Go for quality, build a portfolio for 2019 & beyond: Enam

Sridhar Sivaram, Chief Investment Officer, Enam Holdings, tells ET Now that one should look for quality in the portfolio and if things are not great, it is better to realign. Edited excerpts: What is your view on how the year is going to be for markets? I was here three months ago and I had said that capital protection should be the mantra for 2018. I still stand by that. We had great returns in 2017 and we had a huge rally for the larger market -- the midcaps and the smallcaps. We are seeing some correction there. It is going to be a tough year given how the macro is shaping up and also the fact that some of the flows that we have seen in some of the PMS’s and some of the other sort of flows which I have seen from the domestic market is ebbing a little bit. I would still say that one has to be very cautious for 2018. Look at the quality of your stocks and if there are some mistakes, this is the time to correct it. In some cases, it may be already too late but it is still worth looking at it and build a portfolio for 2019 and beyond. Are you trying to indicate that the pain is not over even after the 26% fall in the smallcaps from the top? I really do not know whether the pain is over. I do not track the smallcaps as closely as some of the others would do. No, but just the feel of the market. The texture of the market is not looking good. The way some of these stocks are falling, even after falling 25%-30% lower, it is not enough, the volumes are not great. I do not understand this so well but the texture does not look so great. I would just reiterate that one has to look at the quality of your portfolio. If you think things are not great, it is better to realign. Largecaps still look reasonably better valued than some of the mid and smallcaps. I would look for where there is earning certainty and may be build a portfolio for 2019 and beyond. Even in the largecap, there are pockets which have corrected and there could be value in some of those sectors. You are saying PSU banks are a hope trade and PSU banks are a top theme. You are looking at PSU banks as an earnings revival theme. When will it come by and how conclusive would that be? 2018-2019 could itself be a big year of earnings and not just because of core earnings going up. Look at what is happening to the provision part of the line. Many of the PSU banks have had credit cost closer to 2.5-3% and the year before that, it was 1.5%-2% and the year before that it was about 2%. We could see the credit cost normalising closer to about 1.5%-2% for this year and may be 1% and below for the next year because so much of cleaning has already happened. I am not saying all the PSU banks but some of the larger PSU banks are surely looking interesting because I believe that the NCLT process, despite some hiccups, is moving in the right direction. The larger PSU banks always gets cornered into just one which is SBI… Not necessarily. Take top three-four PSU banks and pick and choose from there. All of them will have the same story playing out which is that the earnings will be very strong this year and the next year may be little bit because of the core operating earnings but a large part will be because of much lesser provisioning required. They have had excessive provisioning thanks to the February 12th RBI guidelines and we have seen a lot of provisioning coming even in the March quarter. I am not a complete nay sayer for PSU banks but I do not think this is a structural trade for me. It is an 18-24 month trade because I do see earnings growth coming back because of various other reasons. So, there could be a trade here. I know this has been a hope trade and many of them have not worked for 10 years. In fact, some of the PSU bank charts have not worked for 14 years. They are back to where they were 14 years ago and even lower. I was just looking at the top three-four.Let’s talk about the metal space. Metals is more of a macro call. If metal prices do well, companies also do well and stocks do well. So first you have to get the call on the commodity right and then pick up the market leader. What is your call there? As a house we are not as bullish as we were two years back as far as metals is concerned. Have you sold your metal exposure? I cannot give you exact details of whether we have sold or not, but generally our bullishness is not the same. At that time, there were fewer believers. Now almost every research house has a buy on some of these metals. But does not mean that we have sold out lock, stock and barrel. We still like some metal stocks and we still have metals in our portfolio. Everyone warns against consumer staples as these are very expensive stocks. Is it time to think contra and go for them as these are great businesses which may not give return in 2018 and 2019 but for five years, consumer staples, expensive consumer dominated brand owners will still make money? Even though I am a growth investor, I do not really care about Pes. But my issue with staples is that I do not find growth. After many quarters, we saw a double digit volume growth from HUL last quarter. This is the same for most staple companies. I am finding growth very difficult there. I would rather look at consumer durables where I am seeing growth because India’s penetration in some of these categories be it ACs or washing machines or any of these durable categories is much lower, whereas in staples and many of the categories, the penetration is not as in comparison with other emerging market with similar per capita incomes. I would still back consumer companies but not necessarily staples. In my previous avatar in 2009, we had bought into staples in a big fashion. This was just post Lehman when markets were flying. In 2009, markets were up 75% and everybody was looking at cyclicals. At that time, we had bought into staples because staples premium to the market was at the lowest.It always trades at a premium but at that time the premium was the lowest and that trade worked for five years beautifully well. All the consumer stocks almost they doubled, tripled in just two years. The same safety is not there his time plus the growth itself is missing. We had a fiscal stimulus and at that time, we saw huge growth as far as staples is concerned. That is not the case right now. I would still go with that trade but I would avoid staples as far as possible. But you do believe that there is an opportunity in the largecaps?Some of them are normal compounders. But besides that list, PSU banks is one space that I have mentioned; corporate facing banks again form a sector which has not done well. I come back with the same logic that because of how NCLT, the whole IBC have performed, one has to wait.Again in some of these cases, the stocks have not done anything for 10 years but my belief now is because of change in law these may make sense. We have not had this law before and that law is working quite well, though may not exactly in the way it should have because it was to be a time-bound programme and some of the courts in India have taken the liberty of extending their time line. But even if I give an extension of six months or eight months, eventually once this starts working, we will see a significant impact as far as earnings of banks is concerned.Of course, on a bottom-up basis, look at discretionary in durables. I am not a big fan of external facing companies right now which is IT or pharma, but domestic cyclicals are looking interesting because when you look at the micro numbers on the ground, be it two wheeler, four wheeler, passenger vehicle, commercial vehicle, cement or steel, all of them are coming up with numbers which look fairly encouraging.We are looking at opportunities within this and there are quite a few right now. Talking about corporate oriented banks, we have looked at ICICI and Axis Bank’s books and their retail exposure has gone up, almost rubbing shoulders with the likes of HDFC Bank. Should one look at these banks right now and discount the problems with the past? I will add one more to this. Many of the PSU banks cannot lend so when we are meeting companies they are saying that we have exposure with XYZ PSU bank; we need money for working capital we are not getting it. So they are going to either smaller private sector banks or some of the larger private sector banks. There is opportunity even for NBFCs to take market share right now. Some of these should get the valuations that the retail banks get but even a reset to their own historic average itself is a significant rise, keeping in mind that the earnings will also jump. Currently nobody wants to believe that the earnings can move up.

from The Economic Times https://ift.tt/2z88pw5