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  • We still have 23% cash, kept the same portfolio since March

    Raunak Onkar's interview in The Economic Times Market, July 12, 2018

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    The original article could be seen here.

    We still have 23% cash, kept the same portfolio since March We are okay with buying companies growing at the same rate at which they were valued in terms of earnings cash flow multiples, Raunak Onkar, Head - Research, PPFAS MF, tells ET Now.

    You were bearish as a house, you were sitting on a huge amount of cash in March and April. Your strategy has worked out well. What is your market call now?

    Essentially the portfolio is remaining the same since March…

    But the cash…
    The cash is still there, we are still on 23%. We are not 30% always about 22-23% of cash in the portfolio and our holdings more-or-less remain the same. We have added here and there wherever we saw opportunity and valuations were reasonable but we have not taken any meaningful diversions from what we were already investing in.

    When you say here and there, it is in the existent names. Haven’t you put your money in anything new?


    Why weren’t you able to find value in mid and smallcap stocks despite a correction?

    Across the board, stocks may have fallen but really good quality companies are still not comfortably valued. When that opportunity arises, we are ready to deploy the cash immediately.

    Why not in pharma?

    We have invested in pharma but our approach has always been to take a basket call rather than invest in one idea because it is very difficult to predict the fortunes of one company.

    Business models are different right.

    Business models are more-or-less similar.

    But one company is focussed more on R&D, one company is focussed more on innovation, patents and then of course biosimilars are coming in.

    R&D is going to be stable for most of these companies. Now everybody has to keep investing if they want to stay relevant in five years’ time. Not many companies have the balance sheet to take advantage of other products being sold in the market from other generic companies which have financial difficulties. The pricing of those products is not conducive for generic pharma MNCs to hold in their portfolio as these can be easily picked up by Indian pharma companies who anyway have a lower cost of operations and higher gross margins overall.

    Your largest holding is Alphabet followed by HDFC Bank.

    These businesses have long-term trends working in their favour. Safe is a relative concept. The whole idea is if you can find a trend which is still working. You can still participate as the valuation is reasonable.

    Rupee depreciation is good news for your unit holders.

    It would not matter so much because the foreign portfolio that we hold is hedged up to 80% of its value. We do not want to participate in the fluctuation of the currency. It may be a longer term trend which will benefit the portfolio but we want to only focus on the businesses that we own and what we understand is the long-term trends of those businesses. We have no understanding of the currency move…

    If I have a unit and if I redeem that unit, would you be selling the stocks proportionately and then would you be giving the money back to the shareholder or unit holders? If you stay invested in Apple or Alphabet when currency was 65, it is now at 70. So, the returns you will get as a unit holder could be large because of the currency benefit. 25% of your portfolio is global, right?

    We can go up to 35%. Right now it is about 27%.

    In that 27%, there could be a 4-5% swing?

    But it is hedged up to 80% of its value..

    The new theme that you are betting on is digital advertising and digital marketing. What are the plays that give you exposure in that theme in India?

    We do not have incumbent players in terms of technological skill at which Google and Facebook operate and one of the biggest markets is India for both these companies. They are penetrating in different ways in terms of local language content and other areas and they are getting more users in India because of the Android ecosystem or the Facebook Instagram ecosystem.

    These are India specific plays. We do not have a Indian company which is equally competent in competing with these players but there are many intermediaries which may not be in the listed space but who work in the data collection or AI space. They can provide some ad hoc solutions here and there but if you want to play the larger trend, these companies are the best bet to even play the Indian digital ad story.

    Some part of the market is looking at the bottom up stories. We have seen that play out already in two-wheelers. Some of them are already looking at corporate banks. Valuations look very attractive over there, But you do not buy that argument. You are sticking with quality irrespective of how expensive it may be?

    Not really.

    No PSU banks for sure for you.

    Quality at a reasonable price is not something where we have to overpay just to participate in something. If we think that something is expensive but really good, we will keep tracking it and when it falls in the range that is acceptable for us, we will buy it at that point in time.

    So, no PSU banks.

    It was never part of the portfolio.

    And that continues to be an avoid. Could a company like Info Edge be part of your portfolio at some stage?

    It is an interesting company like it is doing that VC thing plus it has some existing products working for them. But at what valuation do you participate in that trend is very important. For example, there are many areas which are also getting disrupted parallely as we speak so we do not have the competence right now to understand which areas of that market will continue to be relevant 10 years from now.

    How much do you stretch the argument on valuations if you have to justify the returns coming in correspondingly? For example, in TCS you can argue about valuations but it has come off from almost four quarters of weakness. There has been two quarters of strength and that is showing up in stock performance. Why wouldn’t TCS merit a buy even at these levels?

    It continues to be a decent player but we have to always look at valuations in context of the growth that they can achieve.

    So what is the mantra on that?

    There is no mantra. You will have a different gauge to decide what is comfortable for you. Some other investor may have a different gauge of what his comfort level.

    What is your gauge?

    We are okay with buying companies growing at the same rate at which they were valued in terms of earnings cash flow multiples.

    So, 24 times 24%?

    Yes, if they are giving that kind of growth we are okay.

    The market is getting very polarised. Globally it is about FAANG and 5-10 stocks in America, 5-10 stocks in India. That is about it. I have been told that 85% of the active funds currently overweigh FAANGs. Is the so-called concentration in global FAANG stocks and local retail banks and retail NBFCs here to stay till 2020?

    Look at how these businesses have grown -- both private banks as well as the FAANG stocks. From a growth point of view, you have seen that momentum. It is not like the valuations are hollow and the growth has not been there.

    They are very cheap, Apple is not even 10 times.


    Facebook will not be about 15 times also?

    No Facebook is about 30 times earnings. These are not ridiculous valuations. I am not paying 30 times for a company which is growing at say 5% or 10%. I am paying 30 times but the company has grown 40%.

    We all know that markets follow a cycle. In 1990, the cycle was around steel and cement stocks, the Harshad Mehta era. Then came the TMT era when everything which had a prefix or suffix IT started doing well. Then came the capex expansion era where anything which was a play on balance sheet did well. Right now it is anything which has got to do with retail. How long will this cycle continue?

    That is a fair question. It is not easy to answer that question but on the other hand, you had to look at other trends that are backing that logic. If the trend starts turning somewhere, you start visualising that it is not going to work anymore, then the valuations will not justify.

    Your portfolio does not change much but are you happy to keep this portfolio given that there is risk of an election in next 12 months?

    Every five years, that risk or opportunity keeps arising. So, it is fine. We do not have to look at election as an investment argument, but look at businesses as they are doing very well. The portfolio might very well be the same but maybe we will find something else to invest in or something which becomes expensive will exit. But that is not input data point for us.

    These US-China trade war talks do not really bother you. That is the only niggling factor which may lead to some correction in global markets. That would not deter you, would it?

    There is this nice quote, “worry macro but invest micro.” You do bottom-up investing but you always worry top-down and what things are affecting. So, you keep one eye on that game but if it is not really going to affect your portfolio on that immediate basis, I do not think there is any problem in investing in ideas where you are already invested.

    You like consumption on good cash flow generation. Is cash flow the new thing in the market?

    It has always been the thing in the market.

    I will tell you why I am calling it new thing. Earlier, we used to talk more about profitability. It is no longer price to profitability, it is more pricing to cash flows now.

    If you look at a company like Amazon, the cash flow statement is far more interesting than the P&L because they do not want to show too much profits. They want to keep expanding and front load all their costs but at the same time they have to generate enough cash flows to keep reinvesting. That is the kind of business which will always do better because there is cash flow behind it.

    In India, is consumption the only space where you get that sort of benefit? Do you have exposure to infrastructure, construction?

    No. One needs to separate cyclical businesses from longer term trend business. For example, if you are looking at cyclical companies, there will be a momentary spurt of cash flow when some commodity cycles turn and some infra plays happen. But on the other hand, companies like retail or technology or pharma, cash flows have been sustainable because a long-term trend is behind a company.

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