The stock markets have rebounded after a huge selloff, but there can still be a big correction, according to Siddhartha Bhaiya of Aequitas Investment Consultancy Pvt.
The broader markets snapped a three-day decline on Thursday as the NSE Nifty Smallcap 250 ended 3.13% higher, while the Midcap 150 closed 2.27% up. The BSE MidCap was 2.28% up and the SmallCap ended 3.11% higher.
"The way I look at it, we have had (a) fantastic four years. We see (a) lot of excesses in the market," the managing director told NDTV Profit's Niraj Shah in an interview. "So, we are cautious... Yes, we are going to see a big correction."
"There is a 60–70% probability that we are past the peak as far as the bull market is concerned," Bhaiya said, while also expecting big corrections in the small-cap index.
Siddhartha Bhaiya, managing director of Aequitas Investment Consultancy (Source: company website)
Siddhartha Bhaiya, managing director of Aequitas Investment Consultancy (Source: company website)
Historically, he said, bull markets have always peaked on good news and there have been several indicators of a roaring bull market. But now "we are probably over the hump as far as the bull markets are considered".
Bhaiya said the decline was not over yet as he expects a ripple effect on the large caps soon.
Investors first invest in mutual funds. Then, they move on to large caps, mid-caps and small caps. So, there will be an impact on the large caps as well, according to the Bhaiya.
On valuations, he said: "We have always traded at a premium but not all premiums are justified."
Bhaiya also pointed out that the difference in valuations in India and across the world is significant. This is one of the reasons that he sees opportunities in the global market.
"The markets are always six months ahead of the economy," he said, pointing out that this was the scenario during the March 2020 rally as there was no reason for it and this is seen across the global markets.
Watch The Full Interview Here:
Our guest today, you could argue that not just in the recent past, but otherwise, his performances have been great. But the recent past will make some people believe that he has the Midas touch because his prophecies around what's happening in the market near term and his positioning as well. Self proclaimed positioning about what he's doing with his portfolio has turned out to be very, very spot on. The big question that we are asking our guest Siddhartha Bhaiya today is this, which will come up on the wall right now. That's the big question, and it's something that you should never ask people, but we will still ask while markets continue to correct.
Siddhartha Bhaiya: So you know, you always keep on saying, Niraj and let's not predict the markets and we always try and do that. So will the markets continue to correct. Look, we know you're in the markets, you're here to take a call and sometimes you go right and sometimes you go wrong. I think the way I look at it, we had a fantastic four years. In March 2020, We talked about the government globally doing quantitative easing, or this was that a lot of this money was going to come to the stock markets and we had a fantastic four years over the last year. The small cap index has gone up 400% in the last four years. We see a lot of excesses in the markets right now. So we are cautious. We are cautious. Particularly in the small cap index and the SME index, we see a lot of excesses. We are seeing valuations like never before. So my sense is yes, we are going to see a correction, a big correction. Is this the end of the bull market? You know, if you asked me, I'll stick my neck out here and say maybe there's a 60-70% probability that we are past the peak as far as the bull market is concerned.
Okay, I'm going to challenge that as well a little bit but let's try and talk about some of the things that you said. You mentioned this in this tweet on March 13, which is yesterday. We had a fantastic four year bull market, there was greed like never before. The correction of the bear market doesn't get over in a week. Are you calling this the start of a bear market?
Siddhartha Bhaiya: As you said, I'd put a 60 to 70% probability that we've probably seen the top of the bull market. As I said, I can go wrong and you look at history and what is it that you see? I read a lot of history and what is it that you see? Well, markets typically will be called good news and very good news. There's a saying that once your shoeshine boy says that, you know, buy stocks, it is the top of the markets, and I'm seeing, I'm hearing horror stories all around. You've never done anything in the stock markets, wanting to come and invest in stock markets. You're seeing so much as far as options trading is concerned. In the markets. Typically, you see a lot of IPOs coming in. You have seen a plethora of IPOs particularly if you look at the SME space and everything. We are seeing massive amounts of promoters selling like never before. So these are all indications of a bond market of, you know, roaring bull market and this is pattern recognition for me. So somewhere, I feel that probably we are over the hump, as far as the bull market is concerned. I can be wrong. Of course, I don't want people to make their decisions based on my opinion.
Most certainly. But we value your opinion and hence the idea to have you here and particularly in times like these, some people would counter that that you would worry a lot if you are at the end of the later stage of evaluation cycle, which we certainly are and maybe we're at a later stage of an economic cycle. It doesn't seem that we are at the later stage of an economic cycle.I mean, economic growth looks to be buoyant if the RBI is to be believed, seven % FY 25 as well and that will bring about a 10 to 15% earnings growth for FY 25?
Siddhartha Bhaiya: Markets will always top out when the economy is at its peak. Any bull market starts with short covering. It never starts with fundamentally good. You know, the bull market started when the lockdown was announced, when fundamentally things were very bad. That was the day when the markets bottomed out. So it was essentially a lot of short covering. Could you have imagined four years back in March 2020, when nobody wanted to touch small caps and today you have the SME index and the small cap index, so people are just buying left, right and centre. So I am a little worried. I'll be very honest with you.
Well, if your tweet on Feb. 9 is to be believed and let's get that up, AF tweet on fame that needs to be believed, lets get that up. Tweet on Feb. 9th is to be believed, all the testosterone and the bull will be killed in this ensuing bear market. So you're obviously putting your money where your mouth is because I know in some sense you also mentioned that you're taking some positions of your portfolio as well so you kind of preparing for a very sluggish 2024?
Siddhartha Bhaiya: All I can say is December 2017, we were at 30% cash and after that the small cap index fell more than 50- 55%. So we are now at 30% cash, only for the second time in the last 11 years.
Is this fear for a particular sector of the market which is small caps and micro caps or do you reckon even large caps have issues?
Siddhartha Bhaiya: I think large caps are very well positioned to be honest with you. But eventually look the way it starts as people first in the bull market. The way it starts is people will first invest into mutual funds, large cap mutual funds, then they'll buy large caps on their own then they'll go into mid caps, then into small caps and eventually they will start speculating in the SME this which is what we are seeing. So there is going to be a ripple effect. The large caps according to me are much better placed than what it is for you know, the small cap index is quoting at something like 30 times earnings or something. I don't even want to look at what is there in the SME, I don't even look at it, but you can see a froth when the way the stock prices are going up. So as I said, that's my (??????.
What can counter this thesis because I know you are a pragmatic person, a realist person. What will make you change your prognosis about the direction of earnings growth and valuation matches at the broader end of the spectrum or if I make it as a larger question, what will challenge your thesis of this looking like the start of a bearish phase?
Siddhartha Bhaiya: So to be honest with you, this is the first time where I have taken a call on the markets and sold our stocks. Typically we just kind of tend to ignore the markets and focus on our companies. But our companies had record profitability last quarter. We expect a very good March quarter for all our companies as well. So earnings growth, order book outlook for all our companies is very, very good. Valuations are extended for a lot of our companies. But as you said what I see around overall, with the IPOs, look, my biggest concern is I focus on what the promoters do. March 2020 and through 2021, you had massive insider buying by the promoters, massive insider buying. In the last one year I barely see any insider purchases. They've been busy offloading their stakes. You have international MNC companies like Whirlpool like Hyundi, like Bat, they are coming and offloading their stake in the Indian markets. Clearly those guys understand their business better than what we do. Whirlpool globally quotes at eight-nine times P/E multiple. In India it is quoting at 50 P/E multiple or whatever. 60,000 people working throughout the year, their annual profit is $500 million and they just sold 24% stake and made $500 million.
But historically, I mean I'm just saying. For example, Unilever has always traded at a discount to HUL, and Nestle global to Nestle India. So that is not a new phenomenon, right?
Siddhartha Bhaiya: Yes,we've always quoted at premium, but the premium to large extent was limited. What we're seeing is a blow out as far as the premiums are concerned. I'll give you an example, we've started researching international companies like SingTel which owns a significant chunk in Bharti Airtel, SingTel’s market cap is $39 billion, they own $30 billion worth of Bharti Airtel. We're looking at China Mobile. China Mobile's profitability is 15x of Bharti Airtel and their market cap is only 2x of Bharti. So there's an 80% valuation differential, you're talking about an 80% valuation differential which is phenomenal. We have always quoted at premium for the quality of the companies we have had in the Nifty Look, there is Nifty which is very very high quality companies and we also have to remember that you have a lot of unscrupulous companies, we have serious corporate governance issues in smaller companies we have had in the past. People tend to kind of forget in this market. So yes, Nifty is a very high quality company, some of the premium is justified, but not all the premium is justified. Just to counter that point, in March 2020, Maruti’s market capitalisation in India was higher than the market capitalisation of Suzuki and then we all know what happened to Maruti stock for the next three years. I think it was March ‘17 or ‘18, when Maruti's market cap had touched 10,000 rupees. Their market cap had crossed Suzuki and then I think Maruti did not do well for the next three to four years after that.
We are talking about some of the things he has put out, I mean most of these things would make you know that he is cautious. Actually let us pull up the series of his tweets that he has done. We showed you the latest one which was done on March 13th and maybe the first one on Feb. 9. But if you get some of the other things that he's put out on Twitter as well. So this is him on March 13. Of course, we saw this. Let's move on to the other one because he's already spoken about how there is okay, this is good. So Siddhartha, can you explain what you're trying to say with this because you're saying that short covering peak on leverage, you believe there's this massive leverage unwinding that is undergoing and we are underway that?
Siddhartha Bhaiya: We saw that yesterday. There was a very broad based sell off while the Nifty was down only one- one and a half %. It felt like the overall markets were down probably four or five % or so. So as you said, what explains it is leverage within the system. So you have to understand that markets are six months ahead of the economy. So you know, this is what we are seeing. Typically, March 2020, there was no fundamental reason for the markets to rally but there were a lot of short positions that got you know, which we are seeing in some of the global markets as well which have been quoting at 15-20 year lows. We are seeing a big rally over there and it is being attributed to short covering.
Okay, let's try and challenge some of these thoughts as well. We've done a little bit of that and we'll get a table with numbers out there to make some reference points too. But while we get the table on the screen, here's one more question. What about some of the themes which aren't necessarily present only at the broader end of the spectrum? They're not present in a large cap space? What do you do if you don't want to but if you want to participate in some of the growth themes, they're not present in the large cap space. Earnings growth looks very strong, valuations may be a bit of a challenge. What do you do in such scenarios?
Siddhartha Bhaiya: I would always say, you know, investing is all about the future. So if you've read about history, you will realise that in the 90s, a lot of projects were announced and many of those projects never saw the light at the end of the tunnel. Look at something like a Dabhol Power plant, or so many other power plants and you know, a bank like SBI was in a big soup, because of the Dabhol Power plant. So to be margin of safety is very, very important. Look, we bought a lot of these growth themes four-five years back when the valuation was attractive, and then the future played out and even we didn't expect that that way. Who would have predicted four years back that you're going to see an infrastructure boom like that in our country. So I'll be cautious. I'll be very honest with you. I'll be very, very cautious. You know, we've made a lot of good returns for our clients over the last four years. They are happy, we are happy. We don't want to pile on any more stress at the personal level. So take some chips off the table, and then we'll see when we want to re enter again.
I'm flipping the question on its head and that table will show you the extent of the fall viewers that has happened in the past. Now that is not to say that the same thing will happen. But I want to question that thus far based on the movements that we've seen from the top around Feb when you put out that first tweet, the last line shows that we are about 12.5% lower on the small caps. Now the past history has shown that we've declined anywhere between 24 to 41% as well, could we go down that much in the current fall as well at the smaller end of the spectrum?
Siddhartha Bhaiya: You know, you can either predict the direction or you can predict the extent, you can't predict both.
I am not asking for an exact number.
Siddhartha Bhaiya: You are going to have a cascading effect. I've never seen detailed participation, at least not even in 2007-8 to the extent that I'm seeing in the markets right now and through the biggest change has been your apps, which have made transacting very easy. Earlier when I started my career you had to call up your broker. You're a small guy, your call got picked up only after half an hour after the markets opened. Then you put in a trade, then the price didn't come, then you have to do one transaction that would probably take one whole day. Today at 9: 15 at the click of a button. You can do the transaction. It has made life very convenient for people. But as I said that convenience is going to come at a cost. So I've never seen retail participation at the rate at which and we all know as I said we there is 400-500 years of history and don't get me wrong, I was not born with a silver spoon. I started off as a retail guy. So the stock market also gives you an opportunity to transcend that barrier from being a retail but we all know the history of 400-500 years of stocks, eventually the majority of people end up losing money in the stock markets.
That's true. Okay. So we're not predicting here but you believe that the extent of the fall may not be contained right now. There could be more exaggerated selling.
Siddhartha Bhaiya: It will not only be one way. The bull market that happens over four or five years, a bear market has to play out over 18 months or 24 months. So there's not going to be a one way decline where everything gets corrected. No, there's going to be declines, there’s going to be false rallies and you might again see this and at the same time you're going to see much more sell off in companies which are not part of the indices. So the Nifty over a period of time will go higher. The small cap index or mid cap index will go higher because there is Survivorship Bias over there. But a lot of companies today which got listed in the last two, three years, I see majority of the promoters are unscrupulous over there. Those are the companies which are eventually going to delist.
Okay, interesting. So within this construct, where is it that fundamentally you're constructing, you are 30% cash but which means you're 70% still invested wherein you believe the chances of these companies and these stocks doing well are higher. So what are these businesses? What are these themes? I mean, I'm not asking for stocks, essentially, the nature of the business.
Siddhartha Bhaiya: So again, you know, we've been invested in stocks for the last four or five years. As a fund manager at 30%.cash is a very, very aggressive bet. Again, only two times in the last 11 years have I been sitting on cash. So, as I said, Why are we sitting with a lot of margin of safety as far as this is concerned and like do you want to call it a personal bias but you know, our stocks are showing good order growth, good visibility, but we are cautious, we're not buying anything more, our buying prices are much lower. So we are okay holding on to some of our infrastructure names or Capital goods names or, you know, Manufacturing names.
They necessarily have to be available at a decent valuation for them to fall in your funnel. So you are not the kind who's bought into a capital good stock which is MNC which has delivered fabulous performance but trading at 70-80 times, you kind of avoid it completely?
Siddhartha Bhaiya: There was a time in 2009 when all these MNC stocks were available at 10-12 P/E multiples. I can share the list with you. You know from KSB Pumps to SKF Bearings to FAG Bearings. They were all available with 20-25% net cash on the balance sheet, and at 110 to 12 P/E multiple cycles. Those companies will also hopefully, at some point in time, come back to those levels or if they don't, you will always find something else.
May I ask you that within this landscape, are there opportunities where in and I'm not asking for names here again, but while you may be overall not buying but what is it that you would keep on your radar because the opportunities may be real and they might be performing and sure your buying decision will depend on a lot of things including the sentiment around the market, but where are these pockets?
Siddhartha Bhaiya: I'll be honest with you. We kind of as part of a research we also research or broadly look at the valuation parameters for international companies, for companies which are in similar businesses and right now, we find opportunities outside India, in some of these names. at a significant discount, you're able to buy Consumption companies in some of the Eastern Asian countries with net cash on the balance sheet at single digit P/E multiples. These are serious cash flows. So if there is a global investor, eventually, you know, they're going to see that and money is going to flow and money flow and cycles tend to happen gradually and slowly over a period of time. So I find a lot of opportunities in the international markets right now, to be honest with you, as compared to the Indian markets.
My final questions. Usually, I heard you say that bear markets take about 12 to 18 months to play out. It's not one way so on and so forth. It's also true that these days cycles have gotten a bit compressed. So could it be possible that with the tailwinds that India has around growth relative to the rest of the world, that a cycle which is bearish in nature or is a bear market could be swift, instead of it being a prolonged one?
Siddhartha Bhaiya: So how do I judge history over a period of 400- 500 years for this. I will not look at the last seven-eight-10 years barometer for stock market behaviour and look we have barely seen a bear market since 2009. So majority of people who have come post that have never seen what a serious drawdown is maybe bar say 2019 2020. So, as I said, learn from history, and I tend to kind of you know, and history does tend to repeat itself.
Leave us with maybe a book recommendation since you read so much. What is a really good one that you read?
Siddhartha Bhaita: I read, you know, a very good book and particularly for people who are into startup investing, or into FinTech, Edtech you know, Health tech, whatever. I just read this book, Pyramid of Lies. It's about a UK unicorn, which got a valuation of three and a half billion dollars or something within four or five years where General Atlantic and Softbank came in and pumped money and it went belly up and you know, it was David Cameroon who was on the board. So it's a very interesting read, and you're going to see, unfortunately, nobody is going to write a book on Byju’s like that in India, but it is the Indian equivalent of Byju’s and you will see a lot more like that in the unlisted space in India.
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