Here's Why Abakkus Asset Manager Prefers Private Banks Over PSU Peers
In the PSU bank segment, the firm has restricted itself to the top two or three names, which doesn’t include those from the mid-cap space.
Abakkus Asset Manager LLP prefers private banks and has restricted itself to just two-three public sector undertaking banks.
Under the private sector banks, the firm has excluded the top names as they run an "un-benchmark portfolio", Aman Chowhan, senior fund manager at Abakkus Asset Manager, told NDTV Profit’s Sajeet Manghat on The Portfolio Manager show.
Among the PSU banks, the firm has restricted itself to just the top two or three names, which doesn’t include those from the mid-cap space, he said.
“Though valuations under the mid-cap PSUs are low, it is more of a tactical opportunity and more of a trade than a sustainable investment as they still continue to face the challenges of manpower or NPAs (non-performing assets),” he said.
From a long-term perspective, they are comfortable owning stocks from a private sector bank or a large PSU bank over a mid-sized PSU bank, Chowhan said.
The allocations made for the industries, banks and non-bank financial company sectors were the highest under the Abakkus All Cap Approach—their biggest fund in the portfolio, he said.
Chowhan said that a major chunk of the action in these sectors are from the government side, as they strive to promote the ‘Atmanirbhar Bharat’ initiative by reducing import dependence and to meet the increasing demand for goods.
Due to the 'China Plus One' strategy, there is a clear market share shift happening and India is favourably placed, he said. This has helped increase export demand as well as revival in capex and capacity expansion, according to him.
After the state elections in December, markets have started to believe that the current government will come to power with a majority, he said. “If the markets continue the rally for the next 2-3 months, then a classic example of 'buy on rumors and sell on news' is coming in. Once the election outcome comes in, then there is a profit-booking that comes in and the markets might give away some of the gains it makes over the months.”
Watch the full video here:
Edited Excerpts From The Interview:
We have been going through the earnings cycle. After the Q3, nearly 60-65% of the numbers have already come in. What is your assessment of Q3 as an earnings?
Aman Chowhan: Broadly, earnings have been in line. We have seen positive surprises coming in some of the banking names. We have seen some of the cement companies report better than what we were expecting. The infra pack has been good. So whether it was an EPC (engineering, procurement and construction) company, a capital goods company, or a manufacturing company, numbers are coming good, but there's still some weakness on the rural side. So, the bottom-of-the-pyramid demand still stops and that segment is still impacted.
Chemicals have been thought to be weak. So it has been weaker than expected. So, chemicals is clearly something that you can say, (are) still on the negative front.
I.T. has been more or less neutral. It has been in line with what the market expectation has been—a mixed bag.
Some sectors have done really well, some sectors are continuing to struggle and more or less, it has been on expected lines. So, 15-16% corporate earnings growth. Expectations seem to be on track, as of now.
How do you look at the RBI policy that came in. What could be the impact for all of that policy on financials? The governor has given a trajectory of inflation but inflation for next four quarters is going to be about 4%.
Aman Chowhan: We are not bond experts.
From the equity standpoint, what we understand is that if the trade cuts—which the equity investors have been expecting—get slightly pushed back, then there is a near-term impact... And if that happens, then there is near-term impact on the earnings.
So, from an equity standpoint, if I am expecting a 20% return in the banking stock over the next 12 months, this gets pushed to the next 18 months. That has, you can say in plain and simple terms, the impact of the policy for the equity investors.
For a bond investor, it's a completely different ballgame. They will have to calculate the yield, they will have to calculate the assumption to what interest rate they're factoring in, what is going to be the credit cost and what is going to be the net impact.
But from an equity standpoint, this is broadly what any equity investor will be looking into that—we were expecting a rerating to happen in the banking sector. Once there is clear confirmation that the interest rate cycle has peaked and rates can be headed lower, because that is where the rerating with the sector will happen. Today, if a bank is trading say at one-time book and I expect for a certain reason this one-point book to go to 1.2 over the next six months, that makes six months get extended to the next 12 months. So that's what the impact on equity markets will be.
How do you play the financials in that case. You say that valuations are compelling for the banking and financial sector and if the returns are going to get pushed or the rerating is going to get pushed out, how do you play it?
Aman Chowhan: For us, there is no change in stance. At the current Nifty levels where we are—with market right now at all time high levels—there are not many sectors where the risk-reward equation is favourable, where the valuations are still comfortable.
Financials is one space, where your valuations are still comfortable. We have large banks trading closer to two times book. We have smaller banks trading around 1-1.5 times book. We have PSU banks that are also somewhere close to those levels. So in a situation, where most of the sectors, most of the companies are trading at above their 10-year average PE multiples, banking is something where stocks are still closer to the 10-year PE multiples and in many cases, even below that. For that reason, we found the valuations for the banking sector is compelling. Now, there is no change in stance for this, because the valuation remains compelling, just that the expected returns over the next 12 months gets pushed over the next 18 months. So we will continue to hold what we have in the portfolio, we will continue to stay invested. It is just that the timeline gets a bit pushed up, that is all the difference. But there is no stock-specific change in stance, per se, in the sector.
We have seen a good run-up in the public sector. Private sector has been a little sluggish in that sense, with HDFC Bank being one of them. How do you play between public sector and private sector and within the banking sector, you have the mid-cap banks as well. How do you play them?
Aman Chowhan: The way our portfolio is structured, we have a preference for private banks versus PSU banks. Within private banks also, we don't have the top names or the obvious names because there, the valuation is full. So, we have never owned them for the last several years now. Even now, they don't feature in our portfolio. They don't also feature because we run completely un-benchmark portfolio. So if somebody is hugging the benchmark, he has no choice but to buy the top private banks or top two or three names. For us, that's not the case. From the top five private banks, we will be owning only two or three of them in our portfolios, and that's where the preference is. As far as the PSU banks are concerned, we at the portfolio level have restricted ourselves to the top two or three names. So we are not in the mid-cap space for the PSU banks because that's where we feel that though valuation is still lower, it's more of a tactical opportunity. It is more of a trade than a sustainable investment to look into a mid-sized PSU bank, because they continue to face the challenges of manpower, they continue to face challenges of NPAs.
So, right now, the cycle looks favourable, but if I had to take a three to five-year call, I am still very comfortable owning a private bank or a large PSU bank, not a midsize PSU bank. So that is where the portfolio construct is.
And besides financials, we also are very positive on non-fund based financial stocks. For example, we have wealth companies in our portfolio. We have broking companies in our portfolio. This is something which are clearly benefiting from the upsurge in the equity markets and upsurge overall in the financial markets and the profitability of these companies are growing quite rapidly. And this is also one segment, where we are pretty positive of and that is also featuring in our portfolios.
In the Abakkus All Cap approach, you have allocated 26.6% to industrial strategy and banks 13.4% and NBFCs 16%. So, roughly between banking and NBFCs 29% to 30% of your portfolio is there. In the industrial space, how do you look at what's happening there? Capital goods companies were doing well. Good order book flow for many of them. How do you look as you go ahead?
Aman Chowhan: There is one segment we are very positive on, because this is where you can say the bulk of the action right now is from the government side.
So clearly there are two initiatives that are going on. One, the government wants—following the policy of Atma Nirbhar Bharat—to reduce import dependence.
So most of the corporates, most of the companies that we speak to, they said that they're expanding the capacity because one, the demand is higher. Second, the import substitution is happening. So there is clearly one thing because which manufacturer is picking up in India The second is the China Plus one strategy where globally your export demand is picking up for Indian sectors. So, there is a clear market share shift happening out of China to other countries and India is favourably placed, among those countries and hence the sectors and segments here are choosing good export demand. Because of this, we are seeing a revival in capex, you're seeing revival in capacity expansion and capital goods companies are the national beneficiary of all these and as you rightly said, reflect in the order book position. This is a multi-year theme, if not just one or two years, this can continue for the next several years and for that reason, we are pretty well exposed in our portfolio in this segment.
So we feel we are in the second year of the upsurge in credit or you can say the capital goods upcycle and in another two, three years we feel order book demand should be good and when the demand is good, we also see that these companies get much better Ebitda margins than when they get in the downcycle. So, say for example, a cap goods company, because the earnings are 5-6-7-8% Ebitda margin when the orderbook is full and when the demand is good, the same 7-8% Ebitda margin because 12-13-14% Ebitda margin and this has a direct impact on the profitability. So because of this tailwind, we like this sector and that's why it is one of the larger exposure into our portfolios.
Despite being expensive, will you add to the portfolio at current prices?
Aman Chowhan: There are two sub-segments. One is the MNC or the known popular big companies like ABB, Siemens, Thermax of this world. They all trade north of 40-50-60 P/E and then you have midsized companies or local companies, some of which feature into our portfolio where valuations are still reasonable. They trade at 20-25 and in some cases, maybe 30 multiples. So, in our portfolios, we don't have the obvious names, which are trading at 40-50 P/E because that is not the style we follow. We follow a value-conscious style of investing for portfolios where we don't mind paying a premium but that should be justified. We just don't want to pay unnecessary premium because you are the market favourite or you are a very popular name or you are part of an index. So, in our portfolio, the companies that you will see would be mostly trading at valuations which will be lower than what the market leading valuation of the sector multiples would be. So, we are pretty conscious of that. While one segment is expensive, we are right now not exposed to that segment.
Give me a sense of how you have a Rs 13,000 crore PMS portfolio. Can you give the breakup of the market in large-cap, mid-cap, small-cap and micro?
Aman Chowhan: The Rs 13,000 crore is the total AUM that is split between two strategies. One is what we call the All Caps Strategy, which is a combination of mid and small caps portfolio and large caps; the other one is an Opportunity Strategy, which is a dedicated small-cap portfolio. So, between these two strategies, we have Rs 13,000 crore a year and roughly you can say, they will be equally split between the two strategies. So, by sheer strategy, if you have to ask me, I can tell 25% of this money would be in large caps, 50-60% of the money will be in mid caps, and the balance money will be in small caps.
I was looking at your Emerging Opportunities Approach and interesting sectors there, especially healthcare. What is the kind of approach that you're looking at?
Aman Chowhan: In the healthcare space, we are incrementally getting positive. Right now, this will be a single-digit exposure in our portfolio. We have increased this exposure over the last three, four months. Going ahead also, we feel that we would be increasing exposure because the outlook under healthcare is improving.
One, the margin pressure in many of these companies … in the U.S. markets have started to bottom out. So, there are less issues from the export front and the domestic demand continues to remain stable. From a valuation standpoint also, there are pockets of opportunities in the healthcare space. So, going ahead, we feel we will be adding on to the healthcare exposure.
Also, from the consumer standpoint, most of the consumer companies trade at multiple valuation which is not something which fits into our risk reward equation and hence, we feel it is much better to have an exposure into a pharma sector versus having something on the consumer side, and that is a reason you will find less of consumer exposure in your portfolio and that getting substituted by more of industrials and healthcare in a way.
Do you see consumer discretionary having a much bigger headwind as compared to healthcare now because the last 12 or 18 months, we saw some kind of pressure on margin, pricing coming up, especially for companies which are export-oriented. Now you're seeing a headwind much higher for the consumer sector, where rural demand is weak, consumption is weak and there will be a couple of quarters before it comes back.
Aman Chowhan: Exactly, we do have the same. Right now, the consumer demand is weak, especially in the rural sector. Any company facing that segment is witnessing that. Typically, what happens is ahead of the elections, there is an increased cash in the economy and this many times act as a trigger for consumption. So, we hope that once the central elections comes in, prior to that the cash in the economy goes up and that should help in the rural demand. If that happens, then these companies will start witnessing good demand in the coming months and hence, in the next three quarters, we feel that this segment should bottom out and start to look up.
When it starts to look up, many of the stocks or many of the sectors will start to become interesting. So, we are very keenly watching this space. There is a slowdown but there can be a turnaround for the next three, six months and in that case, we would like to capitalise on that opportunity.
How come you do not bet on consumer discretionary because that's a segment where we are seeing good demand, good volume growth and price growth coming in?
Aman Chowhan: That is (so), but then the valuations are not by our side. So, we are very clear that even if you're like a great company, ultimately I'm a minority shareholder, so I'm here for a financial return and I'll get the financial return only if I bet on the company of the right value. So, it's a great company and demand is good, everything is good, but the price is beyond perfection and has a significant premium. Then we don't invest and for that reason, you will not see much of these companies in our portfolio.
You seem to have missed the bus in consumer discretionary.
Aman Chowhan: In a way, you may say so. But that's not what our style is. So, we made enough money in other sectors. You can’t make money all the time in all these sectors. We're happy to miss the bus in the consumer space.
Real estate and cement are looking good, led by infra demand. Given the kind of infra projects which are coming up and the impetus which has been given, do you see enough runway for cement companies? Price realisation has been very flat in the last 12 months.
Do you see good price realisations as well?
Aman Chowhan: Yes, I expect that to happen because the industry has consolidated, so now we have consolidation at the top level. So, now large, three groups have emerged in the cement space. Smaller companies are making way to get acquired by these larger companies. So, because of this consolidation, I expect eventually the pricing power will become better for the cement companies, and that should reflect into the realisation.
The demand is strong… and both government as well as private capex is trending up. That also bodes well for the demand side. So, for this reason we feel cement still makes sense for us and on the real estate side also, we are in the third year of an upcycle… We expect the real estate demand also to be good. So, keeping all these things in mind, we feel that the demand for cement should start to pick up.
Are you more bullish on the allied sector whenever it comes to real estate or the real estate companies or developers?
Aman Chowhan: Yes, we don't have direct real exposure as of now. So, while we like the sector, the segment and there is an uptick in the segment, we prefer to play through the ancillary sector. So, we would have a plywood company in our portfolio. We have a laminate company in our portfolio. We have cement companies in our portfolio. We have a sanitaryware company in our portfolio. So, I don't have a direct real estate company in my portfolio. …But we are playing this upcycle via the allied sector.
Why is that, because we've seen good pre-sales happening for most of the real estate companies and if you look at the kind of pre-sales happened in the last 12 months, the runway for real estate developers for the next three to four years seems to be very good?
Aman Chowhan: It is good, definitely, and the pre-sales numbers are good… We prefer to bring to the ancillary rather than the direct company because what happens is that we prefer that as real estate as a sector, as a segment, makes much more sense to invest in project level than other company level. When you make a project, you get your cash flow and profit out of that and that will be redeployed on the next project. So, all your project was in one town. Next you want to make one tower, then you want to make two towers and then keep on rolling on.
As a minority shareholder, there is not much of a dividend it gets paid because they don't conduct free cash flow. Whatever profit is the company's and most of the time, it gets reinvested and in the end, when the cycle turns, you'll be stuck in a much larger project than you can handle. Because of this reason, we created much better investments by investing in ancillary companies than through direct companies. It is against the business model, but so far our preference has been the ancillary sector.
I can see you've also invested in the wires and cables business, Polycab being one of the top holdings for you in the All Caps Approach. How do you see that business, given the kind of issues which came in with respect to tax, etc, in Polycab?
Aman Chowhan: So, we don't commit on stock-specific holdings but overall, the reason we own Polycab or this sector is because as you mentioned, there is an upcycle in the real estate demand. The company that we have in our portfolio are gaining market share, so from a number two player, we have become number one player and you're still trading at a decent discount to the number one player. You're gaining market share, profit growth, revenue growth is pretty strong and the valuation is still half of what the leader is. So, there is enough scope for the valuations also to catch up…
Do you see this sector to be very transparent in the way it functions, because real estate as a whole has some issues with respect to transparency? Do you see similar issues in some of the allied sector as well or is the allied sector much more transparent as compared to real estate?
Aman Chowhan: Yes. You rightly mentioned that transparency is an issue with the real estate sector. That is also one of the reasons why we prefer ancillary sector rather than investing directly in the real estate sector and from a transparency point of view, much better compared to direct real estate.
You have multiple things coming up in the next couple of months. An election, an unpredictable monsoon. There's an inflation cycle which is there and for next 12 months, at least inflation will be remaining above 4% and global headwinds, which are coming in the form of supply chain issues, wars. How do you look and assess the entire market at this point in time?
Aman Chowhan: The market has given fantastic returns over the last one year and from these levels, I'm not expecting similar kinds of returns. The market is in a fair zone, but we are no longer cheap. We are a fairly priced market. One should expect a fair return, not an abnormal return. If it happens, good for all of us. But I think there should not be such expectations. And so, from these levels, we expect mid-teen kind of returns over the next 3-5 years, which I think is still a very healthy return.
In the near term, I feel that the coming central elections are already discounted into the market. Especially, after the December state result outcome, I believe the market has started to factor in that the current government is coming back and coming back with a good majority. So that's no surprise and this market is already factoring that. We could be getting into a situation where the market continues to rally over the next month or two months. Then a classic example of buy-on-rumours and sell-on-news market rallies can be expected right now. And then, once the state or election outcome comes in, there is the profit-booking... And the markets might give away some of the gains that they make for the next one or two months. That can happen or there can be time correction also. So as we all know, the returns in equity markets are not linear. So, this year could be flattish or this year could be net-net a single-digit return kind of a year. But overall, over the next three to four year cycle, if we have to look at it, we see the economic growth picking up and when that happens, then I expect the equity market also to capture that upside and you can say mid-teen return is easily possible from Indian equities.
I can see in the portfolio which you have mentioned, one sector that is not there—autos, or it's there but very minimal if I'm not wrong. What is your view on the autos segment? Especially EVs, because I think, you're taking more exposure to again ancillaries there and companies involved in the EV segment?
Aman Chowhan: You're right in your observation. We don't have much direct auto exposure. Most of the sector exposure is by ancillaries.
The reason is that we feel that most of the auto companies are not that prepared for the EV the way they should have been and they still continue to be traded at valuations which are much much premium, even to the global majors. So you have your global majors whether there's a German company, a Japanese company or US automaker, they all trade at 10-12 PE multiples, whereas companies in India trade north of 20-30 PE multiples despite not being as well-prepared on the EV front in the way their global counterparts are. And EV is writing on the wall.
There is no doubt in anybody's mind that eventually, EV is going to be the biggest market share in this segment. So we see that companies which are not that well-prepared on the EV front as the global majors are continue to be traded at a premium. We don't feel it's justified to pay that premium and that is the reason we don't have a direct auto exposure. But the sector is good. We are seeing upscale and hence we feel it is better to do it via ancillaries.
So eventually whatever gets sold, whether it is petrol, diesel, or an EV, there'll be components and parts that will be required and then, focus on companies which are supplying these so that their growth rates are in tact. So that's the reason we have exposure via the ancillaries.
