Bharat Shah is an accomplished investor with a very wise outlook. He never tires of advising investors to stick to the basis and to buy top quality businesses and to hold them for a long period to get the full advantages of compounding.
In a recent interview to ET, Bharat Shah repeated his timeless advice that investors must not get swayed by short-term factors but should remain focused on building a long-term portfolio for 5 to 10 years.
Bharat Shah advised investors to look at four factors while buying stocks:
(i) The size of the opportunity;
(ii) The ability and integrity of the management;
(iii) The predictable, secular, long term nature of growth in the earnings;
(iv) Reasonable valuations.
Bharat advised investors to focus on businesses which are of high quality, represented by superior return on capital employed, with clean balance sheets and have managements whose governance and competence one can believe in.
He pointed out that if these businesses grow, they will create economic value and in turn, investment value over a period of time.
Bharat Shah cited the example of the pharmaceutical businesses which continues to do very well. The Pharma companies have got great opportunities within the domestic and international markets and are well positioned to benefit from both of these markets in terms of research and distribution and brand building strengths, he said. He also pointed out that there were some very fine opportunities in the banking and non-banking finance spaces, where there are some superb businesses, which can create value in the long term.
On the question of the value that investors should pay for the stocks, Bharat Shah suggested that one need not obsess too much about it. He pointed out that if one bought top-quality businesses, their earnings got compounded over three-year and five-year periods, those earnings get converted into cash flows and the cash flows get reflected in the valuations. The positive cycle of the earnings growth makes those valuations reasonable, he said.
In terms of specific stocks, Bharat Shah referred to the Pharma behemoths, Sun Pharma and Lupin Pharma. Both companies are very capable, have great geographic reach, wide product portfolio and great distribution strength, he said.
Their valuations are also not expensive, Bharat emphasized. He pointed out that Sun Pharma is quoting at roughly about 20 times PE of FY 2014-2015 earnings while Lupin is at an even more attractive territory of about 16 or 17 times. “So these are by no stretch of imagination very expensive valuations for businesses with a potential to grow and which have demonstrated ability to grow their bottom lines upwards of 25% per annum, have return on capital employed in the band of 35% to 45%, if not higher in some cases” Bharat emphasized.
Interestingly, Infotech stocks, which are presently under the weather owing to the strong currency, came in for special mention. He advised investors to grab these stocks on the basis that the valuations are reasonable, they are fantastic, high quality businesses, they generate outstanding return on capital employed and are superb free-cash generating machines.
Bharat emphasized that the software stocks have a long-term good double digit earnings growth ahead of themselves for a multiple year period. He reiterated that investors had to stay clear of unnecessary noise and to focus on the long term. From a long-term perspective, software businesses selectively represent a very good opportunity, he advised.