Is value investing dead in India?

If you have bought the so-called value stocks, the PSU stocks and more specifically public sector banks, at whatever level you have bought, it has probably ended up being lower than that, says Kunj Bansal, Business Head, PMS - Equity at Karvy Capital Ltd..

Are you surprised that the TCS buyback coming in at this price? Is the stock now priced to perfection given the kind of move that we have seen in just the last two years or for that matter in the last six months itself?
The timing of the buyback can obviously be discussed, Probably the reason is the need for money at the Tata Sons level as the Tata Group might have to do its own corporate restructuring and other issues that separately we all know about. But nonetheless who is complaining? Minority shareholders are being treated equally and they will be the beneficiaries so it does not matter even if they do it at a higher valuation or at the height of the stock price in the range of the last one year. So that is one part.

Two, when it comes to valuation and especially in the Indian market and probably in the global market as well, we can keep discussing the valuations till the cows come home but over the last three, four or five years or so, we have not reached any judgement. If at all there is any judgement at least till date, it is buy quality. Even if you are wrong in timing for some time temporarily, you would not be proven wrong in the medium term which certainly is not long term. One does not have to wait for the long term also.

Within one-two years, unnatural expectations have gotten into the minds of equity investors. They should not be getting returns so soon but fortunately that has been happening. For quality stocks, the valuation definition does not apply. So it does not matter, at what level you buy, as long as you are in a good place. The same applies the other way round also that if you have bought bad stocks, even if you bought them at lower prices, specifically the so-called value stocks, the PSU stocks and more specifically public sector banks, at whatever level you have bought you have probably ended up being lower than that.

So I do not think valuation is a question here. In fact, just to support my thesis on, valuation let me give you a couple more facts. It is well known that the IT sector is largely cash rich. If we compare this sector to others, the comparison may not be apples to oranges but when money keeps flowing in, when the equity market continues to attract liquidity and buying interest, it keeps looking for such justifications and explanations.

Let us take FMCG. Of course, they have brand power but if they can trade 50 to 60 times, why can’t IT go up from 15 to 25? I would not be surprised if it goes up to 30 or 35. In fact, if at all, the other reason for that will be that even the growth expectation might go up from here with the way we see the continuous need for increasing digitisation, for backend support, for the help from the IT sector, the growth rates are quite likely to go up and probably that is what is marketing see in advance, we analysts will see it when it actually starts to come in and that is where market has started to rerate. So I am not at all worried about valuation. I am not at all worried about timing. I think the going is good and nobody is complaining.

What do you buy and in which pockets do you book profits?
The investment strategy in the current market is that markets are coming back closer to their highs despite being rang-bound over a two-month period. I will continue to shed those stocks which have continued to be range-bound, if I had any exposure in them. For example, the metal stocks, specifically steel stocks had risen in between and then corrected and probably will rise again. So that will be one part. If I had any exposure to oil stocks, I will keep shedding them. The so-called value stock, public sector banks if any, I will keep shedding them. So these will be on the selling side because these stocks keep getting neglected.

On the buying side I would continue to build a balance of momentum in defensives. If we go by the outlook that companies like Marico gave yesterday, this quarter is going to be good for FMCG companies, specifically HUL and Nestle. Nestle after its correction looks good. In the June quarter, they had supply chain issues on both raw material as well as finished good sides. But that has been taken care of in the September quarter and demand has been equally decent.

The results coming out should be good. That is where I will buy. I will continue to buy banking stocks. If the Supreme Court judgement comes the way the government has indicated that they will be taking over the payment of the interest on interest, then that will lessen the effect the whole thing might have on the banking space. Within that, ICICI Bank valuation looks good to me.

The third part of the strategy is probably I will partially book profits in auto. It is not that I am negative on it as I would continue to buy stocks like Hero Motors and Maurti but if I had bought them at a lower level, I will book profit partially but otherwise will remain positive there.

Are we in for an earning disappointment this season?
I will be much happier if the market consolidates for a reasonably decent period of time before taking its next leg upward movement. Imagine a scenario wherein the market will keep moving one way up. What will happen to valuations? What will happen to the index levels and individual stock price levels? Will the fresh money be comfortable coming in at those continuously rising prices? I do not think so. For more money to keep coming into the market, I would much rather have a consolidated movement of the market along with some corrections and increasing the breadth of the market instead of one way upward movement.

I would not mind if there is a buy on rumour and sell on news. Having said that, we had reached the market high for the last two months. In July end, we had more or less reached the current level of Nifty. After that, August, September have passed and today on October 6, we have been going up and coming down. At the end of September Nifty was at a low of 10800 odd. It was probably down almost 10% from intraday high of 11,700 to intraday low of 10,800, but overall in the last two months, the market has not gone anywhere.

ITC is the talk of the town at least this morning. For 10 blunders of an arrogant company -- it is being said -- millions of shareholders are suffering. What is your own view on ITC especially after the annual report came out?
One doesn’t necessarily have to take a view. The numbers are facts, they cannot be disputed, opinions can be disputed and discussed. The fact is the stock has been a massive underperformer and it has always been my stance that this is one company which has not been performing and is not likely to perform and so it is better to avoid it.

There are few reasons for that. The 10 blunders that you said are largely true but more importantly, my view of an underweight or an underperformer or a negative or an avoid is because I am not a votary of value investing. Value investing has completely failed in India and unfortunately ITC seems to be falling into that category. That is one part.

The second part is that the management decided to be a very bad allocator of capital, dominated by the negative news flow as well as expectations on the taxation side from the government. I have said this earlier that when GST came in, it was thought that only GST now can have an impact on companies like this but in the last budget, the government introduced taxation on cigarettes saying that these companies are something which we will continue to control beyond GST also. Imagine how big a derating factor that would be on a sector and on a company.

Let me just add another stock here. In Hindi, there is a saying, naam bade aur darshan chhote. Look at M&M. If you leave aside the last seven-eight months or so, its outperformance is driven largely by two factors -- sharp positive sales growth unexpectedly from the tractors and the statement by the management that they would look at improving the return on capital. It used to be a massive underperformer for the last five-six years or so when the whole auto industry leaving aside Tata Motors was doing exceedingly well. The two-wheeler companies were doing reasonably well . These are the kind of companies where the minority shareholders have to look for themselves. It is your choice that you are buying these companies, nobody is forcing you.