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    Feel bullish going into 2018, no chance of market topping out: Anant Shirgaonkar, Newport Capital LLP

    Synopsis

    “IT, pharma, NBFCs and private banks are all avoids and would rather bet on credit rating agencies”

    ET Now

    Talking to ET Now, Anant Shirgaonkar, Managing Partner, Newport Capital LLP, says some of the sectors can show massive earnings growth and we have started seeing that in some of the discretionary names.

    Edited excerpts
    :

    The consensus is there is a 89% upside coming for the index in 2018. I think that is a very conservative number, considering we are sitting on the cusp of an earnings recovery?

    That would be a fair statement. What is happening is in last two-three years, people have been expecting earnings growth to come by but it has not really come through and that psychologically puts you on the backfoot. When you project the earnings for next year, you actually lowball the whole thing but that is where the big risk lies in terms of going wrong because when the earnings return, they do not come back in a tepid manner. They flow through and there is a lot of operating leverage, financial leverage built in when that starts playing through. Some of the sectors can show massive earnings growth and we have started seeing that in some of the discretionary names already. When earnings come back, they could be much much more robust than what is being projected.

    How long before earnings from consumer discretionary flows through to other sectors? Is it a wait of a quarter or two quarters or longer?
    That is a very tricky thing to do but it is better to anticipate some of these things rather than try to forecast saying this is going to happen two quarters later and therefore I will jump into this sector after two quarters and into that sector after three quarters. It is better to look at some of these sectors which were beaten down, wherein the earnings expectations were so low that from there, you can only expect an upside. This is where consumer discretionary qualified two quarters ago, alcohol qualified, some QSR qualified and all of them started showing earnings growth.

    Stocks have done very well since then. This is just the beginning for some of these names. We should have identified some similar sectors wherein the expectations are low. Everybody is looking somewhere else and you could actually see earnings growth expectations being beaten in some of these sectors which everybody is neglecting.

    Would you be worried about changing macros like we were discussing earlier today with crude getting back to 2015 highs. The fact that it is going to dampen inflation going forward, the RBI may be stalling interest rates from here if not an uptick is what we can expect. Is that something that would worry you at all?

    I do not think that is something to worry about right now. Basically, the way it will play out is that at any point in time, there will be some macro worry. So, at some point in time it would be coming out of the US or Europe, sometimes it comes out of crude and commodities, sometimes it will come out of RBI. A better way to look at things is bottom up and look at stocks which will show earnings growth in spite of all of these and there are enough sectors and stocks to look at.
    I do not think I am really worried about crude and RBI starting the interest rate hike. I do not think any market has topped out. After the first interest rate hike, we have to see the full cycle play through wherein corporate leverage increases, the borrowing goes up, RBI increases rates and subsequently, inflation peaks out and that is where you should start worrying about the markets. It is way too early to worry about RBI hiking rates and its impact on the markets.

    You like ACC for Rs 2018. ACC is a cement company but a very expensive stock to own. Why go for the market leader and not a regional player because cement is not an all-India play and more a regional play?

    Very often, people talk about south is going to do well or east is going to do well but it is very easy to go wrong on some of these things because when you say south is going to do well and that becomes a consensus view, it also gets baked into the stocks which are based in the south. I always wanted to look at PAN India plays, It is okay to make lesser returns but I do not want to go wrong on one particular region and then not make returns out of it. I am happy with a PAN India play like an ACC.

    I am quite surprised that you are bullish on logistics because about three years back, when the Amazons of the world were just about gaining traction in India this sector was hot and even then it just about took off before crash landing. What makes you bullish because most of these companies are now getting their own logistics model. At least Amazon is, which was supposed to be the biggest play and biggest revenue generator for the logistics business. Why logistics then?

    Logistics is not only going to be an ecommerce play. What drives it is going to be economic recovery. Logistics has gone through two bouts of pains. One is demonetisation after which the economy really froze and at that point in time we started approaching GST, I think the consensus got it wrong saying that GST’s biggest beneficiary is logistics without realising that GST can actually freeze the flow of goods and adversely impact logistics which is what happened in two quarters and now nobody is talking about logistics. This is where the opportunity comes in, wherein the economy is recovering and the negative effects of DeMon and GST are behind us. Logistics plays will start showing volume growth and they will start showing earnings growth followed by. So it is basically a high leveraged economic growth play and I think the timing seems to be much better now rather than one year earlier.

    Any specific names within logistics that you are betting on and if you could talk about those?

    Of the two stocks that I am looking at, one is a global leader in logistics. Air cargo will benefit the most, in domestic it benefits with 17% market share and so that is a nobrainer. There is another one which I like which is the warehousing company which helps in freezing and storing goods. This was very adversely affected because of GST and the utilisation levels really cracked. Now that the GST effects are retreating, utilisations levels have started inching up. We will start seeing utilisation inch up quarter after quarter and that will cause exponential growth in earnings.

     

    But logistics stocks are not entirely cheap. Look at Bluedart. It has got a PE multiple of 40-50 times. Something like All Cargo has no earnings and the PE multiples are looking bloated, Gateway Distriparks, a pure play on the so-called global trade, again PE multiples are slightly out of whack. Mahindra logistics just went public. Future Retail IPO or Future Logistics IPO has come and gone and no one has talked about it.

    I got the same pushback when you looked at alcohol say two-three quarters ago. When the earnings are depressed, stocks will look expensive. The only call you need to take is whether the earnings are going to come back ferociously over the next two-three years. Same pushback was with the pizza company with the numbers not flowing through but when the numbers start flowing through, valuations get even more expensive. Stocks do extremely well and people start forecasting two-three years out .The same thing is playing out in logistics right now.

    In the portfolios which you manage and the stocks which you own what are your top three holdings and what do you think is unlikely to change in 2018 irrespective of the market terrain or the macro picture, three stocks you have been owning from three years and you will not sell for next three years?

    Yes, so I think alcohol I continue to be very positive on, both the top MNC names in spirits as well as beer. Pizza, I continue to be very positive on. Logistics I will continue to own from here. I think cement looks pretty interesting I do not think I will give that away in a hurry. So most of these names will hold for the next two-three years.

    Another interesting name and I remember having a discussion about this with you. Do you continue to find value in wellness companies?
    Yes. Honestly, the earnings have disappointed a bit over there but if you identify what really went wrong, you need to understand that this is a feel- good play and you cannot be feeling good after demonetisation, you cannot be feeling good after the economy freezes after the GST. You need to feel the ebullience in the economy and people having some money to splash around. Both those negatives are behind us. So that name has been underperforming for last one year but now that both of these negatives are behind us, I hope the economy recovers and people have some extra money so that they can start spending on these wellness things. Over the next two-three years, opportunity is huge and that is what I am really betting on.

    What is the future for names like D-Mart, Trent, Future Retail in 2018? 2017 has been a cracker of a year for the brick and mortar retailers whereas we are migrating more towards e-commerce and online shopping. If I look at the listed companies which are brick and mortar companies, they have had a home run this year?
    As a policy, I try to stay away from intermediaries. People want to buy Maggi noodles, they do not necessarily want to Maggi noodles from Big Bazaar so for me Big Bazaar is an intermediary. It can do well but I am happy to pass on that opportunity. Let somebody else make money because I do not know whether the next consumer of Maggi noodles is going to be from Big Bazaar or from Amazon.

    How are you betting on data?
    I do not think I am betting on data. My point on telecom is very contra to most people’s view. I think data is a commodity. The way I am looking at this is people saw telecom as a growth play from 2003 onwards and we are still hooked on to that telecom as a growth play. Eventually what we see happening is that data growth is happening but the revenue growth for the telecom companies is much more tepid.

    You did buy Tata Communication?
    I did buy it for a trade but not necessarily as a core holding. My point is that data growth could be strong but I do not think it may translate into revenue growth and telecom utilities. Both voice and data eventually will become commodities and utilities.

    But that is how technology moves. It starts with a promise, then price war kicks in and ultimately it becomes a commodity. But what happens when a trend is unleashed is that the dependence on that technology or that particular vertical increases highly. The data growth is here to stay and so you may not want to buy companies which are providing data but you may want to buy companies which would benefit because of data consumption. Are you betting on a Balaji or a Tejas Network or a Sterlite Optic because the biggest consumption in India is actually going to be data now?
    I have not figured out which would be the obvious beneficiary in this and contra to what you said, Warren Buffet has gone on record saying this saying that airplanes has been the biggest invention but anybody who bought airline stocks has not really made any money.

    He has changed.
    He has changed of course. The point is this, If you do not figure out whether the companies are going to make money, you do not necessarily have to jump on to the trend. Honestly, I do not think I have figured out which company would benefit out of this.

    I am looking at your top avoids right now, IT, pharma, NBFCs all make sense but why private banks?
    Just a valuation play. At the margin with such high valuations. I think there are better opportunities elsewhere, wherein the valuations could be similar but when the earnings turn, the earnings growth will be much higher than what the private banks would produce. That is the simple argument for not really owning too many private banks or private banks.

    You may get it right. You may underperform in one quarter or first six months, but we know that there are legacy challenges for corporate banks and PSU banks which will not go away. You may see a State Bank of India go from Rs 250 to Rs 400 but on a two-year timeframe, on a three-year timeframe, I still feel HDFC Bank will outperform State Bank of India?
    Do not get me wrong. I am not betting on PSU banks either. What I think is that at this point in time, with these valuations and credit growth playing out, it is better to play the credit rating agencies rather than the private banks. When the turn comes through and the credit growth is already at 10%, we would start seeing credit rating agencies start showing much bigger growth than private banks.

    What is the big view for 2018? Do you think 2018 could be one of those years where the market is going to take in any and every negative surprise, every small or big dip by rushing into buy or do you think it is going to be a more sedate market at our hands, more stock specific where you will make money only in select few names?
    At these valuations, the market is not going to be sedate. It will either go up or go down. What I am seeing is that if you look at psychology or if you look at the positions, corporate debt or corporate leverage is very low, earnings growth has not flown through, interest rates are low. We have not seen in history a market peak out with all these three factors playing out.

    Over the next two-three years we will have to see corporate debt come through as capacities start getting built up, interest rates start moving up, inflation start moving up. Earnings growth will follow and that is where the markets will start getting frothy. I do not know whether it is 2018 or 2019 or 2020, we will track that but with these three sets of numbers being adverse and of course volatility being so low, I do not think this is a recipe for the market topping out. 2018 would be very, very early for looking at market topping out. We should be bullish, I continue to be bullish here.




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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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