FIIs are flocking to India because it is the best Emerging Market
Saurabh made it very clear that the present liquidity situation, which is catapulting the Bull Market, would continue in the foreseeable future as well.
“My answer is an emphatic yes,” he said in reply to a specific and pertinent question about that from the ever-charming trio of Ayesha Faridi, Avanne Dubash and Abha Bakaya.
He pointed out that his Marcellus Fund has been receiving incessant phone calls from deep-pocketed foreign investors looking for avenues to invest in India.
“The reason for that is easy to understand; if you are a CIO of an American pension fund, you need to gun out at least 6% to keep your stakeholders happy. If the US 10-year bond yield is at 0%, how will you get to 6% without investing heavily in emerging markets?,” he asked.
Saurabh also pointed out that amongst the emerging markets, Brazil is not in great shape and China has issues which have made it a pariah and untouchable.
“India has become the main game in town …. EMs have China issues, Brazil issues and India is the big shining game in town,” he said.
He also opined that the gush of cheap western money will power an economic recovery in India.
“It is early days yet, but it does look like the beginning of a 2-3 year economic recovery in our country driven by foreign money,” he said.
Buy high quality financials right here, right now
Saurabh’s fascination for high-quality financial stocks is well known to us.
In fact, during the depths of the CoronaVirus crash, when all Pundits had sounded the death knell for Bank and NBFC stocks, Saurabh was the lone voice which had boldly advised a buy (see Saurabh Mukherjea Recommends Three Stocks Which Are Looking “Incredibly Juicy And Attractive”).
Saurabh Mukherjea says don's get caught up in the near term forecasts, focus on long term. Bajaj Finance, HDFC Bank, Kotak Bank look incredibly 'juicy', attractive at this level
Premium financials in NBFC space, auto look very attractive
— avanne dubash (@avannedubash) May 11, 2020
Needless to say, the few daredevils who obediently followed Saurabh’s advice are now rollicking in incalculable riches.
He made it clear that financial stocks still have a long way to go.
“The first and the biggest bet is financials,” he said.
“The call we are making is, champion lenders which have already done heavy provisioning and raised plenty of capital will continue to power through the next two-three years. Hence, we are loading up on high quality financials,” he added.
Saurabh emphasized that there is no merit in our waiting on the sidelines for clarity to emerge and we should buy the stocks ASAP.
“This is the biggest call. The Marcellus view is you buy the kings of capital right here, right now because you want to benefit from a two-three year revival in the lending cycle in our country,” he said.
Time to look at second-rung lenders like AUSFB and CUB
Saurabh reiterated that HDFC Bank, Kotak Bank and Bajaj Finance are the favourite financial stocks of the Marcellus’ PMS Fund.
This is because these lenders have not only provisioned aggressively for the expected NPAs but they are also going into the next calendar year with capital adequacy ratios of 20-25%.
“It should be the envy of almost all lenders,” he said.
However, he is now scouting for other lenders as well.
“We have also started building positions in lenders one notch below in size like AU Small Finance Bank and City Union Bank,” he said.
“AU Small Finance Bank is a high quality franchise with a strong balance sheet, good cost control and good NPA control,” he explained.
NBFCs will consolidate just like the Pvt Banks
“The bigger call is the NBFC industry consolidation. NBFC industry is likely to consolidate around a dozen champion franchises,” Saurabh said.
He also pointed out that Bajaj Finance is the strongest of the NBFCs and that LIC Housing Finance (which is backed by the venerable LIC) is walking on a similar path.
Even second-rung NBFCs like Cholamandalam and Shriram Transport are promising candidates, he hinted.
“Whichever way you cut it, whether you invest in the elite NBFCs or one rung below, it is fairly clear that over the next three, five, ten years the industry will consolidate much like private sector banking has consolidated. If you see private sector banking four banks account for 90-95% of the industry’s profits. I think we will see a similar phenomenon in the NBFC sector,” he said.
“Whether you buy Bajaj Finance or an HDFC or LIC HF is your prerogative, but it would be a shame if you do not benefit from this consolidation. We will see NBFC industry profitability crunch in the hands of a handful of lenders,” he added.
Consumption recovery will sustain
“Our second big call is on consumption. We believe that the consumption recovery will sustain rather than fizzle out,” Saurabh said.
He explained that he has been personally going to the Mofussil towns to see the state of the market.
“The visits we have done to smaller towns in Maharashtra suggest a pretty broad-based and fairly sustainable recovery in consumption …. In spite of Covid, the town is thriving … There seems to be a pretty broad-based recovery in consumption,” he stated.
Stocks like Page Industries and Pidilite will thrive
Saurabh opined that Page Industries would be a beneficiary of the recovery in consumption.
Pidilite, also a household name, has been a champion franchise for the last 20-30 years and will continue to dominate, he advised.
Champion franchises have rewarded investors handsomely, invest heavily in them
Saurabh pointed out that investors are not appreciating the fact that Champion franchises have rewarded investors very generously with a 20% CAGR return with low volatility.
“It is not as if we are buying some highly risky names to generate 20% returns very consistently. We are buying champion franchises and we are making sensible returns for our clients and for ourselves,” he said.
Saurabh advised that we should shut out the noise around investing and keep investing in Champion franchises.
These champion franchises are stocks like Asian Paints, Nestle, Pidilite, Page Industries, Hero Moto, Bajaj Auto, Bata India, Britannia, ITC, Colgate, Divis Labs, Eicher Motors, Godrej Consumer, HDFC Life, InfoEdge, etc.