What Lies Ahead? Views Of The Biggest Equity Portfolio Managers

Equity market over past 18 months have seen a broad-based correction, investors getting impatient is understandable. At this time, we believe that investors should remember the sayings of successful equity investors like Mr. Warren Buffett, “Stock market is a device for transferring money from impatient to patient’. So, remaining patient is important. But, it’s easier said than done. And hence we invited fund manager from Motilal Oswal for this webinar.

View on the Markets

Mr. Sonthalia admitted that things at macro level are not looking good, and there is an immense pessimism therefore. There are recessionary fears originating from the US, and most high frequency indicators of Indian economy are showing in red. Additionally, he mentioned that liquidity issue that originated from IL&FS default, still persist.

Having said that, he also highlighted that Mid and Small Cap indices have seen approx. 20% and 30% corrections respectively. This is a decent correction. Things may correct in the large cap space, but mid and small cap are definitely attractive.

In his words, “Are things really so bad, that markets can further go down significantly?

My answer is – “NO”

The IBC, New corporate governance standards, the disruptions brought by GST are the new ways of doing business. Some companies may succumb to this change, but the companies that will remain would reap benefits very strongly.

Views on one the largest PMS in the Industry – “Motilal NTDOP PMS”

Extent of Leverage in the company is a major area of risk these days, and this is where Motilal Next Trillion Dollar Opportunities  Portfolio (NTDOP) positioned differently. It is a stable portfolio of unleveraged businesses.

In his words, “Our philosophy is to play on operating leverage”. Portfolio comprises of good businesses, and some disappointment is there in the recent times as even some of these good businesses (example Page, Eicher etc), have under performed. However, we have held these for many years and have seen such times in the past as well. These companies have delivered in long term. We continue to hold as there is a conviction. Businesses do not travel in a straight line; one has to take a long-term view.

Buying decent businesses and holding on to them for long term is what we believe in. Its more about longevity of growth; the terminal value of business and not 1 or 2 years of growth.

Expected earnings growth of companies in NTDOP PMS can be seen in the vicinity of 18-20%. For Q1, 2019, earnings growth of NTDOP portfolio was at 12% but Nifty’s earnings was at 2%. Outlook for next 6-9 months looks hazy. NTDOP Portfolio earnings growth would be better than market’s earnings growth.

 

Questions & Answers

Question: India opportunities Portfolio(IOP), which is a small cap PMS, has corrected sharply, and investors want to know views on stocks that are held in this portfolio. Share some numbers and views on HEG, CCD, Cochin Shipyard, LVB. Why you continue to hold these stocks in IOP PMS?

HEG clocked 3000cr profit last year. This year, we expect profits to be at 1000cr. But, the balance sheet is unleveraged. There is no substitute to graphite electrodes when it comes to melting scrap. They are also putting 20,000cr capacity plant at cost of 1200cr. Their total capacity will be 1L tonne capacity. Given this analogy, we are seeing the replacement cost at  6000cr which is significantly lower than its market cap (they have around 4cr shares, at Rs 1000 per share, a market cap is 4000cr). Unless you see significant innovation or the change in way scrap is melted and consumed, there is nothing to worry about this company.

In case of CCD, what happened was unfortunate. They are taking all steps to de-leverage. They are trying to sell stakes in subsidiaries. Some of the parts individually are much more than the whole. The company continues to stay strong. Assets are high. Monetization of assets is a challenge and so liquidity is a challenging factor. We are just staying PUT as the stock is testing conviction. We see ample margin of safety.

Cochin Shipyard is performing fine. The earnings growth is very good. It’s not only about ship building. They have a good business in ship maintenance & repair which are high margin businesses. Even if earnings growth falls, their cash flow generation potential and implied yield of the stock demonstrates that it’s a very strong franchise with great earnings growth potential in the future.

LVB – Lakshmi Vilas Bank. This is this one lemon in the portfolio. And, we realize it’s a mistake. We look to exit this stock.

Question : With regards to NTDOP PMS, two heavy weight stocks that have heavily  fallen over last 18 months are Page Industries and Eicher Motors. Why have you held on to these companies in NTDOP PMS?

With regards to Eicher Motors, roughly 80-85% of earning come from motor cycles space and commercial vehicles is much smaller. So, 350cc category is very relevant for them. In this regard, “Java” was considered as a strong competition but things have changed for them significantly and, they are struggling. In fact, in auto space, nothing is doing well. Number of units they were selling have come down from 70000 units to 53000 units. First there were floods in Kerala and then overall slowdown. Eicher had expanded capacity in Tamil Nadu Plant and demand has come off there. Hence, margins have come off from 32% peak to 26%.

Near term looks very challenging. I am only seeing 5% earnings growth for next 1 year, and assuming that, Eicher valued at 22-23 times on forward earnings looks perfectly fine. This brand which withstood 50-70 years in the past will stand the test of time even in next 10 years. For Eicher Motors, their number of distributors is significantly increasing. They have launched new products – 650cc twins which is getting some good reviews. The product innovation is not only centered around Classic and a Bullet ( old products ), but also to the Himalayan, GT and the 650 cc twins ( new products ). So, they have products for the domestic market and as well as export market. They are adding new markets. Like UP is the new market where sales is picking up. It’s a high quality franchise. We see great value in Eicher motors and i won’t sell anything. So, we continue to hold.

As far as Page Industries is concerned, numbers in last 1-2 quarter have been below expectations, and management is cognizant that it’s on the back of subdued volume growth especially in the men’s wear. However, company is  expanding the market beyond men’s wear to women’s wear, children’s wear, socks, towels, handkerchief. Volumes are huge 10x as compared to their competitors. They are looking at outsourcing, they have double the industry margins. Most of the negatives are priced in. Franchise is very good. Paid up equity is just 11-12 crs with 1-1.2 cr shares. They have very low floating stock. It is very difficult to get such a franchise, once you exit. We cannot exit such a stock citing temporary fall in earnings. So, we continue to hold page industries.

We at PMS AIF WORLD (www.pmsaifworld.com) do an unparalleled research, and suitability analysis. We recognize Motilal NTDOP PMS as one of the right  investment products for long term equity investors.