Days of multibaggers over, focus on decent compounders: Porinju Veliyath

Porinju Veliyath of Equity Intelligence India, says while the short-term outlook for the Indian market may look challenging, but India continues to be a stock picker’s paradise as of today. In an interview with ETNow, he said SIPs of mutual funds are going to be gamechanger for Indian financial markets Excerpts:-

ET Now: What a strong ride it has been for the broader market! What is your sense? Is there money to be made in individual stocks, because valuations are getting a little bit toppish, times are uncertain and it calls for caution? Do you believe it is not the index but individual stocks which are going to make money for shareholders?

Porinju Veliyath: I think it is a very valid point. Valuation is certainly in the key in any market. But India is in a very special situation, when we talk about valuations. So we have to see the India’s high PE of 20 or 22 in that light.

ET Now: You were talking about is to how money is to be made for some of the broader market stars and individual stocks that you like.

Porinju Veliyath: Yes, we have been talking about individual stock picking. There is no doubt it continues to be a stock pickers’ market. I would call it a stock pickers’ paradise rather considering the operational base we have, especially when you look back the way multibaggers were created over the past five years. Of late, select stocks in India have really come down. I can see companies that can surely grow 10 times, 20 times and some of them 30 and 40 times. Hundreds of stocks have performed that way already. But still there are multibaggers at the same time, which are declining and getting exhausted. A lot of people are in search of good stocks and value stocks among Smallcaps and Midcaps over the past many months, maybe few years. From a short-term to medium-term perspective, there are still multibaggers but investors should focus on decent compounders going forward, which is where you can really create wealth. So the multi-bagger era in general is over. It is a time for compounders. But this compounding is ultimately going to create multi-baggers over time. Indian investors are spoilt so much, a multi-bagger means you make 2 times or 3 times within a short period, six months to one or two years. So that is going to be challenging, but India continues to be a stock picker’s paradise.

ET Now: At this point of time, you are saying instead of hunting for multibagger opportunities, one should stay put with quality, right? There are some interesting antidotes that you have supplied as well, about Kotak, Deutsche Bank and a few others.

Porinju Veliyath: Now what does quality mean? You can find bad quality stocks which then get transformed into the quality league, and that is where we make big money. In India, fortunately, we have a large number of such companies in the midcap and smallcap segments. We always used to discuss about turnarounds happening in various aspects of a business and in most cases the changing attitude of the promoter, which is how some of these so-called penny stocks have come into the quality league. They become multibaggers and they change the space where they belong to. That is why we have many penny stocks becoming smallcaps, many smallcaps becoming midcaps and many midcaps getting into the league of largecaps. That transformation is very special to India. It is very special to India considering the number of stocks getting into that league and we do not see many smart investors are money in this space. Unfortunately, it is not getting widespread among larger, millions and crores of investors in India, potential investors. We have always used to talk about domestic potential of fund flow into the market. The domestic money is going to rule the market in the coming years. FIIs may or may not invest. I am very confident the kind of things happening in the market like SIPs are going to change the game. Today, people are not taking it seriously, looking at maybe Rs 1,000-1,500 crore monthly collection under SIPs. The most important thing about SIPs is that they offer stable growth and that can be stabile even in a too volatile market. We always said cribbed about lack of depth of the market. SIPs will change all that. This Rs 1,500 crore per month collection – it can go up to Rs 3,000 crore or Rs 4,000 crore very soon and who knows it can go up to Rs 20,000 and Rs 10,000 crore in next two-three years – can be a big story. The Indian economy, our demographics and our middle class are most suitable for SIP investors. Plus, we have a lot of things to look forward to, unlike most other economic in the world.

ET Now: What is your view on the sugar sector now after the gains that the sector has already seen? What would be your advice?

Porinju Veliyath: I know when a sector is so hot and it is it in too much fancy, then everybody starts querying that sector. Actually when things are bad, one should make queries. Many smart investors, not only me, in this country identified the sugar sector one year ago and one-and-a-half years ago at the right time, at the inflection point and made huge money. I remember I was picking Dwarikesh Sugar at Rs 25-30, that has grown 10 times in one-and-a-half years. So that is how many of these sugar stocks have performed. Again, do not forget this is a cyclical industry and it is already well-fancied. So, most of the good things happening in the industry are priced in and some of them may be overpriced. So it’s about time investors have a conservative look at the sugar sector at this point of time.

ET Now: Will you stay invested? Do you think the cycle still has some legs to go?

Porinju Veliyath: There could be some more space. I normally do not wait for the peak, because peaks and bottoms happen accidently, not by luck. So, when I find something, the value is Rs 100 but today it is available at Rs 20, it is called a potential five-bagger. So you buy at Rs 20, normally you do not wait till Rs 100, you may start exiting at Rs 70-80 kind of prices. That is always better.

ET Now: So, maybe, one should start booking profits selectively if you are in the sugar space. I think that is the advice.

Porinju Veliyath: That is the advice. I still love DCM Shriram, one stock we are still holding.

ET Now: So stay invested in DCM Shriram. Is that what your thought is?

Porinju Veliyath: Yes.

ET Now: Provide your inputs on Future Consumer Enterprises from a long-term perspective?

Porinju Veliyath: This stock, if you remember, was one of our big picture stocks that we talked about almost a year ago. Actually, this stock has doubled since I have been buying it. It now has nearly Rs 4000 crore market cap. This is a futuristic business and it is, perhaps, the only solid balance sheet company in the group. I like their business model; the food parks and the food processing, packing, grading and so, all of which is still in infancy. Ultimately, selling through their own network like Nilgiris and it is also a well-integrated agri rural company. Not just rural, it is in the cities too. So, it is one of the very good business models, which has the potential to be a multibagger over time. The stock used to be at Rs 5, two-and-a-half to three years ago, then it become Rs 10, when I started liking this company. I had even tweeted it around Rs 10 and I think we discussed it at Rs 14-15 and even at Rs 20. Now I think it is around Rs 21-22. See there is no hurry. These are not stocks for traders to make short-term gains. These are stocks that can compound. It is one of the very good stocks for compounding returns. It can even give you 25-30 per cent kind of compounded return over the next five to 10 years.

ET Now: What are those other interesting pockets that you are researching, or already nibbling at current valuations?

Porinju Veliyath: I was just looking at the railway stocks. Normally, people buy these stocks during the time of Railway Budgets. Actually the Railway Budget was fabulous this time, the way it gave visibility for the future; the future expenditure and future expansion plans were very impressive. Mostly, traders buy into this kind of stocks and then they start selling them after they have come down to one-year low kind of levels. So maybe when these stocks are not fancied – companies like Titagarh Wagons and Texmaco – investors should look at them since the government is spending so much money. There will be companies that supply into that infrastructure segment which will get huge orders and can create big wealth. Some of these companies are debt-free, clean and well managed. They are ready to take advantage of the future. Maybe the current numbers are not attractive, because in this kind of a business when you expect a great future, the numbers may be not reflecting it today. So, you should have the insight into the future; how these companies are going to perform over two years or three years. From that perspective, I think some of them are under-priced.

ET Now: What theme looks good for somebody to make an investment from a two-year perspective? I do not want a stock recommendation, but besides railways, what else is looking attractive?

Porinju Veliyath: Another small segment again I was looking at are the old generation private banks. Banking has gone through very volatile times over the past couple of years. Now there is a lot of apprehensions about the public sector banks, which even I do have. I do not understand that well to predict something. But I think Federal Bank, South Indian Bank -- they are in Kerala in my native place -- look under-priced, because if you see how these companies have been operating in this country over the last many decades and how they have created huge infrastructure, client relations and asset recharge. So they have been going through a bad phase along with all other banks with regard to their NPAs, but the NPA thing seems to be peaking out and the Federal Bank kind of stocks should be posting record profits going forward. The market-cap of Federal Bank is now around Rs 10,000 crore; South Indian Bank should be around Rs 3,000 crore. So I think there is a lot of margin of safety there. If somebody feels there is a long way to go for the banking sector in this country, the old generation private banks are some of them getting transformed into new generation in terms of operations and technology and the way they are adopting the new things. So that is a space investors can watch for reasonable returns.

ET Now: Selan Exploration, have you ever looked at that stock?

Porinju Veliyath: Yes, I have always looked at the stock. This is one of my core portfolio holdings and an underperformer in the last two years. That unexpected kind of decline happened perhaps because of the steep decline in crude oil prices. But it is a clean company with cash on balance sheet, which is available at a throwaway price today. We continue to hold the stock. I think they are expanding their production facility. So at this kind of price, giving a valuation of only around Rs 150 crore, the company is sitting on around 120-130 crore cash. It is a debt-free company. Of course the management is not very transparent. So there are some issues around that. Still it looks like it should give good returns from these levels.

ET Now: Your wife has asked a query, what would you like to have for dinner?

Porinju Veliyath: I can say, perhaps, I may like some rice with Daawat and may be some veggies and curd from the Nilgiris, which look interesting.

ET Now: Who owns Nilgiri, what is the name of the company?

Porinju Veliyath: Future Consumer.