Porinju Veliyath, MD, Equity Intelligence India, has said Indian markets, economy on high growth path. He has discussed stocks like Shalimar Paints, Reliance Industries. He says nobody can be bearish on India and its economy for the next at least three-years’ time. Many multibagger stocks can be bought by investors.
Equity Intelligence PMS Fund
I remember the first time we met about 10 years back. At that time your PMS was just starting off and was sub-100 crore, and now we are meeting today when the market is at a record high and your PMS is Rs 1000 crore in AUM. How has the journey been and what kind of return did you get in that period?
You are right. It was some Rs 60-70 crore when we met long back and markets were stagnant. It was very difficult to collect fund or manage funds that time. I would say the last three years was the game changer in the whole thing and thanks to Narendra Modi that is what I feel. It is not only about him. We had the 90% growth. We are operating now last 14 years, the 90% of the growth in the AUM happened in the last three years.
Biggest Multibagger Pick
I would say it was because of my multibagger pick and that mulibagger pick was Narendra Modi. In 2013 before the elections, I identified him as one of the best multibaggers for India irrespective of any politics or anything. I feel that was the base and when you have a base, you have confidence. The small-small silly things happening in the world or in the our borders would not affect you. Those things will become positive as an event as well.
We had five days of panic and yesterday, the Sensex closed at a historic high. So that is the structure of India even going forward. In the next two years or next seven years stock pickers will be making huge money.
Coming back to AUM, it is very exciting for me, for Equity Intelligence. We have a very small firm with 13-14 people working and this was totally unexpected to be verifying. But the confidence we built with that base and our outlook on the economy and the markets going forward which is still on. We have a long way and I am extremely excited looking at the future.
Rs. 1000 crore AUM
Rs 1000 crore is no mean feat and I remember the last time we chatted you were really emphasising how the domestic investors have really kept the faith. Is that what really worked for your own PMS also because the fact remains that in some time perhaps you will see heightened domestic participation. Demonetisation perhaps is a reason why we are seeing so many people now flocking to the market?
There are various aspects to this element. One is of course demonetisation and the related things. Demonetisation cannot be seen as a single incident. GST is another part of it. Now the government needs to take credit for that but there is a going to be seachange for the economy as we have been talking about -- from black to white, unorganised to organised. This is a never-before structural change happening in Indian economy. Those who really understand it make money. They would not get perturbed. They would not be shocked to see some small infiltration at the LOC or something happening in China or some president election in America.
You should have the big picture with you about India if you are investing in Indian equities, Indian businesses. We had many opportunities when people were selling off shares. The big picture should be always with the investors in the background so you will tend to do less mistakes.
The talking point is that Modi government three years in office. From a market standpoint, what do you think is the big thing for us?
Extremely bullish on equity investing in India
The three years of Modi government has been a wonderful development for India and it has really created a base for Indian economy to grow at much faster rate for faster economic development. I think there is long way to and I am extremely bullish on equity investing in India.
Markets are at record highs. They are expecting a whole lot of reforms from Prime Minister Modi’s government. Some of them have come through. Do you think the reform expectation can take us through for another 500 points on the Nifty?
I see many positive triggers going forward for the economy as well as for the equity investors, for the stock market. a lot of people will be surprised to see the kind of money flow into the equity markets, especially from the Indian households. The household savings will come in a surprising way into the equities, perhaps even the foreign investors, the FII inflow cannot be an important factor for the markets anymore that big thing is going to be the domestic fund flow into the equities.
Equity investors are coming back, financial inclusions have started. Do you think this kind of move is here to stay?
Black money ended
The biggest contribution from Modi government is that environment has been created for the economy to move from black to white, from unorganised to organised and it has led to a significantly reduced corruption going forward. That is what we all working towards and I think it is an amazing thing happening and nobody can be bearish on India and its economy for the next at least three-years’ time.
You seem bullish on this government, what is the beat that investors can bet on, that will of course just amplify the Modi wave?
Yes equity is the best asset class, even going forward that is going to be more evident when people share their experience of creating superior wealth by investing in equities. It is going to spread like wild fire, even lower middle class families in India they are going to invest through SIP route, now there are lot of initiatives for people to invest into equities. At the same time other alternatives like gold and real estate there is lot of disincentive not to invest so that is why I feel one should not think about bear market and we have the strong fundamental supporting this that is very important. One cannot be bullish on the market just be there are technical factors like fund flow happening.
The last three years, as you have said was a game changer for your own fund as well as for the market. Someone who has to approach the market right now, is faced with a lot of risks because small and mid-cap stocks have has already got beaten up. The run up is there behind them. How do you think next two three years will be and how should one be approaching the market right now?
Valuations are comfortable
Even going by the valuations, Indian market today is in a comfortable zone, When you try to get insights into the future, how the economy is taking shape, how these companies are going to grow and what are the earnings potential of these companies, I feel it is cheap. That is why in our last interaction I was telling the markets are at the bottom. Markets are at the peak. when you see the last five years, for the next five years markets are at the bottom. I do not really mean the 100-200 points that it can move here and there. I do not know about that, it is not important. The investors should stay invested.
I remember talking about $100 billion domestic, the households savings coming into equities, I really mean that, not exactly $100 billion I do not know how big it is, maybe Rs 5-6 lakh crore. This is not just DII net flow I am talking about. I am talking about the way households will be acquiring shares instead of bank deposits, real estate and gold.
We Indians are one of the best savers in the world. You cannot underestimate that. There is a huge potential. so $100 billion is not a big amount that the middle class and lower middle class Indian households can pump into equities. That is a technical factor but this money will lead to more capital formation and that will help these companies to grow faster. The deleveraging will happen, there will be more profitability. So, it is a cycle. Everything is looking very bullish in the given environment today.
Buy blue-chip large cap stocks
Your reputation precedes you and often times you are known as somebody who picked the right midcap or smallcap company. What is your take on the largecaps? In your own portfolio, stocks like Biocon, Jubilant, Balaji, the big ones have actually moved quite a lot whereas the impression is that you only buy smallcaps?
Buy Penny stocks for multibagger gains
A lot of people think I am a penny stock picker. In fact, the average market capitalisation of our holdings is Rs 3500 crore. So there are some largecap companies too and sometimes I used to buy personally some very small companies, taking a risk. Luckily, some 90% of that is going right. A turnaround is happening in this country. This is a once in a lifetime opportunity where the promoters are changing their attitude or are being forced to change not allowing themselves to siphon off money and creating black money and assets for their family. They have to now create wealth only through the market capitalisation so that will benefit the minority shareholders.
Is there money to be made on some of these blue chips that we have seen?, Would you bet on them?
High dividend yield stocks
I did recently, not in PMS. I was even suggesting Rs 900 levels for Reliance Industries. It was the second largest at that point of time. It is not that I am averse to the largecaps. To be very frank I do not think about the cap of the stocks, I am looking at value. Normally I have been ending up with mid-caps or some large smallcaps. That is where the best money could be made and that is the history and even in the future, I feel investors should not ignore companies because they are small because the small companies and some smaller mid-cap companies will be in that category of what I used to talk you about how even chor managements are turning around. They are forced to become good promoters, good management taking care of the minority shareholders, paying dividends, stopping siphoning off money.
People are already willing. Yesterday midnight, a promoter came to meet me. It is a Rs 5000-crore company but is a smallcap stock because the market cap is very small due to various reasons. A lot of that Rs 5000 crores is commodity. He wanted to change. So the promoters of a lot of these traditionally family managed companies want to change. They also want to go professional, they also want to grow like a Kotak or like a Marico. You know they were all very small if you remember.
They want to capture the value actually in the books and via market cap. Also you are coming at a time when the Modi government is finishing three years in office. It is coinciding with market at record highs. You have been talking about the leadership for 2013 onwards. What do you make of it for the work done so far as a market participant and what do you think of the remaining two years of his term?
Yes, remaining seven years, I do not believe it is two years. This is my hope because I love India, I want to see India progressing, especially the economy. I want to see the poor people in this country getting their lives transformed. I hope this kind of management of the economy continues for at least next seven years.
The last three years it was an amazing period for the Indian economy, for investors. If there was no Narender Modi or this kind of a government, this kind of economic policies in the country, many of the investors would have found their net worth 30-40% less than it is today. That is the extent of wealth creation that is happening in this country because of not just one man I am talking because of a system which has come, a new system of economy management is happening with a long- term vision.
I think 99% of people are still underestimating this development. This development for me is not a political development, it is an economic development.
Buy Shalimar Paints, Cimmco
So what is on your radar these days in terms of value investing and there is so much talk about how this market is a Teflon market, if I can call it that. Nothing sticks, it just sort of continues to go up. Where are you looking for value? You mentioned turnaround companies. I know that recently Shalimar paints was one company that you showed interest in. I think there was another Cimmco, so of course these are some of the long-term ideas but which sector, which theme because I know you would not tell us specific stocks?
These are some odd companies, some special themes. I would say there are hundreds of sub-themes in this country.
How do you go about looking for a theme?
Buy portfolio of blue-chip stocks for margin of safety
I do not look. It comes to me. An investor typically wants to make a portfolio of 8 or 10 stocks. So, maybe, he will be tempted to have one or two blue chips, well managed, good quality promoters kind of companies. That is very good for the margin of safety. For the remaining 6 or 7 companies for the two-three years, investors should focus on the companies where structural change is happening due to recent economic developments.
When I say recent economic developments including demonetisation, the GST is coming up and taking shape. These all are very drastic changes happening, where the black money dealing is going to be tougher. In India, while buying property worth Rs 1 one crore, used to pay Rs 20 lakh in cheque and Rs 80 lakh in cash.
Today that will not be possible. The income tax raids, CBI, enforcement, all are very positive for economic development. People will be less corrupt going forward. They will be forced to become better human beings. This will help the organised economy and the formal economy. This will also have a big huge impact in the listed company spaces that is what our domain is about.
Recommend to buy stocks with 25-30% CAGR for next at least five years
The listed companies are doing organised business. Some of them could be siphoning off many kinds of things which is going to change now. So this investor should focus on those companies and one or two stocks can go wrong. It is happening to everybody and some people may lose 50% even if they go wrong in 50% in number of stocks. But the remaining will make huge wealth so that can give 25-30% CAGR. The five stocks alone will make up for the total amount invested and give 25-30% CAGR for next at least five years.
And this is not going to end. Some people believe maybe Nifty will rise another 1000 points and it will collapse, no. Markets are going to sustain and again looking and focussing on Nifty also is not going to create much wealth if you see the last two-three years…
The big money is actually made in broad…
A lot of people are making big money and India has very large number of smart stock pickers, value investors in this country, very few of them are known.
Can we have some names from you?
No I got an opportunity to be on the national media and maybe I am known but I know a lot of stock pickers smarter than me. When there is an opportunity on the macro level in the economy and in stock picking, fund management is going to be a major industry. It is not about Rs 5 lakh crore, Rs 10 lakh crore. They will go five-ten fold from here. So the new formats will happen. AIF is something. I am very happy to say today we got letter of approval for certificate for AIF category III. So there, we have a lot of advantage. We can have a full account system. We need to keep only one account with the custodian.
I keep the assets in each client’s individual account. SIP is going to again be a huge game changer. So with the $100 billion, it will have very different kind of pockets for that, formats for that and this will happen. I have talked $100 billion in the next 18 months time and I am very confident about that. The whole fund manager industry is going to go through a huge uptrend.
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