It's time to be wary when you cannot sell soaps, shampoos and detergents: Basant Maheshwari


  • A stock which has liquidity will have more PE.
  • 99% of the twitter commandos wrongly equate PE with GE.
  • India is not a speedboat. It is more of an aircraft carrier. You cannot take a U-turn fast.
We have tried so many things -- digital India, skill India, stand up India, start up India -- but India does not seem to stand, does not seem to start, says Basant Maheshwari, Co-founder & Partner, Basant Maheshwari Wealth Advisors. Excerpts from interview with ETNOW.

You are saying that the worst is certainly not over for the markets. Is this indicating that we are in store for a bit of consolidation or are we in store for something far worse than that?
When I say the worst is not over, it means that the worst is not over for the broad market that is where most of the people have invested in and that is where most of the pain is and that is where people have been struggling for the last year and a half.

When you have a GDP growth which is 5.5% and the jury is still out on the Street whether it is really 5.5% or 4.5% or 4.25% -- who knows what the growth is? In such an environment, you cannot have the entire bunch of industries and sectors doing well. So when you cannot sell soaps and shampoos and detergents, then it tells you about the mood on the Street at that particular time. These things do not change fast. India is not a speedboat. It is more of an aircraft carrier. You cannot take a U-turn or a V-turn as we all wanted to. All you are left with are the bones and the teeth right now. So what will you get out of them?

But in the market, if you do not make money for one year, that is as bad as anything because you come to the market to make more than FD rates of return. In that context, there is no magic on the anvil. We cannot see any magic happening. Normally the first year of a new government is when you get a plethora of options, the reforms. But this seems like a third year or fourth year budget. If you cannot do anything in the first year of a new government, I do not think we can expect any magic in the second, the third or the fourth year. All that will have to be taken into consideration. It is a little tough and an uphill ride from here.

You have always been known to invest into the high growth areas, high PE multiple companies and you have always argued that the growth will take care of the valuations. What is happening now is in some of these high growth names, they are really taking it off. Does that tell you that it is a very risk-off environment?
It is not that we love buying high PE stocks. We are not fascinated by valuation and PE. Growth is not one thing that defines the PE. The first most important thing that defines the PE is the entry barrier of the business. The second is obviously the growth. So 99% of the twitter commandos are always equating PE with GE and saying that PE is more or PE is less. Third, is you would find that a great management always commands a higher PE. Second grade or a third grade managements have lower PEs. Then the fourth thing is sector leadership. The sector leader will have a higher PE. The bottom rung stocks in the sector will have a lower PE. Fifth, comes liquidity. A stock which has liquidity will have more PE. The stock which is in the index and has index factor, will have a higher PE.

I can list 15 to 20 factors that define a PE and not just growth alone. But if you are buying 10 PE stocks, then buying a 10 PE cement company is not the same as buying a 10 PE soaps and detergent company. Some things come expensive and you have to buy it expensive with a forecast that the growth that you envisage is going to make that expensive stock cheap over a period of time. It is a standard cliché that we keep using all the time. But then most people do not want to take that leap forward because that is more into a leap into the dark tunnel and most of the time if you are doing that, the light at the end of the tunnel is from the train coming from the opposite side.

So you have to be very cautious about what you are doing. Obviously it a problematic thing to be trying to envisage growth, but we have been doing that for the last two decades and that is where our forte is and that is what we do.

Auto sector is going through hard times. Barring the flattish sales that we saw in October, in the last one year, the sales have fallen every month for a long period of time. What is your outlook there?
We were doing this back calculation three-four weeks back in office. In December 2015, Maruti traded Rs 4,600 at a PE of 29. In December 2017, Maruti traded at closer to Rs 10000, at a of PE 39 or 38. Right now Maruti trades at Rs 6,000 at a PE of 26 which is lower than the PE of 29 when it was 4600. At Rs 4,600 and PE of 29, people did not want to buy it because you could not justify it since Maruti was at an all-time high.

Now Maruti is at Rs 6,000 PE lower than 29 and still we are not buying it because we cannot see growth. Effectively most of us try and equate PE with growth and still we think that the higher PE is bad. So, to put the entire thing in perspective, when you have a 4.5-5% GDP growth and you are not able to sell motorcycles, soaps and detergents, I think it is a tough game to be in.

Over the last four-five years, one big theme has worked in India from an economy point of view, that is household work substitution. There are tuition classes galore everywhere. The housewife who was teaching her own children, is not doing that. Swiggy, Zomato is doing well. You have got people who are delivering food and that is the only place you see growth.

In the early part of the century between 2000 and 2005, call centres were being set up everywhere. This call centre business is coming in again but this does not translate into the productive activity of the entire economy because food that was being cooked at home may be seven days a week is now being cooked five days a week. So, you cannot have multifaceted growth. We have tried so many things -- digital India, skill India, stand up India, start up India -- but India does not seem to stand, does not seem to start.

Four-five years back, if had talked to you, you would have spoken about the financialisation happening in various NBFCs, smaller finance banks, smaller finance companies. Do you think a lot has changed over there in the last eight months? What is your view now on this financial pack -- stick to leaders?
Experience has taught us the hard way that it is better to be with the sector leader and lose a little bit of money because then the chances of recovering the money back is quite fast. In the demonetisation era, SKS Micro fell, Ujjivan fell, Equitas fell again. Equitas, Ujjivan never ever came back to those levels again but SKS Micro came back to its own level again.

In the jewellery space also stocks fell but the leaders came back. What we have learnt here is stick to the leaders and stay there. In the small space banks, what has happened is that the regulator is now looking at these banks a little differently. In Raghuram Rajan’s time, all those concepts of a small savings bank were promoted where you could go into the last mile banking and get the people to open bank account and have inclusive growth.

This new regulator is equating a small finance bank with a large scheduled commercial bank. If the RBI normally tries to look at these banks in the same lens as the larger banks, then these banks do not get the benefit and so they all have an overhang that they have to list the company. It is complicated. There are several companies right now which look phenomenal in terms of valuation and fundamentals but if there is an overhang, nothing works.




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