- How to build portfolio in volatile market?
- Outlook on pharma, IT and more
Niraj Shah in conversation with Piper Serica’s Abhay Agarwal on 'The Portfolio Manager'. #NDTVProfitLive
- Outlook on pharma, IT and more
Niraj Shah in conversation with Piper Serica’s Abhay Agarwal on 'The Portfolio Manager'. #NDTVProfitLive
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TVTranscript
00:00 Hello and welcome to the Portfolio Manager, a show where we try to get into the minds
00:12 of the person who is managing a portfolio of public money to try and understand why
00:17 she or he has built the portfolio with the construct that she or he has and what is the
00:22 kind of ideal return that the person envisages looking at the current economic landscape.
00:27 Our guest today is Abhay Agarwal of Piper Serica.
00:31 Viewers, for details, Abhay and Piper Serica manage and advise on an AUM of almost 800
00:37 crore rupees.
00:38 They target an annual return of 18% post fees and expenses, ideal holding period of about
00:43 three to five years.
00:44 Abhay, great having you.
00:45 Thanks for taking the time out.
00:46 Thank you, Neeraj, so much.
00:47 It's a pleasure to be on your show on NDTV Profit and looking forward to the conversation.
00:53 Likewise, so Abhay, is it going to be difficult to do this because if the corporate commentary
00:59 that is coming in, in the last 24 to 48 hours is sounding a bit mixed because we heard Bharat
01:06 Ford say that things are looking slightly difficult and the other hand Cummins came
01:11 in and said that no, as of now, client conversations are not that off and a lot of markets would
01:15 depend, a lot of sectors in India depend on the global markets and they are not necessarily
01:20 looking the strongest.
01:23 You're right, Neeraj, I think I was surprised personally by the commentary of Bharat Ford.
01:28 It's a very strong player.
01:30 So it came as a bit of a surprise.
01:35 But it is also quite natural that the environment that we are in with a lot of global flux in
01:43 shipping and inflation rates, interest rates, corporate earnings in the US and Europe, I
01:51 don't think we're in a situation where any company can come in and say that, look, I
01:55 have absolutely clear visibility of growth for the next two years.
01:59 I think there is expectation and optimism, but still, till it translates into orders,
02:06 nobody is going to go out in this market and say that, because you have also seen, Neeraj,
02:11 that you underperform in one quarter and what happens to your stock price.
02:15 I mean, the stocks are priced so finely that management of most companies are not willing
02:23 to go out and make a very aggressive forecast and then underperform because the markets
02:28 will punish them.
02:29 So I think it's just the nature of the markets right now, the corporate commentary just reflecting
02:34 that nervousness.
02:35 But I think that also gives astute long term investors opportunities, Neeraj, to make their
02:43 own bets amongst this noise that we are going through.
02:48 Got it.
02:49 So what's the portfolio construct in such a scenario, Abhay?
02:52 Because I remember you moved the whole distance from being, I don't know if it was one third
02:58 cash, but a large portion of cash to lower, to even further lower.
03:03 I mean, what's the portfolio construct between the different themes and the cash on the books
03:08 and why is that the case?
03:11 So you're absolutely right.
03:12 I think towards the end of third quarter, last calendar year, we had got into cash because
03:19 we were nervous about the whole trajectory of Fed interest rates.
03:23 And normally we don't take cash calls, but this we thought was an extraordinary event.
03:27 And we also had made good money in our small and mid cap bets.
03:32 So we wanted to book some profits and get into large caps, get a little defensive because
03:37 we thought that the environment globally and in India was a little volatile.
03:41 However, things changed pretty quickly.
03:43 We were surprised how fast Fed changed its stance to keeping the rates to where they
03:47 were and actually indicating a cut middle of this year.
03:50 So that gave us the confidence that we don't need to sit on this much cash and then we
03:54 can deploy it.
03:55 And now where we are is we have like 6% cash in the model portfolio.
04:00 So, but what we have done needed is that since we have a very long term approach and we are
04:06 not really looking to jump portfolios very often, what we are looking at is backing the
04:12 long term opportunities that we see will make the kind of returns that you mentioned for
04:19 our portfolio.
04:20 We're not trying to do anything extraordinary.
04:21 We don't want to take too much risk.
04:23 Our investor profile is such that they're already wealthy.
04:26 They are family offices, ultra-engineers and their mandate is that grow the capital at
04:32 a sensible level without trying to take too much of risk.
04:34 So we like to keep the portfolios de-risked as much as possible.
04:38 Can't escape the market volatility.
04:40 But where we are now is that we have cut down our allocation to large banks and NBFCs.
04:47 We are just about 20% there.
04:50 We have a large segment in our portfolio that we call financial services companies, which
04:55 are not lenders, companies like Angel One, CDSN, GAMS.
04:58 We see these as very long term plays.
05:00 We're not even looking at them for one quarter, five quarters or 10 quarters.
05:05 We're looking at them as next five year, 10 year plays.
05:09 Then we have added Agri Chem in our portfolio and right now that bet is flat lining, but
05:16 I think with the focus that the government has on boosting the agri economy, there are
05:21 companies there that will do well.
05:24 Large cap pharma has been a contra bet for us for the last six months.
05:28 We added three names there and they have actually already done well.
05:32 So we are quite positive on large cap pharma because of various reasons.
05:38 And in autos we have one bet.
05:40 So I think that's the portfolio construct.
05:42 We don't have any IT names.
05:43 A lot of people are surprised, but I think IT we still see struggling for growth for
05:47 one year.
05:48 So once we see positive commentary, we'll probably add to that.
05:51 So that's the broad portfolio construct, I would say.
05:55 It's a mix of small caps, mid caps, because of our flexi cap strategy, about 30% is large
06:00 cap, 20% mid cap and 50% is almost 50% is small caps.
06:06 Interesting that you're preempting stuff in pharma, but you're not wanting to preempt
06:11 in IT.
06:12 Why this differentiation?
06:13 No, IT in pharma, we can clearly see over the last three months, we have seen multiple
06:20 things happen that make us believe that trough has been reached in the cyclical business
06:27 of generic pharma exports.
06:30 One is that the extended supply or dumping from China has ceased to a large extent.
06:38 And in generic pharma, our companies were struggling because the pricing power was lost
06:43 and they were making money, but barely any money to cover costs.
06:46 So we see a margin improvement as prices have increased.
06:48 The second thing we're seeing is that raw material prices coming out of China have dropped,
06:53 solvent prices, some of the bird drug prices have dropped.
06:56 Third thing we are seeing, Neeraj, which is again, a very good long term macro play is
07:01 that USMBA has become friendlier.
07:02 And I don't know what the reason for that is.
07:03 I mean, is there a political overtone to that?
07:04 Or is it because the US is running short on generic supply for its domestic market?
07:05 But whatever it is, the USMBA is not as combative.
07:06 And I think a large percentage of the USMBA is not as combative.
07:07 And I think a large percentage of the USMBA is not as combative.
07:08 And I think a large percentage of the USMBA is not as combative.
07:09 And I think a large percentage of the USMBA is not as combative.
07:10 And I think a large percentage of the USMBA is not as combative.
07:33 So we are not at all worried about USMBA actions that used to destroy value a lot earlier.
07:40 And another interesting thing is the pipeline of new launches, both in the US and in India,
07:47 I think I haven't seen that kind of pipeline.
07:50 So you look at companies like Dr. Reddy's, Lupin, Sun Pharma, I'm just taking days, these
07:54 are not my recommendations, but across the board, you will see very strong pipeline of
07:59 launches.
08:00 So that is giving us the confidence that these companies are trading at very low valuation
08:06 compared to their upcycle multiples.
08:09 So there is, I think, enough good money to be made over the next three to five years
08:13 is what is our bet in the space.
08:16 In IT, we are not making that bet yet because we are not seeing any signs of recovery.
08:20 We are not seeing any jump increase in customer demand.
08:24 We are not seeing any innovation coming out of IT services companies in India that is
08:29 leading them to increase their margins.
08:30 So once we see that, we will definitely consider adding those also.
08:36 Okay.
08:37 So you are saying that when it comes to information technology, you are okay to buy the stocks
08:40 5, 10, 15% higher, or you might as well wait for a change in trend because it's almost
08:45 impossible to predict that change in trend.
08:48 Yeah, in the current environment, yes, it's a very competitive market.
08:51 And I think unfortunately, the Indian companies seem to be caught like a deer in the headlight
08:55 when it comes to innovation and adopting new technologies like AI to drive efficiencies
09:03 for their customers.
09:04 And I think some of the recent losses of large contracts is probably because of a reason
09:09 for that, that their pricing is not able to match what the customers expect them to do.
09:16 Got it.
09:17 Okay.
09:18 So that's as far as and then, therefore, I want to extend the conversation because let's
09:24 kind of in this segment kind of talk about some of those export oriented businesses.
09:28 You mentioned that you are surprised with the commentary of Bharat Forge, you've given
09:31 us your rationale for Pharma IT.
09:36 I want to extend it to Agri Chem.
09:38 By the way, Pharma, you are significantly overweight related to weightages.
09:41 So if it does well, kudos, great for you and your investors.
09:45 But Agri Chem, here while Abhay just playing the devil's advocate that the commentary is
09:53 not necessarily sounding very jovial and there has been some commentary around green shoots
09:58 now available in the last couple of quarters from Indian companies, even though global
10:03 companies, company after company has said that there is pain, at least until 2024 there
10:07 was pain.
10:08 So out here, are you pre-empting or are you seeing signs of some revival?
10:13 What is the rationale?
10:14 So we have three companies in our portfolio in the Agri Chem space.
10:19 Two are Indian, they cater to Indian farmers.
10:23 One is Dhanuka, the other is Buyer Crop.
10:28 And then we have a large play in form of UPL that we recently added, though the commentary
10:33 as you said is still pretty weak.
10:35 But I think the kind of extended down cycle these companies have gone through, we would
10:41 like to believe that we are towards the end phase of that, maybe a quarter more, maybe
10:46 two more quarters.
10:47 But again, we can see some of the key product prices inch up as the dumping from China has
10:54 reduced, is reducing as we speak.
10:58 And I think that is what will help them increase margins.
11:01 The domestic companies like Dhanuka, a very small cap company, just expanded capacity,
11:07 has a very good product portfolio, new launches, buyer needs no introduction, one of the best
11:12 players in India, top players.
11:15 So we believe that these companies will get volume growth, will get higher margins, because
11:21 the government is very focused on making sure that the farm level income increases.
11:26 The BJP has a stated objective of doubling the farm income over the next five years.
11:30 And I think that is going to be a big focus area for this government.
11:33 But I'm saying leaving that also aside, just the economics of it, that the farmers will
11:39 need a better yield on their farmland and the farmland is not increasing.
11:45 So all that you can do is increase the yield.
11:48 And for increasing the yield, you need herbicides, you need agrochemicals, you need fertilizers,
11:55 you need crop protection, all kinds of chemicals.
11:58 And I think that is where these companies with a very solid value chain will play that
12:02 up cycle when it comes.
12:03 So you're right, Neeraj, we may be a little early in the cycle, but we know that the valuations
12:10 will spike pretty quickly once the numbers actually start hitting.
12:17 So that's why we have a 13.5% allocation to this space, which we are happy to hold for
12:23 the time being.
12:24 Okay.
12:25 Abhay, may I ask you now to talk about the inward facing themes that you've bet on in
12:31 your portfolios?
12:32 I heard you mention that the bets on some of the banking and NBFC names have been cut
12:41 down.
12:42 It's about a 20.5% allocation.
12:45 In select cases, except for PSU banks, private banks are actually trading at possibly the
12:51 best trailing 12 months or maybe even a one year forward valuation that they have traded
12:56 in the recent past.
12:57 Why is it that you've cut the allocation?
13:00 I think there are two reasons for that.
13:05 One is a structural business issue that these banks are now struggling for two things.
13:10 One is access to cheap deposits that drove their margins earlier.
13:18 I think that access to cheap deposits in form of constantly increasing CASA has probably
13:25 hit its upper level now.
13:28 I think any incremental gain in that is going to be pretty small.
13:32 There is going to be a cross-site inflation as depositors want a higher return for the
13:39 money that they put out in these banks.
13:41 The second thing is that the opportunity space on the credit side is very competitive.
13:47 If you want to go and then do very good quality corporates, that's become very competitive.
13:53 The PSU banks also becoming very competitive.
13:55 In fact, SBI, BNB, Banco Parol are giving all the private banks a run for their money
14:00 as far as corporate finance deals are concerned.
14:03 Where do you go?
14:05 Then you go to retail and retail is a large franchise, but again, as long as you're going
14:10 to do mortgages or secured lending, the margins are limited.
14:14 Then really, really what you're left with to drive aggressive growth in the book and
14:19 margins is to drop down to unsecured lending or close to that.
14:23 Now, that is a space that is infested with microfinance companies, small NBFCs, who do
14:29 a very good job at that.
14:31 I think the large private banks, most of them are really struggling for growth right now
14:39 because either they sacrifice credit quality or at the same credit quality, the growth
14:45 is going to be not equivalent to what it was.
14:49 That is the fundamental part, Neeraj.
14:52 The other part is the technical part.
14:54 Now, look at the valuations, as you mentioned, they are probably one of the lowest end of
14:59 the valuation range if we go back to last 15, 20 years.
15:02 At the same time, if you're an FBI investor, if you're a foreign investor who doesn't really
15:07 have to invest only in Indian banks, you would look at Indian banks and say, well, these
15:10 are the most expensive banks in the whole world.
15:14 You can buy, you look at Citibank, Bank of America, JP Morgan, all these are trading
15:19 also at almost single digit book value, one and a half times book value multiple, international
15:27 level franchises that are fairly de-risked because of their global nature.
15:34 As an FBI investor, you always toss up and say, look, instead of buying a very expensive
15:39 Indian bank, maybe I can just buy a Citibank if I need to increase my banking allocation.
15:43 And you look at some of the Chinese banks, which are trading at ridiculous 0.3, 0.5,
15:49 0.25 times book value.
15:51 So if you look at the technical factor and if you look at the fundamental factor, I think
15:55 there is a case that it is better to, the question is, what kind of return can you really
16:03 generate backing these big banks now?
16:05 Are they going to go into a business restructuring technical valuation correction zone for some
16:11 year before you start looking at them again?
16:15 Okay.
16:16 Domestic themes, and I have two more themes to talk about with you because I know that
16:22 you track them so closely.
16:24 One of them is something that you mentioned, which is capital marketplace.
16:27 I heard you say that you bet on them for four, five, 10 years.
16:31 So there is one thing for somebody who is buying for 12 months, the near term valuation
16:39 becomes a concern or becomes a factor and therefore you may hypothetically not want
16:44 to buy something at 30 P, but okay to buy it at 25 P. But if you are betting on them
16:48 for five, 10 years, then frankly 25 P or 30 P may not make as much of a difference, right?
16:54 Especially for an individual investor because you don't want to show returns anywhere.
16:57 So my question is, what is the thesis behind the longevity of some of the capital marketplace?
17:05 Is it that the number of investors are large and this market will deepen?
17:09 What is it?
17:10 Sure.
17:11 And you said it so well just now that if anybody that in the short term, the short term outlook
17:21 drives valuations, but long term perspective drives the returns.
17:27 That's the truth.
17:28 So the longer you can see, the farther you can see, the better is your probability of
17:33 making returns.
17:34 And frankly, I've seen that the investors that we have, they are looking for compounders
17:39 that will compound at a sensible valuation and we are fairly valuation, we pay a lot
17:46 of attention to valuation.
17:47 We are not investors who would like to buy quality at any price.
17:51 For us, our returns come when we pay fair valuation and let the companies compound growth.
17:57 So some of these companies look expensive, CDSL, CAMS, Angel One, and they have been
18:05 historically expensive.
18:06 We have them in our portfolio since their IPO time and they have delivered excellent
18:09 returns for us.
18:10 And the reason that we are backing them, Neeraj, is that as the financialization of savings
18:16 takes place, more DMAT accounts, more trading accounts, more mutual fund accounts, full
18:25 use, getting creative.
18:26 These are companies that are completely driven by technology now.
18:30 So their margins keep improving because they don't have incremental costs as much as the
18:35 revenue growth.
18:37 So you're in a beautiful space that you have a highly consolidated industry, two players
18:41 at max, three players at best in these industries.
18:45 And your business, you don't spend any money marketing because your business is all inward,
18:50 it's all inbound.
18:51 And with that, as India becomes from a $4 trillion market cap, becomes an $8 trillion
18:57 market cap, these businesses will triple or probably quadruple in size just to support
19:02 that growth.
19:04 So if you take that five-year view, eight-year view, and say that what these companies can
19:09 become, 4 to 5x of their current market cap, then I think the attention goes away from
19:16 their near-term P multiple to looking at what is the wealth that I can create.
19:21 So I think that's the bet that we are making in these companies.
19:26 They would become 3x, 4x, their current size while the market doubles because you're saying
19:31 the market is consolidating and therefore these players, which are large and if not
19:36 monopolistic than the dominant ones, will keep on gaining an incremental larger proportion
19:40 of the new market that comes in.
19:42 Yes, absolutely.
19:43 And they don't have the cost structure, they can scale up very rapidly, they don't need
19:47 to build new offices, they don't have any cap-its, they don't need to hire as many people
19:52 because technology is driving their entire business growth.
19:56 Got it.
19:57 Got it.
19:58 Okay.
19:59 Abhay, I was doing some work on the hotel sector because we've spoken about this in
20:02 the past.
20:03 Now, just a basic, and I don't know if you agree or not, but this is what stood out per
20:10 se that if I just aggregate the entire hotel market cap to earnings, then the Indian hotel
20:17 sector kind of trades at nearly 10, 11 times price to sales.
20:24 Very expensive relative to global peers, right?
20:27 My question is, we've spoken in the past about this being a great domestic opportunity, tourism
20:33 is booming, if anything, the Prime Minister, the budget, etc., all lays emphasis there.
20:39 Are hotels a good way to play tourism?
20:41 Why or why not?
20:43 And if not, is there some other way that you can play this theme?
20:47 Neeraj, we had Lementree in our portfolio post-COVID, we had added and then we exited
20:54 recently.
20:55 And the reason was exactly what you said, Neeraj, that I think a lot of their valuation
21:00 is now well into the frothy zone because of populism of these companies' stocks right
21:07 now and also the fact that there is some scarcity.
21:11 So if a large investor wants to allocate a reasonable amount of capital into hotel segment,
21:18 there are very few names that are available.
21:20 So I think that is driving some of this for the valuation, but I think the earnings are
21:25 not going to be as high as people expect them to be because these are businesses that are
21:30 driven by very high capital inflow.
21:33 So every time they grow, which is either by acquiring a hospital or a hotel or taking
21:38 a contract of a hotel, they have low margin, high capital businesses that will struggle
21:46 for growth beyond a point.
21:48 So I think it's a good secular theme going forward, but it's still kind of the valuations
21:57 are not that attractive anymore in this whole segment.
22:00 I think the returns have been made, whatever was to be made between COVID and now the returns
22:04 have been made.
22:05 So in hospitality sector, if you look at it, travel, there is Indigo, which is probably
22:10 the only airline that one could invest in.
22:12 And then there are restaurant stocks, but they have also disappointed.
22:17 You look at most of the QSR companies have struggled for growth in the last one quarter
22:21 because of seasonality and some of the other factors.
22:25 Then you have the movie chains, PVR again, stock is probably grinding towards its 52
22:34 week low.
22:35 So what is happening is that while it is a good attractive theme, the whole tourism space,
22:43 but the problem is that there are not enough plays in this that the investor can look at.
22:49 And I think that's one of the reasons that whatever is worth investing in is already
22:52 so expensive that you wonder what kind of return would you generate by investing in
22:57 them at this current price.
22:58 Point well taken.
22:59 You know, sadly, we are out of time because otherwise I would have loved to ask Abhay
23:04 Agarwal about his 8% allocation to EMS or media 4.5%, which is not something that we
23:10 started seeing, but not a very dominant piece in most portfolios.
23:13 Maybe we'll save that for another time.
23:15 But this was lovely too.
23:16 Abhay, thank you for taking the time out and being with us today.
23:18 Thank you, Anirudh.
23:19 It's my pleasure.
23:20 Thank you.
23:21 This was entirely ours.
23:22 And viewers, thanks for tuning in to yet another episode of The Portfolio Manager.
23:26 I'm Anirudh Singh.
23:27 We'll see you next time.
23:27 [Music]
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