Forget PNB scam, it will wind itself down
Kenneth Andrade was dismissive about the adverse impact of the PNB scam.
Instead, he advised that we should focus on the numbers in the macro and the micro environments.
“If you look at the underlying micro environment and the quarterly numbers, there are not too many disappointments. That is what we should be expecting, going into the next couple of quarters also,” he said.
He also pointed out that the worst of the bad news is already there as far as the environment is concerned and that the focus should be on the fact that the quarterly numbers are good and for the remainder part of the year, this should maintain itself.
“All we need to do is find a solution for that. This will eventually wind itself down,” he said with reference to the incalculable NPAs of the PSU Banks.
It is worth recalling that Kenneth Andrade has always been allergic to financial stocks in general and PSU Banks in particular.
On an earlier occasion, Porinju Veliyath also developed a dislike for PSU Bank stocks.
“I Have Better Things To Do Than Buy PSU Bank Stocks,” Porinju had proclaimed in a contemptuous tone.
Porinju’s change of stance had come as a big surprise to his followers because he was earlier a staunch advocate of PSU Banks owing to their dirt-cheap valuations.
No doubt, Porinju’s sixth sense bailed him out of the colossal losses that PSU Banks have suffered in the wake of the PNB scam.
Basant Maheshwari had an “I told you so” look.
What a day for investors to get over their new found ‘love affair’ with the low price to book PSU banks? #TheThoughtfulInvestor
— Basant Maheshwari (@BMTheEquityDesk) February 14, 2018
Basant has always advocated staying away from junkyard stocks like PSU Banks and instead to buy high quality stocks even if they are trading at expensive valuations.
Shyam Sekhar tried to make light of the situation.
LoUstruck on Valentine’s Day, Markets hit by PUN, JABbed NATIONALly and don’t know who to BANK on.
— Shyam Sekhar (@shyamsek) February 15, 2018
Samir Arora also joked about the situation.
For a few days I will not call myself "Punjab da puttar".
— Samir Arora (@Iamsamirarora) February 14, 2018
— GhoseSpot (@SandipGhose) February 15, 2018
PSU Banking problem is right now being managed and trust me these PSU Banks are blood-sucking parasites and they will continue to do so. Reforms here means Govt letting these banks go out of their control.
— Deepak Singh (@smarket) February 16, 2018
Corporate India will have best balance sheets going into the next couple of years
Kenneth Andrade advised that we “just need to refocus back on the way the numbers are actually panning out”.
He emphasized that a lot of things are happening as far as the macros are concerned and even the underlying micro environment and the quarterly numbers are panning out well.
“If I just switch the conversation back to balance sheets of corporate India, you are going to get one of the best balance sheets going into the next couple of years,” he added.
Earnings will catch up with valuations and result in good investing environment
Kenneth expressed confidence that the strong growth in the quarterly results would continue in the foreseeable future.
He pointed out that presently the “biggest dampener” to equity investing is the stiff valuations.
“Valuations will continue to hold on to these numbers only if earnings actually rebound and that takes us back to the focussed back to earnings and if earnings hold on to growth that they have displayed in this year, the environment should be quite good for equity investing into the next couple of years,” Kenneth said.
Lack of new large-scale projects augers well for incumbents
Kenneth opined that investors should scout for stocks that have capacity on the ground and are growing in line with demand which is equivalent to GDP growth or a little higher than that.
He explained that Corporate India’s capacity utilisation is around 70% and it adds about 5% to GDP growth and increases capacity utilisation.
“There are no new large-scale projects that are really there on the anvil. As long as supply is constrained and demand is continuous, that is going to add a significant amount of operating leverage on balance sheets,” Kenneth said.
“The key to all of this is big businesses that have incurred capital expenditure, businesses that are low on financial leverage and just run with them,” he added.
Make a portfolio of assorted stocks that are growing fast
Kenneth explained that the challenges of how to growth stocks and what valuations to pay for them are insurmountable.
However, the challenges should not dissuade investment because “there is enough of capacity on the ground”, he said.
He also emphasized that “Investing today does not have any financial risk because no companies on the ground are really leveraged”.
“We just have to put together for most investors a portfolio of 20 to 25 companies and that is all you need to run with it,” he said, implying that there is not much point in obsessing over what stocks to buy.
He pointed out that there is a “fairly large spectrum of businesses that are doing well and we just need to find the couple of them that are growing faster”.
Sectors where there is value
Kenneth opined that there is value to be found in “utilities” because the industry is in distress and nobody wants to touch them with a barge pole.
“There are a couple of businesses out there that you find merit in,” he said.
Kenneth is probably referring to Tata Power, the blue-chip mid-cap stock, which was recommended by Porinju Veliyath a few days ago.
Adani Transmission is yet another stock in the utilities sector which has multibagger potential according to Mudar Patherya.
Yet another fail-safe utility stock is Power Grid, the blue-chip PSU behemoth.
We can also consider Honda Siel Power Products, the MNC which Kenneth added to the portfolio of Old Bridge Capital PMS a few months ago.
Kenneth also pointed out that media stocks are finding traction by showing reasonable growth in both top line as well as profitability.
Here, we do not have to look further than TV Today Network, which is the all-time favourite of Billionaire Radhakishan Damani and Ramesh Damani.
Angel Broking has recently issued a detailed research report in which it has explained why TV Today is a compelling buy.
ZEE Media is yet another media stock that we can look at closely because it comes highly recommended by Porinju Veliyath and forms a part of his portfolio of multibaggers.
In fact, Porinju advised as a Diwali Gift that we buy ZEE Media.
Zee Media is available at 7x FY19 EBIDTA. One of the cheapest media stocks & that too from a bellwether media house. TV/Online shopping could add to valuations. Make no mistake, Porinju has done his homework on this one & is all set for multibagger returns.
— Rajat Sethi (@_rajatsethi) January 3, 2018
Agriculture is one of Kenneth Andrade’s all-time favourite sectors.
At the Sohn India conference, he recommended that we buy Coromandel International, the blue-chip flagship of the Murugappa group.
The stock has given hefty gains since then.
Also, Kenneth Andrade’s Old Bridge Capital has been aggressively buying stock in Shakti Pumps.
PMS of Old Bridge Capital Managemnet Pvt ltd has bought 81,434 shares Shakti Pumps (India) Ltd from Open Market on 1st Feb 2018 . They have increased stake from 4.87% to 5.3%.
— Rohan Gala (@RohanG90) February 2, 2018
Commercial vehicles stocks
Kenneth Andrade opined that the subdued nature of commercial vehicles’ stocks makes them ideal investment candidates.
Probably, he is referring to Jamna Auto and GNA Axles which are supposed to have large dependence on the commercial vehicles sector coupled with reasonable valuations.
#SharekhanFNA: Commercial vehicles: Policy for scrappage of vehicles more than 15 years age finalized -positive for Ashok Leyland, M&M, Tata Motors, Eicher Motors, Jamna Auto #SharekhanResearch #Nifty #SharekhanKar
— Sharekhan Limited (@Sharekhan) February 16, 2018
“Even within the consumer space, you will find opportunities,” Kenneth said.
He explained that consumer stocks are showing relevant growth in top line or in turnover and their bottom line will get magnified going into the next as capacities continue to get utilized.
Kenneth has already bought truckloads of Thangamayil Jewellery, a consumer jewellery stock.
Thangamayil Jewellery Ltd – FUND ACTION
BALUSAMY RAMESH sells 5 lk share s@ Rs 410/- (promoter)
OLD BRIDGE CAPITAL MANAGEMENT PRIVATE LIMITED – ALL CAP STR buys 4.89 lk shares @ Rs 410/-
— SONAM MEHTA (@sonamcnbcawaaz) November 17, 2017
Prima facie, Godrej Industries may also be the ideal play on the consumers’ space given that it has a finger in Godrej Consumer, Godrej Agrovet, Godrej Properties etc. It is also undervalued owing to the steep holding company discount.
Godrej Ind m-cap:16200 cr: stake in Godrej con +Godrej Properties 17587 cr-so standalone biz (agrovert,chem,nature basket) is available free
— Varinder Bansal (@varinder_bansal) February 2, 2017
Avoid financial stocks
Kenneth reiterated his allergy towards financial stocks.
He explained that the asset side of the economy is doing relatively better than the banks and NBFCs and that it is better to participate in the growth of the economy through the “assets” side rather than the “liabilities” side.
He also opined that the financial stocks are well priced in terms of valuations and expectations of incremental returns are low.