The Fund Manager Who Sees Auto As A Top Consumer Play
M&M has strategic capital allocation, reasonable valuations and very clear articulation of strategy, Parekh said.
This week saw top auto companies, such as Maruti Suzuki India Ltd. and Mahindra and Mahindra Ltd., announce their first quarter earnings. The Nifty Auto has hit at all-time highs throughout the week, reflecting the buzz around the sector.
"We like auto as a consumer play," Sanjay H Parekh, founder and chief information officer of Sohum AMC, told NDTV Profit in a televised interview.
Smaller players now look up to Mahindra & Mahindra Ltd, which was not the case six years ago, he said. He sees significant improvements in M&M’s product line over the years, noting that the company, previously considered weak, has seen substantial progress.
Auto Sales In July 2024 Live: Royal Enfield Dips 8%, As 350 CC Motorcycles Find Fewer Takers
"Now, even young aspirants will certainly look towards M&M," he said stating that the company has strategic capital allocation, reasonable valuations and very clear articulation of strategy.
Thursday marked a historic day as India's benchmark index, NSE Nifty 50, climbed to a fresh record, surpassing the key barrier of 25,000. This was driven by optimistic first-quarter earnings and resilience against negative sentiments from the capital gains tax in Union Budget 2024.
Parekh lauded this achievement, stating that this is a commendable achievement. "These are the best balance sheets I’ve ever seen. Government balance sheets, despite rural spending and employment guarantees, contained the fiscal deficit, and it's only going to get better," he said.
The Reserve Bank of India’s balance sheet is also the strongest Parekh said. "The current account balance is surplus, which I haven't seen in a long time and this greatly reduces our dependency on external flows."
Watch The Full Conversation Here:
Edited Excerpts From The Interview:
Congrats to every market participant on the Nifty hitting the 25k key milestone. Where do we go from here, Sanjay?
Sanjay Parekh: Yes, 25,000 is an amazing feat, when you have seen the Covid lows of 17,500 and the whole cycle of over 25 years. It's a commendable achievement and that is very, very clear because all the balance sheets in India are so good. I've never seen it so.
So, right from the government balance sheet, where you see the operating leverage kicking in, in the recent Budget wherein despite the spend that they had to do on the rural and towards employment guarantee and even shelling out to states, yet, the fiscal deficit was maintained. And, it's only going to get better.
Then comes the RBI balance sheet, which is the strongest ever. We have a lot of space there, unlike the Fed which is very tough for them to contract the balance sheet in a significant way.
Then comes the current account balance situation where again last quarter—fourth quarter—we had a current account surplus, which I have not heard for in a long time and that reduces the dependency on external flows.
As for household balance sheet, we all know the wealth effect is $1.5 trillion plus because of gold, real estate and equities. And the corporate balance sheet is also at a leverage of all-time low. And banking balance sheet which is the fallout of the corporate balance sheet being so good, again at the NPA levels, which are the lowest level.
So, in my career at least, I've never ever seen all balance sheets filing and the best part is looking ahead also they look great. Now, we are able to see the benefit of wealth’s effect trickling down in terms of corporates doing capex, individuals buying assets, you know, increasing the leverage to the level they can and that is self-fulfilling and virtuous. That is also reflected in real estate stocks doing well.
So the whole cycle of wealth effect percolating in terms of further increasing growth is what I think is the longer term positives. As you know, in the near term, valuation is one thing which we are all grappling with and certainly not as comfortable in terms of stock entry levels that we want to.
So, Sanjay, are you taking a cash call because of the valuations or are you looking at the momentum in this story, because, frankly, everybody has been proved wrong?
Sanjay Parekh: At least you know, our end that is reflected in our cash levels every month. Our cash levels have been ranging between 6% and 8%.
We very strongly believe that this is not a zone where you need to take big cash calls, at least in the institutional format, where the allocation is done to you, allocation is done by your investors and then you further may not take big allocation calls. We have stated in our PPM as well that if there is extreme froth, we will go to 15%. But we don't think that we are in extreme froth zone, at least in the larger cap space. And predominantly, our average large-cap holding has been 80%. Right now, it is 76%.
So, we think that this is not the zone to create big cash, but our approach is that cash will not hurt. And then, there are a lot of opportunities individually. So, when you look, it's just the filtering that you need to do that is going to be really hard this time.
So when you're buying or looking at new stocks, you really have to see that there is price-value gap and if you get one, irrespective of the level, I think, you can add. Our approach is to look for those businesses, where there is a price-value gap at any price level. And maybe from among 10 stocks that we look at, we may reject nine of them because of valuation. But we will at least get that one stock. And, we do get them even today when we think it is worth participating.
But we are very conscious about the margin of safety and that you can't get into the momentum of overpaying for growth.
How do you take a call, let's say for example, on defence? The stocks are expensive. When you consider TTM valuations, they look egregious, but their three-year out valuations look very strong. Recently, a company's management said they will grow 100% in FY25 and 50% in next five years. How do you value something like this?
Sanjay Parekh: Yes, we are hardcore GARP investors. And here comes the philosophy and following to the hilt and not getting carried away with the momentum. Our price-earning of a folio is 16 times on 26, where markets are at 20 times if you take Rs 12–15 earnings on 26.
So the key is to get growth at a reasonable price and keep that discipline. So we are very clear. I mean, something what you call as defence. We then try to look at the benchmark also. We look at 26 and 27 in certain cases, having known that visibility for 27 is less. So 25–26 are the immediate goal post. And then, have a reasonable view on 27. But if certain stocks at 28 would come down to price-earning at lower levels, because growth is going to be great, you know, one has to be careful because some of the stocks do have lopsided growth as well.
Yes, some of these—defence and all have done very, very well. Yes, we have not participated and we have to admit and introspect, whether we could have gotten right earlier. But to buy and chase them at 60-70-80 times, it is at least not what our strategy is and it's okay to miss out.
With God’s grace, our performance—at 32% Alpha in two years—has been very, very good. So we are okay. We'll just wait for the right stock and look for stocks which we think are right. We don’t have to participate all across.
Is defence not a part of your portfolio, Sanjay?
Sanjay Parekh: We have, of course, quasi players like Larsen and Toubro, which is a very large weight. Pure defence play, we have one company which is a small element of defence, which once it's carved out, but that's a very small part of the value today. But we don't have a direct defence play as of today.
Is there more in store for the auto sector? If you're invested in autos, what do you like within it—four-wheelers, two-wheelers, auto ancillaries, or batteries?
Sanjay Parekh: So, we are right now neutral on the sector. We have Mahindra. Luckily, we caught it really early and this is a stock which we were tracking right from Anish Shah joining and that was in my earlier avatar and you could see the changes. He's going step by step, step by step with a very clear articulation of strategy.
Then the product pipeline was missing, if you compare the products of M&M six years back with what they offer today. And auto was one weak area few years back and they have improved significantly. I still remember telling them that I don't think you will figure out on any drawing board how to influence a car purchase decision. And you can see how they have changed. Today, even young aspirants would certainly look towards M&M vehicles, as they have done a very good job.
And the manner of capital allocation, not allocating capital to wrong businesses and a very clear articulation of strategy also matter. Even today, the valuations are quite reasonable. They're not overbearing. So that is what we like.
Overall, auto EV as a consumer play, we clearly like them. So we have Motherson Sumi, Samvardhana Motherson that we have now held for one-and-a-half years. We have Sansara... Then, of course, we have Ashok Leyland as well, which we bought around one year back. Then Maruti also is a good play, but we don't own it. It's just at the right entry price and you will want to enter it at the right price. We are positive about them, but at the right entry point.
Where are you on commodity stock investments, if at all?
Sanjay Parekh: So we have disclosed this, but I’ll tell you that we used to hold Hindalco and we entered Vedanta at a much lower price and it is 40% up for us. But we did book profits in Hindalco. It's a great company just that we thought valuation in the near-term upside is limited.
We still own Vedanta, because I think overall deleveraging by the parent will certainly help them and they've got an approval for demerger of other six companies. We have seen that when there is focus on each of the companies, there is clear value creation. We've experienced that even in our other portfolio companies, where they have gone through a split and it has significantly created value. And the best part here is that the parent is also delivering which was the biggest concern of the Indian shareholders. But overall, I think, valuations are not cheap. In one of the players you have global exposure in Tisco, which is still going to struggle for a while and the domestic piece is certainly good.
And the other player, of course, is a pure domestic play. But even they have some global exposure, which is not contributing and that is JSW Steel. So JSW Steel of course, is a great company and absolutely impeccable on execution. It's just that we think the near term numbers of Ebitda per ton don't justify the upside from our valuation standpoint.
But just one point. Yesterday, in the Tisco notes, they have mentioned about the Supreme Court judgment which it gives an entitlement for the states to levy more taxes in terms of royalties. We need to examine closely whether it's going to be retrospective or prospective and that is one area of concern where if it were to give more rights for the states to levy, we certainly have to see as to what lies ahead.
Do you reckon this could open up the whole metal space for such levies? Are all companies vulnerable there?
Sanjay Parekh: Yes, we have to watch it because it's very clearly written in the notes. Anything that is under the MMDR Act, the Supreme Court has said, it gives the states the right to put levies.
Now, as I said, we are also closely watching what is the legal view here. But apparently, it does seem that, we certainly have to dig more and think about what are the potential risks in the metal space.
