Nitin Bajaj, portfolio manager-equity, Fidelity International likes one-liners. You ask him about inflation, he says, "India is on QE55", on cement he says, "It goes between bricks and you never see it again" and on macro economics, "It is like a suitcase. The lining is the GDP but the stuff is in the suitcase." He manages over `1,000 crore equity assets.
What is your outlook for growth numbers after the recent disappointment with Index of Industrial Production (IIP) figures?
It will have a short-term impact, but the longer there isn't an investment in capex, more violent the capex cycle will be. The longer you don't invest, the more you will have to invest one day. So can it be that the next six-nine months is still slow? Maybe, I don't know. I have no clue. I don't try to forecast these things. I just know that the stocks which are linked into that supply chain are very cheap. This is all macro stuff, this is only 5% of what I do. I'm not a macro guy. Mujhe toh GDP ki definition bhi nahi pata yar (I don't even know the definition of GDP). People go eat in a restaurant and they say it is GDP. If I cook my own food and eat, they say it is not GDP. I don't even know what GDP means. And I don't think our finance minister knows what GDP means.
How would you define your investment style?
I work on stocks. Business by business, stock by stock. Why the company makes money? How the company makes money? What is the competitive advantage? How long is it sustainable? Where are the margins today versus history? What is the price I'm paying? That's what I do.
GDP is at the back of the mind. It is like a suitcase. The lining is the GDP but the stuff is in the suitcase.
I don't do macro and I'm not saying that the guys who do macro do anything wrong. The reason I don't do macro is that I have very little conviction in my ability to call macro. And the problem with macro investing is that you take one or two strong top-down views and everything you do is based on that.
If the macro views are right, fantastic, you're going to hit the jackpot. If the macro views are wrong, the whole portfolio is wrong. So I don't try to do that. I try to go the other way-what are the valuations? What are the good businesses and that is it.
Do you see a lot of value in the markets at current levels?
Yes, I do. I think people are very bearish which is very good, because when people are bearish the stock market is cheap. Can the markets fall more from here? I think it definitely can. But if you are taking a three-to-five year view, I think this is a fantastic time to enter the market. Now, people are pricing in margins falling, paying low multiples and starting to factor in slower GDP growth.
On an average, the market may not look very cheap, but this is because there is a certain part of the market which is made up of defensive growth companies which are extremely expensive. If you go into places which are more capex cycle driven, they are extremely, extremely cheap. You have to look very hard and you have to be very careful because there are a lot of bad balance sheets, managements and corporate governance practices. But within those I think there are a lot of hidden gems.
You mentioned further downside, what would you say is a fundamental issue that could affect the market?
The fundamental issues in India are always the same, such as the lack of sovereign governance in the country. Some of our analysts just went to Chakan which is a huge auto hub. Volkswagon has put `4,000 crore there and Bajaj has a huge factory. The whole ancillary business is located there.
But all the roads that lead to the place are broken. People are putting `10,000 crore in a place, give them good roads. It is an auto factory.
I read a newsletter the other day that said in China they say let's build it and they will come. And in India they say let's not build it and still they will come.
What is your view on midcaps? They seem to be beaten down quite a bit.
I see value in midcaps. They are cheaper at the moment. The discount on midcaps on valuations to largecaps at the moment is way more than historic average. Especially, if you go into construction and capital equipment, cement and things like that; they are quite reasonably priced.
What is the outlook on the cement sector?
It does not look very great but some of the stocks look cheap. You'll have to be patient. It is not going to work overnight. Right now, the situation looks very bad. But generally I like bad situations.
Cement has a lot of overcapacity issues.
That's why I'm saying the situation is dire. Demand is not good, supply has grown a lot. So it is tough. Cement is a local product, it doesn't travel. It can travel overseas but it can't travel inland because it has high volume, low value. So your freight cost will kill any other cost advantage. It is a pure commodity. You can call it Birla, Holcim, Ambuja or whatever you want. It is cement. It goes between bricks and you never see it again.
So it is about supply and demand. When supply exceeds demand, everyone is bearish and the stocks are cheap. That's good.
How long do you see that situation persisting?
If I knew the answer, I would be very rich. I don't try to time the market. If I find something cheap, I buy. If I buy cement, if I think the stocks are trading at 50% of their replacement value and I know that when times are good they will trade at 1.1-1.2 times replacement value, I know that from trough to peak, I will more than double my money. Even if it takes four years, I am happy. If it doubles in four years, then I made 20% per annum. That's a lot. And remember in stocks it is always tax free.
But it can be very painful when you are waiting. No one knows when it is going to start working. Two months from now, suddenly everything picks up and cement demand starts growing 10% year-on-year, suddenly cement stocks will start working. But can I time it, do I have the ability to say when exactly they will start working, I don't know. I just know that the margin of safety is there today. And it will not be there when they are doing well.
Which are the other sectors that maybe interesting?
Construction and capital goods.
Basically, the infrastructure related stocks.
Anything that goes into the capex cycle. Be it infrastructure, factories, buildings-commercial real estate; all of them are cheap now. Everything in the supply chain of these things is cheap right now.
What's expensive is things that are linked directly to the consumer or the supply chain of the guys who sell directly to the consumer. So consumption is doing very well, investment isn't. So I'd rather be in the investments.
Do you think there is room for more quantative easing (QE) in the United States?
What is QE? QE is printing of money right? We have been printing money for more than 50 years, so we are on QE 55. So that's why we have such high inflation. The US has just reached QE3.
Some people argue that if a lot of fund managers are doing a certain thing, say trying to pick stocks; eventually some of them will pick the right ones. In the context of value investing, how would you respond to that?
I don't respond. People are happy to have their beliefs. If you are in the shipping business, it is beautiful if the competition thinks that the world is flat. So I don't want to change anybody's views. I just feel comfortable buying stocks with a lot of margin of safety. It appeals to common sense and it seems to work. I have no problem with people believing that the markets are efficient and good for them.
Could you tell us of one of your investment ideas that worked, something that stands out for you?
When I joined Fidelity, I used to cover the food sector. There is this company called Numico. They used to make baby food as well as clinical nutrition, food for extremely sick people. Also they had a vitamins business which was a pure commodity and the company was in deep trouble because they bought all these vitamin companies and the pricing got decimated by the Chinese. They bought a retail chain in the US which didn't work out. So they were in great trouble.
But what they had were these two really beautiful businesses. Baby food and clinical nutrition which were extremely high growth, high profit, high barrier-to-entry businesses. But they were stuck with this balance sheet which had become levered because of investments in retail and in vitamins.
As the new management came, they sold the old businesses and raised some equity to clean up the balance sheet.
I think we got in at about 15 euros and got out at about 50 in a matter of four years.
Is there any catalyst that you will be watching when it comes to Indian markets?
I don't even think of these things. I come everyday, shut my door, read annual reports and talk to my analysts. I read industry reports and journals, talk to people and that is it.
At the end of the day, I go home and play with my son.
What is your outlook for growth numbers after the recent disappointment with Index of Industrial Production (IIP) figures?
It will have a short-term impact, but the longer there isn't an investment in capex, more violent the capex cycle will be. The longer you don't invest, the more you will have to invest one day. So can it be that the next six-nine months is still slow? Maybe, I don't know. I have no clue. I don't try to forecast these things. I just know that the stocks which are linked into that supply chain are very cheap. This is all macro stuff, this is only 5% of what I do. I'm not a macro guy. Mujhe toh GDP ki definition bhi nahi pata yar (I don't even know the definition of GDP). People go eat in a restaurant and they say it is GDP. If I cook my own food and eat, they say it is not GDP. I don't even know what GDP means. And I don't think our finance minister knows what GDP means.
How would you define your investment style?
I work on stocks. Business by business, stock by stock. Why the company makes money? How the company makes money? What is the competitive advantage? How long is it sustainable? Where are the margins today versus history? What is the price I'm paying? That's what I do.
GDP is at the back of the mind. It is like a suitcase. The lining is the GDP but the stuff is in the suitcase.
I don't do macro and I'm not saying that the guys who do macro do anything wrong. The reason I don't do macro is that I have very little conviction in my ability to call macro. And the problem with macro investing is that you take one or two strong top-down views and everything you do is based on that.
If the macro views are right, fantastic, you're going to hit the jackpot. If the macro views are wrong, the whole portfolio is wrong. So I don't try to do that. I try to go the other way-what are the valuations? What are the good businesses and that is it.
Do you see a lot of value in the markets at current levels?
Yes, I do. I think people are very bearish which is very good, because when people are bearish the stock market is cheap. Can the markets fall more from here? I think it definitely can. But if you are taking a three-to-five year view, I think this is a fantastic time to enter the market. Now, people are pricing in margins falling, paying low multiples and starting to factor in slower GDP growth.
On an average, the market may not look very cheap, but this is because there is a certain part of the market which is made up of defensive growth companies which are extremely expensive. If you go into places which are more capex cycle driven, they are extremely, extremely cheap. You have to look very hard and you have to be very careful because there are a lot of bad balance sheets, managements and corporate governance practices. But within those I think there are a lot of hidden gems.
You mentioned further downside, what would you say is a fundamental issue that could affect the market?
The fundamental issues in India are always the same, such as the lack of sovereign governance in the country. Some of our analysts just went to Chakan which is a huge auto hub. Volkswagon has put `4,000 crore there and Bajaj has a huge factory. The whole ancillary business is located there.
But all the roads that lead to the place are broken. People are putting `10,000 crore in a place, give them good roads. It is an auto factory.
I read a newsletter the other day that said in China they say let's build it and they will come. And in India they say let's not build it and still they will come.
What is your view on midcaps? They seem to be beaten down quite a bit.
I see value in midcaps. They are cheaper at the moment. The discount on midcaps on valuations to largecaps at the moment is way more than historic average. Especially, if you go into construction and capital equipment, cement and things like that; they are quite reasonably priced.
What is the outlook on the cement sector?
It does not look very great but some of the stocks look cheap. You'll have to be patient. It is not going to work overnight. Right now, the situation looks very bad. But generally I like bad situations.
Cement has a lot of overcapacity issues.
That's why I'm saying the situation is dire. Demand is not good, supply has grown a lot. So it is tough. Cement is a local product, it doesn't travel. It can travel overseas but it can't travel inland because it has high volume, low value. So your freight cost will kill any other cost advantage. It is a pure commodity. You can call it Birla, Holcim, Ambuja or whatever you want. It is cement. It goes between bricks and you never see it again.
So it is about supply and demand. When supply exceeds demand, everyone is bearish and the stocks are cheap. That's good.
How long do you see that situation persisting?
If I knew the answer, I would be very rich. I don't try to time the market. If I find something cheap, I buy. If I buy cement, if I think the stocks are trading at 50% of their replacement value and I know that when times are good they will trade at 1.1-1.2 times replacement value, I know that from trough to peak, I will more than double my money. Even if it takes four years, I am happy. If it doubles in four years, then I made 20% per annum. That's a lot. And remember in stocks it is always tax free.
But it can be very painful when you are waiting. No one knows when it is going to start working. Two months from now, suddenly everything picks up and cement demand starts growing 10% year-on-year, suddenly cement stocks will start working. But can I time it, do I have the ability to say when exactly they will start working, I don't know. I just know that the margin of safety is there today. And it will not be there when they are doing well.
Which are the other sectors that maybe interesting?
Construction and capital goods.
Basically, the infrastructure related stocks.
Anything that goes into the capex cycle. Be it infrastructure, factories, buildings-commercial real estate; all of them are cheap now. Everything in the supply chain of these things is cheap right now.
What's expensive is things that are linked directly to the consumer or the supply chain of the guys who sell directly to the consumer. So consumption is doing very well, investment isn't. So I'd rather be in the investments.
Do you think there is room for more quantative easing (QE) in the United States?
What is QE? QE is printing of money right? We have been printing money for more than 50 years, so we are on QE 55. So that's why we have such high inflation. The US has just reached QE3.
Some people argue that if a lot of fund managers are doing a certain thing, say trying to pick stocks; eventually some of them will pick the right ones. In the context of value investing, how would you respond to that?
I don't respond. People are happy to have their beliefs. If you are in the shipping business, it is beautiful if the competition thinks that the world is flat. So I don't want to change anybody's views. I just feel comfortable buying stocks with a lot of margin of safety. It appeals to common sense and it seems to work. I have no problem with people believing that the markets are efficient and good for them.
Could you tell us of one of your investment ideas that worked, something that stands out for you?
When I joined Fidelity, I used to cover the food sector. There is this company called Numico. They used to make baby food as well as clinical nutrition, food for extremely sick people. Also they had a vitamins business which was a pure commodity and the company was in deep trouble because they bought all these vitamin companies and the pricing got decimated by the Chinese. They bought a retail chain in the US which didn't work out. So they were in great trouble.
But what they had were these two really beautiful businesses. Baby food and clinical nutrition which were extremely high growth, high profit, high barrier-to-entry businesses. But they were stuck with this balance sheet which had become levered because of investments in retail and in vitamins.
As the new management came, they sold the old businesses and raised some equity to clean up the balance sheet.
I think we got in at about 15 euros and got out at about 50 in a matter of four years.
Is there any catalyst that you will be watching when it comes to Indian markets?
I don't even think of these things. I come everyday, shut my door, read annual reports and talk to my analysts. I read industry reports and journals, talk to people and that is it.
At the end of the day, I go home and play with my son.
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