R Srinivasan of SBI Magnum Emerging Business Fund has a simple philosophy when he buys stocks. He checks to see whether the stock is operating in a niche area and is dominant in the market place. It must have a consistent high ROE and it must be reasonably valued in relation to its peers.
It is this winning formula of picking stocks that has helped R Srinivasan to home in on winning stocks like Page Indistries, Hawkins Cookers & Amara Raja which have led SBI Magnum Emerging Business Fund to its spectacular gains.
In his interview to CNBC TV18, R. Srinivasan made it clear that he had made the most money by backing stocks in the consumer sector whose asset-light business model, dominant market share, huge demand and ambitious management meant that they churn out high ROE’s year after year. He said he would follow the same theme in 2013 as well and buy more of his favourite stocks such as Hawkins Cookers, Page Industries and Agro-Tech Industries.
Amara Raja Batteries came in for special praise from Srinivasan. He pointed out that Amara Raja had snatched away market share from arch rival Exide but it was still quoting at a steep discount to Exide. Srinivasan hinted that there was a re-rating of Amara Raja happening and that the price discount to Exide would be lowered. Amara Raja was a good buy even on a fundamental basis, Srinivasan emphasized, by pointing out that its performance was consistent in the last many years, it had a very high ROE, and is somewhat undervalued, in relation to Exide and other companies generating that kind of profitability.
Srinivasan’s second favourite sector is the NBFC space where nimble companies, not subject to the same restrictions as Banks, are able to generate high NIMs with low NPAs. Srinivasan showed special interest in Muthoot Finance & Shriram City Union Finance. He explained that Muthoot was a strong favourite of his because it is out of favour at the moment owing to the RBI regulation on gold loan companies. A lot of investors had been petrified that the RBI regulation would adversely affect Muthoot Finance’s growth prospects.
Srinivasan exhibited superb sense of timing in Muthoot Finance. He waited for the panic to reach its peak before he swooped down on the stock and bought truck loads of it. Srinivasan’s logic was quite strong. He pointed out that Muthoot Finance is in a business that generates very significant return-on-equity (ROE) and that it would pull itself together. He also added that all the worries about the adverse impact that the RBI regulation would have was already in the price and there was no incremental downside expected. Muthoot is a cheap stock at the present valuations, Srinivasan declared confidently.
Shriram City Union Finance also came in for special mention from Srinivasan. He said Shriram’s customer access and growth potential would ensure that they would continue to generate significantly high ROE of 23% in the future as well. return-on-equity consistently for the last many years. Shriram City Union Finance’s valuation of about 2 times book was also reasonable for the kind of consistency it has delivered, Srinivasan said.
One of Srinivasan’s surprising stock picks was SpiceJet and he gave strong logic to support his choice. Srinivasan pointed out that though SpiceJet had nearly the same market share as Jet Airways, it was quoting at an undervaluation. While Jet is trading at more than almost a billion dollars, SpiceJet, even after the run up during which it almost doubled, is still at half a billion dollars. Srinivasan also pointed out that SpiceJet was quoting at favourable valuations even compared to the presently-defunct Kingfisher Airlines, which has no market share at all at the moment and has a gargantum debt of a couple of billion dollars.
Srinivasan emphasized that SpiceJet was the cheapest aviation stock you could buy today and he expressed great confidence that SpiceJet’s valuations would catch up with that of its illustrious peer Jet Airways. Of course, the icing on the cake would be if SpiceJet announces a takeover by Emirates, Ethihad or some other big-ticket player.
It is clear that Srinivasan’s stock picks are based on fundamental factors. All the stocks in the SBI Magnum Emerging Business Fund are of top-notch mid-cap companies which will deliver great results over a time frame of 3-5 years.