ET Now: Is this volatility a long-term investor's great friend?

Rajeev Thakkar: Absolutely.

ET Now: Why do you say that?

Rajeev Thakkar: So one does not know where the bottom is, one does not know what will happen three to six months from now. What one knows is that if you are away from the primary commodity players, people who dig hole in the ground and take things out, you are okay. If you are not in the lending space, you have it good whether you are a FMCG player, a consumer durable player or a capital goods player. Your input costs are easing and as long as your demand does not collapse, you should be fine. So we had Lever results coming out and their top line grew 3 per cent but their profits grew much higher and this is despite passing on price cuts to consumers, spending more on ads and things like that. So it is a period where we are in a low growth, low interest rate environment, low inflation environment. But at the same time, you have a situation where markets can give you maybe 10 per cent to 15 per cent nominal returns and which is not such a bad thing.

ET Now: Considering this is the time, how do you protect your downside and more importantly do you foresee further downside, more bouts of volatility in the next few months or do you think what we witnessed from the start of the year till now is the worst that we have seen?

Rajeev Thakkar: In psychology, people talk about obsessive compulsive disorder (OCD). The markets currently have OCD which is oil, China and commodities. So let us look at these three. No one knows where the oil bottom is, but at the current prices, a lot of players do not find it viable to extract oil. So somewhere production will taper off and balancing should happen. So I do not see it as much of a worry. If you are ONGC or Oil India, obviously there is a problem. Your profits will be under pressure. Things will go off. Again primary commodity players will have a lot of earning downgrades. The problem is what happens to these countries which have invested in sovereign wealth funds. How much money will go out? Again I am not a macro expert, but it is more of a supply of securities in the market. It does not affect the underlying business per se.

ET Now: But the problem is that nearly 40 per cent of the free float in Nifty, broadly 40 per cent is held by foreign investors. They have been fair-weather friends. Foreigners were investing into India because there was cheap source of money which was cheap oil or oil money which was coming via funds to emerging markets like India. If I close that big funnel of liquidity, then that rebalancing could come at a price.

Rajeev Thakkar: So that is a very interesting point you are making. Despite all this, Swiss bonds are still at 0.20 negative yield for 10 years, Japan is maybe 0.2-0.3 somewhere there about on the 10-year bond, entire euro zone is at cheap money. US again, despite the 25 bps hike, is nowhere near expensive. So if you are foundation, if you are a pension fund, where do you put money? Do you put money into assets which give you nothing or do you put money in assets which over five year, ten year period will give you some real positive return. So I do not see that as a big worry going forward. On a particular day, the marginal seller sets the price which is what is happening in the markets. So someone who wants money irrespective of the valuation, irrespective of the price is going to sell but that is a short term phenomena.

ET Now: So how do you construct your portfolio right now considering your mutual fund is exposed to across global equities and across asset classes? What is the right way to sort of hedge your risks at this point in time?

Rajeev Thakkar: So places which are not affected by the turmoil are the places to be in. So how does a lower oil price affect a company like Google? I do not see there being any direct impact on that or on a Mahindra Holidays.

ET Now: Of course, it does. People would not have that much money to travel and take holidays?

Rajeev Thakkar: Oh! they have more money. Airline tickets will be cheaper. Your fuel costs are lower. So any one who is not digging a hole in the ground to take out money has it good.

ET Now: But people would not have bonuses to travel but anyway...

Rajeev Thakkar: So there are losers in the turmoil and there are winners. Consumers in the US, Europe and Japan have a huge round of quantitative easing (QE) irrespective of the central bank policies. The pain point of Russia, Saudi Arabia and Kuwait is the gain of consumers elsewhere.

ET Now: It is a coincidence that you own Persistent and Mahindra Holidays and we had management of both these companies today. Persistent has reported choppy numbers but what they reported for the quarter gone by are excellent numbers with sequential growth of about 8-9 per cent. Has Persistent rediscovered its mojo?

Rajeev Thakkar: So Persistent keeps telling people that it is not a company which can be looked at quarter to quarter considering the nature of the business. They are not completely into the application development, maintenance kind of thing. It is more into that digital space which is project driven. So it is a company which we feel has a clear focus on what they want to do and where they want to go rather than compete in all spaces. I think that is a promising space, the management is competent.


ET Now: Are you happy to own Persistent for the next five years?

Rajeev Thakkar: I would think so but it is not in a space which moves very slowly. So it is one of the stocks where one would have to keep a close watch unlike some others.

ET Now: Your views are right now on banks. I mean, is all the mess already in the price or do you think there is more to go? What do investors do because up until now, one has just sort of latched on to HDFC Banks of the world what next?

Rajeev Thakkar: Market is probably saying we will be left with one bank in the years to come. I think it is the time to discriminate between banks, make two set of banks, one set of players, players who will bounce back soon, I mean, they have problems in terms of NPAs everyone has and we spoke about how commodity players are affected or infrastructure players in India and so on. But given that the whole sector is in a tough time, we will have deposit rates being low for an extended period of time. There would not be any competition on borrowing, at the same time, lending rates will not come down in a hurry. So in such a time where the entire system is using high interest margins to write off their problem loans which they have had in the past, people who do not have that much of a problem will show above average profits, that is the way we are looking at it.

ET Now: But you own ICICI Bank? And is that only the one bank, the HDFC Bank or do you think the list could get a little larger in the due course?

Rajeev Thakkar: I think in the private sector there are players who are better positioned so we own three banks and of course there are a few more but I think the private sector players will have it better than the public sector banks.

ET Now: In this decline have you added a new mid-cap stock, where are you shopping? What are the changes you have made?

Rajeev Thakkar: I would not be able to talk about what we have done from 1st Jan till today. Our fact-sheet will be out early February and so we will wait till then. But essentially, a lot of purchases have been in stocks which we already own and where things were looking attractive.

ET Now: So has there been any big change?

Rajeev Thakkar: No. Usually month-to-month, we do not see big changes in the portfolio that we have.

ET Now: Google is your largest holding, I am curious?

Rajeev Thakkar: They are going to be announcing their first results under the new structure at the end of this month where they will break out their core Google earnings versus the new bets that they are making and I think that will be interesting. So in the past what used to happen is the losses on the new bets would overshadow the core business. Analysts will now be forced to look at it as sum of parts rather than just a net number

ET Now: The street is divided on the Axis Bank commentary. The optimistic would insist that they have done a great job of NPA management. They may have increased their NPA guidance but that is in line with what RBI had instructed. The pessimistic would say that this is just the beginning. If Axis Bank is feeling the heat, more pain is coming.

Rajeev Thakkar: There will be pain. I do not see the slippages stopping completely, given the way commodity players are going and prices are going. But having said that, there is enough room in their core operations for taking in that increased credit cost. So whether you say 90 bps or 130 bps or 140 bps, depending on how you calculate it, I think given the fact that they have a good core operation they will be able to take that credit cost in their quarterly earnings and yearly earnings and still be able to deliver shareholder returns.

ET Now: The general assumption is that lower commodity prices is good news for India. Now that may happen with oil consumers, but that may not be the case if you are a farmer. That may not be a case if your income is dependent on some key soft commodities. So do you think markets are not able to estimate how this commodity adjustment actually is bad news for the rural economy, for the agrarian economy and for some commodity dependent industries?

Rajeev Thakkar: So the linkage between farm prices and international soft commodity prices is not that strong as we are not a completely open economy in that sense and when the prices go up abroad, we do not increase prices. It is more linked to the minimum support prices and things like that. So I would not be too worried about the impact on the rural India or farm prices.

ET Now: Do you have any exposure to pharma in your fund?

Rajeev Thakkar: We have a small exposure to Ipca laboratories.

ET Now: Ipca is a company which has failed to clear the US FDA test. I know they are the market leader in paracetamol but a big profit pool opportunity for them is the US generic market where they are struggling.

Rajeev Thakkar: So we have been seeing a situation where there is sudden death for these pharma companies. Suddenly warning letter comes and all hell breaks loose. So we have decided long back not to buy a pharma company when things are going good. So we are that way like undertakers who benefit from plague. So we enter a stock after the warning letter comes. Ipca also we bought after the warning letter came.

ET Now: That should leave you with plenty of opportunities. Why just Ipca?

Rajeev Thakkar: So we are looking at the other stocks as well. Wherever there are warning letters and where volumes are expected to be subdued for some, we are looking at that space.

ET Now: Broadly you are more like a midcap fund. When I say midcap fund, you are investing a lot in midcap stocks that is your niche right now. whether it is Maharashtra Scooters or Zydus or for that matter Mahindra Holiday. But midcap is where the froth is. In midcap, there is valuation comfort missing. What is your take on this disparity between largecap stocks and midcap stocks purely in terms of valuations?

Rajeev Thakkar: We also have largecaps like HDFC Banks, ICICI, Axis etc. The entire overseas stock portfolio of ours is in mega caps which are much larger than even TCS in India. So our strategy is to go where we find opportunities and where we find attractive valuations.

ET Now: Market cap is not a criteria.

Rajeev Thakkar: Market cap is not a criteria.

ET Now: You are actually right because on one side, you own Google and on the other side you own Maharashtra Scooters. So one is a mega cap and second is a micro cap. Any other global mega cap companies that you own or is it just Google?

Rajeev Thakkar: We own Google. We own UPS. We own Nestle, the parent company. We own IBM. There are quite a few.

ET Now: Buffett has lost many while investing in IBM. You are confident you will make money there?

Rajeev Thakkar: So if we lose money, I would not make money. That is for sure.

ET Now: You bought IBM just because Buffet bought IBM or you like it independently?

Rajeev Thakkar: What we have seen is that essentially the strategies of various IT companies are converging whether it is Cognizant or TCS or Accenture or Infosys. The big cost advantage that Indian players had in terms of hiring people in India is being followed by overseas players as well. So IBM in India employs more people than Infosys. IBM is undergoing some transition in terms of getting out of legacy businesses and moving towards cloud and digital offerings. It is very attractively valued and once that transition gets done, people will start recognising true potential.

ET Now: No new social media stuff in your fund, no Facebook, Twitter, etc.

Rajeev Thakkar: We are watching that space but those do not fall under the valuation parameters.


ET Now: Even Apple is down 20 per cent this year.

Rajeev Thakkar: Oh! Apple is an interesting place. They should be reporting their numbers tomorrow and we are watching that space. But the only difficulty there is that they are too dependent on the upgrade cycle and we have seen in the PC space where the Wintel combination, Windows and Intel kept, go chugging along and suddenly people said we are happy with the PCs we own and we would not upgrade every two years. That is the difficulty that could come to the smart phone space as well but it is attractively valued, no doubt about that.

The original article could be seen here.