It is a mere “cyclical slowdown” and not a “structural slowdown”
It is well known that Sonia Shenoy is very fond of the novice investors of Dalal Street and has a soft spot for them.
She usually highlights the good news and sugar-coats the bad news so as to save us from panicking and doing something rash.
Her latest interview of Saurabh Mukherjea is a text book example of this.
Saurabh was being bombarded by Sonia’s colleagues with incessant talk about gloom and doom.
This was increasing the anxiety level of the viewers to dangerous levels.
Sonia decided enough was enough and stepped in to salvage the situation.
“Saurabh, do you think this cry of a slowdown has become a bit exaggerated or unwarranted now. We heard big companies like Amul and Britannia saying that growth has petered down but it is not a slowdown. How do you respond to that?”
Saurabh, sharp as a tack, immediately took the cue from Sonia.
“It is a cyclical slowdown. I strongly believe this notion of a structural slowdown is overplayed by commentators …. The more we ignore the structural slowdown crowd, the better off we are“, he said.
He also explained that the malaise plaguing the market is “overvaluation” of stocks.
“More than the economic slowdown what we are seeing is a correction of excess,” Saurabh explained in a soothing tone.
It is explicit from Saurabh’s analysis that it is only a question of time before the so-called “overvaluation” corrects itself.
Also, a “cyclical” slowdown means that the cycle has to turn sooner than later.
This clearly implies that we have nothing to worry about. We just have to sit it out in the bunkers and wait for the storm to blow over.
#MarketMaster | Saurabh Mukherjea, Marcellus Investment Managers says believe the market is bracing itself for a poor Q2 earnings season; @KotakBankLtd, Bajaj Finance & @HomeLoansByHDFC are good picks for a portfolio#OnCNBCTV18 @latha_venkatesh @_anujsinghal @_soniashenoy pic.twitter.com/jgvcHGmIin
— CNBC-TV18 News (@CNBCTV18News) August 30, 2019
(Teen Deviyan: Sonia Shenoy with her charming colleagues Anisha Jain (L) and Sonal Bhutra)
I am buying HDFC Bank every single day for past 9 months
Saurabh Mukherjea is acknowledged by experts as an authority on the doctrine of “Coffee Can Investing“.
According to the doctrine of “Coffee Can Investing“, investors should avoid investing in “opportunistic” stocks and should instead invest only in high-quality, fail-safe and blue-chip franchises.
These stocks compound slowly and steadily over a period of time and give excellent returns to investors with low volatility and negligible risk.
Some of the stocks that qualify for coffee can investing are Asian Paints, HDFC Bank, HDFC, TCS, Pidilite, Bajaj Finance, Nestle etc.
Saurabh revealed that he is taking advantage of the savage correction to buy these stocks in a slow and steady manner.
“Our consistent focus has been to look for companies with outstanding fundamentals …. Every single day, for the last 9 months, we have bought HDFC Bank for our clients’ portfolio. I also hold it in my own portfolio,” he said with a flourish.
Coffee Can stocks are immune from all crises
In an earlier talk, Saurabh had asked the poignant question whether people would stop consuming milk and biscuits merely because there is a slowdown in the economy.
His point is that these products are so essential and low-ticket that they are immune from the evil effects of an economic slowdown.
“Asian Paints, Nestle, Marico have track records of consistently growing revenues year after year, decade after decade, in double digits with ROCs consistently ahead of 15%. There are around 20-odd companies in our country which fall in this bracket where revenues are double digits year after year. It does not matter whether it is Lehman or the dot-com bust, these companies are able to grind out outstanding results,” he explained.
Saurabh also pointed out that it is futile to value these stocks on the traditional P/E basis.
“With franchises of this caliber — Asian Paints, Nestle, Marico, Kotak Bank, HDFC Bank — you really should not be using PE multiples and PB multiples to ascertain their fair value. It does not work. You have to look at their ability to generate outstanding results over long periods of time and therefore buy them even at current valuations,” he stated.
He cited the example of Asian Paints to explain how the enormous cash flows make the investment worthwhile.
“Asian Paints is compounding cash flow per share pretty consistently at 23-24-25% … If you keep doing that, then even if the current PE multiple in Asian Paints halves over the next 10 years, if the cash flow per share keeps bounding ahead by 23-25% and you add back the dividend, you will still compound pretty comfortably at 20% on Asian Paints,” he opined.
Three themes ripe for a buy now
Saurabh advised that we should focus on three themes and put our savings into them.
The first theme are the elite financials. These are high-quality financial and private lender stocks such as HDFC Bank, HDFC, Bajaj Finance, Kotak Bank etc.
The second theme are the top-quality FMCG stocks like Asian Paints, Nestle, ITC, Britannia etc.
The third theme is IT services which encompasses blue-chips like TCS and Infosys.
Saurabh pointed out that in the first quarter of this year the FMCG stocks in his portfolio had earnings growth of around 17-18 percent.
“This gives a sense of how strong these elite FMCG companies are,” he exclaimed.
Insurance company stocks are a good buy now
Saurabh opined that the “love affair” of investors with insurance stocks will continue for a prolonged period of time as the financialisation of the country continues.
“These are massive industries they will grow enormously over the next 10-20 years,” he opined.
He advised that we should tuck into high quality life insurer or a high quality general insurer such as ICICI Lombard, HDFC Life or SBI Life because these are building dominant market share in the industry and have got deep competitive advantages because of big data analytics and balance sheet strength.
These stocks can give 15-20% consistently compounded returns in spite of the current elevated levels of price to embedded value, he said.
Buy Relaxo – it has a bright future
Saurabh recommended Relaxo Footwear as the ideal small-cap stock to buy at this juncture.
He explained that Relaxo is now by far the dominant player in the northern Indian footwear market.
Also, while Bata, the creator of the Hawai chappal, is out of the hawai chappal segment, Relaxo is now the dominant player.
“A category dominator like Relaxo has a bright future and there is very little dependence between Relaxo’s fortunes and the latest GDP print or the NBFC crisis and so on. These sort of stocks provide opportunities which does not really depend on the outcome of RBI policy or elections and so on. You buy companies which are category dominators and you compound with them over several years,” Saurabh advised.
I fully agree with philosophy and stock discussed, in my view he could have mentioned AMC business also in financial sector list.My portfolio also contains many of these stocks except leather stocks.
Leather shoe related stock may also be good but I avoided these due to religious reason till now.
I agree with what Saurabh Mukherjee had to say about the large cap stocks. Kharab you said about AMC business could you please advise if you are hinting towards Edelweiss. I was optimistic about this stock however seeing the recent crack down in financial sector I am bit worried.
In AMC business ,I mean mainly HDFC AMC( Although at high price now but can be bought as SIP or at correction if any )and may be Reliance Nippon AMC .HDFC AMC is in my portfolio .
It is no brainer to quote every slowdown as cyclical and somehow I feel this one structural and don’t agree with the views of Saurabh. Now everyone talking about US recession and if that happens, Indian market also will hit hard. Economy shrunk from 7.25 to 5% which is nearly about 25-30% drop and markets (NIFTY or SENSEX) corrected only about 10%. Although I agree with the stocks mentioned in the post as high quality and strong one, but we are not close to bottom yet. I feel, tt is good to shop stocks around SENSEX levels of 30000.