“We have not felt more confident about the Indian economy any time in the last eight-nine years as we feel now. The corporate balance sheets are the lightest they have ever been since 2005 and there is this globally coordinated kind of a capex move included. So the setting is very good.This year, one should be very carefully picking up stocks and from a three-year perspective, there is a very high likelihood of making great returns,” says Anil Sarin, CIO, Centrum Broking.
Market has a habit of looking for some new worry every now and then to latch on to and negotiate. So what is the new worry on the horizon, according to you?
I cannot think of a new worry. There are enough old worries. So, till the first rate hike happens, people are going to keep on speculating whether it is going to be 25 bps or 50 bps and then there is the whole liquidity issue. That is the elephant in the room. Ukraine was troublesome and for the moment it appears to have receded into the background, but honestly to answer your question, I cannot think of a new worry. The old worries should resurface.
A sideshow, of course, is the price of oil which is continuing to cause problems.
Mr Fereidun Fesharaki told us that large parts of the oil producing community are thinking of ramping up their production. If that balance lies a couple of few months ahead once the first 50 bps rate hike comes in the US, that worry will be out of the window?
I would be in that camp, yes. The fear of the pain is more real than the actual pain itself. There is a saying: Buy on rumour and sell on news. Here it seems to be sell on rumour and it just might happen that people will want to buy on the news.
How does the picture look for people who are positioning and buying the dips for the next 24 to 36 months? In the last two years, there was a lot of lumpy gain clubbed into a year. Do you think it makes sense to position with a three-year window? What is your portfolio composition?
We have not felt more confident about the Indian economy any time in the last eight-nine years as we feel now. The corporate balance sheets are the lightest they have ever been since 2005 and there is this globally coordinated kind of a capex move included. So the setting is very good and there are multiple industries which were not doing well earlier, namely real estate, textiles, telecom and capital goods.
So many industries are now participating. We have seen that markets do not go down in the environment of rising earnings and we are in that environment now. A lot of people have been sitting on the sidelines. A lot of smart traders have made a lot of money and they are booking profits now. But that should not be taken as the last word. This year, one should be very carefully picking up stocks and from a three-year perspective, there is a very high likelihood of making great returns.
What is your model portfolio looking like? What are the themes and how are you capturing it? Also, what kind of earnings growth is your model portfolio throwing up? Is earnings doubling in the next three years?
We are obviously constructive on private sector banks, basically we love lenders of any shape or colour. We like real estate quite a lot. We love hospitals and logistics. I would say a large part of our model portfolio is stacked with these three or four themes. Speaking about earnings growth, within fiscal 22, our model portfolio should be growing between 36% and 38% at the EBITDA level and there is not much of interest or depreciation, So a lot of it can be taken to be at the bottom line level as well.
The following year we expect similar or slightly reduced earnings growth. So let us call it 36-36. This is a very good setting. On a PEG ratio basis, our portfolio is less than one time. So strong earnings growth coupled with valuations which adjusted for the earnings growth are not too demanding. It is a good setup for a three-year kind of investor.
If I even conservatively talk about it, the earnings will be doubling in two-and-a-half years for your model portfolio. What is your largest composition of big earnings contributors in all the four?
So we tend to be bottom up but as a block, lenders are going to be doing quite well. In the last two quarters, we have seen loan growth picking up. But the bulk of the money is being made in not providing any more because of excess provisions already sitting there. We are finding that the top line is moving at a certain rate, the bottom line is moving at a much faster rate. Going forward, we are going to see that loan growth itself is going to return to a trend of 14-15% or so. The bottom line will not go up very smartly because the base would have gone up.
So roughly, 20% odd is sort of baked into the lenders.
Real estate will do much better because many of them have completed apartments and buildings where they have not booked sales yet. The costs are of older nature and the revenue is now getting booked. So, real estate again is going to give a very strong kind of comeback and the remaining bulk of the portfolio is bottom up and very well positioned. We have technology names. We have digital-oriented companies with a very strong earnings profile. So yes, it is a stock pickers’ market but if you want to look at it thematically, real estate and lenders are going to grow. And if you compound 26%, anyway, you double your money in three years.
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