ICICI Bank added to the Kings of Capital portfolio
ICICI Bank was earlier not regarded as an investment grade stock owing to the alleged shenanigans of its earlier CEO Ms Chanda Kochhar.
However, things have changed dramatically for the better over the past few months under the able leadership of Sandeep Bakshi.
“In the pre Sandeep Bakshi era, people who were in key positions of power had made capital allocation decisions which seemed to us unwise. We wanted to understand whether those people control the capital allocation levers in ICICI Bank any more. It took us a couple of years to figure out that in the Sandeep Bakshi era, those people are firmly out of power and until we got that clarity that the people who basically made wrong capital allocation decisions are no longer controlling the levers of power in ICICI Bank, we had not gone ahead with the investment.
But all credit to Mr Bakshi as he has rebuilt the bank and rebuilt the key team which runs the bank and we wish them well and we hope to compound with them in the years to come,” Saurabh stated.
“We are now satisfied that the ICICI Bank of say five, six, seven years ago has turned the corner and therefore built a position in Kings of Capital,” he added.
No reason for pessimism in Indian IT services
As regards IT stocks, Saurabh opined that there is no justification for any pessimism in the sector.
“The picture is clear, there is no weakness in the pipeline,” he stated referring to the leaders in the sector such as Infosys, TCS and LTTS.
“Even beyond India, if you look at Accenture’s results or talk to people at Accenture, there is no weakness in the IT services demand pipeline and I doubt there will be, if the west is going into recession. Officially, the United States is now in recession with two quarters of shrinking output. If the West is in recession, then that will increase demand for Indian IT services and even more work will come to Bangalore, Pune and Hyderabad,” he added.
“Hence I do not really see why there should be any pessimism about Indian IT services. We are steadfast in maintaining our TCS and LTTS holdings,” he emphasized.
There is buoyant demand in the Pharma ecosystem in view of the shift from China
Saurabh confirmed that there is buoyant demand in the Pharma space in view of the shift from China and there is no need to worry about Pharma stocks.
“The whole world is trying to replace China in both its formulation – API, and its intermediate supply chain. So not just the Government of India, but the Government of the United States, several European governments are keen that their countries reduce their dependence on China for the entire pharma supply chain that in turn has meant tonnes of work for Indian promoters,” he said.
“Promoters of Pharma companies are busy running around the world signing up for more orders and that in turn means that the demand ecosystem is going all the way down – to say a glass lined reactor supplier like GMM Pfaulder – is revving up,” he added.
Saurabh also pointed out that his Fund has significant investments in companies like GMM, Alkyl, Divi’s etc.
“We are considering making some more investments in the space but as we invest in companies with barriers to entry with moats and that require careful work at the down level,” he asserted.
It is worth noting that in earlier interview (see Marcellus PMS Funds are underperforming because market is undervaluing longevity of great businesses), Saurabh had explained that Divis Laboratories was trading at ~40x earnings in 2018/19 thus reflecting market’s view that Divis’ high growth period of 20%+ would last only for the next 5-6 years (and fade-off thereafter). However, given the kind of extended growth runaway available to the company from its dominant position in the pharma API segment and given the immense growth opportunities available from API manufacturing shifting out of China, the share price quoted underestimates the potential length of high growth period available to Divis. Increasing the length of high growth (20%+) period to just 10 years (vs the 5-6 years expected by market) implies an intrinsic fair value P/E for Divis which is ~50% higher than what the stock is trading at, he stated.
“Therefore, the reason we are able to buy these great companies without paying share prices which FULLY REFLECT THEIR SUPERIOR COMPETITIVE ADVANTAGES is because the conventional three stage DCF employed by most investors tends to undervalue the longevity of a great business. Given the depth of research and conviction required to hold such a view (regarding an extended high growth period), most investors seek comfort within a narrow band of P/E multiples. We thank them for doing so because that gives us the opportunity to continue compounding our clients’ wealth at a brisk rate,” he had emphasized.