It may be recalled that on an earlier occasion, investors raised the issue as to why Parag Parikh and the PPFAS Mutual Fund were doing the reverse of what the rest of the World was doing i.e. while the rest of the World was pumping in billions of dollars into India, PPFAS was doing the reverse and pumping in large sums into foreign markets.
Parag Parikh explained that it is his belief that international diversification by way of picking high quality business available at attractive valuations provided more choice and reduced portfolio volatility.
Parag Parikh candidly accepted that his game plan may result in under-performance, at least in the short term, because Indian stocks are on the boil while foreign stocks are relatively subdued. He, however, made it clear that his game plan is for the long-term (5 years) and he would not alter it.
To prove his point, Parag Parikh went ahead and bought a chunk of 5520 shares of Google ‘C’ Class shares (these are like DVRs, without voting rights) in June 2014 for Rs. 19 crore. Now, in July 2014, he has doubled the holding to 10920 shares, worth Rs. 39 crore.
Google is now the largest holding (between foreign and Indian stocks) in the PPFAS portfolio, with an allocation of 8.21% of the AUM.
Why such confidence in Google?
Parag Parikh explains that though value investors like Warren Buffett and Charlie Munger avoid technology stocks because of unfamiliarity with technology, he believes that Google has a “very strong moat /competitive advantage”. He adds that apart from the large and dominant share in Search, the same dominance is there in Email, Maps, Mobile phone operating system, Video sharing and so on. He emphasizes that the whole ecosystem that has been created enables personalised advertising / marketing options for companies/ advertisers which are also liked by consumers because they are so relevant to their lives.
Parag Parikh further explains that Google’s reported earnings do not reflect the true earnings potential because of the high R&D expenses that are expensed straight away each year. He notes that in the last 12 months, almost $ 8.5 Bn of R&D expense has been expensed out and that this has artificially impacted Google’s bottom line.
Of course, as with any stock, there are diverse opinions on whether Google is a good investment or not. One school of thought is that as people increase their use of mobile phones to browse the web, Google (and Facebook and Twitter) will be adversely affected because they can display lesser/ smaller advertisements on the small screens. But there are equally convincing arguments to the contrary on why Google is a great stock to buy. So, we’ll just have to trust Parag Parikh’s judgement on this.
Parag Parikh has also given a brief explanation on why United Spirits, which appeared as a “special situation/ arbitrage” in June 2014 is now being shown as a regular investment in July 2014. Apparently, PPFAS bought United Spirits (worth Rs. 16.77 cr) with the object of tendering in the open offer and making a quick buck. However, a part of the shares (worth Rs. 7.47 crore) were not accepted in the open offer and PPFAS has been saddled with it.
United Spirits, which is presently quoting at a P/E of 102, is not a stock one would ordinarily find in the portfolio of a “value investor”. Of course, an explanation has been given on why PPFAS is “happy owning” the stock for the present.
Incidentally, Motilal Oswal, JP Morgan and Angel Broking have said that they are “neutral” on United Spirits at present on the ground that the present valuations are “expensive”. United Spirits has also under-performed the Index with a 2.16% YOY return and a (-) 15.54% 3M return.