Just to get a sense from you, this entire debate which everyone is having is it going to be the year of a complete reversal from a largecaps of their underperformance or is it going to be a year of the continued momentum in midcap and smallcap, what is your view on the same.
I think from a US perspective it is very difficult for anyone to take a call whether it will be a largecaps’ year or a mid or smallcap year. If you have a longer time horizon like next three to five years across caps, across sectors there is enough opportunity in the market today which is what market and the market participants have recognised over the past few years and that has kept the market buoyant. So, regardless of what happened in the past month when people got a little worried about the impact on mid and smallcap due to some notification by the industry body or by a certain other notifications, I guess on average you have a decent medium term time horizon. Things are looking fine to us, we have enough ample opportunities to invest and we are looking for ideas all across.
For a long-term view when you look at it, obviously you are saying there are a lot of ideas, there is a lot of potential but where are these ideas? When you look at some of the quality names, they have seen a very sharp run-up as well. PSU side specifically seeing a sharp run-up. So, is that something you would still look at, is that something you would avoid, what is the thought on that?
As I said across cap there will be ideas in any market. You will have to dig deeper. So, our life becomes a little more tougher versus last year or a year before last. That said if you look at specific opportunities, for example, say the auto ancillary pack, the healthcare pack, the IT pack where things have corrected in the past one month or so. So, across caps, across sectors there are opportunities. We will have to dig deeper. We will also have to longer our time horizon largely because a lot of the returns have been upfronted in the past few years.
So, we will have to longer our time horizon and that is true for the investors too. So, you cannot presume that the return that we have seen over the past one year, three years will be similar in a particular year, but as you longer your time horizon things should be fine, so that is what we would advise to investors.
What is your view on financials because even in your top 10 holdings or your top sectors I am not seeing any presence of financials as such, are you going complete underweight then?
Look, financial again one has to be very selective specifically from a one-year view because there are a lot of moving parts in terms of how the system liquidity has been tight, again it has been well covered.
There have been diktats from the regulators to various financial companies. There is a pressure on NIM. There is a likely increase in credit costs in the upcoming year, so one has to be extremely selective in the entire financial space from a year’s perspective.
That said when you think about the entire journey of India from a three-and-a-half to a 10 trillion, there will be many financial companies who will become very-very big in size regardless of the size today.
So, while we are navigating the short-term pressures on a lot of financial companies with regard to NIM, credit cost, etc, the big picture is that how do we position our portfolios to have the right set of opportunities where companies will become very-very big in size over the next three, five, and ten years. There are many financial companies which will become very big in size, so that is our focus and that is what we are doing at this point in time.
Just help us understand what exactly are you looking at, is it NBFCs, is it those micro financing institution, is it PSU bank or private bank, is it the capital market ancillaries, insurance because there are a lot of pockets right. So, help us narrow it down a bit at least.
For private banks the opportunity size is large and they are well diversified across sectors, across segments and they will continue to do well, so we will have to pick and choose the best amongst many-many opportunities over there.
You have a lot of the entire opportunity coming up in new segment which have got listed over the past three years. As you pointed out in terms of the opportunity in the entire capital market space, many-many opportunities over there, where again as the country become big in size, the market caps become big in size, many of those companies will become very big in size. In some cases you have monopoly or duopoly business in those segments. Life insurance again have seen a lot of volatility in the past few years. Things are stabilising over there, especially with regard to the regulatory headwinds that they had seen. So, things are looking up over there too, especially in the near term.
What is your thought on the real estate sector? Is that something you would be looking at? We have seen a lot of expansion, focus coming in from these real estate names and obviously we have seen a run up there as well. But overall thought on the real estate sector, is that something you would look at for the long term?
We are looking at it very-very actively. We are very constructive on the entire real estate and the ancillary building materials, light and electrical space. Again, one needs to have a slightly medium-term time horizon on the second order impact of building materials and light and electrical, but on the real estate at this point in time it is amongst the best cycle that we have seen over the past many years now and that cycle seems to be continuing amongst the large listed developers or even the mid-sized listed developers.
The launches are being taken up in a hurry, so they are selling off their launches in very-very short time. So, this is amongst the best time that we have seen and this has significant positive impact on the cash flow. This will lead to a virtuous cycle on more incremental additions to their kitty in terms of the overall square footage that they are building up. So, we are in a virtuous cycle right now and it seems that it still has some legs to go.
But where is that space where you are trimming positions as well or redeploying capital out of it into other sectors?
I guess we do not take a sectoral call when we are trimming our position. It is more to do with specific names, specific areas where we think that the headwinds will last for beyond one year, we take money off the table and redeploy in ideas with similar valuation where we think the upside is decent both from a one and a three-year perspective.
So, we are doing this across caps, across companies. The valuations have moved sharply ahead of the fundamentals, very-very difficult to justify, it could be because of certain technical factors, it could be because of low liquidity. In those cases, we try and take money off the table. We try not to being carried over by what is happening in the market, especially in the near term.
And can you discuss any of those names in terms of where you have added position or trimmed position because I see the top 10 holdings in your list, but any additions or deletions that you can talk about?
I guess our fact sheets are publicly disclosed every month. So, investors have very decent understanding of what we are doing. But as I pointed out that the area, the sector that we are constructive we are adding more names, wherever we think that the valuations have run off very sharply or where we do not believe in the company especially where earning headwinds will remain much beyond the next one year we are taking money off the table.
One thing that I want to talk about is in terms of the chemical sector or the chemical names. What is your thought on that one because last year, obviously, we have seen not a great performance coming in from these chemical companies, but still right now again we saw a bit of a run up and now there is more dumping going to be from China. So, is there a concern coming in from the chemical side because you do have some of holding in the chemical sector as well, so what is your thought here?
I guess it is a useful reminder to all investors that several sectors are cyclical. Chemicals was presumed to be a structural sector and China plus one took up all the chemical stocks to a valuation which was not seen in the previous cycles. Valuations have corrected in some names, it still should correct according to our understanding. But it is an extremely good reminder to all the investors that several sectors are cyclical, so just be careful, which is what we discussed earlier that one needs to be very disciplined and take money off the table where fundamentals are running much ahead of expectation.
I guess from chemical sector specifically, it will take some more time before things come back to normalcy. China is still expanding capacity. In some cases, they are adding up newer capacity which was not the base case, say about two years back, China was not supposed to add capacity. So it is happening as we speak. Investors are still grappling with how to think about China expansion and how that will impact their earnings and cash flows of the specific companies and which is why we are seeing that stocks have corrected.
And I guess there is some more way to go before one gets constructive in general on the sector, apart from that you have specific sectors or specific companies in that sector which are looking fine so we are adding some of those. But in general, on the sector, one needs to be still cautious.
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