You don’t have to hit a six in every ball, wait for market to throw you a loose ball: Madhusudan Kela

As the markets have amply proven in the last four, six months, the loose ball is coming. Meanwhile, pharma could provide great opportunities, says market expert Madhusudan Kela.

What would you like to start with the year, the month gone by or tomorrow’s event, which is budget?
Budgets are becoming less and less relevant because throughout the year there is something or the other which the government have been doing from an economic perspective. One important thing which I would like to talk about is that a lot of debate is going on as to why the economy has slowed down to below 5%. People are giving any number. In my mind, what is less appreciated is the flow of credit into the economy. The NBFC & HFC sector and some aggressive private banks like YES Bank and other private sector banks and mutual funds all put together were putting in a lot of debt money into sectors which were really in need of that kind of money.

On a year-on-year basis, pre IL&FS, year after year, there was incremental growth from the NBFC sector which was anywhere between Rs 2- Rs 2.5 lakh crore. So, you will be able to appreciate why the economy is slowing down. Roughly 2% to 3% of the GDP is not going into the markets as credit.

The other thing is that on an aggregate basis, the situation may not be that bad but Bajaj Finance is financing people for six-nine months and they are doing consumer loans while the need of the hour is developer loan or industry loans which impacts the economy much greater than what the Bajaj Finance loan can do for the economy as a whole.

Whether it is today’s event or whether after two months, this is one single thing which I personally would like to focus on is how that confidence is coming back and how the credit flow is improving into sectors where it is important. One more thing is we had fantastic a big tax reforms which were very good but who benefited? It went to companies which did not need that kind of money. It has not gone to people or sectors where there is need. It will do its own kind of good but it is not stopping the bad unregistered sectors.

Now let us address all the factors one by one. First there is one caffeine and then there is green tea. Caffeine is the immediate relief, green tea is something which is structural and detoxes. In this Budget, what should be that caffeine shot which will take the economy higher and what do you think should be the green tea approach that will clean the system and make some structural changes?
Informally, I learnt that the government has been proactive. Prime Minister himself has met a number of industrialists. So, there is a clear-cut recognition and we know that the only way to solve the problem is to focus on growth because if you have growth, then a lot of these factors will get marginalised.

In order to build the growth, what I would like to watch in this Budget is what are we doing to boost the confidence? It is such a paradox. Rs 4 lakh crore has been parked by the banks with RBI and there is no taker for that. On the other hand, there are stressed companies who cannot borrow. The sector which needs the liquidity, though their credit rating might be questionable, but they have enough security to give. But they are not getting the money. So I would like to watch what is it with the government will do in this Budget to boost that confidence so that people are once again willing to borrow money and put up the capex for productive purposes. That is the single most important thing.

Typically in a budget, you watch for the fiscal deficit number. This time, at least from a capital market perspective, people have more or less reconciled that whatever the number is -- 3.7%, 3.8% or 3.9%m I do not think the market will be perturbed. For next year’s numbers. people will definitely want to see the arithmetic of how that number was arrived at.

So, I am watching for two things; one, what happens to telecom provisions for next year. Second, the government got 1.75 lakh crore from RBI this year what happens to that number? Third, what are the broad growth assumptions? In Modi ji’s regime, I do not think they will go absolute haywire as far as fiscal is concerned. That will be under check and so that is the second thing to watch in the Budget. Third, from a capital market perspective which is most important, the market is watching for three things; one what happens to dividend distribution tax? Again there is lot of talk that dividend distribution tax from the companies may be removed and it will be taxed to individuals. But if it is taxed as a real rate, then it may not be that positive but if that taxation is curtailed for individuals, like 14% maximum dividend tax, then it will be quite positive for the market. Second, if you remove dividend distribution tax (DDT), do you also do away with the buyback tax? Third, what happens to our favourite topic of long term capital gains (LTCG) tax? These are the three things which people are watching from a capital market perspective.

Over the years you have always said do not look at the news, try and figure out how much of the good news or bad news is in the price. If one works with an assumption that this year’s budget would be reasonable both in terms of assumptions and understanding the need of the economy, do you think markets are markets factoring in a good reasonable and a smart budget?
The undertone is that there is a lot of belief that the government will do comprehensive action to revive growth. I do not know how much of that can be done because growth revival is not an event, it is a process. Let us understand that it cannot be achieved in an event. It is not like yes or nom but this is a signal of the intent of the government.

Let us segregate this market. A lot of people have this paradox. On one hand GDP is at a 42 quarter low, inflation is high. Why are the markets going up? We need to understand this. a) Many people have come and explained that there are only 10 stocks which are contributing. My theory that you have to look at bear market survivors. Last three-four years have been very tough for midcap, smallcap companies and even a lot of sectors.

But still there are a lot of companies which have survived through this phase. They have not got into regulatory challenges, they have not spoiled their personal and the company’s balance sheet. Plus, they are in reasonable businesses. These people have a huge runway. Second you also have to appreciate that if they aggregate the 100 players in India which were servicing a particular industry, at least 30%, 40%, 50% of them have gone into ICU or coma or they have gone out of the business.

Maybe more in case of real estate and some NBFCs?
Maybe more. That is what I am saying, That means demand has not contracted that much. If the size of the opportunity was 100 and if 100 people were servicing it, maybe the size of opportunity has come down from 100 to 95m but the number of companies servicing them has certainly come down to 50. So, whoever has survived are doing well and that is why in a stressed sector like real estate, the stock price of the leader almost doubled.

If I am in the stock market, I have two choices; one, I can keep on looking at numbers. The government is not doing that, this is not happening, that is not happening, I do not think I am in that mode. Whatever is there, is there. There is tremendous opportunity and you just do your bottom up stock picking. If you have conviction, if you do your homework properly, there is money to be made.

When we met last time about seven, eight months ago, your words were “I am getting ready because this market is looking attractive to me, I hunt in the mid and the smallcap space and that is where I find value.” It may be a coincidence or your assessment, but the markets bottomed out.
I can give you 50 examples where the money has doubled in the last four to six months. I am just saying what my conviction was because as you rightly said, there are times when market absorbs all the bad news and whatever bad news comes in, the share prices have already reflected that bad news and at that time, it is a buying opportunity. You will never have good news and good price; you will always have good news, bad price, bad news good price.

News has improved and prices have also improved. So, news is not great and prices are also not great? What are you thinking?
I am saying prices are still great. Just because something has gone up 30% because it fell from let us say 100% to 30%, and 30 has gone up to 40%m but from 100 it is still 40. I still see it is not as screaming as it used to be when I spoke to you seven months back. But I still feel that there are opportunities in the marketplace in various industries on a bottom up stock picking basis, but we have to be more disciplined. It is not like old times, abhi nazar hati durghatana ghati matlab (there will be accident if you look away). We have learnt that in the last two, three years; markets are very fast.

If you have not done your homework and you just go in and if something goes wrong, the stock can fall 30-40-50%. As the markets are rising, you have to increase your intensity of work but I can clearly see lots of opportunities even now.

You have always said that for investing you need an edge, some years ago it was information, then it was behaviour, then it is analysis. How would you define your edge?
Everyday, we have to question ourselves why will I be better than anyone else? The way I look at it is a) the passion, that is my edge. I would say that I am 51 years old, but I am still as passionate as when I got into the market when I was 22 and that does a lot of work. b) I have the humility to accept that I can be wrong and I have been wrong and correct myself, that is very important; c) There is no shortcut to hard work, there is no shortcut to detailed working. You have to absolutely understand the company you are buying.

These are the three things. Put them all together and wait. The other thing that we have learnt now is to wait for a loose ball. No one has told you to hit a six in every ball and the market throws the loose ball on its own. You do not have to do anything. But the question is that did you get a loose ball and did you make one run or did you get a loose ball and you really hit it for a six? As the markets have amply proven in the last four, six months, the loose ball is coming.

You always say that I look at the big profit pool. Buy a company which has an edge either cost edge or a scale edge. Where do you think earnings migration in India will happen? In this decade where do you think there is going to be high growth earnings?
It is difficult to address that question but I would say that I am not recommending any sector or company to buy. I clearly see a lot of opportunities in the pharma sector because the pharma index has not done well, the larger companies have not done well. There has been a lot of regulatory issues and those issues have been around for five years roughly and earnings have improved. The cash flows of these companies have improved. Second tier companies are cheapest ever. In the last 25-30 years of me tracking companies pharma companies on an absolute basis, the mid-sized companies are the cheapest now. Plus this is definitely a more defensive business.

Now again there will be noise, there is some coronavirus flue in China, some disruption in raw material supply happens and one or two quarter results are not good. Maybe stocks will fall but that is a buying opportunity, it is not an opportunity to be worried about.