Will still bet on HDFC Bank, Eicher Motors five years down: Sridhar Sivaram, Enam Holdings

In a chat with ET Now, Sridhar Sivaram, Investment Director, Enam Holdings, says even if you are sitting on cash in a mandate like this, it is fine. Edited excerpts

ET Now: How are the markets? The last time the red sign was China. What is it now or is it even a red sign?

Sridhar Sivaram: See the red sign is lot of places but the point is that a lot of it is already priced in.

ET Now: Wow, you are sounding bullish.

Sridhar Sivaram: I am not bullish but I am just saying that a lot of it is priced in. After being bearish for 18 months, you had a price correction, you had a time correction. It is not looking that bad now. But I am not saying that this is like a bull market. If earnings growth are 10 per cent, you could possibly make 10-15 per cent profit.

ET Now: DNA of the firm where you are at present is that there is always opportunity and there is always a bull market irrespective of the problems. So where is that bull market?

Sridhar Sivaram: Which is true. Even previously I was saying that there is stock specific opportunities and there are enough stocks where you are seeing some sort of a bull market and oil and gas is one. What we are speaking right now is that irrespective of government as both UPA and NPA governments have carried out reforms in this sector and GRMs are fairly healthy right now. So this is surely an interesting sector.

ET Now: What about oil marketing stocks?

Sridhar Sivaram: There is an opportunity in oil marketing stocks and even the normal refining stocks like Reliance because the refining margins are strong right now. The oil marketing companies are in a sweet spot right now because the government is falling true on the reforms.

ET Now: How have you used the January and February decline to change your portfolio positioning? Were you active bias when market was selling? We touched base in January and then the mayhem happened in February and now markets are looking reasonable. So what has been your basic investment strategy during the so called mini stampede?

Sridhar Sivaram: There has been a change given that no longer I have a benchmark to hide or to follow. Obviously, the investment philosophies change a lot. So in the previous avatar, whether you like it or not, you have to hide behind certain stocks because they have a large benchmark. So here it is an absolute return mandate and if you like a particular stock, you would buy and continue buying even when there is a mayhem and if you do not like it and it corrects, I am not really going to chase the stock anyway. So I do not think much has changed but the cautious stance has helped because we were waiting for the prices to suit us. So in most cases, if you waited for three-four months, you would have got those prices to buy.So even if you are sitting on cash in a mandate like this, it is fine.

ET Now: What is your view on cement? That is the big call that we are discussing this morning?

Sridhar Sivaram: If there are certain positive signals that we are getting especially from the road sector, there is some pick up in infra and may be very early signs of pick up in housing. So at the margin I would say that we have seen very poor cement volume growth over the last may be 12 months, I think we are just seeing signs of turnaround. These are early signs. We have seen some of these early signs in the past also for one or two months and then they fizzle off. So if we have to take a view that what this government is doing is right but may be a bit slow, then we are on the right track. It would eventually play through may be 12 months-18 months.

ET Now: It seems you do not want to take a call on that space?

Sridhar Sivaram: We would have some exposure in cement because…

ET Now: But it is not the top draw?

Sridhar Sivaram: Yes, it is surely not.

ET Now: So while oil and gas is one space that is doing well, the fact remains that if the market stays stable and does not correct than for an avid or an average stock picker who identifies great businesses, there will be above average or above normal returns that could come in where are you seeing opportunities right now?

Sridhar Sivaram: This is still a tough market to find stocks at reasonable prices and to expect return is a lot of work. This is not a bull market by any stretch where you can buy a stock and expect returns. There will be even a minor negative news flow when you will see stocks getting killed. So you need a lot of background work to be done, much more than what you would do normally. So first off, all the return expectations have to be muted. Once you have muted return expectations, there will be a defensive tilt that everything is not great either in India or globally. We are in low growth environment globally and high volatility environment and anything could happen. So there is no point being over exuberant in this market and it is really stock specific and not sector specific. So within sectors also, you are seeing huge divergence. So it is really becoming bottom up stock picking unlike say 2013-2014 where you just took a call on the sector and you could have even the worst stock which would have given you significant returns.

So I really cannot give you a sector right now. Oil and gas is one where you can may be bet; construction is the other because road construction activity has really picked up. So if you look at NHAI data, even the other data that you are seeing from companies urban infrastructure because of elections coming up, huge activity can be seen in urban infrastructure. All this adds up for construction companies. So there are a few pockets here and there but one has to be careful on management quality in some of these sectors.

ET Now: A sector where we say management pedigree is better, the business is strong, return ratios have been excellent in the past is pharmaceuticals. Now you cannot blame it on management with what is going on with US FDA but yet pharma companies are suffering.

Sridhar Sivaram: Well I will defer with you. So if you look at some of the US FDA observations, they are quite shocking. I do not want to take any names here. You go through some of the last four-five US FDA observations, some of these companies have repeated observations on the same thing and they say that no these were test batches, these were something else. I am not a pharma expert but as a layman when I read that, I find it quite shocking that I think they had taken the US FDA for granted. That's what I feel, otherwise how is it that so many of Indian companies are now suddenly falling into this US FDA trap?

ET Now: So how come US FDA ignored this all this while?

Sridhar Sivaram: One of the reasons hich I hear is that US FDA did not have enough manpower to do the inspection. So about three-four years back, they started Indian operation. They have office in India now and they have beefed up the operations and the number of people. India is the second or third largest US FDA approved plants country in the world now. So the fact that so many pharma companies have US FDA plants, they have beefed up their inspection team and as a result we are seeing this. So I am saying that it cannot just be a coincidence. At the same time, I am saying maybe some of these pharma companies took things for granted because things were going so well and nothing was happening so they reduced the standard that they should have normally maintained.

ET Now: So is that an opportunity then because if there is a system in place, check and balances are being brought in, would you buy pharma given this selloff?

Sridhar Sivaram: Selectively yes. So there are companies which have either come out of this after correction and at the end of it, you have to take the management at some face value, you have to assume that they have done the corrections and things are…

ET Now: The leap of faith is important…

Sridhar Sivaram: Yes, a leap of faith is important. As you said the management is good. I cannot question the intentions. May be they assume that this is good enough.

ET Now: See for Maruti I think it is the yen strength, let us be real. Yen is at a multi-year high against the dollar. We all thought that for HDFC, the business model would be solid. I mean it would be an immortal model and now the provisioning are just telling you that they are also feeling the heat and we always thought that HDFC will never ever have NPA problems, they will continue to go on irrespective of the terrain. Now when these popular convictions are getting challenged, that is where the disappointments start coming in.

Sridhar Sivaram: In my previous avatar, we did not own HDFC in our portfolio. It was 9 per cent of the benchmark. So it is a huge exception but we had presented to the investment committee that between 2010 and 2013, they diluted their credit standards as far as corporate loans are concerned. Their exposure to large steel companies were challenged by the management on why would they would want to lend to steel companies. Their view was that they were building housing colonies for them when the company did not have money to pay salary. So I am just saying that they had diluted their standards and what we are seeing now is possibly the result of the dilution of the standards. So their corporate exposure is large. At one point it was close to 40 per cent. Now it may be closer to 30 per cent.

ET Now: Their NIMs are not the best in the industry. They are losing market share. Competition is also coming in and we are talking HDFC Limited here.

Sridhar Sivaram: I am talking about HDFC Limited and they lend to a tough sector. I mean its real estate. They also lend to a lot of infrastructure companies. So it is a tough sector and when there is so much storm in that sector, they will face some brunt of it.

ET Now: I want to quiz you on your understanding of the auto ancillary sector without getting into why. I know you have a very deep understanding of that sector. How should one understand the current problems which are plaguing the auto ancillary sector whether it is a Bharat Forge or a Motherson Sumi? They are not the high fliers now, business is contracting, some are getting stuck because of a Volkswagen problem. For Bharat Forge, it is a problem that their main car business in US is not growing or main truck business in US is not growing?

Sridhar Sivaram: I think auto ancillaries have had a huge run. So if we take the last three-four years, they have been multi-baggers. So they are facing multiple headwinds right now. One is that the business itself is seeing some sort of challenges -- some are stock specific, some are sector specific and the other is that the valuations had gone to maybe slightly dizzy heights which is correcting right now. But if you take a three-four-year call from here, it is possible that they will still give you reasonable returns because some of these companies have shown in the past that they are very good at global acquisitions across sectors. There are a handful here. You can just maybe pick five, six companies across sectors. Some of these companies have very well integrating international companies. So I would still give benefit of doubt to the management and stay invested. I would back some of these companies.

ET Now: Talking about integration, we have been discussing Tata Steel. Now that it seems like they are on a slow, steady path given the pressures that they are facing, they will perhaps get the UK assets which have been a pain point for the balance sheet off their accounts. The domestic business looks good given that there is an expected turnaround there and of course they are integrated?

Sridhar Sivaram: So domestic business looks better than the international business. I think the domestic business also has got some protection right now and there is some talk about some increased protection for the domestic business. So I think the domestic business is looking much better but having said that, I still have a bias against commodities. I think given the huge capacity that China has and we are still a rounding off error in the global scheme of things for steel, we will have impact on what happens globally.

ET Now: You own steel stocks, I know about it.

Sridhar Sivaram: Yes, those are converters. So let me be honest, I am not a big fan of some of the steel stocks but if you look at say JSW, it is at its 52-week high and in fact I was looking at it yesterday and I could not believe my eyes. So the three-year performance of JSW steel is better than HDFC Bank.

ET Now: Is it? I am just shocked I did not realise it?

Sridhar Sivaram: I was shocked.

ET Now: I know it is at a 52-week high.

Sridhar Sivaram: So hats off to some of the owners of...

ET Now: Let us do that actually. Let us do that. Let us do that. A very interesting comparison. We will do it just for the benefit of our viewers, I am not challenging your data.

Sridhar Sivaram: I was myself challenged and I am being honest.

ET Now: You are saying on the basis of the three-year performance?

Sridhar Sivaram: I am saying three-year because this is the period when commodity stocks have got killed. This is the same time Vedanta was down minus 14 per cent or minus 10 per cent CAGR three years. This stock has returned better than HDFC Bank. So I am just saying let us be fair to the owners of JSW Steel. They have done a great job. I am being honest that I was not a big fan but this is the reality. So you have to give credit where it is due that they followed and backed the company because it was a converter, it had nothing to do with commodity and one of the most efficient companies and a great promoter.

ET Now: Look at the return. 78 per cent over the last three years for JSW.

Sridhar Sivaram: Whatever it is, it has done significantly well over a period where there has been commodity downturn. You would not have guessed that this stock would have done well. So all I am trying to say is that this is becoming a very difficult market from a sector standpoint. You would have assumed that all commodity stocks would have underperformed, even year-to-date the stock has significantly outperformed. All I am trying to say is that it is becoming a stock specific market.

ET Now: What we are discussing is history and a very famous Warren Buffet quote is that in financial markets money is not made when you do a rear view driving, you always have to look forward. If you have to do some similar comparisons in 2020 or 2019, what would throw up best surprises? I am interested in that, what you have told me is great data for the past.

Sridhar Sivaram: So my style is backing companies which have sustainable growth. So either you go and find companies which are in early stage or you just back companies like HDFC Bank which I know over a period of time. So if you look at five-year data, HDFC would have significantly outperformed.

ET Now: I want to look at the next five years not last five years.

Sridhar Sivaram: No, so I am just telling you that even if I look at five-year data, HDFC still would have given 20 per cent CAGR whereas JSW would not have.

ET Now: But HDFC Bank is like a bond trade, it is consistent.

Sridhar Sivaram: Well, people think it is a bond trade, it gives me 20 per cent return, why should I be bothered? So I am just saying that is like one sort of a stock. My bias has always been for growth. So if I find good companies with strong growth and maybe slightly more expensive valuation that is fine, I will back the management as long as I am sure of growth. I mean, Eicher used to be one of my favourite stocks and I backed it for three, four years. It has been significant outperformer. It has sort of market performed now, I think I would still back that.

ET Now: I do not know if you look at microfinance as a space or not?

Sridhar Sivaram: We are quite bullish on the microfinance space. My only caveat is when the companies turn themselves into a bank, there is a period of pain. As long as investors are willing to take that period of pain. When there is a bank conversion, there is a lot of cost which is your CRR, SLR.

ET Now: Are you talking about IDFC Bank by any chance?

Sridhar Sivaram: Not saying only for IDFC. If the investors is willing to take that risk of a possible pain during conversion this is a great business.

ET Now: So if I have to say let us make that list, HDFC Bank, Eicher Motors and hopefully IDFC Bank there in next five years?

Sridhar Sivaram: I will take the first two. There are enough other options in the banking space.

ET Now: Equitas could be one of them?

Sridhar Sivaram: Time will tell.