Next 10 years, compounders will come from PSUs: Sanjay Dutt, Quantum Securities

ETMarkets.com

Highlights

  • Stick your neck out, start building a mid and smallcap portfolio.
  • There are midcap stocks which are not going to remain in a 5-year bear market.
  • Some timeless cos and brands will survive and I will bet on those.


Those are midcap stocks which are not going to remain in a five-year bear market. Also strategic PSUs and top 5 public sector banks are going to be the top compounders in the next 10 years, says Sanjay Dutt, Director, Quantum Securities. Excerpts from an interview with Nikunj Dalmia of ETNOW.

You have been making a case you would put money into small and midcap stocks. There is reasoning that mid and small cap stocks are trading at a discount because of technicals and FIIs selling and fund selling. But there is no appetite for these stocks now. There is value but the value could remain deep value for a long, long time.

You are absolutely correct, but the fact remains that at this point of time, quality is crowded and risky in my opinion. Everyone is basically into those 10 or 15 stocks. Just an indicator, Kotak Bank has a market cap of Rs 3.3 lakh crore and on the other side, Bank of Baroda, PNB, Canara, Union, Corporation Bank put together do not even come to half that market cap despite their deposit books in the liability side as well as the asset side being multiple times of Kotak Bank. Are you telling me that those banks are going to shut down and Kotak or HDFC is the only bank that will survive?

This is a time to take those courageous calls. I do not know if tomorrow or four weeks later, those same good quality stocks in B group would turn. No one knows. It is like what we were experiencing last year in January 2018 and December 2017, when no one was looking at the largecaps and the midcap were an extremely crowded trade and then everything collapsed!


This is the time to stick your neck out but I obviously cannot say whether this is going to happen in the next two weeks, four weeks or six weeks. I am not that kind of an investor. I expect to make money two, three or five years later where am I going to make money. I feel this is the time to be courageous and start building a portfolio.

When stocks go into a bear market, it takes time for them to revive. When midcap stocks corrected in 2008-2009, it took them five years to come out from that hole. It has only been two years since the 2018 corrections. The midcaps may just hang in there for another two years! Meanwhile, largecap stocks will keep giving such great returns that you feel left out.
That is exactly what you are going to live with. But I disagree with you that largecaps are making substantial gains barring the 15 or 20 Nifty stocks. It is wrong to say all largecaps are making huge money.Whether it is L&T or ITC, neither have made any money in the last two years.

I am not saying that go and buy the entire midcap index at 500. Within midcaps, I can easily make a list of 100-150 good quality, low leverage companies which are substantially prominent and large in their own markets, in their own businesses but at this point of time no one wants to look at them. That is where the opportunity is. Those are the stocks which are not going to remain in a five-year bear market.
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Yes, as a basket, mid or smallcaps may remain where you correctly said. In any case, we cannot go back and lean on history because I do not think any one of us in our living history has seen these kind of developments and these kind of carnage in the financial markets and in the main street, in the main system! Clean up of NPAs, IBC, GST rollout and the pain that we all are going through. This is a transformation period. So we cannot in any way go back on history and project forward as to what will happen. Times have changed dramatically and we have to realise that we have to adjust to these new realities that are coming to us as investors, corporate business managers and promoters.

You are a long term investor. Give me some themes or ideas where you will buy and stick for the next three, five or seven years. What are your high conviction long-term bets?
See I am absolutely clear there are certain timeless companies and brands in the country which are not going to shut down. They are going to survive cycles and I am going to bet on these. One, which you know I have very openly bet on and which everyone in the market knows has tremendous potential is the largest stainless steel player in the country - -the Jindal Group. Both Jindal Stainless and Jindal Stainless Hisar are more or less the same. If you look at the combined enterprise value of both companies, they would not even total up to $2 billion. But between them, they control 50-60% of the stainless steel industry in the country.

Stainless steel is something that is being used in railways, defence, production, in construction and everywhere else. What you are trying to tell me is that the entire 50% or 60% of the Indian organised stainless steel market is just worth $2 billion and I can buy a player in $2 billion or $2.5 billion in value? So, three-five years down the line, something is going to definitely change for this company.

Dabur is another timeless brand. I do not know Dabur but I am giving you just another example. It has not performed for the last year or so.
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If you have the patience to ride them out, if you have the patience to see another 10 or 20% down in them and then make that 50% gain. then go for the timeless gems which are in a slump.

-Sanjay Dutt


Look at companies even in the public sector; there are companies like Power Grid which controls 1.7 lakh km of power lines across the country. So, whether you are solar, thermal or nuclear -- you need to roll power across the country from transmission lines on transmission networks. The entire enterprise value of the company would just be about $4 billion! So are you telling me the largest power consumer country over the next few years which is going to be India, you can own the entire grid for about $4-5 billion? No way. This is going to change.

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Okay we may say nothing will happen with PSUs. We have sat on HPCL and BPCL for 10 years and what they are doing to make money? But it is very difficult to say when these things are going to turn. Similarly, I can go down and find so many other ideas. Power Grid is one that I own; Exide Industries is another one . I own a very small position. That company is going into EV batteries. If you need batteries, the first brand that comes to your mind is Exide. At this point of time something like a $2 or $3 billion enterprise value.

These are all quality names, these do not have questionable promoters and neither are they highly leveraged companies. These are very manageable leverage or in fact zero leverage with marquee managements, marquee brands and promoters. Similarly, I can go on with many ideas like these but you need to have patience to invest in them. They are not going to give you returns in four weeks, four months or 12 months even. If you have the patience to ride them out, if you have the patience to see another 10 or 20% down in them and then make that 50% gain. that is where you got to be.

You are not talking about long term bets. What do you make of your experience with the ADA companies? Would you call that a misjudgement, a learning?
Phenomenal learning! I have lost a lot of money. I have lost more than I could ever think of in life in those companies, but that is exactly where we learn. In the last three or four decades in the markets, none of us have experienced such times, none of us ever thought groups like ADA, Zee, Essar would go through what they are going through. But we must understand these are times which are going to totally change the face of a Indian business and Indian markets.

We ourselves are opening our eyes as to what we need to do before we need to invest. I am sure these lessons are going to remain for a long time and of course quite a few will be wiped out, quite a few will start rebuilding our lives, like we all are trying to do now.

We have seen the obsession as well with low debt. But that is an ideal scenario and one cannot really work with that. What is your outlook on some of those companies?
One should not have an obsession with low debt. One really needs to go and look at the consolidated position of a group and where the promoter is stretched. One lesson we have all learnt is if the promoter has four or five companies and even if company is in trouble. you are sure that the other companies are going to have pain also. Therefore we need to do much deeper analysis. I would say that it is a very important lesson that we learnt for corporate India as well as for investors like us who got lost in those go-go momentum where everything was good and a growth of 6%-7% was taken for granted.

We got to look at optimum debt, at enterprise value as well as coverage ratios, interest and debt services. This kind of learning has been an eye opener for all of us. I have been in the market from the late 90s and we never saw debt as a bad four letter word. Trying to understand the implications of debt and how much stress case situations can companies and cash flows do is what it has taught us in this crisis.

When do you think this tipping point would come where markets would say you need debt to grow, you cannot have a situation where only startups and no debt only brand companies will fuel economic growth? When would markets say go for good companies with reasonable debt and well managed businesses?
I am already seeing this trend because in the last three to four weeks. some of the savvy investors have started looking at ideas that have started coming out from very savvy broking houses. They have already started differentiating. The time is to start picking up now.

Whether you are going to have to hold those good quality stocks with manageable leverage for the next two, three months before they start to stop losses and start going up, is very difficult to guess. But I am reasonably sure that we are at the end of this whole cycle of correction. Yes, there may be a little more pain left in a few more pockets but I think most of it has corrected now and companies are starting to look at borrowing money and negotiating good rates. If you ask good quality companies, they are able to get money from banks at much lower rates.

Yes, pockets like NBFCs are still facing a problem. The government still needs to address some issues there but behind-the-scenes, the government is doing a lot of work. Companies are also starting to look ahead and have cleaned up substantially. A case in point was the ICICI Bank move of the last four five weeks, led by a few savvy fund managers who realised that that was the place to be. You will find similar examples across the market. There are a lot of pockets like that.

What is the large compounding story for the next 10 years? Is it still private banks or could it be insurance or something else?
Spaces like insurance are going to be evergreen in India for the next many years. Whenever you get negative periods, add insurance and asset management companies as steady and stable bets. But I think the compounding 2x, 3x, 4x bets are there in a lot of good quality second tier names, good managements which have learnt their lessons but are still not being rerated by the market because everyone is crowding into quality.

The one play which I am willing to take a risk on and bet on in the next five years is going to be strategic PSUs. Beginning with BPCL, there is going to be a lot of PSU action in the next four to five years and I am convinced because I have seen what the government is now looking at. The government has no option and perhaps the government is very clear that they need to get out of most of the companies where there is no strategic sense. There is no need for a government company to be there present whether it is consumer focussing etc.

PSU is one place where you can safely bet for some 2x to 5x ideas over the next five or eight years. There is going to be a lot of big stuff there whether is going to be restructuring, management changes, governance issues, strategic divestments, a lot of focus is going to come in there. No PSU is going to get money being poured into it just for nothing. They have all started becoming accountable.

I feel exactly the same for the top five public sector banks. They are all beefing up. If you go and ask anyone in the market, particularly the ones who are consumer focussed businesses like automobiles etc, see how aggressive banks like State Bank of India and a lot of other banks have become in even auto financing etc.

So, that is another play. If you are going to bet on the economy you need to bet on a few four, five PSU banks which will actually make you money and it is not just the private banks which will keep getting market share. A lot of work needs to be done, these are just one or two themes that I have been looking at.
I maybe wrong and so therefore we need to discipline and learn from our stop loss levels but I think these can play out and are worth a risk reward right now.

What is the stance when it comes to auto, lots of sound bites coming in from the likes of RC Bhargav, Anand Mahindra saying that we will see green shoots of recovery, while there is not going to be any big bang turnaround. Is there any select opportunity within the auto space?
I am a little confused there because auto has got major structural issues that we are dealing with. Som whether it has got to do with a shift to EVs, whether it has got to do with the shared commute concept or whether it has got to do with public transportation in metros and metro lines starting to work in cities. So, that is one place I still do not have a call. It is going to be very difficult to actually spot the next winner and I do not find anything that is dirt cheap that I can go and buy and take a risk on it.

They are all well owned or maybe over-owned to quite an extent and are not cheap. That is something I would be underweight on. I would probably have a Maruti in my portfolio which I do not have right now, but if I have to at the right price or maybe an M&M. But there also, I am a little worried about the business model. Auto is one place where I am a little confused right now. I am confused and I am doing a lot of work on it right now. I do not want to take a call right now. But some key auto ancillaries whether it is EV or otherwise will still be needed. Like one example that I have in Exide, those plays can be looked at. So, irrespective of what the trends pan out, these companies would be beneficiaries.
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