Damani on 2 unique themes that could take bull mkt by horns

Apps centering around streaming media business and quick service restaurants is where Damani expects to pick 67846897 66542129 67845872 up his GenNext leaders, Ramesh Damani, value investor and Chairman, Avenue Supermart, tells ET Now. We are going through a transition period but over the next five, 10, 15 years, airlines will make a really good investment hypothesis, says Damani.Edited excerpts: Do you think the interim budget was more like a full budget? The short answer is yes. It was more like a full budget than a interim budget. Therefore, clearly there is more analysis about the budget. But the longer term influential trend of the budget does not seem to be more than a few days. Of course, the fiscal deficit concerns -- what has been projected in the budget -- seemed a bit fuzzy. There is scope for trying to equalise inequality in the Indian economy. All these things will have more lasting impression. But what they did in the first budget – the GST, the insolvency and bankruptcy code - there is nothing like that. What struck me over the budget is the vision Piyush Goyal laid down for 2030. Of course, it is very far reaching. Whether they come back to power or not, but they talked about things that I think someone in North Block should be talking about -- artificial intelligence being at the cutting edge of transportation revolution, how do we make India first a $5-trillion and then a $10-trillion-dollar economy, how do we send astronaut in the space. The India of 2030 will have to start thinking about those areas and I am very glad someone in North Block at least put the big grand picture vision statement even though we did not get much details at this time. Markets or smart guys like you understand the importance of events but you also know that in the overall scheme of things, whether it is budget or election really does not matter. Do you think we should stop getting fixated – A) about the budget adjustment and B) more importantly about the upcoming elections? I think so. I do a presentation where I say India grows at night. What I mean is that when I came to the stock market in 1989, the Sensex was about 800 at that time. Today it is closer to 36,000 on the level. So India has gone up some 50-60X during the last 25 years. All kind of events have taken place in last 30 years which had negatively impacted the stock market -- from Kargil to DeMo to the global financial crisis. But the index always finds its way higher. The underlying truth is that rather than being fixated on macro events or forecasts, investors should find a great business run by credible people at a price they understand, What Warren Buffett has taught us many years ago is still true. I mean you do not think yourself as buying a price but piece of a business and generally you will end up better because you have been able to compound your money. If I look at the global lay of the land from Ray Dalio to Howard Marks, Stanley Druckenmiller, the so called global gurus are quite bearish about what could happen to the world and what could happen to the America. If American stock markets start correcting, I cannot imagine what will happen to the world! Good point and let me tell you Jim Grant who writes Grant’s Interest Rate Observer made a point in his column in Barron’s this week that if you want to forecast, do it in the shower because no one will listen to you and do not risk coming on public television! And nobody will remember you also. But think how difficult it is. The Dow had the worst December in 90 years -- since 1930. In January, it had the best January since 1987! So it was down 9% one month, up 7% the other month. Who knows what is going on? But a couple of things seem certain as you go through all these mess out there, that this huge 30-year bull run in bonds may be over. So collapsing from higher 14-15% to under to actually 1.2% in July 2017, that bull market is over. Interest rates are held higher. If they held higher, it is generally not very good for equities because they act as reversed force of gravities. In the next year or two, interest rates in America will head higher. When they head higher, there will be huge displacement of money going back to developed markets from emerging markets. We do not know how these things play out at this point. But the broader point is that markets correct and then they move back up. So, you remain invested. If interest rates move higher, do you think the impact on corporate America this time or the market cap this time could be limited? The real euphoric rise has happened in FAANG stocks — Facebook, Alphabet, Amazon, Netflix. These are zero debt companies and some would argue that they will move independently of what the interest rate regime is. They are. They are not only zero debt companies, they are also zero working capital companies. They are actually phenomenal but also valued very highly. Interest rates generally are not good for the stock market. Oil prices rising generally are not good for the stock market. These are things you learnt over last 40-50 years. The market can tolerate some degree of laxity in terms of interest rate or even oil prices. But if you have a 35-year bull market, the end of interest rates going down, that is almost two generation shift that took place. I was a child of the 70s and grew up in a very high inflation, high interest rate environment at the Dow. I remember after the first interest rate crack business, there was this article saying ‘Will interest rates spike back up?’ In fact, they headed down for the next 30 years. So, these things work in cycles and we have clearly hit the low point. I do not think we are going to go below 1.6 or 1.2 whatever the low of the US 30-year treasury bill was. They are probably headed higher. In India, I there was some hope that the RBI would reduce interest rates in the next meeting. I think it is becoming increasingly unlikely because of the fiscal spending that the government has undertaken. Almost one trillion rupee, Rs 70,000 crore for the farm budget, Rs 30,000 crore personal tax. It is very unlikely they will reduce interest rates in this or the next cycle. We are also at fairly high interest levels. The macros are favourable for us, things have improved on the margin and yet Indian markets are underperforming the world. Why? There are two things. First, the NBFC crisis, in my opinion is not over. It is a slow moving train wreck going through the system and liquidity. I do not know this very well but my analyst friends tell me it is extremely tight. Money is very hard to get even for corporate India at this point. Liquidity is the mother’s market or bull market. If there is no liquidity, we are going to be squeezed out here. We will depend on the kindness of strangers, foreign portfolio investors to pour money as they have been doing for the last few days to hold up the market. My best case scenario is that we will chug along like this, the market may go and test its all-time high. But based on poor volumes and perhaps even negative breadth, we are not going to make a 10:1 advance decline ratio and breaking out to new highs. We probably will just go and test that area before the general election, but as I said, with very poor volume comes very poor breadth. The macro situation in terms of oil prices is good. Oil is at $60. But we are getting into period of uncertainty with regard to elections, fiscal targets, private sector investment getting crowded out. It does present a challenging picture and particularly in respect of global slowdown. Indian export figures have been nothing write to home about. Is the bull market in mid and smallcap stocks over now? That seems to be the trend right now but I for one look largely at smallcap and midcap stocks, trying to find hidden gems. It is hard to be bearish at these points, at these levels on these companies. Will they underperform? Maybe they will underperform for another six months or so. I am not sure about that but contrary to more popular opinion, I am not bearish about that sector of the market that saying we should never invest in those stocks. As an investor are you fully committed in this market?I am. My cash levels are very low. We sold a little bit and I remain invested and long-term bullish. These things happen in the market out there. At least the evidence does not suggest that the bull market is over. It suggests you are going through a very painful consolidation period out there. Bull market tops are made with a lot of leverage, lot of euphoria. As someone said, when small men make long shadows, that is when you start worrying. I do not see any of the signs yet. It is very painful and I am not trying to diminish the pain that the street is feeling or the damage to the portfolio, but it does not seem to be like we have made a top of the 2013 bull market. But in 2017-18, we saw almost a rising tide phenomenon in small and midcap stocks. Was that not a sign that we may have peaked out a year ago? You only know in hindsight at 2020 but in my judgement, after going through all this, I do not believe so. Yes, there were some excesses in that space which corrected but unless the largecaps top out, a bull market cannot get over because they constitute 60-70% of the market cap of our country today. You would have to see euphoria in those sections and I do not see any euphoria at all in that sector. For the longest time, if I asked anyone what is a good business, they would says it is HDFC Bank or an Asian Paints or an HUL. Some would say all three. These are great businesses but the problem is they are too expensive. How does one approach this kind of dichotomy in the market? At what point do you actually step in and buy these shares? I do not think I have a clear answer. Over the last 30 years, I have learned one thing, you always want to look out for good businesses at a valuation you understand and run by decent people. I would not worry too much about interest rates going higher or the fiscal deficit expanding to 3.5% or things like that. I have no control over that but I do control some good goods and services. Typically, if we are even starting a new bull market cycle, there will be new leadership in the market and that would come from some of the small and midcap stocks. In 2013, no one had heard of Bajaj Finance. Today it is probably one of the premier finance companies and despite the issues in the NBFC sector, the stock is standing firm. You have got to keep looking for new ideas, people approaching businesses in a new way. Clearly technology, app-oriented businesses will do well in the next few years. Keep looking for other opportunities I am sure they will show up. I am almost 100% sure that new opportunities will show up you just have to have a good pair of eyesight. Where do you think a new sector has potential to get created and then you will hunt for it? The media business, in the last 10 years, has moved away from broadcast to streaming, which is a phenomenal change because almost nobody watches live broadcast anymore. They all watch it stream on YouTube at their convenience but there are a few businesses that remain immune to that. If you look at say sports programming, the news cycle, maybe they will not feel the pressure and there will be interesting apps based on that. So you could take a look at somewhere out there. We have liked quick service restaurants because as more women work outside the house, as more people want more hygienic food, easy availability, internet on demand, air conditioners etc, quick service restaurants will answer that challenge. We have very little competition in that area. It is a very difficult business and people who are there right now and going to scale up the business will probably make good bets.You have always maintained that as an investor you should always focus on one thing; price, you need to buy them cheap. PSUs across-the-board - engineering companies, metal companies, banks -- all are cheap. Right now, are you hunting in the PSU banks or PSU stocks? I am, to be honest. There are a couple of things I would say about the PSU basket, the government has a very aggressive disinvestment programme. Last year, it was Rs 80,000 crore. This year, they are budgeting Rs 90,000 crore. They are going about it the wrong way, taking it from one pocket and putting it in another pocket. There was some press item today which said that we are going to do a strategic disinvestment of 28 PSUs this coming year. I do not know if that will happen because every government in the last 15 years has tried it and failed. They could not do Air India even. So, I am not very hopeful it will happen yet but they need to do that. You cannot have national assets being frittered away. MTNL, BSNL value just collapsed and nothing was done about that. If the government is serious about fiscal responsibility, it needs to, These are national assets which need to be handled with more care. So, I am looking at PSUs because in some of them, particularly, in the newly listed railways sector, there is very little competition. This business always goes to them. They are very cheap whether you look at the price to earnings multiple or dividend yield multiple, We have made money in the past on PSUs. So, e are not averse to them but the basket as a whole that does not look as attractive as it used to look a few years back.You and your friends have bought a lot of PSU stocks. Are you spotting and smelling that huge poker opportunity in PSUs go all in?I would not use that word quite aggressively because we are a bit dismayed by the capital allocation process of the PSUs. I do not think PSUs should be used as milch cows by the government. Increasingly, the government seems to be doing that -- whether it is with the RBI, which is also a PSU in some ways or with the actual PSUs. The government is just raiding their coffers to meet its spending priorities. I do not necessarily like that. I do not think there is enough spine in a lot of them to stand up to the government and say we are autonomous corporation you cannot tell us how to use our money. If something is so cheap that the prospects could look good for the next two, three years, I am still buying them. Disruption is here to stay. As an investor, you need to spot something which is durable and has a moat around it. Which are some of those ideas which have a moat and a unique edge? Quick service restaurants should be one. Airlines will be the other. They have not really played out. I have been bullish on airlines and we have done very badly out there but if you look at the Indian picture, one of the leading carriers now has about 50% market share in India. The other competitors are going by the wayside. Maybe they are buying market share currently and ignoring profitability, but 50% market share for the market cap they have is phenomenal. Also the business is not prone to technological disruption. You will still want to go to a wedding in Delhi, to a holiday in Calcutta or a conference in Chennai. The business still lends itself to fairly good economics. United States had multiplicity of carriers. That got whittled down to four or five and then these became extremely profitable and so noticeable that even Warren Buffett had invested in them. The same thing is happening in India. I don’t think almost nobody after Mallya and the problems with Jet would want to open an airline. So, the players that we have would be fairly stable and they will consolidate. At some point, they will start increasing pricing pressure. Already there is a lot of problems when you fly from Bombay to Delhi because you do not have great capacity. That means prices will go up and that would help them. We are going through a transition period but over the next five, 10, 15 years I think airlines will make a really good investment hypothesis.

from Economic Times http://bit.ly/2TEdrpO