Are you looking at companies that could monetise their assets in this economic scenario? For instance, Lanco Infratech is planning to sell its hydropower assets. IVRCL Assets and Holdings wants to sell a few of its road projects. Jaiprakash Associates is looking at a sale of its cement operations in Gujarat.
First of all, Indian promoters are always reluctant to liquidate their assets, especially at the price that a buyer would be willing to pay. This is more so for deals between Indian promoters. In this scenario, monetisation is more likely in the form of private equity transactions. In general, monetisation of assets is a long drawn process, there tend to be fewer buyers at such times, and finally we have to evaluate if it is in the interests of minority shareholders. So, we donít tend to rely on such transactions while taking investment decisions.
So you do not look into the above aspect at all when you are buying stocks?
When one looks at a balance sheet, there is no assumption that the assets are liquefiable. Businesses are bought as ongoing concerns, which means one analyses what is the return or profit they can generate on the assets that they have and what price is one willing to pay for it.
When we look at a company, we look at its capability to generate cash flow. Each asset will have a certain return capability. If the market believes that that particular asset has a low return capability, it will price it accordingly into the stock. Then we take a call based on all this. If the stock is below BV and we believe that somewhere down the road the asset will generate cash or return, then we take a closer look at the business and decide what we are willing to pay for that stock. If we find the balance sheet too leveraged and believe that the business will not turn till before the leverage kicks in, then it is a problem. So we think it makes sense to avoid highly leveraged companies even now if we believe that the companyís economic prospects will remain down for a while. Of course, if such companies tide over the cycle and interest rates start falling, even such leveraged companies can give a good return.
What are you basing your decision on?
We are looking very closely at valuations, particularly RoE and PB. We are looking at potential future RoEs. We are not too focussed on a companyís ability to liquidate its assets.
How do you see the economic climate panning out in the future?
My personal view is that I am fairly optimistic on how the scenario will pan out in the coming years. Nothing will happen overnight, though.
Due to all these problems that India is facing on a macro level, something had to give for the system to eventually start repairing itself. And the currency has given and has got damaged. Now the trade deficit will start repairing itself as imports decrease and exports rise. The government may start acting because it is under pressure now that the rupee has fallen so dramatically and growth is also coming off sharply. Oil prices have started coming off. The petrol price hike is a good step though small when compared to the overall subsidy problem. There are a lot of government decisions which have supposedly been taken in principle, but not announced such as FDI in aviation and the fertiliser policy. So these have to come to pass.
Government capex picks up a lot in the year before elections, which is 18 months away. There has been a slight increase in capex programmes by public sector companies. There is a slight push. Generally the trend is that public sector capex starts and then post election, if there is clarity on the government formation, then private sector capex also kicks in. So these are slow turns and I see things gradually changing for the better.
Based on this how are you viewing your portfolio?
We are gradually getting more constructive. We cannot wait for all the data points to come our way but at this point we will not have a purely defensive portfolio that has worked so far. We would prefer going for a balanced portfolio. As the growth fear intensifies, we could go through a rate cut cycle that could eventually benefit interest sensitive companies.
The only thing left is for the market to get cheaper. The market is very range bound. Either it just hangs or does a sideway correction for another six months, so when we roll over to FY14, there will be much cheaper valuations. Or, there should be a small correction of 10-15 per cent and valuations drop.
We started the year thinking that fixed income will outperform equity and investors have to bide their time. But there should be a change in mindset now and investors should get into the mode of looking to increase equity exposure and how they plan to do it over the next six months.
That is your general view. How does it reflect from a bottom-up strategy?
Like I said, we will not be very defensive for too long. The additional risk that one can take is from companies whose balance sheets are not in great condition. We believe that the sectors that will start doing better are capital goods, banking, specifically public sector banks, and interest rate sensitive companies.
So if we stick to very good quality balance sheets or say we are avoiding companies till they sell their assets, we are getting defensive all over again. The risk is on the price, not on the business anymore. So we are looking at price levels to buy into these companies.
Looking at the way the currency has fallen, it is surprising that the market has not, since they usually move in tandem. Had that happened, it would have been a potent combination of currency fall and market fall. The market has not fallen by as much as was thought and neither have FIIs sold significantly. This is preventing many from being outrightly bullish going ahead or at least believing that we have touched rock bottom.
How are you balancing micro, macro and global view?
What is most in our ability to understand is the micro perspective. There is no substitute to understanding a business and its management. You cannot fully factor in the macro into a portfolio. It also depends on the cycle. Two years ago, the macro view would have contributed a lot which resulted in investors sticking to cash and defensives. Now the macro view will not help as much as the micro view. Global news flows has a temporary effect and one cannot manage a portfolio according to that.
BV: Book Value / PB: Price to Book / RoE: Return on Equity / FDI: Foreign Direct Investment / FII: Foreign Institutional Investor