Economic recovery will be a game-changer for midcap and smallcap stocks: Kunj Bansal

In 2020, we need to see whether our expectation of return is from economic recovery or from continued inflow of money.
Tata Group stocks have always performed in line with respective industries irrespective of management changes and so the latest developments vis-a-vis NCLAT ruling should not be a cause of worry, says Kunj Bansal, Partner & CIO, Sarthi Group. Excerpts from an interview with ETNOW.

In 2019, only those investors and traders made money who kept it very simple. 10-15 stocks were the favourites and if you were in those 10 or 15 stocks, 2019 was a great year. What is the trick for 2020? Do that what has worked for the last three years?
Instead of one year, we can look at the phenomenal return that we got in the last six months. After the Budget, a sharp negativity was built into the economy and the market. In fact, last July, almost 6-7% markets were down and from there, we have had almost one-way rise. Coming back, let us take 2020. We need to see whether our expectation of return is from the economic recovery or from the continued inflow of money.

If it is going to be from continued inflow of money, then the investing strategy will have to continue to be exactly the same. Keep it simple, keep it focussed on a limited number of stocks which have been giving reasonably decent results compared to their own numbers, that of their competitors and compared to other sectors also.

But if we see economic recovery taking place, then the game will change and returns will come from mid and smallcaps. There have been pockets of return in midcaps and smallcaps even in 2019. But be that as it may, that is where the recovery will become broad-ended. We will have a lot of returns from midcaps and smallcaps. We will have a lot of return coming in from sectors which have not participated so far.

You are absolutely right that the economy will be better than what it was because 2019 has seen a very big shakeout. Decline has kicked in and that has really shaken the market. Typically whenever there is a crisis, the big companies always get bigger and bigger companies become giants. Every sector has seen a big migration from midcaps to largecaps. What is the scope for small and midcap companies to make a comeback?
Two points: One, the fact that in every new set of bull run or a market upturn, it is a new set of midcaps and smallcaps that participate though some of the older one may continue to participate.

Two, if economic recovery takes place, the demand goes up. In the case of paint industry, if demand goes up, because of the higher base, the larger companies rate of growth could possibly be lower than the rate of growth. I am only talking of rate of growth, I am not talking of absolute tonnes of paint being sold by those companies. The rate of growth of a small company could be higher because it is a small base and because if the management is aggressive, they will probably increase their distribution, take some cut on the margins and do a lot more branding and advertising expenses. Now if the rate of growth of the smaller companies is going to be higher than the rate of growth of bigger companies, then that is where the return could possibly be in the same proportion.

It is fashionable to say I want to buy cement, industrials and cyclicals. What happens to the classics this year? Where would stocks like Asian Paints, Titan or D-Mart go? Would those stocks get corrected or continue to outperform?
It is not fashionable for me. I have never been a fan of cyclicals, commodities or industrials.

What is your top holding?
My top holding will come from financials and consumers. Currently, let us say ICICI Bank is one of our top holdings. Another consistent underperformer Godrej Consumer is one of our holdings. These are the kind of stocks that we have currently.

What would you definitely stay away from? Everyone is being really optimistic, but what are the pain points?
I think infrastructure sector.

So the infra push from the government is not doing anything for you?
No, no. That is where I was about to differentiate. It is not that I am not bullish on the intention of the government or the fact that the investment would not happen. It would happen, but there is a difference between the push and actual expenditure by the government and the benefit drawn out by the listed companies. That is where the gap comes. Listed companies have to operate under multiple circumstances which do not necessarily lead them to making a consistent amount of money both profitability and cash flow wise.

Say there is a road company; it has four or five BOT projects, two or three HAM projects, three or four EPC projects. What happens is it is making money in two out of the four BOT projects. Same is the case with HAM. In EPC, one project gets stuck due to land acquisition hurdles, one due to other legal issues.
Not only in 2019, if we look at its last three, four, five years or even longer, the whole banking sector pack including SBI has been a consistent underperformer and that is why probably as an investment, it lags behind but offers a very good trading bet.

-Kunj Bansal

As a result, the company as a whole is not making money and that is where we have seen inconsistency of share price return from the last two, three, four years.

What do you make of the auto numbers which have trickled in so far?
When it comes to cricket, market and maybe economy, we Indians are very hopeful, optimistic and we should be. The same thing is happening with the auto sector. We had Diwali, Dussehra, Navratri, Durga Puja, Ganpati festivals a few months ago and we thought maybe things will turn around and there were some signs. Then we started justifying ourselves by looking at month-on-month recovery, if not year-on-year. Then we said okay, by year-end, things will settle. Now, we are extending our time to March wherein the transition from BS-IV to BS-VI will happen. It is a difficult call at this point of time. At least, going by the numbers, things continue to look difficult and if we look at the macroeconomic numbers, those are not giving any signs of recovery as of now. When does this recovery come and for what reasons; will it come suddenly? All these things have always been difficult to predict but as of now, things are not looking good.

2019 has been a dream year for a franchise like SBI. They got the Essar money back. In the first three months of 2020, SBI Cards will go public. Why are markets not recognising that that NPA cycle has turned and subsidiaries are going public? It is still trading at a price to book of less than 2.5 times?
SBI Life had its IPO about two or two-and-a-half-year ago and after the initial underperformance, last one year or especially last six seven months have been a time of a sharp outperformance for SBI Life. Has it reflected in SBI’s share price? Unfortunately not. The reason is clearly that over reasonably medium to long term, if we take the results that one expects from such a behemoth, lots of factors keep coming in. Suddenly the NPAs spike up, suddenly there is a management change and we see all the accounting getting changed, all the older NPAs which were not being revealed till now, have started coming in.

All those things are there and of course, it is a well known fact that on a comparative terms from its private sector counterpart, the return on assets ratio, return on asset is significantly lower. The consistency part is missing and not only in 2019, if we look at its last three, four, five years or even longer, the whole banking sector pack including SBI has been a consistent underperformer and that is why probably as an investment, it lags behind but offers a very good trading bet.




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