He backs the cement sector, which has done well. He is upbeat on Orient Cement .
He said Nifty’s current 8000 level should be as the ideal bottom, adding that it is a golden opportunity to be making superior returns in the next 5-10 years.
A company shouldn’t be judged by its performance in a quarter or two, but an investor should have a long-term view on it, he said.
Among smallcaps, he prefers Kalyani Steels as he believes the company might see demand for raw materials that go into the making of army tanks.
Below is the verbatim transcript of Porinju Veliyath’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Sonia: We were going through some of the stocks you had picked up for us during our Sixteen for Sixteen show that we started the year with and one of them was Biocon which has now been hitting new highs over the last say couple of weeks. Is that a story that you would still keep the faith in or do you think that people have missed the bus there?
A: I don’t think people have missed the bus. This stock has long way to go and I was talking at that point of time, first time I bought into Biocon few months back because it was at an inflection point. I think my strength is mostly at identifying the inflection points of companies and perhaps industries. That is very important for long term value investing.
So, Biocon I feel it has moved by 35-40 percent in the last few months. It can go up by another 100 percent in the next two years time. That is the kind of potential this company has and it is on the right track. That initial dull times of a decade after listing of the company that is over. That is why I told it was at an inflection point and I am very bullish on this stock. We continue to hold.
Latha: Speaking of inflections cement is one sector that stands extremely well. Are they still stocks that offered inflection points there?
A: A lot of the stocks from the industry has gone up already. So, investors should be evaluating that rise, but there are still some stocks in the industry which I think are worth looking at some companies like Orient Cement which haven’t had a big run up in the recent past. I feel the whole economy is at an inflection point, than some of the industries that is a bigger picture investors should never forget.
We are going through a period of mispricing of Indian equities. If you see last January-February-March, it was not any rationale bottom. I used to use the word rationale bottom all those times, even at around 7,000 I used to say 8,000 should be the rationale bottom which is happening now. It happens in the market nobody can help it. It is a lot of leveraged positions and speculative activity which guide in the short-term.
With a bigger picture of Indian economy which I always believe in what long-term investors have to watch is the political management of the economy. From that perspective I strongly feel India is at a historic inflection point. Not just an inflection point. This is going to go long way and it is a golden opportunity for investors to make superior returns in the next five to ten years.
Sonia: You just briefly mentioned Orient Cement but I want to talk about that in detail. I was going through the earnings and the operating profits have actually fallen 40 percent this quarter, the profits are down 78 percent. I know you like to take contrarian calls but it is a gutsy call to buy a stock where the numbers are so weak. At what point do you expect to see a turnaround?
A: Here I have a love towards bad numbers when it comes to quarterly numbers. That is where I have made most money for my investors and myself. Some good businesses, some worth business, great companies when they report a quarter or two bad numbers and the market participants react very severely and it goes down sometimes 30-40 percent that happens in not a sophisticated economy or stock market. I feel that is a great opportunity because we cannot judge a company by a quarter or two or may be sometimes one year numbers.
Today most market participants in India they are looking for numbers. If they don’t see numbers they will throw away their shares and that is an opportunity for a smart stock pickers. There can be temporary challenges for some industry wise because of the bad environment for the industry or the general economic environment or may be company specific temporary issues. So, mostly some companies, some great businesses worth holding for next ten years or five years such companies report a quarter or two bad numbers I think that is where you make multi baggers.
Orient Cement is not a big multi baggers idea or something, nothing like that. The company is having, now they had 5million tonne cements. They have added another 3 million, very efficient cement plant, the new one. Now it is 8 million the company has talked about making this 3 million the new capacity at Gulbarga in Karnataka they will be making it a 10 million. So, totally the cement capacities are going to be 15 million for this company.
More importantly this additional 7 million they will be set up at a very cost effective style. So, that is going to be very good, so there will be a good growth ahead for this company and India the way the government of India today envisaging projects going forward in infrastructure specially I think cement will be a definitely an important industry to look at.
Latha: There is some bit of a lens of mutual funds on midcap stocks. But on small caps it is way more difficult, that is where we want your expertise. Have you identified any of the small guys who will be tomorrows midcaps and day after tomorrows big caps?
A: A small company which I have been just looking at when I was asked to give an interview. Kalyani Steel , now the stock is at around Rs 155-160. It is a Baba Kalyani group company. They are having good numbers. With the current fundamentals of the company or the last year earnings this stock is available at 6 PE. It is a big company, something like Rs 1,200 crore of turnover, the market cap is around Rs 700 crore. Defence is something we all are talking about and now it is dying down, the fancy. But it is going to come up. It will take time. Now the government talks about defence and you won’t see in the next quarter numbers for the company, potentially in the defence sector. This company is into the special steels and forgings and alloys, that kind of very speciality business. Bharat Forge have that big tie up with Rafaels and the raw material for the tanks kind of thing can be sourced from this company. So, it can potentially grow into a very big lead company. So, today when it is available at 6 PE kind of valuations investors should have a look at that and monitor how these companies are going to operate in the future and how the numbers are coming up. So, investors should bet on some such safe small caps and midcaps in the market going forward. There are a lot of them in the Indian market.
Sonia: As they say in this market you win some, you lose some. On one hand Biocon has given you great returns, but on the other hand the other stocks that you had recommended at the start of 2016 have not done that well. Anant Raj was recommended at Rs 45, today it is about Rs 39. Indian Hotels has come off quite a bit. It happens in a market like this, but do you still hold on to these stocks, keep the faith or have you sort of churned already?
A: These are the 2016 stocks and we are half the way. So, there is lot of time to prove it. Of course win some, lose some is a bad idea. You have to win a lot and lose very few. That should be the game and that is how India is placed now. For smart stock pickers you can win a lot of them and lose very few. So, equity is going to be in fancy, going forward as an asset class. I am very confident on a macro level. So, Anant Raj is something which is underperforming even in my portfolio. I still haven’t left the hope on selective real estate companies who are going to be definite survivors. It is a question of time, market will come to a rationale valuation of these stocks, it may take time, people want to see numbers. Maybe the coming quarters you may start seeing numbers. So, that time when Anant Raj goes to Rs 80-90 lot of people will justify it with numbers. Actually value investing we should try to analyse the potential future numbers. From that perspective there is no country in this world today, no economy in the world which offers as many ideas as India offers at this point of time. I am very bullish.
Latha: Tell us about KNR Construction , I believe that is a stock you like?
A: KNR is a very clean company. In fact I have been buying this stock since Rs 40-50 three years ago. It always used to keep the balance sheet clean and healthy. That is the reason this stock has been performing very well. When other people went on bidding aggressively for projects and they were making losses on that later and had a very highly leveraged balance sheet now they are struggling to manage it. There are some companies that kept the balance sheet strong, like even Ahluwalia Contractors , maybe J. Kumar Infraprojects . Infrastructure we talk about railways, the port and waterways, we talk about roads. Once the government announces that it takes at least one or two years for the numbers to start coming in for the companies to bid for that and execute the orders. Now government offers a Rs 5 lakh crore worth of road projects and people are looking at the numbers of these road companies in the next quarter. That is foolishness. It doesn’t work like that. So, investors with long term perspective they should watch which companies are going to benefit with this unprecedented infrastructure move by the government of India. I really appreciate – Modi government has completed two years. I have no politics but I am telling you investors always tell don’t discuss politics. You focus on the stock market.