There are 2 mega investment themes for next 5-6 years: Saurabh Mukherjea
By ET Now | Updated: Sep 06, 2017, 12.29 PM IST
Talking to ET Now, Saurabh Mukherjea, Ambit Capital , says black to white and saving themes are going to be the next big thing for investors. Edited excerpts:
ET Now: There is a stretch on valuations but money is still flooding the markets. You believe that FII selling is due to valuation issues but it is a divide really because FIIs maybe withdrawing some money. DIIs are coming heavily into the market. It is a mixed bag. There is no pocket which is drying up when it comes to liquidity flows into the markets on a broader level.
Saurabh Mukherjea: Clearly. domestic money has been flooding into the market over the last 12 months and that journey continues. The challenge remains fundamental. It is not evident that even in Q2 or indeed in Q3 this big GDP pickup insight.
Q3 probably will look better on the GDP growth front because Q3 last year was weak on account of demonetisation but the overall earnings picture even for the current fiscal has once again become fairly grim and that will make it the fourth year in a row where earnings in India, Nifty earnings, Sensex earnings stay in single digit.
We got a market which is overstretched on valuation grounds. We got financial services stock trading at an all-time high price to books and you really do not have fundamental support for these valuations. I think that has been our house view for the last six to seven months and remains the house view that domestic money continues to flood in but there really is not any fundamental support to the stock market.
ET Now: Quite a few of fresh papers are hitting the primary market as well. Today you have got two IPOs getting launched, that is Dixon, BRNL, later on of course we know that there is this entire kitty of insurance companies as well waiting to list. Anything in particular? I know you are not going to name stocks but any specific sector that you are looking out for in terms of fresh paper release.
Saurabh Mukherjea: It obviously makes sense that if you have a market which is stretched on valuation front, it would be a good time to raise money. I would do the same if I needed money. I would go out at a time when valuations were out of whack with the underlying realities.
From an investors' perspective, what I would say is look for two themes which allow you to play the transformation in India from the black economy to the white economy. There is a bunch of companies which are already listed which will help you play this market share transfer from black to white whether it is in sanitaryware, whether it is in building materials, whether it is in hair oil, adhesives.
So, the whole spectrum of companies which are benefitting from this black to white journey, one and the second thing I would look for is savings and not so much lending. Lending I think is an overdone theme in our stock market. Valuations are somewhat real for the lenders a formal financial savings theme will run in India for a long time to come.
People have realised that they cannot really expect to save through real estate and gold and hence formal financial savings will rise rapidly over the next 10 years. Whether it is through life insurer, asset managers, financial services stock broking companies, try to play the savings theme through as many angles as you can. Also, try to focus on the black to white theme which I think is a mega theme for the next five-six years.
ET Now: Within the insurance sector, earlier there were no options. Now there are plenty of options. SBI Life will go public. HDFC Life will go public. ICICI Pru already has gone public. A couple of general insurance businesses will also go public. So what is the go to space in insurance?
Saurabh Mukherjea: As these companies go public, what investors will realise is there are broadly three drivers which make an insurer special or mediocre. Firstly distribution, did you have your own branch network which has a proven track record of pushing your product at low cost. Clearly the larger banks have a clear edge there and the economics of pushing your own insurance product through your own branches at scale and at low cost I think is a compelling one.
The second is when you get the investors' money and how good is your investment management. This is one facet of insurance which I think is under appreciated in India. The insurer has to manage money properly.
Thirdly, capital allocation. Can an insurer time the cycle? When risk is underpriced, he does not want to be pushing your boat out and taking more risk. You got to pull back on risk when risk is underpriced and when everybody runs away from the market and the pricing for risk runs up, that is when he wants to lend money. I think the life insurance industry in our country is quite large and there is a variety of players who are different in each of these three aspects.
The good news is the first flush of insurers who are getting listed in India are credible high quality names and this is a potent long-term theme.
ET Now: Let's talk on the financial inclusion theme. I am getting a sense that it may be a very powerful theme. This is a very well discovered theme. MOSL is a stock which you track as a brokerage and my compliments I think to the first brokerage which came out with a buy report on MOSL even though it is competition. You are able to identify the power of that franchise. Some of the companies like MOSL, Edelweiss, IIFL Holdings, Bajaj Finance they are trading at PE multiples and market caps which are unheard of.
Saurabh Mukherjea: Yes, they are. Whether it is the lenders or the savings place, the lending place and the saving place, both sides of the balance sheet are trading at unheard of multiples and I do not think it is just the one broker that you mentioned.
The entire financial services place is on fire. Between the two, the lending space risks are high. The economy is soft. The risks on the lending side are high. The valuations are unsustainable.
On the savings side, the picture is very different. There is good reason to believe that now that we have fallen out of love with real estate, there is good reason to believe that the amount of retail savings that will come into the stock market will continue accelerating over the next five to ten years.
I think we are already reaching a point. We are not very far away from the point where SIPs alone could be a billion dollars a month of inflows into the market and even that I think is scraping the surface. We have enough wealth in our country, enough savings in our country to believe that the SIP number can go considerably north of a billion a month.
In that context of how far we can go on the savings path, how much we can move away from real estate -- whether it is through insurance or through broking or asset management, remember there will be some asset management IPOs as well.
On all of those fronts, there is plenty of upside in this theme. There are fine credible companies, clean honest companies on the savings theme whether it is insurers, asset managers or brokers, buy them, sit on them for a long time. This is a safe theme which will give you good returns.
Obviously, there will be ups and downs in the stock market and on those fluctuations, these companies will oscillate but structurally savings I think is the big theme for the next 10 years.
The lending theme has worked very well for the last 20 years and the last 10 years as well. Savings is where we now shift the focus of the camera in financial services.
ET Now: You are mildly positive on IT and pharma, take us through your perspective there. What would make you build your conviction to buy IT and pharma when most of the market is wary about the business prospects here?
Saurabh Mukherjea: Part of it is, when you see a sector getting beaten up on the back of factors which are somewhat noisy, somewhat random, you start believing that there is elements of value in some of the names in the sector.
Specifically with regard to the US regulatory actions in Indian pharma, I do not think this is sort of structural phase where the Indian pharma companies will keep getting caught by the FDA for regulatory violations. The industry is smart enough. The Indian pharma companies are smart enough to clean up their act on the FDA front and as the clean-up proceeds, the FDA issues will gradually fade away.
I am not saying Trump will create a transformation in US appetite for Indian pharma but the FDA issues, the suspension of plants and so on those will recede over the next couple of years.
Therefore in Indian pharma, especially names which have modest exposure to the US and there are good midcap pharma names in our country where no more than say 20 per cent of revenues come from the US -- there is value. Cash generative, high quality franchises, long-term cash generation track record, no more than 20 per cent of revenues, 10 per cent of profits from the US, those names are worth buying.
Come to Indian IT, we know the story around top line slowdown. We know about how the world is moving to cloud and how Indian companies are not really ideally placed to benefit from cloud but what is also true for these companies is they are incredibly powerful cash generators.
Some of them are already giving back 80 per cent, 90 per cent of their profits back to the shareholders through buybacks and dividends and in effect becoming 5-6-7 per cent dividend yield place. And when you see a sector with that sort of power on the cash front, the ability to generate a 5-6 per cent dividend yield play, you have to believe that there is at least one or two companies there which can then use that surplus cash flow to reposition themselves.
My reckoning is that amongst the top four Indian IT companies, at least one play is there which can become a credible dividend play with some growth upside. As we go into a new era for Indian IT where top line growth is lower but the ability to generate EPS growth comes from consistently buying back shares.
