Gold Silver Reports — Markets to See Sustained FII Buying for Next 12 Months — The global search for yields will lead to sus tained buying by FIIs in India even as the valua tions are looking higher. In an interview to Nishanth Vasudevan and Sanam Mirchandani, ahead of the firm’s 12th Annual Global Investor Conference, Agrawal says he remains bullish on NBFCs, liquor and oil marketing companies. Edited excerpts:
There is concern about high valuation. What is your view?
In 2007, the PE (Price-Earnings) multiple was 27-28 but then there were high earnings and a high PE multiple.Now, earnings are depressed and PE multiple is a little higher. One has to be careful while buying expensive stocks, but if it is backed up by sustained growth in the next 3-5 years, the valuation might turn out to be reasonable. Recent macro developments like GST (goods and services tax) and good monsoon cannot be priced as they will not reflect in the earnings immediately but by second half and next year, they will have tremendous impact on earnings and ease of doing business. Globally, interest rates are very low and FIIs (foreign institutional investors) are willing to pay higher price for quality equities in India. For the next 12 months, FII buying will remain sustained since India has higher yield on debt side and even higher potential for growth on equity side.
You said liquidity chasing quality firms have made them more expensive. How long can it continue?
Quality is expensive but that’s where you have to be very selective in building your portfolio. We are looking for mispriced quality. There are three components where mispricing can come in understanding quality of business, growth and longevity of growth. Like HDFC Bank is growing for last 21 years at 25% plus rate. In 1995, nobody knew that HDFC Bank will keep growing like this and hence, they never gave it the valuation.Investors who bought in 2000 and later have made good money and those who buy now will also make good money as long as the quality of franchise and growth continues.
What is your view on the local consumption story?
We are used to seeing the companies at little lower valuations. For example, Asian Paints. The market is right in the way they are judging because of the longevity of the franchise.It has 60% market share and is still gaining market share. Valuation is made up of franchise value and growth. Companies like Emami have a good franchise. They have space for growth and it is coming through.If you are buying something at 60 PE, be sure that this franchise will be there after 10 years and whether it will become 10 times bigger. The success or failure of investing comes in understanding what is built into the stock price.
What will be the next trigger for oil marketing companies?
Price expansion has happened but valuation hasn’t expanded. The market is still calibrating whether the government will maintain the current policy structure if oil prices go to $80-90 (per barrel). The policy mess happened when oil went from $25 to $100 and the government came between the consumer and the crude prices. It will take time for the markets to believe. Quarter after quarter, as the government doesn’t interfere in the working of the companies, PE multiples will start rising.It will get the blue chip status it had in the 1990s.
Do you remain bullish on aviation space? What is your outlook for InterGlobe Aviation?
It is a very interesting space.InterGlobe has 40% share and is growing rapidly. The industry itself is growing at 25%. I am also understanding how bad is the aviation business where as new capacities come, your price keeps going down. It is intensely competitive and we are watching. As bullish I was a year back I am less bullish now, not on the volume growth but on how much, in a predictable way, a company can make.
Did your stance change after Q1 numbers?
It was a bit of a disappointment. A `600-crore (InterGlobe’s June quarter net profit) number is very good but it was lower than last year. The company is delivering but we have to figure out how much money it can make in the next five years. That calculation is not getting set in my mind.
Liquor sector has seen major change in policy. Do you remain positive? You have been positive on United Spirits.
It is a long-term business and a lot of changes are happening in terms of restructuring of the business from erstwhile management to the new management. It is a very duopolistic business and pricing power is massive. There are a lot of regulatory hurdles as the whole country is not free in pricing. But I remain optimistic on long-term basis. Consumption possibility is high in the next 5-10 years. This industry is definitely for patient guys. It is better to go with a moderate volume but sit through.
In terms of valuation and market share, where do you see things going in private and PSU banks?
The value migration, which is happening from PSU banks to private sector banks, is relentlessly on. It is now for the government to see if they can stop it. They have the franchise, business and the customers.You have to gear up public sector banks in such a way that they not only do as good as the private sector but more as they have the advantage of scale. — Neal Bhai Reports