In a chat with ET Now, Rajeev Thakkar, CIO, PPFAS Mutual Fund, says if one is looking at five years out and if there are some extreme reactions in the interim, volatility could give good opportunities. Edited excerpts :
ET Now: Nearly one-fourth of your portfolio is global in nature whether it is an Apple or whether it is a Nestle or for that matter Google. Right now there is a global growth concern. It is haunting American companies as well as European banks. What is your positioning in terms of the global big picture?
Rajeev Thakkar: Specifically Brexit. I think that is what is on everyone's mind. So Brexit has two parts to it. One is what we know and the other is what we fear and to me it is actually a sequel of a movie we have already seen in the past. Earlier it was called Grexit. B was replaced by G. Even at that time, the government in power called for a referendum, there was a change in government, population took a tough stance to beat back the EU. Finally even the new government which came in arrived at some sort of a deal with the EU and life went on. Today no one talks about Grexit, today it is Brexit. In fact Greece was a bigger concern to my mind. It was part of the monetary union, it had threatened to default on its debts. Britain has its own currency, it is not threatening to default on its debts. What is the issue today, issue is migration, issue is trade.
ET Now: Size also. I mean UK is world's fifth largest economy, Greece was like a dot in the overall scheme of things. This explains some of the RBs etc. of the world crashing 30 per cent in last two days?
Rajeev Thakkar: That is a question even I have. So sentiment can take things in both directions, up and down. On the ground, UK has voted to leave 50 to 48. What happens is there is a two year negotiation process. Nothing is going to happen tomorrow or day after. Let us look at what will happen two years. Today UK runs a trade deficit with the EU and the most dominant country in the EU Germany has a more than $55 billion trade surplus with UK. So it is not in the interest of EU to jeopardise the thing. Ultimately, they have to come at some compromise as to how trade will work. May be there will be some saving deal on immigration and things like that but I do not see trade barriers or trade walls coming up between UK and the European continent.
ET Now: So you do not foresee a prolonged significant impact on asset classes namely currency and equity market?
Rajeev Thakkar: Prolonged no. If you read Nassim Nicholas Taleb, he has been warning about EU breakup for a long time. There is monetary union. There is trade thing but there is no fiscal union and somewhere you keep hitting the can down the road. Somewhere that has to come to a breaking point. Maybe some countries will exit wherever things are not sustainable, devalue their currency and so on. But this specific event on hand that we have today, number one - it is not an event for today. It is event two years out. Current prime minister will exit. New government has to form. That government has to enter into negotiations with the EU and they have to come to some sort of arrangement. Both sides want that arrangement. It is in no one's interest to jeopardise it. Even people who voted to exit are having second thoughts as we see in the media. So they will work out something. I do not see let us say beyond a week, people will be too much worked up about what is happening right now.
ET Now: So let us talk about your fund. Your global exposure in stocks like Google or rather Alphabet, IBM, etc, stay as is. You have not tampered with any of your holdings?
Rajeev Thakkar: We have not tampered. Wherever there were opportunities, we added to some positions marginally and so on. But you mentioned Alphabet. Alphabet gets about 10 per cent of its global revenues from UK. Now currency has fallen let us say 10-12 per cent. On the top line, it is a 1 per cent impact. So these things happen. I do not see why vote over the weekend should fundamentally alter the world as it were. Mainly it is business as usual. Actually, if one is looking at five years out and if there are some extreme reactions in the interim, volatility could be a friend. It could give good opportunities.
ET Now: You bought Apple. Just a coincidence, I was reading your last disclosure, Buffett has bought Apple, you bought Apple, so who is leading whom?
Rajeev Thakkar: Buffett is leading or rather his deputies. It is not Buffett's position. It is one of the two deputies.
ET Now: Berkshire Hathaway.
Rajeev Thakkar: Yes so they are comfortable at a far higher price. They have bought north of $100 and probably they are looking at it as a mote investment. Our own thinking on this is that the valuation is compelling. So different approaches...
ET Now: Are you valuing Apple as a consumer company? Are you valuing Apple as a technology company because it is no longer a disruptive company? I mean they disrupted their analogue to digital platform. They disrupted the so called music space and the iPad space but that is history now. Now they are trying to behave like a company which is cash rich, company which is struggling with iPhones and a brand which has become more like a consumer durable brand.
Rajeev Thakkar: So I look at it this way that the smartphone war is somewhat over with two winners in a sense - you have the Android Ecosystem and the IOS Ecosystem. The smartphone growth peak maybe behind us as Mary Meeker has pointed out in her report, meaning iPhone 7 will be maybe an incremental improvement over 6 or 6S and people may not line up outside the stores to buy the products. But increasingly what is happening is that same ecosystem is giving annuity like cash flows to these companies. Just for example, if you renew some music subscription on your iPhone or if you renew a magazine subscription on your iPad, Apple gets a cut out of it. So out of inapp purchases, out of app purchases, out of music, movies and so on, Apple pays another thing that they are trying to popularise. So they will be part of the ecosystem. They will get a growing chunk of these spends and again finally it boils down to valuation. Even a de-growing company has value at some price. So currently, there is all pessimism, everything negative is factored in in our mind.
ET Now: The other interesting thing that could happen is people wanting to pick up some of the good banking shares in the UK. You have a chance to do that. Those stocks are right now falling the way our PSU banking stocks had fallen, but concerns are real though one does not know the extent of the damage that could happen. Are you tempted if there is a certain percentage fall in those banks? Would you be tempted to go out and buy those? By this I am essentially trying to figure out what is the extent of damage? Do you think that could happen on financials across the world?
Rajeev Thakkar: Banking is a highly leveraged business, especially in the international context, not only it is leveraged in terms of lending, a lot of these players are big and active participants in the derivatives market. So a lot of that exposure comes off books. So when there is volatility, when there are disruptions like this even though in the real economy things may normalise six months down the line or one month down the line, if those bets go wrong you could see huge losses. So banking is a space where we would be circumspect. We do not have that much coverage, that much expertise on European banks or international banks in that sense. We are not looking at that space actively.
ET Now: What you also like is Mahindra Holidays, I looked at their Q4 numbers, uptick seems to be kicking in. Even though numbers are strong the stock has not been a massive outperformer, it is getting jammed at Rs 420-430. I do not know who is selling but I know you are buying at lower levels. Is your thesis for Mahindra Holidays still intact?
Rajeev Thakkar: We have bought long back. We have not sold or bought anything for the last maybe a year or two.
ET Now: What is your price target for Mahindra Holidays, is it a long haul stock, three years, five years, are you happy to own it for that kind of a time period?
Rajeev Thakkar: So as such, what we love about the company is the business model. If the business model works out right, it is a long haul stock. Then you are not working on specific 20-30 per cent kind of price targets. The business model being customer pays money upfront for a long period of holiday. Most of the capex is funded by the customer advances and occupancy is not a problem unlike other hospitality spaces where sometimes if there is a scare then occupancy ratio goes down. Again it is in the discretionary space. So wherever people meet their basic needs of food, shelter, clothing then what next buy a car or go on a holiday kind of thing. So to that extent, we think it is in a good space. It has had issues in the past with regard to customer satisfaction levels which they have been working on addressing. To a large extent, that has been addressed and that is showing in the Q4 numbers but I think what will drive it will be the sign on numbers increasing in a significant way.
ET Now: Are the sign on numbers showing a decreasing trend? Two, how many hospitality or hotel companies do you have which have 20-30-40 properties of their own and are virtually debt free? Why is not that a big positive for Mahindra Holidays?
Rajeev Thakkar: Well that is a big positive. What has been a problem for them in the past they ran all these aggressive campaigns, sign up and get a free LED TV, sign up and get this free, that free but people would sign up on instalment basis pay one instalment get that gadget and then figure out no, this is not really for me and then cancel up. The company would not lose money but that entire marketing effort, all that would go waste. So actually the company has been somewhat un-transparent in one regard; they have been showing net addition numbers, net addition numbers is gross people signing up and not people who have stopped their membership. So on a net basis, you see a number but it is actually clearing up the past mess. I think once they cross that hurdle then the signed up numbers should look good.
ET Now: What about Indian stocks? While Maharashtra Scooters continues to be one of your largest holding, you have got the likes of lot of private banks there; Axis, HDFC Bank, any juggling in the holdings here, any reduction of size given the current market volatility or do they remain as is?
Rajeev Thakkar: There will be some changes. Again, will not be in a position to disclose portfolio actions before the monthly factsheet is out but it would not be anything dramatic, it will be marginal pluses and minuses in the individual stocks.
ET Now: The need of the hour actually is to discuss monsoon and the impact of monsoon and what markets are factoring in terms of monsoon, it is not Rexit or Brexit, we have gone over those humps, what is the importance of this year's monsoon and how much of a normal monsoon is already baked in in the price?
Rajeev Thakkar : Well I think monsoon is important not just for the markets, it is important for our lives in that sense whether it is food production and inflation or water for drinking or hydropower etc. So to a large extent people are not factoring in a crisis kind of situation. People are factoring in business as usual. If there is no problem on the monsoon front I think we are well poised for overall...
ET Now: So do you have a monsoon bet in your portfolio where you bought that stock with the assumption that demand curve will come back, rural consumption has suffered in the last couple of years, urban consumption has been static but we know the indirect importance of monsoon, both in terms of demand and sentiment, so are you buying something from the consumer category where the uptick could happen because of a good monsoon?
Rajeev Thakkar : When we look at this thing we factor in different cycles, if we are buying with a five-year outlook, in that five years you will have periods of sub normal monsoon and periods of excess monsoon. We do not take opportunistic bets on buying a specific stock for a good monsoon and then exit it post that event happening or not happening. So there is nothing in the portfolio which is specifically a bet on rainfall and things like that.
ET Now: Still convinced about Ipca or oh my god what stock have I bought, need to get out, it was a mistake?
Rajeev Thakkar : We have factored in pain. When we buy in into these things, especially when it is a contrarian thing, you have to be prepared to take pain. Essentially what we are saying is will it ever come back to the pre-crisis earnings which is pre FDA problem earnings, if it does and if it grows from there, the stock will do well. It is a question of how long the issue will take to resolve and we are ready to wait for three to four years kind of thing.
The original article could be seen here.
