the cycle looks favourable but that
06:19 is just a very near-term hypothetical. If I had to take a three to five year call, I
06:23 am still very comfortable owning a private bank or a large PSU bank, not a mid-sized
06:28 PSU bank. So that is where the portfolio construct is. And besides financial, we are also very
06:32 positive on non-fund-based financial stocks. For example, we have wealth companies in our
06:38 portfolio, we have broking companies in our portfolio. This is something which are clearly
06:43 benefiting from the upsurge in the equity markets, upsurge overall into the financial
06:48 markets and the profitability of these companies are growing quite rapidly and this is also
06:53 one segment where we are pretty positive of and that's also featuring in our portfolios.
06:59 I was looking at your allocation for your biggest fund which is Abacus All Cap approach.
07:06 Industrials 26.6% is there and banks 13.4% and NBFC 16%. So roughly between banks and
07:15 NBFC 29-30% of your portfolio is there. In the industrial space, how do you look at what
07:22 is happening there? Capital goods companies were doing well, good order book flows for
07:27 many of them. How do you look as you go ahead? This is one segment where we are very positive
07:35 because this is where you can say bulk of the action right now is from the government
07:40 side. So clearly there are two initiatives that is going on. One, the government wants
07:44 to follow the policy of Atman Debra Bharat where they want to reduce the import dependence.
07:49 So most of the corporates, most of the companies that we speak to, they say that they are expanding
07:52 the capacity because one, the demand is higher. Second, the import substitution is happening.
07:59 So that is clearly one thing because of which manufacturing is picking up in India. And
08:03 the second is the China plus one strategy where globally, your export demand is picking
08:07 up for Indian sector. So there's a clear market share shift happening out of China to other
08:12 countries and India is probably placed among those countries and hence the sectors and
08:16 segments here are also seeing good export demand. Because of this, we are seeing a revival
08:20 in Capex. We are seeing revival in capacity expansion and capital companies are the national
08:25 beneficiary of all this. And which is, as you rightly said, reflecting the order book
08:29 position. This is a multi-year theme. It's not just one or two years. This can continue
08:34 for the next several years. And for that reason, we are pretty well exposed in our portfolio
08:40 in this segment. So we feel we are in the second year of the upsurge in the credit or
08:45 you can say capital goods upcycle. Another two, three years, we feel order book demand
08:51 should be good. And when the demand is good, we also see that these companies get much
08:56 better, you can say, EBITDA margins than they get in the down cycle. So say for example,
09:02 a cap goods company, which was earning say 5, 6, 7, 8% EBITDA margins, when the order
09:07 book is full and when the demand is good, the same 7, 8% EBITDA margin becomes 12, 13,
09:13 14% EBITDA margin. And this has a direct impact on the profitability. So because of this tailwind,
09:21 we like this sector and that's why it is one of the larger exporter of our portfolios.
09:26 Despite being expensive, because it's still expensive at this end, will you add to the
09:32 portfolio at this current price? So in this segment, there are two sub-segments. One is
09:39 the MNC or the known popular big companies, the ABB, Siemens, Thermax of this world. They
09:45 trade all north of 40, 50, 60p. And then you have mid-size companies or local companies,
09:51 some of which feature into our portfolio. My valuation is still reasonable. They trade
09:56 at, in some cases, maybe 30 multiple. So in our portfolios, we don't have the obvious
10:03 names which are trading at 40, 50p because that's not the style that we follow. We follow
10:08 a value conscious style of investing for our portfolios where we don't mind paying a premium,
10:12 but the premium should be justified. We just don't want to pay unnecessarily premium just
10:17 because you are the market favorite or you are a very popular name or you are part of
10:22 an index. So in our portfolio, the companies that you will see would be mostly trading
10:27 at valuation which will be lower than what the market leading valuation of the sector
10:31 multiples would be. So we are pretty conscious on that. So while one segment is expensive,
10:36 we are right now not exposed to that segment. Give me a sense of how you have a 13,000 crores
10:45 PMS portfolio. Can you give a break up of market cap wise? How much is in large cap,
10:52 mid cap and small and micro? The 13,000 crores is a total area that AMS
10:57 spread between two strategies. So we have brought in two main strategies. One is what
11:03 we call as the all cap strategy, which is a combination of mid caps and large caps.
11:08 The other one is an opportunity strategy, which is a dedicated mid and small cap portfolio.
11:12 So between these two strategies, we have 13,000 crores of area and roughly you can say there
11:18 will be equally spread between the two strategies. So just by share, strategy wise if you have
11:22 to ask me, I can tell you around 25% of this money would be in large caps, 50-60% of this
11:28 money would be in mid caps and the balance money of this 13,000 crores would be in small
11:32 caps. Raman, I was looking at your emerging opportunities
11:36 approach and interesting sectors there, especially healthcare is coming in there. What is the
11:46 kind of approach that you are looking at healthcare there? Because otherwise between the two sectors,
11:51 I think consumer discretionary and healthcare is the only two sectors which are different
11:56 in the approach. On the healthcare space, we are incrementally
12:02 getting positive. So right now this will be a single lead exposure in our portfolios.
12:07 We have increased this exposure over the last three, four months. Going ahead also, we feel
12:12 that we would be increasing our exposure because the outlook on the healthcare is improving.
12:16 One, the margin pressure with many of these companies are facing the US markets have started
12:21 to bottom out. So there is less of issues from the export front and the domestic demand
12:26 continues to remain stable. From a valuation standpoint also, there are pockets of opportunity
12:31 in the healthcare space. So going ahead, we feel we will be adding onto the healthcare
12:35 exposure. Also from the consumer standpoint of view,
12:40 most of the consumer companies trade at multiple valuation, which is not something which fits
12:45 into our risk reward equation. And hence we feel it is much better to have an exposure
12:50 into a pharma sector versus having something on the consumer. And that is the reason you
12:55 will find less of consumer exposure in our portfolios and that getting substituted by
13:01 more of industrial than healthcare in a way.
13:04 You see a consumer having a much bigger headwind as compared to healthcare now because last
13:11 12 odd or 18 months we saw some kind of pressure on margins, pricing coming, especially for
13:19 people or companies which are export oriented coming in. Now you are seeing a headwind much
13:25 higher for consumer sector where rural demand is weak, consumption is weak and there will
13:32 be a couple of quarters before it comes back? Exactly. So we have the same view that right
13:37 now the consumer demand is weak, especially in the rural sector. Any company facing that
13:41 segment is witnessing that. Typically what happens is ahead of the elections, there is
13:47 an increased cash in the economy and this many times acts as a trigger for consumption.
13:53 So we hope that once the central elections comes in, prior to that the cash in the economy
14:00 goes up and that should help in the rural demand. If that happens, then these companies
14:05 will start witnessing good demand in the coming months. And hence in the next two to three
14:11 quarters we feel that this segment should bottom out and start to look up. Once it starts
14:15 to look up, there's many of the stocks and many of the sectors starts to become interesting.
14:19 So we are very keenly watching this space. Right now there is slowdown, but there can
14:24 be turnaround for the next three, six months. And we would like in that case to capitalize
14:30 on that opportunity. How come you don't bet on consumer discretionary because that's a
14:36 segment where we're seeing a good demand coming in, good volume growth and price growth which
14:40 is coming in? There is, but then the valuations are not by our side. So we are very clear
14:46 that even if you like a company and if it's a great company, ultimately I'm a minority
14:52 shareholder. So I'm here for a financial return and I'll get the financial return only if
14:56 I bet the company the right value. So it's a great company, demand is good, everything
15:00 is good, but if it's priced beyond perfection and treated as a significant premium, then
15:04 we don't invest. And for that reason, you not see much of these companies in your portfolio.
15:09 You seem to have missed the bus in consumer discretionary it seems.
15:16 In a way you can say that, but that's not what our style is. So we made enough money
15:21 in other sectors. So you can't make money all the time in all these sectors. So happy
15:26 to miss the bus on the consumer space.
15:30 Real estate and cement, you said cement is looking good led by infra demand. Given the
15:37 kind of infra projects which are coming up and the impetus which has been given, do you
15:42 see enough runway for cement companies? And price realizations has been very flat in the
15:47 last 12 months. So do you see good price realizations as well?
15:52 Yes, I expect that to happen because the industry has consolidated. So now we have consolidation
15:58 at the top level. So now large three groups have emerged on the cement sector space. Smaller
16:04 companies are making way, getting acquired by these larger companies. So because of this
16:09 consolidation, I expect eventually the pricing power to become better for the cement companies
16:15 and that should get reflected into the realization and the EBITDA pattern. Demand is strong,
16:20 both from the retail demand as well as from the infra demand and both government as well
16:26 as private capex is trending up. That also bodes well on the demand side. So for this
16:31 reason, we feel the cement still makes sense for us. And on the real estate side also,
16:35 we are in the third year of an upcycle. Typically we have four, five good years on the real
16:39 estate front. For the next two to three years at least, we expect the real estate demand
16:43 also to be good. So keeping all these things in mind, we feel that the demand for cement
16:47 should start to pick up.
16:49 Are you more bullish on the allied sector when it comes to real estate or the real estate
16:54 companies or developers?
16:55 Yes. So we don't have direct real estate exposure as of now. So while we like this sector, this
17:03 segment and there's an uptick in this segment, we prefer to play through the ancillary sector.
17:08 So we would have a plywood company in my portfolio, we have a laminate company in my portfolio,
17:12 we have cement companies in the portfolio, we have sanitary by company in the portfolio.
17:15 So I don't have a direct real estate company in my portfolio. I don't have a DLF or an
17:20 Oberoi or for that matter any of the direct real estate. But we are playing this upcycle
17:25 via the ancillary sector.
17:27 Why is that? Because we've seen good pre-sales happening for most of the real estate companies
17:33 and if you look at the kind of pre-sales happened in the last 12 months, the runway for real
17:38 estate developers for the next three to four years seems to be very good.
17:43 It is good. Definitely your observation is right that the pre-sales numbers are good
17:48 and that's the upcycle in the segment. We prefer to play through the ancillary rather
17:51 than the direct company because what happens is that we prefer that a real estate as a
17:56 sector, as a segment, it makes much more sense to invest at the project level than at the
18:01 company level because what happens is that you make a project, you get your cash flow
18:04 and profit out of that, that gets redeployed for the next project.
18:07 So earlier your project was one tower, next you want to make two towers, then you want
18:11 to make three towers and it keeps on rolling on. As a minority shareholder, there is not
18:15 much of dividend that gets paid out because they don't conduct free cash flow. Whatever
18:19 profit this company has done, most of the time it gets reinvested. And in the end, when
18:25 the cycle turns, you will be stuck in a much larger project that you can handle. Because
18:30 of this reason, we feel it is much better to invest via ancillary company than through
18:35 a direct company. We are not against the business model, but so far our preference has been
18:41 via the ancillary sector.
18:42 I can see you have also invested in wires and cables business, Polycap being one of
18:47 the top holding for you in the all caps approach, if I'm not wrong. How do you see that business?
18:54 Because given the kind of issues which came in with respect to tax and others on Polycap,
19:00 what is your assessment?
19:01 So we don't comment on stock specific holdings, but overall I can tell you that the reason
19:08 we own Polycap or this sector is because, as you mentioned, there is an up cycle in
19:14 the real estate demand. The company that we have in the portfolio is gaining market share.
19:18 So from a number two player, you have now become number one player and you're still
19:21 trading at a decent discount to the number one player. So one, you're gaining market
19:26 share, profit growth, revenue growth is pretty strong and the valuation is still half of
19:31 what the leader is. So there is enough scope for the valuations also to catch up. So this
19:36 would be some of the reasons where we have invested into this space or in this sector.
19:41 Do you see this sector to be very transparent in the way it functions? Because real estate
19:48 as a whole has some issues with respect to transparency. Do you see similar issues in
19:54 some of the allied sector as well or the allied sectors is much more transparent as compared
19:58 to real estate?
19:59 Yes. So you rightly mentioned that transparency issue with the real estate sector. That is
20:06 also one of the reasons why we prefer the ancillary sector rather than investing directly
20:09 in the real estate sector. Ancillary from a transparency point of view, much better
20:15 compared to a direct real estate.
20:18 I just wanted to get an idea on how you look at the markets at this point in time because
20:24 you have multiple things coming up in the next couple of months. You have an election
20:28 which is coming in. You have a monsoon which is unpredictable at this point in time. There
20:33 is an inflation cycle which is there and for next 12 months at least inflation will be
20:39 remaining above 4 percent. And you have global headwinds which is coming in form of supply
20:45 chain issues, wars which is there. How do you look and assess the entire market at this
20:49 point in time?
20:50 The market has given fantastic returns over the last one year. And from these levels onwards,
20:58 I am not expecting similar kind of returns. The market is in a fair zone. We are no longer
21:02 cheap. We are no longer too expensive and we feel that there should be a worry in the
21:08 market. But we are fairly priced. We are slightly above 10 years average. Hence, we are fairly
21:12 priced. Hence, from a fairly priced market, one should expect a fair return, not an abnormal
21:16 return. If it happens, good for all of us, but at least that should not be the expectations.
21:21 Hence from these levels, we expect, you can say, mid-team, teen and mid-team kind of returns
21:27 over the next 3 to 5 year cycle from equity markets, which is still a very good and which
21:31 is still a very healthy return. In the near term, I feel that the coming central elections
21:38 is already discounted into the market. Everybody, especially after the December state result
21:43 outcome, I believe the market has started to factor in. The current government is coming
21:48 back and is coming back with a good majority. So that's no longer going to be a surprise
21:52 and hence the market is already factoring that. We could be getting into a situation
21:56 where the market continues to rally over the next 1-2 months. Then a classic example of
22:01 buy-on rumours and news coming in that market rallies right now. And then once the state
22:06 election outcome comes in, there is a profit booking which comes in and the markets might
22:11 give away some of the gains that it makes over the next 1-2 months. That can happen
22:15 or that can be time correction also. So as we all know, the returns in equity markets
22:20 are not linear. So this year could be flat-ish or this year could be net-net, maybe a single
22:26 digit return kind of a year. But overall, over the next 3 to 4 year cycle, if you have
22:31 to look at it, we expect economic growth to pick up. And once that happens, then I expect
22:36 the equity markets also to capture that upside. And you can say mid-team kind of return is
22:42 easily possible from Indian equities.
22:45 I can see in the portfolio which you have mentioned, one sector which is not there,
22:51 autos, or it's there but very minimal if I'm not wrong. What is your view on the
22:58 autos segment, especially EV? Because I think you are taking more exposure to again ancillaries
23:03 there and companies involved in EV segment.
23:06 Right. Right. Right in our version, we don't have much of direct auto exposure. Most of
23:13 the sector exposure is by ancillaries. The reason for that is that we feel that most
23:17 of the auto companies are not that prepared for the EV, the way they should have been.
23:21 And there's still continuity in valuations which are much, much premium even to the global
23:26 majors. So we have your global majors, whether it's a German company, a Japanese company,
23:30 a US automaker, they all trade at 10, 12 P multiple, whereas companies in India trade
23:34 north of 20, 30 P multiple, in spite of not being as well prepared on the EV front, the
23:40 way the global counterparts are. And EV is writing on the wall. So there's no doubt
23:45 in anybody's mind that eventually EV is going to be the biggest market share in this segment.
23:51 So we are looking at a company which is not that well prepared on the EV front, the way
23:56 the global majors are and still continues to trade at a premium to them. And hence,
23:59 we don't feel it's justified to pay that premium. And that's the reason we don't have a direct
24:04 auto exposure. But the sector is good. We are seeing an upscale. And hence, we feel
24:09 it is better to do it via ancillary. So eventually, whatever gets sold, whether it is petrol,
24:14 diesel, or an EV, there will be components, there will be parts that will be required.
24:19 And then focus on companies which are supplying these so that their growth rates are intact.
24:23 So that's the reason we have exposure via the ancillary.
24:26 Aman, it was a pleasure talking to you today. Thank you very much for joining us on the
24:31 Portfolio Manager. That was Aman Chauhan, who is the Senior Fund Manager at Abacus Asset
24:36 Manager, managing nearly 25,000 crores in PMS and alternative investments. Thank you
24:41 for watching NDTV Profit.
24:43 [Music]