Wednesday, December 6, 2023

stock market strategy: Is the one time re-rating in PSU, defence, railways, banks over? Madhusudan Kela explains

Must read

Madhusudan Kela, Market Expert, says “I would not put the PSU stocks in a basket, saying that it is all over. There will be individual companies. The pace of growth, pace of returns will definitely not be as good as it has happened in the recent times but remember the market cap of the entire PSU basket, three years back, was Rs 14 lakh crore. This included SBI, banks, defence, railways, HPCL, BPCL, all companies was 14 lakh crores. Three years later, the entire basket market cap is Rs 45 lakh crore.”
If I look at public data, there are times when your name pops up in block deals, which means you have made significant investments in last two or three years. But I do not see you investing in largecap stocks now. I do not hear about you investing in semi midcap stocks now.
We have not made any announcement.

Unlock Leadership Excellence with a Range of CXO Courses

Offering CollegeCourseWebsite
Indian School of BusinessISB Chief Technology OfficerVisit
IIM LucknowIIML Chief Operations Officer ProgrammeVisit
Indian School of BusinessISB Chief Digital OfficerVisit

So, you are investing in largecaps and midcaps also.
We are investing in largecaps.It is not that you are only focusing on midcap and smallcap stocks.
No, no. We are investing in large companies.

Give us a flavour of your largecap portfolio.
See, I do not talk individually. If I say there is Glenmark, would you clarify it as a midcap? It’s a Rs 20,000-25,000-crore market cap company. I own Aditya Birla Finance. Would you classify it as a smaller midcap company? So, there are a lot of investments which are there. I have owned Dalmia Bharat for almost five years now. I have owned Gujarat Fluoro for five years.

I distinctly remember some of your very super calls at the peak of the Covid you came on ET Now and you said the following. Bhai, teen jaga bahut value lagta hai (there seems to be a lot of value in three places) – PSU banks, PSUs across the board and pharma. Between 2010 and 2020, PSU stocks were called the ugly ducklings. Now, they have become the swan. If there is a company which has a prefix PSU or a suffix PSU, that stock has done well. Has that one time re-rating in PSU, defence, railways, banks, over?
A significant appreciation has happened. I would not basket it by saying that it is all over. There will be individual companies. May be the pace of growth, pace of returns will be definitely not as good as it has happened in the…let me give you some data. In the entire PSU basket, three years back, the market cap was Rs 14 lakh crore.

Including SBI?
The market cap including SBI, banks, defence, railways, HPCL, BPCL, all companies was 14 lakh crores. Three years later, the entire basket market cap is Rs 45 lakh crore.

A little more than 3x. But there are individual companies, within this basket, of course, that have given 500, 800, 1000%, 1500%, 2000% returns. PSUs are clearly the leader of the market. I still feel that, PSU banks are quite compelling. They are still trading at four-five times PE, less than one time book value, if I have a two -year perspective. I do not think they have peaked out.What about pharma, your favourite theme?
Pharma is a short-term theme. I think, next two, three years, is time for the mid-size pharma companies. And let me explain why did they do badly. The last four, eight quarters have been very challenging. There was clear-cut logistical problem which was there because of Covid, import coming from China, logistics cost going completely haywire. Because of the Covid, there was no real inspection which happened in lot of pharma companies. So, whatever drugs were approved, clearly everyone wanted to produce the approved drugs only.
So, there was a tremendous pricing pressure in the US market, specifically on the generic side. That is the third point.

Fourth point, of course, because of Covid, the other casualties. If you do not leave the house, where will the accident happen? Everyone was just wanting to postpone whatever was the other ailment. So, a combination of all of this weighed down. But if you look at it, all of this has got solved now. USFDA commissioner coming to India and talking and you know, I am not a technical expert, but I am being told there are at least 100 drugs in the US where there is a shortage.

If I look at the companies’ performance, specifically in the last two, three quarters, four quarters, a lot of these companies are showing improved performance. It is reflected in stock prices of large companies, Sun, Dr. Reddy, Cipla, Torrent and on the pharma index. But on some of these mid-size companies, it is not reflected. I would say that because of these factors getting resolved and also because of the severe underperformance of these companies vis-à-vis the broader market. Any company, according to me which really deals with USFDA, European markets, generally will have to have some basic standard of corporate governance. Otherwise, it is very difficult for these companies to deal in those markets. I am not making a general rule, but some of these companies are well governed.

The threshold has to be good.
When the performance comes, I am sure markets will recognize.

When you look at Indian promoters, when you looked at them and when you met them 20 years ago, 10 years ago, and now, what is the difference you see?
Big difference. The first and the biggest difference is there is respect for equity.

They care about minority shareholders?
They care about market cap. They care about themselves first. They know because they see that all of these market cap which has got created, is actually real. They have seen lot of their peers actually get out. They have seen lot of their peers sell partial equity and enjoy the wealth. So, 20 years back it was, how can I take money out of the company? Now, generally the mood is we want to respect, we want to be clean. That is a big mindset change and partially also driven by the government policies. If you want to steal, it is not possible.

Taxes are low, GST has kicked in and digitization is there.
And plus there is vigilance, all around there is vigilance. It is not easy to manipulate things. Not possible generally. So, that is one big change I see. The second big change, is because of the severe debt problem, which happened in the last 10 years, where people borrowed through the roof etc and many people had to actually go to jail. There is a general consciousness to keep the balance sheet in check.

So, people do not want to borrow excessively. They want to keep the leverage in control and they want to make sure that the growth and when the growth happens out of internal accruals, that is the most rewarding growth. And that is what we are seeing. The kind of returns which you are seeing in some of these mid-sized companies is also the result apart from the broader India opportunities, is also the result of recognizing these two or three factors that we do not want to over-leverage our company. We want to make sure that we want to have governance and standards being followed up. So, a big change.

I will take the clock back. You started your investing career 32 years ago, am I right?
Yes, absolutely.

The shape of the Sensex was very different. Nifty was not there. It had automobiles, it had a lot of steel, it had a lot of commodity, textile. There were 30 companies but the composition was different. Today the composition is financials, IT, consumer….
And their weightages have gone up significantly. It is a new India basically.

This is 2023. Since we are talking about the 10-year theme and we have spoken about 4 themes. Hypothetically, if you have talk about the composition of the market, whether it is the Nifty composition or the market cap, what could it look like?
I think there will be significant change. If you look at American markets, how many Dow stocks are still there which were there 50 years back. We will find maybe one or two companies which are still there. You look at any developed market, change will happen and so will be case of India. When I look back 20 years later, I am sure lot of these companies which are large companies may not be in existence 20 years later unless they really change themselves, like what Reliance Industries is doing today. It was an oil company.

But is it oil and a polyester company any longer? It is a completely different company. Maybe 20 years later it will be a completely different company from what it is today..

So, Indian entrepreneur is actually changing and they are adapting with the times.
It will and they will have to adopt.

India is in a great position. Equity is a good asset class. SIP has become the new EMI. SIP has gone up 10 times. Like EMI was a new concept 20 years ago, SIP is now more popular. People want to know how do I know that this stock I have bought could be a multibagger? They want to know when is the right time to sell it?
That is a very specialised subject . You think I am very successful. I have publicly admitted that I got only a bucket full of water from the sea (mereko pura samundar tha, mein ek lota pani leke aa gaya).

The opportunity was very large. This is a very specialised subject and it is not a part-time job that you can watch one interview and make money. Wealth creation is a very different subject. If you are really full-time in it, then you have all the right to really do it yourself. But if you are not full-time in it, my message is very clear, that India is happening, corrections will happen, there is no doubt about it. The question is, first, do you have a real belief in this country that we are here, like the Government of India going and making a presentation in Davos saying that our aspiration is to reach to $35 trillion GDP by 2047. The moot question is, do you believe in this direction?

Which you do.
I don’t know if it would be 26 or 36, but if the direction is clea , then everything is sorted out. Then you will look at every crisis as an opportunity.

Even if you bought a moderate portfolio, you have put substantial money and have that faith and continue to put money, we have so many examples in front of our eyes. Guys like me went with a bucket and I only got a bucket. But I know guys who have got tankers, who got there wikept th Tullu pumps and the water keeps coming in front of our eyes. Rakesh bhaiya is one of the examples, Radhakishan ji is one other example.

And they have kept it very simple.
They have kept it very simple.

Toh stock market ke hisab se India ka Tendulkar kon hai (Who is the Tendulkar of the stock market?
I think India as a team will do well. Let us not identify Tendulkar. Even if you have identified a Tendulkar, I would bet on a team.

Ok, not Tendulkar. Who can be Shubhman Gill? Nobody knew him three years ago and now everybody knows him
I do not have much really to add on an individual company or individual theme. I am saying, believe in this country.

Source link

More articles

Leave a Reply

Latest article