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  • We are sitting on around 30% cash and only adding to stocks we own

    Mr. Raunak Onkar's Interview in ET Now, December 12, 2018

    The original article could be seen here. Raunak Onkar, PPFAS MF

    We have been adding the companies that we already own and which we felt were still reasonably valued in our portfolio, Raunak Onkar, research head, PPFAS Mutual Fund, tells ET Now.

    We have absorbed Urjit Patel’s resignation, we have absorbed the setback for the BJP in the polls and we have recuperated from the recent lows. Do you think that most of the bad news, at least in the short term, are behind us?
    It is very hard to say that. Anything can come up going ahead because recently we had IL&FS kind of situations happening and people still worry about liquidity concerns in the NBFC space and things like that. I do not want to comment about it. When we look at businesses for the longer term, we probably have to keep investing despite what news cycle dominates at that moment and just like business managers have to run businesses irrespective of the news cycle, fund managers and investors also have to keep investing in the same manner. We will probably get some interesting businesses available at decent valuations if that happens.

    How have you managed your portfolio in the last six months because there has been enough damage in midcaps and smallcaps? Have you increased cash levels and booked profits or have you kept your portfolio largely intact?
    We have entered that phase fairly with a large amount of cash in the portfolio -- about 30% -- and we have been selectively buying the stocks that we already own…

    Since when?
    Since the past three months. We have been adding in the portfolio and the new inflows also keep getting allocated. At the moment, we have about 26% or 27% cash which also includes arbitrage and things like that. We have been adding to the portfolio companies that we already own which we felt were still reasonably valued.

    What have you done with your exposure to financials?
    We own private sector banks and financials and we have exposure to Bajaj financial subsidiaries through Bajaj holdings and Maharashtra Scooters. We have kept on holding on to them and added where we thought it was possible to add.

    There is still fear of a liquidity crisis in the market. You still believe this fear is still there in the market but you still have your exposure in financial names. What is your view of the liquidity crisis? Has it eased on ground?
    I do not have a fear as such. I am presuming that people might react to whatever news cycle dominates at that time. If somebody comes up with the explanation that there is no more any fear, the point is, we own private sector banks which have a very healthy CASA. The biggest holdings we have is HDFC Bank, second is ICICI and Axis Bank. All have a very healthy CASA and good retail franchise and fee-based operation. These companies are more or less steady in terms of the way they operate and have a large runway.

    This story has been played for a long time and private sector banks are eating into the market share seeded by public sector banks. There is nothing new over there. The story will continue and if the valuations remain reasonable, we can add on to these ideas as well.

    Would you consider housing finance companies (HFCs) and NBFCs given their mouth-watering valuations given the recent correction? You have already spoken about Bajaj Finance. What about other HFCs, the mid to smallcap names?
    Our philosophy is to go with diversified businesses. A bank provides a lot of incentives to invest in the financial space in terms of diversification of the assets that they have in the sense NBFCs become too concentrated for our taste.

    Among frontline consumers with high valuations, are a lot of consumer names which I think you do not fancy.
    We love those businesses because they keep generating amazing cash flows but I do not have the heart to play for…

    So this HUL-Horlicks deal is not your thing?
    Cannot really pay the valuations that the market is quoting for these businesses.

    But wouldn’t you have a fear of missing out because these are compounding stories?
    I guess we have already missed out in that sense. Valuations keep rising. There are cyclical valuations as well.

    Do you think PE multiples really matter when it comes to consumer businesses?
    Of course they do. You cannot over-pay for something which grows at about 10-15% max. You cannot pay 60 times, 100 times earnings for that. For instance, we bought Alphabet shares which is at 20 times earnings and growing at 20-22% year on year. There is a huge runway in terms of the penetration in many countries like India.

    What part of your portfolio is that?
    10%.

    What about 90% of your portfolio? Prashant Khemka said one has to look at the cash flows and the return ratios over a long period of time. PEs may make the mirror a bit blurry. Despite volatility and the fact that 2018 has been a nothing sort of year for markets, you would still come in with an alpha.
    Maybe but if you are not comfortable with the valuations, then you have a set of principles which you want to invest by. It is okay to miss something which is overvalued.

    So just for PE, will you keep these stocks aside?
    Not just PE. Apart from that, there is some growth incentive that the company has to show. These companies are supposed to grow at a certain rate to justify that valuation. If you do a DCF of the valuation numbers that we see today, you would not able to justify a decent amount of growth rate. You will probably want a 30-40% growth rate to justify if you buy at a decent valuation. Again it becomes subjective beyond that point.

    Where would you get that kind of growth rate in this market? In certain spaces like PSU banks, valuation may be cheap but growth is slowing down and there is not much possibility of a higher return.
    Exactly. So why overpay for something that grows slowly. If you can pay reasonably for something that is growing at a reasonable or even at a slower clip, then why do you want to over pay for something which is growing at the same rate.

    What have you added in the last three months except for financials where there is reasonable growth and reasonable valuations?
    We added to IT services exposure in our portfolio. We added to some of the auto names. We bought Hero MotoCorp a couple of months back. We were adding to Suzuki, the Japanese parent company. So we have been adding.

    It is not just last month but for the last two-three months we are seeing a slowdown. Yes it is fine. That keeps happening. These are large businesses. You cannot expect them to keep growing consistently every quarter, every month, year on year. In some periods, there will be a lull and then probably they will pick up.

    You would not regret HUL going to 2200 from here?
    No.

    How would you play the entire rise in raw material costs scenario which would hit autos and FMCG names?
    In certain cases, there is inflation in raw material prices. In some cases, we will also have a deflation in those prices because of the commodity markets elsewhere. Instead of thinking about them on a quarter-on-quarter basis, we take a slightly longer term view of five-ten years.

    Can you see this company doing better? Can they keep on increasing their competitive advantage, market share and still perform reasonably well? Is it available today at a reasonable valuation? If all these things meet with the management quality, we will go ahead with the investments.

    How much should investors be worried about what is happening across the globe? There is the US-China trade war, crude prices issue. To what extent should Indian investors pay attention to all these global cues?
    No one knows what is going to happen. We can worry top down but ultimately you have to pick stocks and you have to invest bottom up. If you figure out that there is an interesting company available at a valuation you want to pay and the management is good enough as per your expectations, you go ahead and take that call and build a diversified portfolio.

    We also own foreign parts and so about a quarter of the portfolio is in foreign stocks. That also helps us get an exposure in something which is not India based. If something happens over here, that exposure takes care of some volatility in the portfolio.

    What about the refiners, do you like the refiners?
    We do not own them. PSUs have not been great partners for us for a long time.

    I do not see any mention of even metal stocks or any sort of commodity stocks. Is this on account of the variability of prices and inconsistencies in earnings?

    For most of the commodity businesses which are in metals or any other sectors, one needs to be really good in spotting the cycles. If you are good at cyclical investing, you can probably go ahead with that. We have not demonstrated those qualities yet and so we will keep tracking. We study these businesses from the raw material angle and understand these companies and the managements but we have not yet invested in cyclical stocks yet.

    You are saying 25% of your portfolio is exposed to the US markets, US stocks?

    Yes.

    Are you looking to book profits there at all given what is happening with the markets there ?

    We keep adding where we see the valuations are reasonable.

    Have you added more in Alphabet?
    Yes.

    What about the other names?
    Alphabet, Facebook, IBM, 3M, Nestle.

    And you have added to all positions?
    Yes.

    So you are taking this fall in the US markets as an opportunity to buy and you are not nervous about how the market is coming off a cliff, especially the IT stocks?
    IT stocks have a different characterisation, what they call techlash .in the media. That techlash is happening because some of the issues have never been discussed in the public media. Ffor example, the Google CEO recently was in front of a government panel. The whole idea is all these regulatory angles are going to come in and you have to be cognisant about them and keep a watch on them.

    On the other hand, is the business going to be affected? Is there any other company apart from Alphabet, Facebook and Google who have a significant market share in the online ad space. You have to keep track of that. We keep looking at competition and how these companies keep building their franchises that way.

    View expressed here are personal.

    Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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