You have to buy even a growth stock at a value which discounts a future profit, says Sunil Singhania, Founder, Abakkus Asset Manager LLP.

Why is there such a big disconnect between markets and the economy? Who will ultimately get it right and have the last laugh eventually? Will it be the investors or the economists or basic analysts who are raising concerns?
The market has a life and move of its own. If it would have been so simple to gauge the market movement based on what was happening on the economy front or only one factor, we would not need so many books which are behind my back to understand the markets. So I think the market is a combination of a lot of factors. Obviously the economy is a big factor but there is never a direct correlation between the economy and the market on a day to day basis.

In fact it said that markets are always either lagging the economy by a year or ahead of the economy by a year. It is only after three-four quarters that you realise that they will finally convert to some extent. What we are seeing right now is one, obviously there was a huge fall largely because of the scare where no one knew what was going to happen. Now people have accepted that this is here to stay but it is not like a crazily life threatening scenario. Yes, you have to be careful but people are going back to work.

In some countries like the US, we have seen a good recovery. Retail numbers for example in the US were almost 14% higher; in China across sectors, we are seeing some move on the upside. Even in Europe, you are seeing that; even in India, we are behind the world in terms of opening up and recovery but a few sectors which have opened up and are rural-focussed like cement and steel, there is optimism. I think the worst thing is that we had written off everything even on the financials. We had said this is going to be a crazy year and maybe it is not going to be as bad. So this is a scenario where worse can become bad or bad can become better and I think that is what the market is discounting.

From Howard Marks to Sam Zell, from Warren Buffett to Charlie Munger, everyone is quite sceptical about what is happening in the equity markets. So if the authors and the masters of the books have to be believed, then it looks like we are headed for tough times?
Elon Musk is also there. So it is a mix. It is not only this. Obviously the names you mentioned are some of the greatest names that you have ever seen. I am not saying we should just throw all the caution to the air. In fact, we are also quite cautious. But at the same time, we have to be open about what might happen. So yes, there is a probability that the world is going to face a lot of stress which we are already facing but there is also a probability that over the next two-three months, we might have the scare reduced quite significantly. It has already come down a lot but even from here on, it might reduce.

Three to six months of P&L has gone but the balance sheet of these companies are intact and come FY22, you will have a favourable base effect. You have this huge liquidity, you have very low interest cost and suddenly profitability of FY22 can be back to what people were expecting pre-Covid levels. Yes, FY21 is going to be stressful but FY22 might come back on track. So it is basically a game of probability of what can happen and what cannot happen. It is still early days. So you have to be very cautious and you have to be sure about what kind of companies you are getting in.

I would completely agree with you that all these penny stocks are something which one should avoid. There is a huge move there. People are just saying that this Rs 100 stock is now at Rs 5; let us buy that. I think it will give you a near-term thrill but ultimately it is like a roller coaster. Ultimately it has to go down.

You have been a big proponent of buy value, which is buy stocks when they are cheap where PE multiples are low. Are you somewhere getting worried about why value investing is not working? Will the true blue value investing work now?
Little bit tilted towards value but we are not only value in. In fact since the start I have branded myself as an opportunistic investor. So India provides value and India provides growth. The only disconnect which I have is that you cannot buy a stock just because it is a growth stock at any valuation. So you have to buy even a growth stock at a value which discounts a future profit.

So we had a gold finance company which was a value stock with decent growth and you had the fastest growing NBFC where everyone was chasing a seven-eight times book and on a one-year basis, the outperformance is 125%. So I do not agree with you that it is not working there. I would say that just do not buy anything which is value just because it is 3 PE, 4 PE, or 5 PE on the face of it. It is also about whether these earnings are going to sustain and you need a little bit of growth. That is why our definition of values is 15. You want a below 15 PE stock but you also look at 15% growth possibility. So I would say that growth at reasonable value is what you have to focus on.

I think the market is slowly accepting that consensus trade is buying anything which is quality at whatever price and now we are seeing stocks are floundering. There is continuous analyst downgrading. One after the other the best known consumer names are being downgraded. Yes, surprise impact has not been all that great so far but it is a matter of time before valuation will take into account the price we take into account, the valuations and the future growth probably.

Is there merit in aligning more with global businesses and local businesses because there is every reason to believe that in the recovery phase, global markets will recover faster and ahead of what Indian markets would do. For an investor who has the choice to invest in global-dominated companies versus local-dominated companies, should the choice be more tilted towards global rather than local?
Absolutely right. At least for the next six months, I would agree with you. The US economy looks like being the strongest. They have this unlimited ability of printing currency. The savings rate has shot up to 30-35% because every family has got cheques in their bank account. People have not spent in the last two months because they were indoors and now when the economy opens up, you are going to see a huge surge in spend. I would not be hesitant to say that we might suddenly have the US economy even growing at upwards of 3-3.5% in the second half of the current calendar year. And in that respect, companies which are focussed towards the US or the global markets would in the near term be a little bit more secure.

So whether it is export-oriented pharma or IT, despite it being an election year in the US and all this rhetoric being there, IT might bounce back faster and we are already engineering exports in May doing very well for India. So these export-oriented companies might do well. But we should not forget the fact that now this Atma Nirbhar and Make in India and suddenly with this Ladakh issue between India and China and the government talking about more and more protection against Chinese imports, you might have some of the local-facing companies get a breather in the sense of extra protection and we have to be open to it.

Where does PSU investing fit in your scheme of things?
Seeing my experience with PSU investing in the initial phase of my fund management career was superb. But I think in the last 8-10 years, we have seen the ROEs of these companies go down dramatically. From a net cash company, most of these companies have become net debt companies. There have been cross holdings which have been encouraged by the government obviously to fulfil their disinvestment targets. Therefore I am a little bit sceptical in a lot of these companies.

These companies are asset rich for sure. I do not agree with you that there is no solvency risk. We have seen companies like MTNL and BSNL not pay their vendors for years and years. So on the face of it, you can say that it does not have solvency risk but from an equity investor point, there is a risk. However, some of these companies have become too cheap and maybe there is a trade there but I would be a little bit sceptical given my past experience.







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