Where are you hunting for returns?
I still believe in the short term, it will be in smallcaps. Tremendous structural changes are happening. Till 2011, we had an investor base of 2.45 crore investors and in the last 12 months, we have added 2.6 crore new investors. Post April last year, more than 3 crore new investors have come. So they outweigh the number of old investors like us. It means a lot for the markets because these investors mostly buy smallcaps. You will be surprised but in the last 10 months, we have got more than 12-13 lakh new investors and this structural change means a lot. There is no need to worry for at least another three to six months. They will drive up smallcaps in a very big way. The only thing is the investor should be very cautious while picking up the stock. They should not lose comfort in valuation multiples and quality of the management and balance sheet.
What themes exactly in smallcaps?
There are many themes still waiting to play out. We look at the pre-pandemic economic parameter number to see the current year growth is genuine. Last year, the base was very low. A similar analogy can be used in picking up the stocks. What I suggest is to look at the pre-pandemic stock valuations. There are some stocks still available at the pre-pandemic valuation and that is the area one should focus.
If that basic investment suggestion is kept in mind, one should look at smallcap pharma, tyre companies, building product companies, agri themes and companies which are holding rich land banks and investments and shipping and lastly the PSU banks where the net NPA is less than 4%. These are the themes one can play in a big way.
I am expecting the next one will be the land bank which will get inflated in a very big way. ALso PE funds are buying a lot of smallcaps. Earlier, they used to focus only on the unlisted. Now they are focussing on even listed space. Therefore unlocking value from investments and land banks will be a very big opportunity. These are the five, six themes the retail investor should bank on.
Let us talk about real estate. You spoke about land banks and a lot of companies are coming out with stellar quarterly volumes. In Mumbai, south India, NCR bigger companies are doing very well. Is it time to start focussing on midcap real estate names?
I am negative on pure real estate because land bank price will get inflated. Just now we looked at the real estate company balance sheet of FY21. Many companies are still sitting on two to four times inventory to annual sales and debt of Rs 1,500-3,000 crore. Unfortunately, some of the names where the market float is very low, in single digit are flaring up. I think this is the time to sell. Only focus on companies sitting on a lot of land bank.
SBI, Canara Bank, BoB, PNB, — the big PSU banks have done well, Canara to a certain extent and SBI for sure. Private sector banks did very well in the last one year. Do you think from here on, it will reverse?
I think so. I may be wrong. Remember what happened in 2003. We had a massive drought and that time also, a similar thing happened. All the PSU banks were available at 50% discount to adjusted book value. Again the same thing got repeated post Lehman crisis. They crashed and they were available at around 50% discount to adjusted book value. That is happening now to some of these PSU banks available at 40 to 50% discount to adjusted book value. But earlier two times, when the revival and the growth came, a significant revival came in these stocks and they gave multiple returns.
I am not saying that they will give multiple returns, but I would not be surprised if some of the names in the PSU space give multiple returns in the next one to three years because when economic growth picks up, the demand for infrastructure and manufacturing also picks up and that is where the focus is on PSU banks.
Also, there is a structural change unlike in the past. Now, there are only eight solid banks. The finance minister recently said that she wants to create SBI like at least another two, three banks. So I believe it is very much possible and the credit growth also picked up from around 5.5% to now close to 7%. I believe that is going to improve further. All this would augur well for some of these PSU banks.
My only suggestion is see that the depositor accounts are not degrowing and net NPA is not more than 3.5 to 4%. These are the two criteria one should adapt and pick up and wait for one, two, three years. Enormous alpha can be created third time in a row in the last 20 years in select PSU banks.
Among small cap or midcap pharma companies what do you like? Chemical or pharma? API providers to larger companies or do you like CRO companies or companies which are contract companies for other larger companies or domestic OTC, what do you like there? ,
I would suggest the formulation exports to the US that would be one theme that can play out. There are a couple of names available at throw away valuation. I would suggest to focus on smallcaps with good management, good balance sheet preferably debt free and not have any warning or alert in the last one decade but primarily exports to America. This is going to be a match up theme in the near future.