ET NowIn an interview with ET Now, Basant Maheshwari, Author, The Thoughtful Investor, shares his views on the markets as well as some sectors and stocks. Excerpts:
Nikunj Dalmia: 2014 has been a dream year for the Indian markets on all accounts, whether it is politics, macros or earnings. Indian markets have got rerated. Is this as good as it gets?
Basant Maheshwari: The rerating has to be looked in a context. Whenever a bull market starts, the bad boys move up first. Bad boys are like people with whom you can have a late night party, but you cannot make them your life partners.
So, the rerating has happened. Beaten down construction and infrastructure stocks have risen by four-five times, but I do not think wealth could have been made there. It is because had you bought some shares, you would have sold it at the first uptick or sold it up if it went up 50%.
So, overall we have to look for a trend in this market and I do not think this trend is going to come from the old leaders, which is the infrastructure and the real estate, because every bull market has its new leaders. Though it is a common cliché, but it has worked every time. Cement did well in 1992 and then cement did not do well for the next so many years. Software did well till 2000 and then it did not do well. 2003 was a time for Unitech and DLF and that is what happened.
So, this time the one trend which is already in vogue before this market started is the set of companies that cater to a consuming class, i.e. the semi-urban rural India.
Nikunj Dalmia: You are of the view that every bull market has a new leader. If I look at the leadership patterns right now they lie with IT, pharma and consumers. Do you think these three are the legs of this bull market?
Basant Maheshwari: IT is in a bullish phase, pharma could be a leader. Consumer is also very different. In consumer you have got the HULs and the Nestle.
Leadership will always come from a sector or from a set of companies that are growing at 30-35%-40%. In this market, there are 200 companies that can assure you of growing at 15%. Nobody cares about that.
There might be 50 companies that can assure you about 20-25% growth each CAGR for the next several years and people just get interested. Then there are a set of 10, 15, 20 companies that will grow at 30, 35, 40%. They are the real cheerleaders. The market will pay top dollar for them -- if not today, then tomorrow. If not tomorrow, then surely the day after.
So, the leadership will not come just because the prices are going up. It will also not come just because the dollar has appreciated and the rupee has depreciated. For one or two years, IT and pharma are doing well. The leadership will come from companies that can grow at 30-35% for the next 5-10 years. Even if they do not grow for 10 years, the market has to perceive that they will grow for 10 years and then they are going to put it on that valuation and that is what happens every time. First you underestimate growth, then you try to overestimate growth and that is when the bull market tanks off.
So my sense is anything relating to semi-urban and rural India will do tremendously well.
Nikunj Dalmia: Home financing business is the most stable sector in Indian markets per se. HDFC has been a mega wealth creator, Gruh Finance has done well, but some would argue that these stocks have already made mega wealth for investors. Will they continue to do that going forward?
Basant Maheshwari: There is a CRISIL study or it is an official study that India has a shortage of 6.3 crore homes. Out of that 80% pertains to rural India. You just see how many accounts they have. Look at Repco’s loan book divided by the average ticket size, and you get about 50,000 accounts.
If you divide Gruh Finance loan book by the average ticket size, you get 1.2, 1.3, 1.5 lakh accounts. Put in Dewan Housing, the low income category you will see that the scale of opportunity is at least 50 to 100 times from here and by the time you go 50 times, the entire market will also expand. Their shortage will not remain at 6.3 crore homes. Also, there is a cultural shift happening in India. Two brothers do not have to fight always to create a new demand.
You are from Delhi, you came to Bombay, you bought a new home, took it on rent or did whatever. Thus, you created a demand. If your child goes to Bangalore tomorrow and says that I have got to study in Bangalore or I am going to work there, he creates a new demand. So, with education, literacy, with the growth of India as people get displaced, it is bad for the family but it is great for these financers.
Mortgage to GDP which we say is 8%-9%, is nothing in today’s environment. We can easily go to 30% over the next 20 years. All you have to do is look for a company that does not lend to real estate developers or intermediaries that does not do a lot of loan against property.
Nikunj Dalmia: But Gruh Finance or for that matter Repco Finance are wildly expensive stocks. Gruh Finance 10 times book, Repco about 3-3.5 times book. Is the margin of safety on your side if you are buying these stocks?
Basant Maheshwari: First of all, who will decide whether these stocks have to be evaluated only on the basis of price to book or on the basis of PE? Gruh Finance does a ROE of 35%, not all consumer companies do 35% in India. If Gruh Finance deludes 10% of its equity tomorrow, they will get the buyers. That is not the problem. The price to book will immediately come from 10 times to 5 and the biggest crime which investors think they have done is by giving dividends because when Gruh Finance pays such a hefty dividend, it reduces the book value.
So, we have to see whether these companies can grow for the next 15-20 years. I think they can grow and they will grow very well. You just cannot put all your money in one of these stocks, you have to buy two of them because both of them will grow very fast. Since inception Repco has grown its loan book at 38% to 40%.
Nikunj Dalmia: But the fact that Repco is focused on non-salaried, is it not an issue? Because if you are focusing on non-salaried, the challenge for you is documentation.
Basant Maheshwari: If you are focusing on salaried, why would he pay 12%? He would go to Bank of Baroda and take it at 10.25. So, non-salaried is where the cream is, there you can skim amount you can really charge.
The point is whether these guys are blowing money by lending or not. They are not. They have got a very good asset book and in the non-salaried segment, your NPA profile goes up and down in the sense that when there is a festive season, the guy does not pay you because his earnings are lumpy, his earnings are not linear. So that is the only question, but otherwise these stocks are there. You can just buy them and forget it.
Nikunj Dalmia: Five-six years ago, no one liked TTK Prestige, Hawkins. Suddenly these stocks are the fashionable stocks. Why do you like Hawkins?
Basant Maheshwari: First is the focus. The management had its problems of pollution and labour for the last two years. So they could not get things off and one thing about this management is, they are a little too honest to work in Indian circumstances.
Anything which would take somebody else maybe 10 minutes, it could take these guys 10 days to solve because they want to go through the right channels only. If you look at Hawkins as a product, 80% of India’s rural segment is under penetrated with cookers. So gas connections have to happen.
Nikunj Dalmia: Now they are happening.
Basant Maheshwari: Yes, obviously you cannot fire a cooker with wood. You need gas connections there. Secondly, with the new home, you always buy a cooker and Hawkins is no more just a cooker company. Earlier we used to just have one big cooker at home, now they have broken the market – one litre, two litre, three litre, four litre etc. They are getting into different variety.
One brilliant thing about Hawkins is it pays everything that it makes. They do not need capex to grow, which is really funny, but that is how they do it. They want to pay all the money back to shareholders. So if you are getting a Rs 60 dividend now and if the company grows at 20%, 25%, 30% for the next 10 years, I do not think Hawkins will grow at 30%, but if they put in the new products, they will have to grow at 30%. Why would they put in the new products otherwise?
Nikunj Dalmia: What about competition? Orient and Havells have moved into the white goods market. So competition ultimately is the big back breaker for any good business?
Basant Maheshwari: See, the new guy who comes in, can sale five lakh cookers and says he is doing a great job, but these guys sell 40-50 lakh cookers.
Nikunj Dalmia: 50 lakh cookers! How much is TTK selling?
Basant Maheshwari: Hawkins says they sell more than TTK. TTK says we sell more than Hawkins so…
Nikunj Dalmia: Always a debate. What has been your last and latest acquisition?
Basant Maheshwari: Last and latest has been Repco.
Nikunj Dalmia: You have not bought anything after that.
Basant Maheshwari: No, nothing. Good stocks are not easy to get. Once you get one, stay put with that. Do not try and change here and there because if you try buying a new stock every fourth month, how will you make 10, 20, 40 times your money?
Nikunj Dalmia: So what do you do with the fat dividend you get every year? You keep on buying the same stocks?
Basant Maheshwari: Oh! I re-invest it.
Nikunj Dalmia: In the same stocks?
Basant Maheshwari: In the same stocks.
Nikunj Dalmia: So you only have seven or eight stocks in your portfolio?
Basant Maheshwari: Yes. One stock goes up, the other does not go up. Of course, you have to keep the complete allocation correct because you cannot go wrong on the allocation part. That is one way to look at it, plus it is a challenge to collectively lose money in these kind of companies because except for the NBFC, the two are debt-free.
Nikunj Dalmia: 2014 has been a dream year for the Indian markets on all accounts, whether it is politics, macros or earnings. Indian markets have got rerated. Is this as good as it gets?
Basant Maheshwari: The rerating has to be looked in a context. Whenever a bull market starts, the bad boys move up first. Bad boys are like people with whom you can have a late night party, but you cannot make them your life partners.
So, the rerating has happened. Beaten down construction and infrastructure stocks have risen by four-five times, but I do not think wealth could have been made there. It is because had you bought some shares, you would have sold it at the first uptick or sold it up if it went up 50%.
So, overall we have to look for a trend in this market and I do not think this trend is going to come from the old leaders, which is the infrastructure and the real estate, because every bull market has its new leaders. Though it is a common cliché, but it has worked every time. Cement did well in 1992 and then cement did not do well for the next so many years. Software did well till 2000 and then it did not do well. 2003 was a time for Unitech and DLF and that is what happened.
So, this time the one trend which is already in vogue before this market started is the set of companies that cater to a consuming class, i.e. the semi-urban rural India.
Nikunj Dalmia: You are of the view that every bull market has a new leader. If I look at the leadership patterns right now they lie with IT, pharma and consumers. Do you think these three are the legs of this bull market?
Basant Maheshwari: IT is in a bullish phase, pharma could be a leader. Consumer is also very different. In consumer you have got the HULs and the Nestle.
Leadership will always come from a sector or from a set of companies that are growing at 30-35%-40%. In this market, there are 200 companies that can assure you of growing at 15%. Nobody cares about that.
There might be 50 companies that can assure you about 20-25% growth each CAGR for the next several years and people just get interested. Then there are a set of 10, 15, 20 companies that will grow at 30, 35, 40%. They are the real cheerleaders. The market will pay top dollar for them -- if not today, then tomorrow. If not tomorrow, then surely the day after.
So, the leadership will not come just because the prices are going up. It will also not come just because the dollar has appreciated and the rupee has depreciated. For one or two years, IT and pharma are doing well. The leadership will come from companies that can grow at 30-35% for the next 5-10 years. Even if they do not grow for 10 years, the market has to perceive that they will grow for 10 years and then they are going to put it on that valuation and that is what happens every time. First you underestimate growth, then you try to overestimate growth and that is when the bull market tanks off.
So my sense is anything relating to semi-urban and rural India will do tremendously well.
Nikunj Dalmia: Home financing business is the most stable sector in Indian markets per se. HDFC has been a mega wealth creator, Gruh Finance has done well, but some would argue that these stocks have already made mega wealth for investors. Will they continue to do that going forward?
Basant Maheshwari: There is a CRISIL study or it is an official study that India has a shortage of 6.3 crore homes. Out of that 80% pertains to rural India. You just see how many accounts they have. Look at Repco’s loan book divided by the average ticket size, and you get about 50,000 accounts.
If you divide Gruh Finance loan book by the average ticket size, you get 1.2, 1.3, 1.5 lakh accounts. Put in Dewan Housing, the low income category you will see that the scale of opportunity is at least 50 to 100 times from here and by the time you go 50 times, the entire market will also expand. Their shortage will not remain at 6.3 crore homes. Also, there is a cultural shift happening in India. Two brothers do not have to fight always to create a new demand.
You are from Delhi, you came to Bombay, you bought a new home, took it on rent or did whatever. Thus, you created a demand. If your child goes to Bangalore tomorrow and says that I have got to study in Bangalore or I am going to work there, he creates a new demand. So, with education, literacy, with the growth of India as people get displaced, it is bad for the family but it is great for these financers.
Mortgage to GDP which we say is 8%-9%, is nothing in today’s environment. We can easily go to 30% over the next 20 years. All you have to do is look for a company that does not lend to real estate developers or intermediaries that does not do a lot of loan against property.
Nikunj Dalmia: But Gruh Finance or for that matter Repco Finance are wildly expensive stocks. Gruh Finance 10 times book, Repco about 3-3.5 times book. Is the margin of safety on your side if you are buying these stocks?
Basant Maheshwari: First of all, who will decide whether these stocks have to be evaluated only on the basis of price to book or on the basis of PE? Gruh Finance does a ROE of 35%, not all consumer companies do 35% in India. If Gruh Finance deludes 10% of its equity tomorrow, they will get the buyers. That is not the problem. The price to book will immediately come from 10 times to 5 and the biggest crime which investors think they have done is by giving dividends because when Gruh Finance pays such a hefty dividend, it reduces the book value.
So, we have to see whether these companies can grow for the next 15-20 years. I think they can grow and they will grow very well. You just cannot put all your money in one of these stocks, you have to buy two of them because both of them will grow very fast. Since inception Repco has grown its loan book at 38% to 40%.
Basant Maheshwari: If you are focusing on salaried, why would he pay 12%? He would go to Bank of Baroda and take it at 10.25. So, non-salaried is where the cream is, there you can skim amount you can really charge.
The point is whether these guys are blowing money by lending or not. They are not. They have got a very good asset book and in the non-salaried segment, your NPA profile goes up and down in the sense that when there is a festive season, the guy does not pay you because his earnings are lumpy, his earnings are not linear. So that is the only question, but otherwise these stocks are there. You can just buy them and forget it.
Nikunj Dalmia: Five-six years ago, no one liked TTK Prestige, Hawkins. Suddenly these stocks are the fashionable stocks. Why do you like Hawkins?
Basant Maheshwari: First is the focus. The management had its problems of pollution and labour for the last two years. So they could not get things off and one thing about this management is, they are a little too honest to work in Indian circumstances.
Anything which would take somebody else maybe 10 minutes, it could take these guys 10 days to solve because they want to go through the right channels only. If you look at Hawkins as a product, 80% of India’s rural segment is under penetrated with cookers. So gas connections have to happen.
Nikunj Dalmia: Now they are happening.
Basant Maheshwari: Yes, obviously you cannot fire a cooker with wood. You need gas connections there. Secondly, with the new home, you always buy a cooker and Hawkins is no more just a cooker company. Earlier we used to just have one big cooker at home, now they have broken the market – one litre, two litre, three litre, four litre etc. They are getting into different variety.
One brilliant thing about Hawkins is it pays everything that it makes. They do not need capex to grow, which is really funny, but that is how they do it. They want to pay all the money back to shareholders. So if you are getting a Rs 60 dividend now and if the company grows at 20%, 25%, 30% for the next 10 years, I do not think Hawkins will grow at 30%, but if they put in the new products, they will have to grow at 30%. Why would they put in the new products otherwise?
Nikunj Dalmia: What about competition? Orient and Havells have moved into the white goods market. So competition ultimately is the big back breaker for any good business?
Basant Maheshwari: See, the new guy who comes in, can sale five lakh cookers and says he is doing a great job, but these guys sell 40-50 lakh cookers.
Nikunj Dalmia: 50 lakh cookers! How much is TTK selling?
Basant Maheshwari: Hawkins says they sell more than TTK. TTK says we sell more than Hawkins so…
Nikunj Dalmia: Always a debate. What has been your last and latest acquisition?
Basant Maheshwari: Last and latest has been Repco.
Nikunj Dalmia: You have not bought anything after that.
Basant Maheshwari: No, nothing. Good stocks are not easy to get. Once you get one, stay put with that. Do not try and change here and there because if you try buying a new stock every fourth month, how will you make 10, 20, 40 times your money?
Nikunj Dalmia: So what do you do with the fat dividend you get every year? You keep on buying the same stocks?
Basant Maheshwari: Oh! I re-invest it.
Nikunj Dalmia: In the same stocks?
Basant Maheshwari: In the same stocks.
Nikunj Dalmia: So you only have seven or eight stocks in your portfolio?
Basant Maheshwari: Yes. One stock goes up, the other does not go up. Of course, you have to keep the complete allocation correct because you cannot go wrong on the allocation part. That is one way to look at it, plus it is a challenge to collectively lose money in these kind of companies because except for the NBFC, the two are debt-free.
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