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  • Bitcoin is a consensus currency, not tested for failure yet: Raunak Onkar, PPFAS Mutual Fund

    Mr. Raunak Onkar's interview by ET NOW, November 29, 2017

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    Not bothered about caps, we go where opportunity is: Raunak Onkar, PPFAS Mutual Fund
    Raunak Onkar of PPFAS Mutual Fund says it is not easy to pick new stocks in this market. “We are sitting on 18 per cent cash, but that is mostly residual cash,” says he. Excerpts from an interview with ETNow.
    ET Now: What is going on with Bitcoin, is this an indication of risk in the world?

    Raunak Onkar: Not sure. Bitcoin is not regulated by governments, and it is a distributor ledger which manages all the transactions. Since nobody knows who is regulating it, you have to trust each other who are transacting in bitcoin to make sure that value exists in the products we are selling through bitcoin. That is the system we understand so far. I am not an expert on bitcoin. I just track it academically for my own interest.

    ET Now: What is the risk to this bubble? I mean if it is a bubble, and many are calling it so, that it is completely speculative. Like you said, no regulatory authority has direct charge of how the market is transacting. What happens if the bubble bursts?

    Raunak Onkar: That is a good question. We do not know what happens if there is a bubble burst and who is going to bear the brunt. It is like any commodity price excess, and it rises to a certain extent, the people who have sold will probably be enjoying that okay we are no longer part of that bubble burst, but the ones who bought at the peak will be suffering. It is real dollar loss for those people and those who have converted into dollars do not have to worry about it anymore.

    ET Now: But there is no potential systemic risk coming out of this?

    Raunak Onkar: I am not really sure. Because, it is not tested for failure yet. A lot of people say the distributed ledger system feels safe to some extent, because different nodes transact and understand how the value is determined on transactions and everything is authorised by the system. It seems to work for people and you have to trust it. It is like consensus currency, like Mr Blankfein said, and if you understand, if it is a consensus between you and me, that is the value of the currency.

    ET Now: Somebody told me that a year ago real estate stocks would be up 5X. I think people fail to understand what is happening there. What is happening in the market? Suddenly, laggards are making a comeback; private banks are taking it easy. Is the market telling you it is ready for a churn and the leadership is changing?

    Raunak Onkar: Specific to real estate, if you have seen these stocks have not done really well in last five-six years. The businesses did show volume growth. At the same time, a lot of people had purchased very expensive real estate during the previous infrastructure run. At that time, if you were buying something, raw material was so expensive, you needed to price the finished products as well. And taxation and everything has been ironed out now. You have RERA in play. So all the organised players are seeing their names being among the established players and volume growth was there. It is like wherever people were able to afford and when housing finance kicked in, people could still purchase property.

    ET Now: I have your October portfolio with me and that has not changed much in a meaningful manner. Google is still at the top holding. Private banks are right there and you continue to buy pharma.

    Raunak Onkar: Yes.

    ET Now: Let us understand pharma. You are leaning more towards MNC pharma rather than generic pharma.

    Raunak Onkar: Not really. We are leaning more towards generic pharma than MNC pharma. We only have one MNC pharma stock in the portfolio, which is Pfizer, and we have Dr Reddy’s, Lupin in the portfolio. The whole idea is to buy low-cost producers or people who have demonstrated good management skills in generating market share for their generic businesses outside the country.

    If you look at the results of many of the domestic generic players, you will see apart from the US market, they have grown volumes and earnings in other world markets such as India, South Africa and even African markets or European markets. These are different markets compared with the US market, where it is more of a volume game and quality-conscious game rather than just quality conscious, which is in the US right now. Profitability is impacted because they have seen sharp declines in the US business, which is because of several reasons that we have discussed before, such as FDA issues, other competitors getting faster approvals. These things will happen.

    One thing that has changed is the product pipeline, which was a holy number, which everybody used to quote; not as holy because if you see, many companies realise it is no longer viable to market the same product because price erosion has been steeper than what they had anticipated. That is something we keep a close watch on and see how the value is getting affected. But there is really no way to model these risks and dynamic changes quarter after quarter. We have to take a sectoral view.

    ET Now: My only followup question there is that in pharma it has now become each company for itself. In 2014-2015, there was a bit of herd mentality, because everything used to move up together. When you are looking at individual businesses, one day you will get great news about Divi's Labs and Biocon getting their EIRs through and their relationship with the USFDA clearing out, another day you will have Lupin or some other pharma major coming under the scanner again. How do you kind of mitigate this news flow risk for the companies that you buy into? How do you choose the opportunity in a cloudy regulatory environment?

    Raunak Onkar: It is not easy. That is why we have a distributed approach. We do not want to put a single position determining the value of pharma stocks in our portfolio. We have smaller stakes in a few companies, which is a safer way to play, because nobody really knows how it is going to impact each individual company. For example, if there is a warning of 483 letter to a company, how do you know the value of the stock will correct 20 per cent and not go up 50 per cent. It is all determined by people who react to news rather than to the actual value.

    ET Now: But is not that related to revenues you draw from that facility?

    Raunak Onkar: Can you really compute, because the companies can re-route the raw materials to other plants. They can also have third-party outsourced manufacturers, who can supply you the raw materials.

    ET Now: For example, Sun Pharma does not have Halol. It is suffering because Halol is not getting fresh approvals.

    Raunak Onkar: Agreed.

    ET Now: So that chokes your complete futuristic pipeline and then your forward-looking assumptions have to be pared down.

    Raunak Onkar: Yes, but how do you know what to pare down?

    ET Now: Each company would have at least three or four facilities, they can route it through either one.

    Raunak Onkar: Not for all plants, not for all products. Maybe, some of the key products. For example, if you wanted to get exclusivity in some of the key products, which nobody else is selling, that is the plant which is affected, then the most newsworthy thing for that plant is that this product is not going to come out in the market. People will then extrapolate a range of possibility that they will lose because of this.

    ET Now: So the way you construct your portfolio is you believe in the basic principles of investing, power of compounding, buy good businesses, let them compound and if earnings grow, markets will recognise that. Where do you think there is potential of a strong mood rerating and business rerating? Give me an example, business or sector, where you think there is a lot of value. The markets are just not recognising the potential that a company or business has to offer.

    Raunak Onkar: At the moment, the market has recognised probably a lot of potential, which is not there in many sectors. We are not finding it easy to pick new stocks right now. We are sitting on 18 per cent cash, but that is mostly residual cash. If we find a really good idea to invest in tomorrow, 5 per cent will just go away. So the whole point is whatever we have in the portfolio is based on what our outlook has been for the past. Wherever we see that, even that has become frothy and unpredictable in terms of how further rerating can happen. We have decided to scale down some of these ideas.

    ET Now: What is keeping you back, because 18 per cent cash in this kind of a bull market is very unusual? You run the risk of underperformance if the stock market goes up in the short term?

    Raunak Onkar: Yes, but it is better to not invest in something in which you do not have conviction. If you understand a business and you know that it cannot be valued or cannot be bought at this particular valuation, which will generate value for you going ahead, then you can sit back and wait for your opportunity to come.

    ET Now: You are also bullish on the e-commerce space. Could you shed more light on that, because within the listed universe there is very little. Info Edge is a website company. I do not know whether that falls into your portfolio. Grom the e-commerce basket, what is it that you like?

    Raunak Onkar: The e-commerce basket is good to try academically to understand what is happening. It directly affects banking and payments that happen through. People are purchasing; the scale on online transactions goes up the way they transact. That goes up, plus you have ancillary logistic companies that keep doing well because of e-commerce businesses. So, it is a good way to track these things, not in the portfolio though. It is academic interest to understand what is happening in the market.

    ET Now: Give a name or a business where you think there could be 15-20 per cent volatility because that could happen in any market. Winter is coming, so do you think a 15-20 per cent correction could happen any time but you are reasonably confident of the business growth.

    Raunak Onkar: So in the portfolio, we have Alphabet which is one of the biggest themes for us in the digital advertising business, or targeted advertising business.

    ET Now: You are talking about $350 million market cap and Google is the easiest answer where you are confident. Okay, Facebook, Apple, Google. Let us go beyond that.

    Raunak Onkar: If you look at the IT space, it is tough to predict the future of a lot of India-based IT companies, but we have a few stocks in the portfolio on which we are reasonably confident. They will have short-term pain, but there can be a longer-term advantage for them. Because they are in areas where they are in and the migrating from traditionally-managed services to digital businesses has been one of their most important transition strategies.

    The original article could be seen here.

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