Why Kunj Bansal is betting on consumer and BFSI stocks

Talking to ETNOW, Kunj Bansal, Partner, MD & CIO, Sarthi Group, says if the government finally goes for privatisation of PSUs, that will be a very big re-evaluating factor for global investors. Excerpts:

After the corporate taxes and all the euphoria faded down and most market men believe that the government will have to do a little bit more. That little bit more has come. Strategic divestment of five PSUs is on the cards. Do you see the euphoria returning to markets?
The euphoria has been back in the market since the tax cuts were announced. Still there was a one-time revaluation to gains. That will always be followed by some volatility and some correction has to be there, because that gives opportunity for fresh money to come in.

Otherwise, the base for the next level of rise would not get made up. It is now getting supported by further news flow, of which divestment is one and unfortunately I have been of very high disbeliever in the government being able to do or willing to do or being able to do the strategic part of it. I would like to call it privatisation, if it does. It is not exactly divestment. It has been doing divestment for so many years. All the governments have been doing it. But selling one PSU to the other PSU is not privatisation.

For me, there has always been a tussle between the heart and the head and the government should go in for privatisation. But going by past experiences and by the constraints of the government, going by the fact that for them money is needed more in terms of timing early need, instead of quantity which also they need, it has pushed them to go in for divestment, selling one company to the other within the PSU place.

If this privatisation goes through -- I am a great disbeliever how far this will go -- because some of the companies are too intricately involved in the economy like say BPCL. The policies which drive the business of this company are too much linked to the government. A private player buying a majority or a management control into it, will need to be assured of how much freedom he will have to run the company.

Additionally, how much support will he continue to get from the government because running these kind of businesses which have been based on the government support of policies will be difficult. But if the government takes this bite of privatisation vis-à-vis divestment, that will be a very big re-evaluating factor for the market for global investors.

Will you buy PSUs? Why are you sounding bullish and not buying PSUs?
No, I clearly said that I am a great disbeliever. For me it has always been a tussle between the heart and the head and another reason is that I have enough risk reward adjusted opportunities in the market.

It is not that Indian corporates have done something extraordinary. Keeping aside a few good companies, there are problems of execution, integrity and business and then there is a demand issue as well. In PSUs at least, there is no accounting problem and they would be disproportionate beneficiary of tax cuts. Also they are available cheap. Should one shy away from buying PSU stocks just because they have a prefix public associated with it?
Before looking at the financials, for me and I am sure for you as well, the investment process starts by understanding the business ownership/management in Indian context. Mostly it is taken together. That is where the challenge used to be till date. The possibility of being able to find the government’s future plans on a sustainable basis for a medium to long term, always used to be challenging.

They will change overnight or maybe if not overnight, they will keep changing based on the government political composition changing and even if not the minister changing and within that also, based on the government’s needs keep changing. That is where it becomes difficult to be able to take a longer term view or leave aside longer term, even medium term view on the policies that the company will keep following.

I am happy to have lower returns. If I want higher risk, higher return, maybe this is what will play. Even now, if privatisation happens, then yes, BPCL, Container Corporation has the best financials, not Air India though.

If I am willing to play that high-risk-high-return game, then yes. But if I want to be okay with lower-risk-lower-return, then I do have other opportunities? Last almost two and a half years have been very challenging for the Indian economy -- macro as well as micro.

There are a lot of money managers who are hiding in Asian Paints or Trent or some of these high PE stocks. These are good companies but is not that high-risk investing that you are buying high PE multiple stocks which look fashionable right now but in the long term there is a risk of time-wise correction and price-wise correction? Buying stocks at PE multiples of 70-80-90 that is also high risk in my book.
Point conceded. Indeed, that also is high risk, there is no doubt. It is a question of which risk one chooses and that is what makes the market. Unless there will be different opinions, there would not be buyers and sellers.

Where else do you find that buying opportunity, if not PSUs?
If I go by risk-adjusted reasonably optimum return, not very high return and not certainly very low return, on a broader sectoral basis, I still find opportunities in consumer stocks. The valuation of good quality managements is also becoming more and more premium because on a daily basis, we find a whole set of companies or business houses, going completely off the radar for medium-term investors. That is because of the various governance issues that are happening.

Once that is happening, those investment opportunities are getting off the table. What is being left on the table is that the number is shrinking and that is where we are seeing the valuation because of the limited supply for the demand of money that is there. Let us keep in mind that post tax cuts, FII investors have still not come to India. So let us imagine a scenario wherein they decide that okay let us come back to India and the whole question of premium valuation will probably get left aside. So, we like consumers despite valuations being not as comfortable -- both durables and non-durables.

I still see opportunities in BFSI, leaving aside the public sector banking space. Two very secular themes which are right now playing out in the market are insurance and internet based stocks.

There is only one stock -- InfoEdge?
While the number of stocks available is lower, look at the valuation, price movement of the two recent IPOs -- IndiaMART InterMESH and Affle. It is not an investment recommendation. Maybe we will come to that separately, but just for the sake of discussion, look at the way their share prices have moved, look at the valuation they are trading at.

First of all, when the IPO came, the valuation was not looking comfortable as was the case in the insurance space. Only time will tell if it will pan out longer. Going back to the late 1990s and early 2000, the way the IT sector was continuously being revalued, the way the infrastructure capital goods were being revalued in 2005-06-07, probably something thematic like that is playing out.

Would you lay your bets in the metal stocks? Long term trends for metal stocks tend to bottom out between 0.6 and 0.7 times the book value. They are not there yet but they are nearing it and you have to buy bad news in metals, They are at the bottom of the cycle.
You are right. The good news and the good prices do not come together in general for the market and stocks more so for commodities and metals. Metals are always a good trading bet now since traders could be short term in terms of intraday to a few days or weeks, or could even extend it to six months to a year.

But metal stocks have never been and possibly can never be really medium or long term buy and hold kind of stocks. At the current price to book ratios, they are reasonably close to the bottom and anybody wanting to take a trading bet of a few months to a year, can consider the space.

Why don’t you like PSU stocks?
If you extend the chart over multiple time periods, you will find instances of significant underperformance of public sector companies. That is the answer. But there are a lot of trading people in the market who are indeed needed to provide liquidity for such stocks.

In case of State Bank of India, banking is 80% of its business. But they are taking the subsidiaries public, SBI Life had a brilliant listing. ICICI Bank is valued for all its subsidiaries. When will we start acknowledging that SBI subsidiaries are also good and are market leaders in every category?
And they always have been market leaders, let us not forget this also. That is something that has been completely being ignored by the market. Probably the other factors keep dominating. One is the inconsistency of the policies of the owners of such business, particularly public sector business which is the government.

Two, is the lot of directed business which probably used to happen but does not happen now. This is politically directed, industry directed kind of businesses that they have to do.

Three is, as a result the pressure on the margins that comes to them even financially, we will clearly find the difference between the net interest margins, the return on assets or public sector banks and private sector banks.

SBI used to be around Rs 340-360 hardly two days ago and now it is at Rs 270! There is a big market for traders and they need these kind of stocks. They are the brave hearts and they know the risk that they are trading with.