You can’t pay the price of a Mercedes for a Maruti, it is better to be in cash: Deepak Shenoy, Capital Mind
August 08, 2018
Deepak Shenoy
From a valuation perspective, do not buy everything just because it seems to be going up: Deepak Shenoy, Founder, Capital Mind, tells ET Now.
Edited excerpts:
A lot of people are saying the market will be rising higher. We are getting aggressive targets of Nifty moving towards 12,000, 13,000 and 14,000 in six months, one year, two years. How are you viewing market? Do you have valuation comfort at these levels or do you feel that this is a stock specific market and not a broad-based rally?
To be honest, all markets are stock specific. Very few markets will move based on the index. But having said that, the index level valuations in some stocks are at crazy new extremes. Yesterday, they had the second highest PE number on the Nifty ever since early 2000s when it was higher than this.
Secondly, we have got earnings growth as a whole at an abysmal 3% or 4% on Nifty. You are not seeing earnings recovery happening just now. For last three years, it has been suspect. Nifty next 50 is also at an all-time high in PE terms.
There has been a huge change in composition of Nifty index over last 10 or 15 years. Earlier, we had more of manufacturing companies where PE has to be less. Today we are in an index dominated by financials and FMCGs where PE has to be high. Is it right to compare 10-year-old data with current PE?
Well yes. At the index level we have 50 stocks. It is true some are FMCG companies and some are financial services. But why are we giving banks 30 PEs? We used to give banks 7 PEs earlier. They are not even growing at the same rate as they used to. We used to give IT companies 100 times earnings. Today we are giving them only 10 times earnings. PE numbers of individual stock or sectors basis will change but as an aggregate on a broad index, 50 stock indexes are reasonably good.
If you do not grow your PE or your PE goes haywire, you should at least be seeing earnings growth. You are seeing PE expansion but no earnings growth on aggregate. Your manufacturing company base changed to financial service or a FMCG company base today. If earnings on aggregate are not growing, then we are paying too much. It is wrong.
If you look at the PE metrics for the last one year, very often caution is not abundantly stated and sometimes you just give up saying that this is overvalued just because markets not going down. But it is in my opinion. Having said that, individual stock stories still continue with basically great earnings in some stocks. I would still stay stock specific, I am still a buyer. I have not shorted the market and from a valuation perspective, I would say do not buy everything just because it seems to be going up.
We are seeing private banks making a comeback. ICICI Bank is up by 1.63% and I am not just referring to today’s price action. Axis Bank and ICICI Bank have been making a comeback at the cost of IndusInd Bank, Kotak Bank and HDFC Bank. These stocks have not been performing now. May be people will not increase the exposure towards banking space to accommodate ICICI Bank and Axis Bank in their portfolio once again and that is the reason we are seeing cut in stance when it comes to HDFC Bank, Kotak or IndusInd. Is this the right way to think?
There is another round of NPAs coming and this is primarily because there is another AQR with the RBI. There will be obviously an NCLT four level suggestions on cross- industry NPA recognition. Both these factors will lead to Axis and ICICI getting impacted more than HDFC, Kotak or IndusInd. Therefore, if you were to make a choice between them, one should stick with HDFC, Kotak, IndusInd and may be a Yes Bank. There are some corporate problems in Yes Bank as well.
If you are willing to own some of the newer banks, then an RBL or may be a Bandhan Bank can be considered after may a be couple of quarters’ results because the NPA cycle there is in a much more controlled fashion. I would say allocating more to the financial sector may not be a good thing, given interest rates are rising. But if you were in that, then I would concentrate on HDFC, Kotak and IndusInd.
Some of the high value expensive names include Reliance Industries, Piramal Enterprises or for that matter, the newly listed entity HDFC AMC. Do you continue to chase quality and do you buy them at that expensive price?
I wish I could say yes but the most expensive stock I am buying is probably Maruti. There are reasons to buy these stocks. Reliance is not actually very expensive if you look at it from an earnings multiple perspective. It is probably just higher priced than it was two or three years back but historically it has been valued at much higher.
But stocks like the FMCG biggies are at 80x and 70x. Britannia or Nestle are good quality companies but I do not know whether you would pay the price of a Mercedes Benz for a Maruti. It is just not the same thing. You are not going to get the value for your money at these prices. It is okay to be in cash and so we still retain a reasonable cash position.
We are still buying some of the smaller cap companies and even the large caps companies where valuations are lower. Maybe a Hero MotorCorp or two-wheeler companies because I can see some growth coming in from earnings in the longer term there. I do not see that happening in some of the larger names. If you pay a high PE, then expect high growth in earnings. But that is not happening and my theory is that I would not buy it.
Why are you sitting on high levels of cash right now? Do you sense that the market is getting a little toppish?
We are probably 30-40% in cash, which is fine. We do not see that having been fully invested will give us great returns five years from now. So, it does not make sense unless you are trading momentum or you are trading short term to be completely invested.
If you are a long-term investor, you should keep some cash at hand. It is historically all times when valuations were at these levels that we have seen corrections. In corrections, you need to be in cash because you need to be able to buy.
We have kept that cash position and we are happy. We still participate 60-70% of the positions but we are not going to completely put our money in right now because this is not the time.
August 08, 2018
From a valuation perspective, do not buy everything just because it seems to be going up: Deepak Shenoy, Founder, Capital Mind, tells ET Now.
Edited excerpts:
A lot of people are saying the market will be rising higher. We are getting aggressive targets of Nifty moving towards 12,000, 13,000 and 14,000 in six months, one year, two years. How are you viewing market? Do you have valuation comfort at these levels or do you feel that this is a stock specific market and not a broad-based rally?
To be honest, all markets are stock specific. Very few markets will move based on the index. But having said that, the index level valuations in some stocks are at crazy new extremes. Yesterday, they had the second highest PE number on the Nifty ever since early 2000s when it was higher than this.
Secondly, we have got earnings growth as a whole at an abysmal 3% or 4% on Nifty. You are not seeing earnings recovery happening just now. For last three years, it has been suspect. Nifty next 50 is also at an all-time high in PE terms.
There has been a huge change in composition of Nifty index over last 10 or 15 years. Earlier, we had more of manufacturing companies where PE has to be less. Today we are in an index dominated by financials and FMCGs where PE has to be high. Is it right to compare 10-year-old data with current PE?
Well yes. At the index level we have 50 stocks. It is true some are FMCG companies and some are financial services. But why are we giving banks 30 PEs? We used to give banks 7 PEs earlier. They are not even growing at the same rate as they used to. We used to give IT companies 100 times earnings. Today we are giving them only 10 times earnings. PE numbers of individual stock or sectors basis will change but as an aggregate on a broad index, 50 stock indexes are reasonably good.
If you do not grow your PE or your PE goes haywire, you should at least be seeing earnings growth. You are seeing PE expansion but no earnings growth on aggregate. Your manufacturing company base changed to financial service or a FMCG company base today. If earnings on aggregate are not growing, then we are paying too much. It is wrong.
If you look at the PE metrics for the last one year, very often caution is not abundantly stated and sometimes you just give up saying that this is overvalued just because markets not going down. But it is in my opinion. Having said that, individual stock stories still continue with basically great earnings in some stocks. I would still stay stock specific, I am still a buyer. I have not shorted the market and from a valuation perspective, I would say do not buy everything just because it seems to be going up.
We are seeing private banks making a comeback. ICICI Bank is up by 1.63% and I am not just referring to today’s price action. Axis Bank and ICICI Bank have been making a comeback at the cost of IndusInd Bank, Kotak Bank and HDFC Bank. These stocks have not been performing now. May be people will not increase the exposure towards banking space to accommodate ICICI Bank and Axis Bank in their portfolio once again and that is the reason we are seeing cut in stance when it comes to HDFC Bank, Kotak or IndusInd. Is this the right way to think?
There is another round of NPAs coming and this is primarily because there is another AQR with the RBI. There will be obviously an NCLT four level suggestions on cross- industry NPA recognition. Both these factors will lead to Axis and ICICI getting impacted more than HDFC, Kotak or IndusInd. Therefore, if you were to make a choice between them, one should stick with HDFC, Kotak, IndusInd and may be a Yes Bank. There are some corporate problems in Yes Bank as well.
If you are willing to own some of the newer banks, then an RBL or may be a Bandhan Bank can be considered after may a be couple of quarters’ results because the NPA cycle there is in a much more controlled fashion. I would say allocating more to the financial sector may not be a good thing, given interest rates are rising. But if you were in that, then I would concentrate on HDFC, Kotak and IndusInd.
Some of the high value expensive names include Reliance Industries, Piramal Enterprises or for that matter, the newly listed entity HDFC AMC. Do you continue to chase quality and do you buy them at that expensive price?
I wish I could say yes but the most expensive stock I am buying is probably Maruti. There are reasons to buy these stocks. Reliance is not actually very expensive if you look at it from an earnings multiple perspective. It is probably just higher priced than it was two or three years back but historically it has been valued at much higher.
But stocks like the FMCG biggies are at 80x and 70x. Britannia or Nestle are good quality companies but I do not know whether you would pay the price of a Mercedes Benz for a Maruti. It is just not the same thing. You are not going to get the value for your money at these prices. It is okay to be in cash and so we still retain a reasonable cash position.
We are still buying some of the smaller cap companies and even the large caps companies where valuations are lower. Maybe a Hero MotorCorp or two-wheeler companies because I can see some growth coming in from earnings in the longer term there. I do not see that happening in some of the larger names. If you pay a high PE, then expect high growth in earnings. But that is not happening and my theory is that I would not buy it.
Why are you sitting on high levels of cash right now? Do you sense that the market is getting a little toppish?
We are probably 30-40% in cash, which is fine. We do not see that having been fully invested will give us great returns five years from now. So, it does not make sense unless you are trading momentum or you are trading short term to be completely invested.
If you are a long-term investor, you should keep some cash at hand. It is historically all times when valuations were at these levels that we have seen corrections. In corrections, you need to be in cash because you need to be able to buy.
We have kept that cash position and we are happy. We still participate 60-70% of the positions but we are not going to completely put our money in right now because this is not the time.
Last edited:
