Looking for classic compounders? Bet on these 3 sectors: Ajay Srivastava, Dimensions Consulting

In a chat with ET Now, Ajay Srivastava, CEO, Dimensions Consulting, says he is betting heavily on commodity stocks including OMCs. The other two favourite sectors are large banks and IT.

Edited excerpts:
I do not have a coin to toss but I guess that is how we will have to do it to get a market view in the short term?

Well the market in the short term is certainly negative. The earnings downgrades have come through. The GDP forecast has been downgraded, the global market volatility has not gone down. I do not see any positive trigger coming up. Even if the election throws up surprises in terms of the ruling party winning, I doubt very much this market will react. This market needs some really fundamental triggers domestically and of course, things to settle down globally. That is where the problem lies.

It is a good time to call in early Christmas by 15th December. Do not invest any more! Go home and use the money productively in holidays.

You are amidst all the action in New Delhi. What is the buzz on exit polls and how critical would that be for the market?

Whatever Delhi says, Mumbai has more betting than Delhi by the way. The buzz is same as everywhere. I think it will be a decent kind of losses in terms of seats, voting share. Whether it transforms into government changing we do not know the answer to that one, but by and large they believe in Delhi that at least two states will go the other way. Will it affect the market? I doubt it very much. That is why I said we have got too many other non-political factors to affect our market than just the election of the assembly.

Those are all factored in. Definitely we know the ruling party will get lesser number of votes, lesser number of seats, may lose a government or two but that does not change the dynamics of the market. Our economy has a serious problem. Globally, we are seeing the trade war hurting everybody in the market. More importantly, after a long time, fixed income has become an attractive option and at 8-10% or 12% return, you are doing pretty well compared to equity markets. The allocation itself is an issue today for investors who are saying let us keep in fixed income for the time being and see how it rolls.

Next week is going to be a really heavy event risk week. The Brexit vote is coming in on the 11th of December. There is talk about what the Fed would signal for 2019 in terms of the rate trajectory and then in India state election results would be out. Are we bracing for a volatile close to 2018?

I doubt it. What we have gone through in the last few months has been a flushing out. Flushing out of euphoria, flushing out of the positions in the market, the long positions, the weaker positions. We have actually a very healthy market at this point of time which is a long-term committed investor in the market. Very little speculative interest is left in the market at this point of time. That is why you will see that the stocks do not play up that much compared to what it used to happen three months earlier. Our market setup is very good because we do not have weak hands, we do not have too many long positions and we are pretty well setup to take any decent surprise and take the market up.

I doubt there is going to be too much volatility on the downside. This market can surprise you on the upside. By and large, market players are sitting with liquidity, positions are lightened up. There are long-term committed investors, no major selling happening and that is a good sign for the market.

Market fundamentals are very good, economic fundamentals are very weak. This volatility can only surprise on the upside, I do not think it will be downside surprise at all.

Are you fully invested in this market or are you keeping your powder dry? More money is lost in waiting for a correction.

Well, it depends on where you are. If you look at the Indian people, the investor community, by and large, are fairly well invested. It is not that they are waiting with 100% money. It is warranted in such a market that at least 20-30% of your money is in fixed income. That must be done and that should be done. There is no doubt about it. Do not worry about opportunity loss with a 20-30%. Fixed income is giving you good return.

So from the perspective, Indian investors, by and large, are fairly well invested. They are sitting on a loss position at this point of time. That is the story of most Indian investors for this year at least. From January 1st cut off to now, 99% would be sitting with losses.

Therefore, in that context, to risk more and more into an environment which is volatile, which is our own economy, give me a good factor. It is not about market correction, it is about falling car sales, falling cement sales. Look at the government balance sheet. You are doing PEC-REC deal. If you consolidate like a typical company, should that not affect the fiscal deficit? But if you are doing that for mathematical purposes, we would not be heading into calmer waters. You are heading into more choppy waters.

Having invested so much already, would you want to commit more capital? I think that is a questionable issue at this point of time compared to your fixed income options.

Arguably, one sizable opportunity in market is coming in autos. Most of the auto stocks are nearing 52-week lows. Is it time to hunt in a Maruti, bet on an Eicher or take an outsized bet on Bajaj Auto?

The good part is that there is no auto sector per se. You got to divide the sector. There is no doubt in my mind that commercial vehicles sector will continue to do well and election time is the best time for it. So, on the commercial side, you could be well positioned to take a position in some of the LCV and HCV stocks that are hitting lows at this point of time.

Now we come to the discretionary expenditure space called the cars. The problem there is twofold; one is that the leader Maruti is under a severe threat and the threat is cost. The threat is very clearly what is demand pull in the system. The threat is that their models are not having enough traction. You cannot just say the demand will grow. Demand will grow but others will gain. Volkswagen will gain. Tata came up with a phenomenal pricing and they will gain. Maruti is not a cheap stock by any standard, even at the corrected level.

Auto is a bet on discretionary income game. I do not think discretionary income game will change very much in the next three to six months. It is going to get much worse. Everything should go back to GDP. If you are getting fudged about the GDP numbers and the trajectory is downward, there is no physical economic way that discretionary income or spending will go up. If GDP curve is down, discretionary spend will go down. There is no doubt about it. So betting on a recovery in a two-wheeler or a Maruti kind of a stock is very difficult.

We have a short position there and so quite logically from our arguments, we should not be having a long. But I think the discretionary income trajectory is down very clearly. It is not about the car companies, any company which has strong discretionary element of this thing is going to go down in a lowering GDP environment that is a given. Why I say LCV and HCV are going to be higher is because elections will take some chunk of it. The natural transition, the diesel norm etc will take a chunk; public sector undertakings will buy more buses as elections come into play. So you will have a plethora of orders coming for buses, trucks etc in the LCV, HCV segment. They have an upbeat model in an election year.

The other side is that we are going to have a problem. It is not about getting in low today. I do not think they have seen the lows. They will come around February March when you will see the true impact of cost pressures, margin pressures and demand pressures.

The backdrop of this mega deal by HCL Technology is close to about $2 billion for IBM assets. How much more steam do you think there is in IT names which have really proved their mettle all of 2018? Can they go on further?

Of course, they will. Phenomenal, absolutely. The point is again look at their market. The market is booming. No company in the US can say that they are short of orders. What are they short of, is people. They need to recruit locally. Companies getting large US contracts say we want x percentage of local people employed. Whether it is Trump pressure or whatever, companies getting $200-million worth contracts say we want all local staff.

The problem of IT companies is only staffing and not demand. They are well up the curve. You could stay invested there. They will do phenomenally well because this year they will bump up profits because their forward covers are going to come in at 74-75 realisation compared to a spot of 70.

You cannot go wrong in IT stocks, stay there, add, you will be doing well. They have got a good demand, they will get good traction on forward currency contracts and they are in a happy situation. They just cannot supply enough manpower to fulfil the contracts. What a happy place to be!

Is it a happy place for investors because TCS is trading at 22 times with a run-up of 40-50%. It is like saying that HUL is a great business but it may not be the best stock to buy?

Again,it is all about risk-adjusted returns. You may make a higher return in Eros International which runs at a very cheap price of Rs 80. You cannot fathom why. You may run very good in that one. You may make a higher money in some of the stocks which are running cheap but that is not the point. The point is risk adjusted return. Over three years, where do you see the maximum traction?

How many companies in Indian environment can say that the demand side is perfect, supply side is a bit of a problem, needs to get fixed? The realisation in the current year is going to be at Rs 74 to a dollar or 75 to a dollar compared to spot of 70. It is not easy. So you risk adjust your return and say listen, this is a safe bet. That is why I keep saying that we just look at absolute return and the carnage in midcap is absolute return carnage.

We just need to look at risk return. When you talk about Unilever, we know for sure that it may not be the spectacular way, but if my 25% of portfolio is in these stocks which are stable and will not see major correction, you have got a portfolio which is balanced. Just try maximising returns. Again depends on the perspective.

We do not believe in maximising return. We believe in optimising returns on a risk adjusted basis. Somebody may want to get maximum money for money capital. It is a different perspective. All I would say is we believe in risk adjusted returns as a philosophy. Some may want to risk it all on midcaps and higher returns. I would still go for a risk-adjusted rate return philosophy.

Stick to some of the names which are there. Take a 20% portfolio punt on what you call go-for- the-kill stocks which may kill you either way. But whichever way it works out, go for it and lose 20% but these will keep you going. I can guarantee you three years later, if you are still talking, it will be 20% compounded year on year return on IT stocks. Take it from me. It is 20%.

Would that mean that you would say yes to a Yes Bank at these levels?

I already hold it. So I have already said yes to it. It is a great franchise. It will be sold and eventually it will be merged and even if you get a decent two time, two and a half times book value, you would have made a decent pile of money.

I think you are in the game in there. It is a good bank. It has got result. Nobody said results were wrong. It has got its own set of issues which they will sort out and eventually it is a clear case of merger. It will get merged somewhere. It is just a matter of time. You punt on it and live with it.
We hold it and we believe it is going to be a good buy because nobody is saying that the bank is a sham at the end of it.

Are you buying Yes Bank at Rs 168? You hold Yes Bank but I would imagine that your purchase price was much higher.

We have been purchasing for a long time. I do not know whether this week my people have bought or not. But if it gets any lower, if we are about Rs 150 or so, would you buy add your position? My answer is yes unless there is a catastrophic event. Again it is not answer that in case of the worst case scenario like a big fraud in the bank, would we buy it? Answer in that case is perhaps no.

I keep guarding myself in saying that because a long time back there was this one bank. The press conference was going on and somebody was on the stage and I would have bought this bank at any point of time. But by the time the conference ended, the stock was zero. So, I am not sure. I think Yes Bank is a reasonable buy at this price unless a frightful surprise comes out.

You said go for the kill. Yes Bank is a yes. Anything which you would say is a classic compounder which you are happy to buy for next three, four, five years?

We have started heavily buying into commodity stocks including oil marketing company stocks and across the board we are buying because they are really dirt cheap. You cannot get these stocks at this kind of book values irrespective of what happens on interim.

We will see substantial dividends being flown out of these companies. They have zero debt. We have put in quite a bit of money in commodity stocks now and we continue to be overweight that we will keep buying them at these prices. Whether it is aluminium, whether it iron ore, whether it is oil marketing companies, this is a new focus.

No matter which government comes in place, these companies have got franchise and they will be sold. Given the fiscal situation, whichever government comes in, you will see the sale of these companies. At one times book value if you buy the largest alumina manufacture in the world, you cannot go very wrong. At the end of the day it has zero debt. It is unimaginable! So we put a lot of money on commodities. We think they will give us a very large compounding factor on a safe platform at this point of time.

We are very large on the banking space and I think that is where the money is going to be made. Large banks again will give you what 20 odd per cent return on capitals.

You can very safely bet on these two sectors along with IT which I have already talked about . Put these three together. Auto will come later but not at this point of time. These three sectors could give you a decent margin and keep you safe as well. If the aluminium company goes down below one time book value, it is going to come back sooner or later. With no debt, it does not have a default risk. You are in good hands. And of course you should buy the leading aviation stock because that guy is going to be the killer in the market because he is the only man standing, the rest of them will die out. It is a decent place to be if you are the sole guy in the market. The so-called bear in the pond with everybody else floundering. He is going to make money, lots of money down the line. You are safely with the market leader.

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