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  • Not bothered about caps, we go where opportunity is: Raunak Onkar, PPFAS Mutual Fund

    Mr. Raunak Onkar's interview by ET NOW, September 28, 2017

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    Not bothered about caps, we go where opportunity is: Raunak Onkar, PPFAS Mutual Fund
    "The whole idea is if you can identify great businesses, you can stick with them for a while and you can watch those businesses grow in scale. "
    In a chat with ET Now, Raunak Onkar, Head-Research, PPFAS Mutual Fund, says for long-term investors, 5% plunge should not matter and that If the stocks you wanted to buy in your grocery list have not fallen, sit on your cash and wait for them to come down further.

    Edited excerpts:

    5% down and everybody is feeling Oh my god!

    Yes, people can worry if they want to.

    5% after a 25% appreciation.

    Yes, but if you have a longer term view, all these things would not matter. If the stocks you wanted to buy in your grocery list have not fallen, you sit on your cash and probably wait for them to come down further.

    Are you saying this is a buying opportunity or a good correction? We are not there yet in terms of a good entry point?

    I agree with you.

    Do you think there is more in store?

    I would not really know. It is difficult to predict how much it can fall or go up. There is a lot of other macro issues weighing on that. The whole idea is if you can identify great businesses like you were discussing in the morning, you can stick with them for a while and you can watch those businesses grow in scale. You are set, I guess.

    Your largest holding in the funds is Alphabet. Of course, you then have Indian names like Bajaj Holdings, HDFC Bank, you have recently bought in the Facebook also. Are you worried that globally also, this weakness could creep in because they also are at almost all time highs like we were a week-10 days back?

    It is a good question so I have a question for you, you know what the kind of volume growth there are in the digital market space, volume growth, number of clicks growing year on year? It is 50%. Digital is growing. Right now, why would you scare yourself saying that a minor correction in the offing, may not be a huge thing to worry about. These businesses have a long runway practically a duopoly or oligopoly in the digital marketing space right now.

    But the problem for a Google Alphabet is anti-trust suits. We have seen the headlines which are coming for Google Alphabet for Europe are not very kind and typically when these anti-trust suits or large government organisations or large geographical things go against you, they can break the company?

    Yes, they can. The interesting thing is a company like Google or Facebook who has the cash.

    Google is a virtual monopoly and I think Europeans are jealous that how can an American company come and just dominate the search market? Look at what they did to Microsoft, look at what happened to Netscape, Dell is a classic example of how a monopoly can be broken into baby Dells and then the company was just finished.

    That was a capital intensive business unlike this one. The whole idea behind Google and Facebook if they are regulated is what are you going to add? You are going to add up a lot of barrier for somebody else to come in because they have to comply with the same regulations as they have. If you have a good balance sheet, you can weather it easily over a period of time. That is my view. May be there is another view out there.

    But in India what is it that you are pencilling in because now on the index your representation for financials is going to go up, Bajaj Finance has come into the index much priced and fancied. Would that also then culminate into your portfolio adjusting for a high weightage in financials, higher than the usual because either ways it is mostly overweight financials?

    We are right now in financials in four forms. One is three banks that we own -- HDFC Bank, ICICI and Axis Bank -- and we have Bajaj Holdings and Maharashtra Scooters which are basically proxy holding of Bajaj Group companies including Bajaj Finance and they are at a significant discount to the underlying value and probably if the gap closes in the future, we will see a better appreciation on Bajaj Holdings may be.

    Maharashtra Scooter is more like buying a Bajaj Mutual Fund. It is a good holding. Then Bajaj Holdings is a wealth kind of investment, Both these stocks have seen a run up -- Maharashtra Scooter is up 50% from the recent low, Bajaj Holding is also higher now. Are these stocks fairly priced?

    In the past, I would have said probably yes but now with the new Companies Act, there is a reason why you have to look at these holding companies because now that little parties can vote into significant decisions that the company has to make regarding cash allocation, maybe we are going to see a different face for the holding companies. Let us figure it out.

    Explain this point to us. I am aware of the procedure and I am aware of the new finance norm but just for the benefit of our viewers, you are making a case that holding company discount should go away because of the new accounting norms?

    Not accounting norms, in terms of corporate governance, now the minority shareholders have more weight in deciding what happens to the company's balance sheet going ahead.

    Why would you still have Persistent and that is a sizable holding of about almost 4% in your mutual fund? There will be a time when you would go back to the drawing board and wonder whether this is a wise holding. Would you look to sell it at any given point?

    We keep reassessing every once in a while as to why an idea works or does not work and we see that they do not have a legacy baggage of the managed services businesses that the bigger IT companies have.

    But is that enough because IT per se as a sector is not really doing well and I do not think it is going to do well for the next foreseeable future?

    The average ticket size of revenue that they have is less than $3 million dollars right now. If you can get little bit bump up in the average revenue that you can grow and the other companies are running at $12 to 15 million average revenue size. So. there is a huge gap to cover up and without being in managed services which is anyway a declining business, you are going in digital space where you have the skills to execute on all the contracts.

    All you need to do is set up your sales base which has been the challenge for them in the past couple of years and they are addressing it. We have to trust the management to some extent.

    And so you do, put faith in them. Any of these names Zydus Wellness, Mahindra Holidays, Balkrishna Industries or for that matter HPCL -- where you think you need to reduce your holding?

    HPCL is an arbitrage position and it is not a core holding anyway. The other stocks that you mentioned have a runway. It is not like they are bid up like to crazy valuations. Zydus for example has the highest market share in the sugar-free category. If you believe the stories that diabetes numbers are increasing consistently in the country, we will have to believe that people will not quit the taste of sugar. So we will hope that the business keeps growing.

    You are bullish on IT which is I would reckon a contra bet because the market is a bit sluggish on IT right now. What is your call on pharma? Would you be bullish here as well in relation to rupee going lower vis-à-vis dollar now?

    Currency is a huge problem for IT companies. The whole idea was to keep cost low and readjust the forex impact that they are going to have in the future. That is one way of looking at IT. For pharma, we have a portfolio approach. We buy small stakes in a few companies because you cannot really put a big bet on one company. You never know where the regulations will move, you never know where the product portfolio will move. We realised that if a company has strong balance sheet, good management and good products in the runway, we have to figure out and readjust the portfolio accordingly.

    You are playing across market caps and that is very unusual. You own what could be called one of the world's biggest companies, Alphabet. You own something like Maharashtra Scooter, the market cap is not even a billion dollar. So, for a unit holder, what is the message over here? Are you a large-cap guy, are you small-cap guy, are you multi-cap guy? What is your positioning?

    The whole message is that we can go anywhere where the opportunity is. We do not have restrict ourselves to Indian stocks or Indian ideas or small cap or large cap. Wherever we see the opportunity exists, we will probably go there...

    Is there a thought on the PE multiples or the kind of companies you choose or you only believe in buying good businesses?

    Good businesses is the first and foremost category. Good management is the most important one. Multiples obviously matter but PE is one way of looking at it. If you look at cash flows and cash on the balance sheet of these companies and what they do to deploy that cash and the incremental return on capital rate on their business is significantly higher than you can see in many companies in India because we have a higher cost of capital right now.

    You are saying stay away from very expensive stocks. But HDFC Bank is expensive from a price to book perspective...

    Relatively yes. PSU banks are ceding market share to all the private sector banks and the banks which are already at scale can take advantage of that sooner. There is some reason why banks like RBL and the newer private sector banks are growing so fast is because somewhere the market share is being ceded to them.

    So that rule has some exceptions?

    That story has been going on for a while and I hope it plays on.

    There is quite a bit of new paper which has hit the market of late and insurance seems to be this big ticket theme. You have already got ICICI Pru. ICICI Lombard listed just yesterday and few many others in the pipeline as well. Any new pockets that you may be looking at or at least reading up on and researching about?

    We keep reading a lot but we act very few times. What we own right now we feel we are comfortable with and probably if we get more attractive valuations to buy them, we can buy them again.

    At heart of your portfolio is Alphabet or that matter Bajaj Group of companies, there are three banks which you own, do you think 90-95% of your portfolio is unlikely to change for the next 12 months?

    Tough to say but I think I can agree with you if valuations remain the way they are. we can probably see the same stocks in the portfolio.

    The general view is markets are expensive...

    Markets can be expensive but we do not think businesses are that expensive.

    What do you think is at an inflection point, the idea which every fund manager chases is that try and find an inflection point for a company, for a sector or for the industry. Give one, two or three names where you think there is an inflection in making?

    I do not think we have to always look for inflections, sometimes the trend keeps going and you have to just keep holding on to long term ideas.

    What is the consumption theory which you have bought? Zydus Wellness or Mahindra Holiday or for that matter some of the consumer names you own, suddenly I could make a excel sheet and prove that if job creation does not happen these valuations will not sustain?

    Yes, the same excel sheet can be used to do the other thing So anyway the whole point is...

    The funny thing about the market is that at every price there is a buyer and a seller, the buyer things he is intelligent because he is buying it, the seller thinks he is intelligent because he thinks the stock has peaked out?

    I would take reference to the log of Times Network, you know, the top of the pyramid kind of a thing. A lot of these businesses cater to the top of the pyramid. So and when more people come up in the ladder, probably we will see some of these ideas getting more steam. But I am not saying it is going to happen immediately or I can predict a timeline for that. It is just a structural thing and you have to keep waiting and watching and then readjust your portfolio accordingly.

    You like Indraprastha Gas because that is core to your portfolio in gas distribution but not GAIL. Are you completely off the state owned companies?

    Those are different kinds of businesses.

    I know but it is still in the gas segment essentially?

    Yes, so IGL is probably a virtual monopoly in the region they operate in. They are generating cash flows, reasonable management, they are doing a good job at what they are doing.

    What excites me about your construct is that there is a very strong exposure to global businesses, about 20%?

    27-28%.

    Will that division between local and global, will that remain like this or you could look at reducing your global exposure because there is a Sebi mandate that beyond a percentage. you cannot buy global stocks so the percentage allocation cannot go higher it will only come down. Are you committed to keeping this fund more like a mix of local and global players?

    That is the whole idea so by mandate we cannot go beyond 35% in foreign stocks. For example, if we see a better opportunity in India, there is no reason why we cannot liquidate something there and buy something here. And plus we have cash, so we do not have to do that.

    So when would you look at Tesla and Amazon?

    We keep looking at them, mostly to see how they are disrupting other companies that we want to own. So those are really good case studies.

    But still Amazon is a great business?

    I am a huge fan of Amazon.

    Tesla is perhaps the next age of things to come? It is hope trade, do you have that?

    We are not in that. We are not in the hope trade business

    What is stopping you?

    Like you said it is a hope trade so let the numbers come out, let other competitors come in, everybody is putting up capacity for electrical vehicles so you have to see how the competition plays out. Right now one player which has the most visibility is out there and everybody believes the story, let us see how it plays out.

    The original article could be seen here.

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