Bottom-up approach most suitable for 2019: Porinju Veliyath

India still has a huge opportunity for picking the emerging companies, small and midcaps and creating multi-baggers, Porinju Veliyath, Founder & CEO, Equity Intelligence, tells ET Now. Edited excerpts: For a midcap or a smallcap stock-picker, it has been a tough year. Do you think 2019 will not only be a better year but a great year for individual stock pickers? A lot of people now feel that they got trapped in midcaps and smallcaps and it is a time to move to the blue chips, the largecaps. That would be a double mistake. There can be exceptions in both largecaps and mid and smallcaps. 2019 I strongly believe that will be a year for the midcap and small caps because of what happened in 2018. That is the basic reason. The valuations have come to reasonable levels and some of them have come to very attractive levels and that is the main point I would like to make. People have already invested in mid and smallcaps. They have continued to hold it and they are staring at a huge draw down in general. Smart people whose stocks have not gone down are maybe a small exception but in general, average investors in small and midcaps are sitting on a huge draw down. Some people sound very intelligent at this point of time when they say do not buy small and midcaps, buy only the large blue chip, looking at the state of the market. But it can be a wrong advice if given at the wrong time. Now it is a wrong time for that kind of advice. You have to be consistent. If you are a mid and smallcap investor and have been creating wealth in the last many years, five years or ten or twenty years, be consistent. I am telling you India still has a huge opportunity for picking the emerging companies, small and midcaps and creating multi-baggers which may not be the case today with the Nifty and Sensex. The Nifty and Sensex are not as cheap as maybe in 2013 or earlier. But things are not very expensive too, looking at the macro environment we are going through. 67320685 Luckily, in India, recently we are going through a huge reverse trend in macro headwinds. Now crude price and rupee is getting stronger, lot of good things are happening in the economy. Most importantly, people have to watch the reforms done in the past, the major historical reforms. The benefits will start accruing in many aspects. Number one will be tax compliance. Already, we are collecting 16-17% higher tax we are collecting. In the last five years, the tax has almost doubled. This is not a small thing. Our economy is growing at 6-7% and the tax collection is growing at 16-17%. Now I-T department has access to GST data and all BSE-NSE data on a daily basis. I would imagine any kind of non-compliance will be discouraged. I would not be surprised if our tax collection grew at 20% to 25% in last few years. That is very important for the economy.Clearly the time has come to separate the men from the boys when it comes to small and midcaps. I understand that is where your conviction lies . Where are the small and midcaps you are hunting right now? It is a bottom-up approach most suitable for 2019. Of course, bottom-up approach is something very common and is very highly appreciated. In 2019, it has a very special relevance. Instead of getting into a particular segment or industry, it will be better to adopt that approach because there was a huge volatility in 3,000 stocks other than the top 15-20 blue chips in the Nifty. It is an ideal situation for a bottom-up approach. There are companies and we have all seen that only the smallcaps have grown to midcaps and midcaps have grown to largecaps. Now HDFC Bank is a largecap and it is growing at 20% CAGR. It had only Rs 500-crore market cap two decades ago and now it is a Rs 5-6 lakh-crore market-cap company. Every largecap was a smallcap or a midcap at some point of time. Some of them are microcap. Infosys was a microcap in 1993 when I bought the stock first. So, it would be wrong to say do not buy smallcap. Everybody has different ways of investing. Some people invest only in the blue-chip companies. That is also a wonderful way to invest in Indian market and they are making wonderful CAGR, maybe 10-15 CAGR and are very safe. They do not have much volatility. That is also one style of investing. But it is not the only style of investing. There are people who created 25-30% CAGR, 35% CAGR and that has happened not by blue chip investing. For a long period of time, that has happened because of small and midcap investing in the structure of Indian economy. There is a lot of scope for such midcap businesses, medium type of companies to grow big and create 25-30% CAGR and we still have it. But it is not in plenty. When you look back in 2013, we had stories of very attractive valuations in mid and smallcaps. That has come down. You had bet on the likes of HSIL GSFC. You spoke about midcap IT also. Where are you looking for cherry picking next year? I do not want to give any individual names at this point of time. But it is true that I talked about some midcap IT companies. They are transforming into digital business, not just rupee trade or IT services. India has lot of companies managed by very smart people who are waiting for re-inventing that space in midcap IT. There are maybe five-six companies and we also started buying a couple of them in the last five or six months. I do not want to take names. Investors are smart enough to identify such quality names in midcap IT. Another sector, which is totally not fancied and beaten down and which nobody is talking about at this point of time is cement sector. I feel two aspects for this industry. First of all they are beaten down very badly especially the midcap cement companies and they are available at $45-50 per tonne enterprise value. That is really cheap like at 2013 level. Now the GST is at the high bracket of 28%. But there are clear indications that it will be brought down very soon. At the $50-60 dollars per tonne valuation, it looks very safe and cement will be consumed in India, After the demonetisation drive, there was lack of construction activities. It is again picking up and it will go much higher and today replacement cost of cement per tonne the EV is more than $100 and even the blue chip companies in cement are available at $80-90. Some well managed midcap cement companies at $50-60 valuation, will be very safe bet for 2019.In the beginning of 2018, you were bullish on HSIL, Kaya or a Lead Electronics. Can you be confident about any of these stocks for the next two to three years?We continue to hold Kaya and HSIL with a high conviction. At these prices, it looks really good. Kaya is our largest holding. The company has given an indication that they are going for more products. Now their care business has become profitable after a long 14 years. They are going to grow bigger by focussing on the products, product sales and brand. That is not reflecting in today’s valuation of Rs 800-900 crore of market cap and a clean balance sheet company.Marico has a very high quality management and I feel we are very confident and are holding on to the stocks. HSIL also has been beaten down because of some challenge in the earnings in the last couple of years. Again, that is a leader in the segment in some of the niche areas and Hindware, is a big brand nationally with high distribution reach. I feel HSIL at these prices is also very good. We are holding the stocks in portfolio management.The last time I spoke, I was betting on the improvement on corporate management and corporate governance. But many managements continue to remain chor. They find loopholes to siphon off money. There are two factors which drive small and midcap stocks, one is attractive valuations and second is sentiment and liquidity. When do you think the sentiment will change because if sentiment does not change, buyer and liquidity will not make a comeback?When liquidity and sentiment comes back, it will be about selling the stocks and not buying. So you should buy much before that. When liquidity and sentiment is low, you get stocks at say Rs 100 and when liquidity and sentiment is very good on the stock, it will be Rs 300. This is typical in small and midcaps. In 2013, people were not feeling like buying stock. I was extremely bullish on some of those companies at 5 and 6 PEs and I still am. In spite of the big drawdown, many of the stocks I recommended in 2013 are five times, 10 times and KRBL kind of stocks is 20-30 times up. So that is-- you should buy midcap and small caps with a conviction and as a great idea if you believe in that business model and its growth, buy it when the sentiment is low and if the liquidity is low it is an added advantage, you can buy it aaram se there would not be FIIs and all will come and buy it. So for individual investors this is very positive that liquidity is low, sentiment is low.What about your view on the elections and your expectations in terms of high conviction growth areas? You are saying that irrespective of who comes to power, the India growth story remains intact?The elections are going to be very important for investors in 2019. It has to be seen in the light of the huge reforms India witnessed in the last few years starting with demonetisation, the GST, IBC and NCLT. Anybody will agree there were flaws in implementing these reforms. We have got a limitation, India is such a huge, diverse country and economy that it is not an easy task to implement a GST. That is why we took so many decades after thinking of implementing it. Once we have to do it with a lot of imperfections, you cannot keep a perfect system and implement GST, nobody can do it. Anyway, this has to be seen as an attempt by the government to reduce black money, to bring in formal economy, to create a base for a higher growth of economy so that India can reduce its poverty level.

from Economic Times http://bit.ly/2Vjdyss
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