After a lot of buzz in 2017, even as the primary markets remain muted in the current year, Jatin Khemani of Stalwart Advisors says that IPOs have taken a breather as the stock market has turned weak. According to the expert, the effort of digging out stellar IPOs with more than 100 times over-subscription and then eventually get allotment worth pennies is not worth it. Taking stock of the earnings recovery in the various industries, Jatin Khemani noted that steel sector seems to be in a strong upturn, whether it is steel manufacturers, ancillaries like refractory suppliers or converters like steel pipe companies.
With expectations of a normal monsoon, high infrastructure spending and government’s focus on doubling farm income, companies focused on rural India should continue to be in the sweet spot, he said. In an exclusive interview to Sushruth Sunder of FE Online, Jatin Khemani, founder of Stalwart Advisors, a Delhi-based independent equity research firm, shares insights on the upcoming IPOs, the earnings recovery in the industry and the concerns about the recent emerging markets’ currency crisis.
The IPO markets seem to have taken a breather. What are the upcoming IPOs which investors can look to invest?
Our views about IPOs have been consistently negative as shown by base rates of IPO returns over long run. IPO is a seller’s market; they time it when they can extract maximum juice hardly leaving anything on table for new investors, which is why IPOs have taken a breather now as markets have turned weak. In most cases one can find already listed businesses from same industry trading at cheaper valuations. Also unlike earlier times when businesses used to raise IPO money for growth via fresh issue, these days they raise growth capital from private equity and hit public markets only to facilitate PE’s exit via offer for sale. Having said that, occasionally there are some IPOs which are interesting both from business as well as valuation standpoint, however the effort of digging those out and then eventually get allotment worth pennies in that 100-time over-subscribed IPO may not be again worth the whole effort.
There seems to be an earnings bounce back in the latest quarter. Which sectors have done well in your assessment, which sectors must investors look at?
Entire steel sector seems to be in a strong upturn, whether it is steel manufacturers, ancillaries like refractory suppliers or converters like steel pipe companies. Consumption stories including branded footwear and branded luggage are reporting strong growth and should be on investors’ radar. Many companies focused on rural India are going strong and with expectation of normal monsoon, high infrastructure spending and government’s focus on doubling farm income etc., these companies should continue to be in the sweet spot. Auto ancillaries supplying to Commercial Vehicles are reporting very positive numbers. With ban on overloading, expected scrappage policy as well as migration to BS VI by FY20, the CV momentum should continue.
Mid-cap cement companies in select geographies like AP/Telangana are reporting strong volume growth and could be interesting to look at. While in the long run it is truly the earnings which drive the stock prices, in the short to medium term there could be strong deviations. For instance, over last few years while Nifty earnings did not move much but the index almost doubled led by strong liquidity and positive sentiment. Similarly, may be finally its time for earnings to rebound, but if sentiment and liquidity turns negative we may see another strange period of earnings and stock prices not moving in tandem.
We are seeing many reputed global voices cautioning of an upcoming emerging market crisis. Is there a big correction in the offing, given such worries? How should investors tread given factors such as the upcoming elections, rising crude oil prices, interest rates etc.
A lot of these voices have been raising alarm bells for many years now, imagine if one had paid attention and moved out of equities in 2014/2015/2016 then he/she would have missed this entire bull market. If you continue to predict something eventually you would be proved right; even a broken clock shows the right time twice a day. I am not saying there will be no correction, drawdowns are a very basic part of market. However, one should not try to time the market as it is a futile activity. One should however be cautious and focus on safe- guarding the gains made over last few years. Unlike 2017 where everything went up, 2018 and 2019 will be much more stock-specific and one has to focus more on bottom-up.
This is the testing time to see how resilient one’s portfolio is and whether business and management are truly high quality. Incrementally, we suggest to focusing more on large caps versus high beta small/mid caps. Individual investors often ignore large caps thinking they are well discovered and hence not rewarding, which is not entirely true. There is a long list of large caps including HDFC Bank, Maruti, Eicher, Bajaj Finance etc. which despite being discovered for so long have created consistent wealth for shareholders. One strategy which we prefer while investing in large caps is to go contrarian; when you take out sell-side reports on a business and most of them are negative, that’s the time to look at it. You don’t have to be contrarian for the sake of it, rather you have to then try to understand the business better than others and look for green shoots.
You generally get such opportunities at very attractive valuations as nobody is interested in them. Mahindra Finance and Crompton are few such investments we made in last couple of years and made 100% return on each, in a short period of time as pendulum shifted from extreme negative to positive. During such heated or uncertain times, ones sitting with surplus cash may also hunt for opportunities in special situations like demergers.
Jatin Khemani, CFA is the founder of Stalwart Advisors, a Delhi-based independent equity research firm. The model portfolio is diversified across roughly 20 companies with a conviction-based allocation.