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As long as growth is there, valuation is not a big concern: Basant Maheshwari


As long as growth is there, it is okay to pay a little more and make money, Basant Maheshwari, Co-founder and partner, Basant Maheshwari Wealth Advisers , tells ET Now.

Edited excerpts:

What are you buying apart from HFCs and private banks?

Most of the time, the best stock to buy would be the one which you already have and which you have seen deliver on earnings front. Instead, you are obviously going to look at the new things which look good at first strike. After all, it is a world of naya kya hai batow, naya kya hai (Whats new)?

But stocks are not like cloths. You do not have to change them every six months. Stocks are stocks. They are like not exactly family members but very close to them. So, you can change your stocks but not very frequently. Of late, the chatter has been whether these handful of stocks are taking the Nifty up and whether the smallcaps and midcaps have been artificially punctured by Sebi. There will always be bits and pieces to every story.

Yes, of course, the Securities and Exchange Board of India (Sebi) has taken the speculative element out of the small and midcaps. Once speculation is dead, then the stock falls a little bit but if the stock is good, if it is reporting earnings, it is going to bounce back and buyers will come. You do not have to send an invitation card to a buyer.

Similarly, there are a handful of stocks that we keep saying are taking the Nifty up. We do not buy stocks depending on whether they are in the Nifty or not in the Nifty, they are all reporting earnings. You give me 10 stocks that are going up right now and I will tell you each of them are going up because they are delivering 15-20-25-30-35% CAGR growth.

Six months back you could have told me about 100 stocks and I would have pointed out that there is no earnings in 60 of them. So, a stock without earnings is like a man in a swimming pool. You do not know whether he is wearing anything or not unless the bull market goes away.

Once the bull market goes away and there is no water, he comes out and then you know what is there inside. It is a cliché to say that I have no sympathy with anybody who is losing money. A person works 10 hours in the office, boss ki galian sunta hai, ghar aata hai, 2 bate aur sunta hai, naya fridge lena hai, naya TV lena hai (gets pulled up by the boss and returns home to family demands for new TV, fridge). Suddenly, at the end of one market cycle he is down 60%, 40%, 30%! We owe an explanation to everybody.

I know sympathies do not matter. What matters is how many people have seen the Harshad Mehta cycle right now? Not even 10% of the public. How many have seen Ketan Parekh? Maybe 25%. How many have seen the 2008 crash? Maybe 50%, the 50% left over public has not seen what it takes to lose 40%-50% and you can always say yeh market hai ji, market mein toh hota hai (this keeps happening in markets). But, you cannot lose 40% capital and say this is market! That does not work. Of course, we are paranoid about losing money and that is why we do not chase ideas.

We are doing very well over the last six months and not because we have changed the strategy. We have the same stocks. Just that when the market gets narrow, fundamentals get paid for. It is back to balance sheets, it is back to business model and those days of chakri and kachra (roundtrippers and trash) are gone. You talk of a stock at Rs 40, put it on a social media and the public comes and buys it, stock goes to Rs 50. You have a self fulfilling prophesy that because I have spoken about this stock, it went to Rs 50. You buy more of it, the public buys more of it. But every Pied Piper has normally faltered at the end.

A quality portfolio may work when there is uncertainty but if the cycle is changing, do you think a combination of A quality NBFCs and A quality financials and some A quality retail as well work? You are trying to buy good business at a reasonable price. But the stocks which you own, they are good companies and they will continue to grow. But is the scope for PE expansion or book value expansion limited and restricted?

I completely understand what you are saying but then this is a market. The seller is not foolish. He will never sell you a rupee worth of stuff at 50 paisa unless he is leveraged or unless his bank is selling the stock for you.

That theory about buying a rupee worth of stuff at 50 paisa looks good in theory. Sometimes, you have to take the calculated bet as to whether this one rupee bet which I am buying at one rupee five paise can become three rupees over the next three years and we normally do that because it is very difficult to buy a one rupee stuff at 50 paise.

We normally buy high growth companies. We buy companies that are predictable, sure and promise to deliver growth on a consistent basis. We buy companies that are taking away market share. If the market is going at 20%, our company should be growing at 25% and not 15%. We do not buy companies that are growing at 15% when the market is shrinking by 5% because it is very difficult to eat your food when your neighbour is dying of hunger. Somebody is going to snatch it away from you sometime.

While I can take a lot of accolades for the kind of performance we have shown, during November, December and January, we did not know what was happening and finally internally we decided bhai humko jo aata hai hum wohi karege (to stock to what we do best). We will not do what we do not know because everything was going up at that time and of course we were not going up at the same level as the market. So, basically the same strategy works.

Let me give you a very interesting data. We held Page Industries for four-six years. The growth was 35-40% every year but the stock price used to grow at 70% every year. From 2009 to 2015, it grew at 70%. That means the balloon got bigger and bigger and one day it had to burst. Stock market is like a human life – birth and death. You have to get out of the balloon before it bursts. If it is a high quality company, it will give you enough time to get out. If it is a low quality company, that is going to trap you inside.

As long as growth is there, valuation is not a big enough concern for you to say that you do not want to buy the stock. Valuation will always be a concern because you just cannot buy it at any price and make money. As long as growth is there, it is okay to pay a little more and make money.

A typical definition of quality stock would be good management, growth prospects, low debt etc. etc. How would you qualify quality at this juncture?

Quality for me is not about management. Many would say Tata Steel is high quality buy I would say it is not high quality. Keep it for 20 years and you do not make even bank FD rates of return. Tatas in TCS and Tatas in Tata Steel is very different. Management is just one part of quality now. Look at Vijay Mallya in a Kingfisher and Vijay Mallya in United Spirits. No matter how flamboyant Vijay Mallya tried to be, he could not destroy United Spirits and no matter how careful he wanted to be and pulling money from all his other companies, he put it in Kingfisher but he still blew it up.

So, quality is more about the business model. If it is a commoditised business, it has to be the lowest cost producer. We have one and maybe there will be others but we do not know. We have D-Mart, which is a low cost producer.

If it is a brand, then stickiness is quality. If it is a Louis Vuitton for example, then it is high quality because nobody can really touch it. There are various definitions of quality but on the numbers if you ask me, it has to be the return on equity without the debt factor.

If you have a company that is growing at 25% consistent ROE for the last five years, I would say it is high quality but if it is a cyclical you will have a 50% ROE in a good year and a minus 5% in a bad year. Cyclicals are not quality. Government stocks cannot be quality because they are managed with a welfare motive. If the motive of the government is public welfare, the motive of the stock market investors is profit. Profit and welfare can never converge unless you make a lot of profit and want to get into the welfare mode. So, there is no single definition of quality. It is bits and pieces of everything.

If you have a business where you have a brand, then you have to keep growing because quality without growth is like an orphan on a street. Colgate Palmolive, for example, is one of the biggest quality names in India but the stock does not do much because the company does not grow at a rate which we want it to grow. No recommendations to any of the names that I have mentioned but there are various facets that make quality. If you can get all of them or six-seven out of the eight right, that we can talk about a winner. But if you get seven out of the eight right, then it would not be available at a price that you would like to pay. Then you will have another dilemma — should I overpay and then estimate FY21 kind of earnings. That is the point where you will have to go back to the drawing board and say you are willing to buy a Re 1 stuff for Rs 1.5 paisa because it is going to go up to Rs 2, Rs 3, Rs 4 over the next two, three, four years.

More or less defying the basic rules of investment, Bandhan Bank has rallied significantly and at Rs 80,000- crore market cap, it is almost price to book. Promoters seem to be cutting down their stake in the stock. What do you find so enticing about the stock?

I would like to skip that for the moment.

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