ET Now
In an interview with ET Now, Vijay Kedia, MD, Kedia Securities, shares his views on the markets. Excerpts:
Nikunj Dalmia: 2014 has been a great year for the Indian stock markets. After this extraordinary run-up, do you think the party is getting over?
Vijay Kedia: I do not think so. Party has just begun.
Nikunj Dalmia: Why do you think the party has just started?
Vijay Kedia: Because all the parameters are now in the favour of the economy and still, retail participation in market is very less and the economy is reviving. Companies have yet to deliver good numbers and return. So it is just a beginning.
Nikunj Dalmia: External factors are clearly are on our side. Brazil is in a mess, Russia seems to be falling apart, ECB and BOJ are committed to print more money and we do not know what will happen to the US economy in the short term. So, do you think India on the margin will benefit because globally things are in a mess?
Vijay Kedia: That could be an advantage for India in other words. So, why not?
Nikunj Dalmia: Three years ago, I remember, when we interacted on this same forum, your big call was that the Sensex will eventually touch 1 lakh. We are at 27000. Are you still confident that the Sensex will touch 1 lakh?
Vijay Kedia: Yes, of course. On the contrary, I will say that my confidence has increased. I am of the opinion that by 2020, the Sensex should touch 100,000.
Nikunj Dalmia: That is a big number, isn’t it?
Vijay Kedia: Could be a big number today. It looks like a big number, but I have some reasons why should it be 100,000 by 2020. I will give you an example. Prior to 2003, any bull market in India never lasted for more than nine months. If I say bull market, that means the previous top to the next top. So the duration of every bull market was less than 9 months and the duration of every bear market was more than 16 months. This was the history.
Nikunj Dalmia: This was before 2003?
Vijay Kedia: Before 2003.
Nikunj Dalmia: So you are looking at the Sensex history from 1980 to 2003?
Vijay Kedia: Yes, you can say that.
Nikunj Dalmia: That time bull markets were small and bear markets were big.
Vijay Kedia: Yes, the bull market was smaller, means not more than nine months. I may be wrong by 1 month or 15 days, but I am near perfect figure.
For the first time it happened in the history of India in 2003 that the bull market lasted for five years or six years, and when the bear market came, it lasted for less than 16 months. If you remember, from 22000, we went down to 7200 or 7300, but within a span of nine months, we recovered.
Nikunj Dalmia: So now the reverse is happening. Now bear markets are small and bull markets are long.
Vijay Kedia: Yes, they are long. The same story is now going to be repeated. I think that we are in a bull market. So if you take the clue from the past history, we should be having another five or six years of a bull run and in the last bull market, 6000 was the top before 2003.
Nikunj Dalmia: The TMT bull market?
Vijay Kedia: Yes, the TMT bull market. So when the index crossed 6000, it went up to 22000. That was somewhere around four times. I think the same story is going to be repeated again.
Nikunj Dalmia: So, what is the real entry point or the beginning point of this bull market? Is it 8000 because we bottomed out at 8000 in 2008 or the beginning entry point of this bull market will be closer to 21000 or 22000?
Vijay Kedia: Around 20000-22000, not 8000.
Nikunj Dalmia: Are you of the view that the bull market has only started last year, it has not started three years ago?
Vijay Kedia: I do not think so. It depends on how you calculate. That could be the end of a bear market. As they say that the end of a bear market is the beginning of a bull market, but the actual bull market has started now.
Nikunj Dalmia: So in this bull market, can the Sensex go to 100,000?
Vijay Kedia: Yes, this is what I think that in this current bull market, which is going on, we should see the index of 100,000.
Nikunj Dalmia: For the Sensex to go to 100,000, a lot of things have to align our way both locally and globally. Inflation is still sticky, valuations are not all that cheap and earnings are still a big question mark.
Vijay Kedia: That is why we are at 27000, because of that only.
Nikunj Dalmia: So how will things change? For the index to go to 100,000, the dynamics have to change completely.
Vijay Kedia: It is changing. When I read newspapers in the morning, I feel that something is happening in India, something is cooking. It might take some time as all experts are saying.
Nikunj Dalmia: There is an old saying on the Wall Street that bull markets always climb the wall of worry and they always come down on ray of hope.
Vijay Kedia: Yes.
Nikunj Dalmia: I just get a sense that right now, there is too much of hope and hype in the Modi story.
Vijay Kedia: No, that could be hype because if you do not have excitement, you cannot become bullish. You need to have that mentality. That is why they are called bull. Why do you call a bull market? Why don’t you call a goat market or a dog market? So you should have that mentality of a bull.
ET Now: You are a master stock picker and the way you invest is that you always look at small cap companies which can become midcap companies and midcap companies which can become large cap companies. One of your classic, or I would say, one of your best investment is Atul Auto. I was looking at Atul Auto and I took the clock back. In 2008, Atul Auto was at about Rs 50. Now, with stock split and bonus adjusted, it is at about Rs 1,200. What is the future for Atul Auto? How did you identify Atul Auto?
Vijay Kedia: I know the management of Atul Auto for a long time. The management is very genuine, honest and transparent.
ET Now: You always look at the management?
Vijay Kedia: Management is my first priority. Looking at the management, I thought that I should invest in that company and when I invested, it was 2005. That time company was running on maybe 30% or 40% of capacity utilisation. So there was a huge margin, there was a big margin that company could have scaled up its operation. It was also because there were hardly four or five manufactures of three wheelers in India and all big shots like Bajaj Auto, TVS and Mahindra and fifth was Atul Auto and plus we were in a bull market. Automobile industry was also reviving.
ET Now: So you actually bought Atul Auto in 2005?
Vijay Kedia: Yes, the first investment was made in 2005.
ET Now: And you held on to the stock for five-six years and Atual Auto never moved from Rs 5 to Rs 25 for the first five years of your holding?
Vijay Kedia: Yes, never moved.
ET Now: You never lost your patience?
Vijay Kedia: No, I did not lose my patience because I had confidence in the management. As I said, the first investment was made when it was maybe around Rs 80 or Rs 90. That was in 2005, and in 2009, as I said, it was around Rs 5. So you can say that my capital was literally wiped out.
ET Now: And you did not sell?
Vijay Kedia: No, I did not sell. On the contrary, I bought more because of the management.
ET Now: That is the smartest of a great investor. Okay, but why are you selling Atul Auto now? According to BSE disclosure data, you have reduced your stake in Atul Auto, I would not say substantially, but you have sold some shares.
Vijay Kedia: Yes, I sold some shares because I am not a promoter, though the promoter and me are closely bonded. That is a different thing, but so far the business is concerned, I am an investor in the market.
Vijay Kedia: As you said, the middle class, that would be going to be the theme for next bull market. Right now, I do not know which sector is going to become the leader. So that is why I have scattered, I have spread my investment in many companies, but middle class things will rule the market.
ET: Where are you investing right now? Where are you allocating capital? Give me some stock ideas. What was your last big acquisition and why?
Vijay Kedia: I have invested in so many companies, maybe 15 to 20 companies this time.
ET: So why have you invested in Sudarshan Chemicals?
Vijay Kedia: Because I feel that the chemical sector is reviving after a gap of maybe 20 years because China, which had played a dominant role in the chemical sector, is losing its grip. So there is a complete turnaround in the chemical sector in India.
ET: Do you like their promoter?
Vijay Kedia: Yes, I like the promoter.
ET: Have you met the promoter?
Vijay Kedia: Yes, I have met the promoter and they are very clean. Any company which had a capex in the last three-four years when Indian economy was in doldrums and any company which has finished this capex in 2013 or till 2014, is going to reap the benefit.
ET: So basically, you are betting on companies where the capacity expansion or the capex is over and when demand comes back, financial average and operating leverage would kick in?
Vijay Kedia: Yes.
ET: What about valuations? I was looking at a research report on Sudarshan Chemicals, the stock is not cheap. With EPS estimates of about Rs 14-15 for next year, it is still trading at about 10 times plus.
Vijay Kedia: They had a capex of 250 crore which they completed last year. The company has a tiny capital of 7 crore and this year the turnover should be somewhere around Rs 1200 crore. So I like such companies where capital to sales is huge. Now with this Rs 250-crore expansion which they had done, I expect this company to grow 20% year on year over the next three to four years time.
ET: What is your price target for Sudarshan Chemicals?
Vijay Kedia: I really do not have any price target.
ET: Can it be the next Atul Auto for Vijay Kedia?
Vijay Kedia: This is very difficult to say, let me tell you. When I invest in any shares, I do not know whether it is going to be another Atul Auto or Cera Sanitaryware or Motherson Sumi.
ET: So at what price did you buy Sudarshan Chemicals?
Vijay Kedia: Sudarshan Chemical, I bought at Rs 41-42.
ET: Are you happy to stick to your position for the next three to five years?
Vijay Kedia: Yes, I think so.
ET: If it goes to Rs 60-70, will you buy more?
Vijay Kedia: Yes of course, I will buy...I think I will buy more.
ET: Any chemical business is also dependent on global factors. Given what has happened to global commodity prices, do you think chemical prices could come under pressure?
Vijay Kedia: I am not sure about this temporary blip or temporary upswing and all because I do not have any parameters to judge and I do not bother about those things. Worldwide, dyes and pigments plants are closing down. So that is an advantage for Sudarshan Chemical and the company is also striving. They have set a target for themselves to become the number fourth player in the world in the next two-three years time.
ET: So they are moving in the right direction?
Vijay Kedia: I think that they are moving in the right direction. The only weakness in the company is that their margin right now is very less.
ET: But that you think will expand?
Vijay Kedia: I think so. The economy of scale and going forward when capex is over, now they have got their debt position also, they are converting their high cost debt into ECBs. All these things will add up into their bottom line.
ET: Do you think this bull market will last for the next four to five years?
Vijay Kedia: Of course, I think so.
ET: That is a core thesis.
Vijay Kedia: All my investments are based on that philosophy only. Another stock which I have bought is Repro India Limited.
ET: What does the company do?
Vijay Kedia: It is a printing company. They are into printing business.
ET: You are buying very offbeat ideas. Typically, investors right now are chasing consumer names, IT names, they are chasing companies where the balance sheet is strong, return on equity is strong, but you are investing actually on the other side. You are buying companies where return on equity, return on capital, debt is high and you are betting on the economic recovery. So that is a very different thesis. It could be a risky thesis also.
Vijay Kedia: Could be. I read somewhere choose the road less travelled by.
ET: Why do you like Repro?
Vijay Kedia: Repro is a painting company and they are painting for all the publishers. It is a 50 to 60-year old company, good management and board of directors.
ET: So you like the management, you like the board?
Vijay Kedia: Yes.
ET: What is your price target for Repro?
Vijay Kedia: No, I do not have any price target. I like the business because if you see the current numbers, the company is well-placed.
ET: They have suffered in the past.
Vijay Kedia: Every company has suffered in the past and if you have suffered in the past and if you have the ability to come out from that pain or from your past, you will survive.
ET: The world is moving towards digitisation. Can a printing business survive in today’s digital area?
Vijay Kedia: You are right. Maybe it cannot survive, maybe it will last for the next five or six years. That is why this company has come out with a unique product which is called Rapples, where they are converting all the school textbooks into digital form.
ET: That is a very competitive space, isn’t it?
Vijay Kedia: No competition. I do not find any other company in India.
ET: Magnum Publishing?
Vijay Kedia: These are publishers. If a publisher converts their content into digital form, they are converting their own data.
ET: That is a fair point. What was your buying price for Repro?
Vijay Kedia: I bought from 150 to 250.
ET: If it falls below 200, you are happy to commit more capital?
Vijay Kedia: Maybe because I am already having 3-4%...
ET: So you have given me two ideas, give me one more idea. Atul Auto is an old idea.
Vijay Kedia: I have bought so many shares. For example, LIC Housing Finance. There are many simple stories in the market.
ET: So the third idea from you is LIC Housing Finance?
Vijay Kedia: LIC and Apar Industries.
ET: Okay, LIC is the obvious one, but I want to discuss Apar Industries.
Vijay Kedia: Apar to me looks interesting because all these companies are not doing well now. So that is why I am telling you all these are three to five years investments. I assume this company should be doing well going forward.
ET: Do you like the promoter?
Vijay Kedia: Of course I like the promoter and the company. The same theme is happening in Apar, similar to Sudarshan Chemical. They had a capex of 200 crore, which they finished last year. Now if you are bullish on India, you have to be bullish on the power sector. If you are bullish on the power sector, you have to be bullish on the transmission and distribution system. So this company belongs to those sectors.
ET: It is interesting you told me that you are betting on the middle class, but the stocks you are buying essentially are from the old economy basket. You are not buying a consumer name. You are not backing an FMCG company. You are not backing a white goods company. You are not backing a Whirlpool or a Page Industries. What you are backing essentially are paint companies, chemical companies and industrial companies.
Vijay Kedia: Ultimately, the end consumer is the middle class. I was tracking Whirlpool, but I could not buy the shares because the stock went up very fast. Like Cera Sanitaryware, which I am still holding, is a consumption story, but Atul Auto is a lower class, middle class consumption theory. Similarly Sudarshan Chemical are making pigments and dyes for the ink industry, paint industry and automobile industry.
ET: And the end user is the consumer?
Vijay Kedia: Yes, the consumer.
ET: We have been very stock specific. Any disclosure?
Vijay Kedia: I am holding all those shares which I have named.
ET: So in 30 seconds, if you have to summarise your big call, what is Vijay Kedia’s big call?
Vijay Kedia: All these shares which I have...
ET: All these?
Vijay Kedia: Yes.
ET: Are you fully invested?
Vijay Kedia: Not now. I am looking for some story. You can share some story with me.
ET: You are sitting on some cash and you are looking for new ideas.
Vijay Kedia: Yes, that is temporary cash.
ET: What is on your radar then?
Vijay Kedia: How can I tell you now?
ET: Okay.
Vijay Kedia: But I will tell you first.
ET: Okay.
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