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Basant Maheshwari on how to invest in HFCs

BY ET NOW | UPDATED: AUG 30, 2017, 12.43 PM IST Post a Comment

Talking to ET Now, Basant Maheshwari, Basant Maheshwari Wealth Advisers, points out
that without earnings and without growth, a stock is like an orphan on a street nobody bothers to
look at it.

Edited excerpts:

The fact that you have bought into HFC stocks, pretty much symbolises what the
potential of HFCs is. Do you like this reputation? When it comes to Titan, we always
associate that with Rakesh Jhunjhunwala; a Lupin we always associate with him but
markets have now started associating or calling you the HFC guru.

As long as there is no growth, there is no bull

Actually anything I like to chase anything which is growing. There are two ways of looking at it.
market. So money is going to chase growth and we
One is price and one is earnings. Somebody wrote to me why do you look at the price, why not can say for example that a stock like Bajaj Finance is
the earnings? It is more like looking at the horse and the cart, it is the earnings that drive the not a recommendation.

price and as long as the earnings are there, the prices are going to go up. So, of course, they
are expensive. They will go up, but right now we are holding stocks that is 100 trailing PE. We EXPAND
RELATED COMPANIES
bought it when it was 60-70 trailing PE. It is not that I like buying 100 PE stocks but if the 100 PE
stocks is going to make me 40-50% every year, then obviously I do not mind buying them. Titan
 Gruh Finance
Similarly, within the HFC space, the two stocks that we own are going to grow at 40-45%. We
have to focus on growth. Growth in a bull market is like steam in a sauna. If there is no steam, Can Fin

there is no sauna. As long as there is no growth, there is no bull market. So money is going to EXPAND TO VIEW ALL

chase growth and we can say for example that a stock like Bajaj Finance is not a
recommendation. We are invested there. But it is abnormally priced. Gruh Finance was at Rs Big Change:
The end of Five-Year Plans: All you need to know
200 when we used to own it, was 10-12 times. Now it is Rs 500, two and a half times from there.
So people have gone fed up saying Gruh Finance is expensive, nobody talks about it now. Over
a period of time, people get fed up saying it is expensive. We should focus on earnings, we
should focus on growth. Without earnings and without growth, a stock is like an orphan on a
street nobody bothers to look at it.

Do you continue to deploy fresh money into the same stocks because that is where you find growth and visibility?

That is correct but there is a change. When you start, you can put in higher allocation but when the price goes up, then you tweak with the
allocations. You look for a new growing company another thing what you do normally is all these stocks give you 7, 8, 10% correction. If you just
go and see Page Industries, a stock which we owned from 2009 to 2014, it never fell more than 20% even once. I do not recall obviously.

If it is a leading bull market stock, unless there is a demonetisation or something like that, it would not fall more than 20%. If from the highs, the
stock has fallen 20%, then you find buyers. Basically we want to buy it say 10%, 12% down from all-time highs. Then you can say okay it is going
to fall 7-8% more but that is the time to put in money and obviously we put in money and we do not pray to God that we have put in money
because already so much money has been put in.

If I am not bullish in the stock, I should be selling my existing companies. It is wrong to say I cannot buy more because you are already invested
there. So obviously that allocation varies. You cannot be as aggressive as you were one year back but then you find new stocks to bet on and
that is how life moves on.

The eye opener for me was when I looked at the numbers from Repco. They had this edge that we will not give loans to the salaried
class. We will give it to the non-salaried class. In came demonetisation, a bit of a disruption from GST and their numbers were slightly
shaky. Whereas the big picture for HFCs is great, I am getting a big variance within companies there.

No what you say is correct. Of course. we do not own Repco. We bought Repco the first day, first show during the IPO and we held it for a long
time. About two years back, we exited. Within that space, there will be gaps but about Repco… A company for example, it is not just growth. Let
us take HFC. Let us take an NBFC. Ultimately it is a commoditised business. If somebody gives a loan to me at one percentage point lower, I will
go to that person. So you have to attack your business from all sides – one is the growth, the other is your cost of borrowings, the third is your
geographical diversification and there were so many things. But Repco -- we realised over time – is just focussed on making 20-25% growth and
they were not going at lowering the cost of deposits. They are not going for geographical diversification the way they wanted to. So there will be
gaps and tomorrow what we own today, they might have a problem. But then, if you are following a company very closely, you get these hints
two, three, four quarters before the market. But you have to follow the company closely. Repco, of course, we sold out by chance and right now
we are not interested in Repco. It was an ex-girlfriend and we do not look at exes now.

Howard Marks said a few days ago that this is not perhaps the time to be aggressive even if you are fully invested, maybe caution is
the right way forward. Do you also share the same view or is it just from a valuation perspective that you are stopping and saying look
this much and no more?

Normally a leading bull market stock does not correct more than 20% to 23%. Can Fin corrected a lot more. Of course, we are invested. No
recommendation now because Catamaran came in, dumped the entire stock during the demonetisation time. But a stock is going to correct 20%
from the all-time high and if, there are two ifs running here, and if it is a leading bull market stock, then we try and get in a 10-12-13% from all-
time highs.

We say we will see whatever comes. But the thing is, once you buy a stock, you cannot sell it. So the moment growth stops, it is like the music
stopping with you not having a chair to sit on. Either you push someone and sit on a chair or you say you have lost the game.

We normally get out of the room the moment the music stops but that is a very hard thing to do because when you want to sell a stock on
earnings disappointment, you will be selling it 10-20-30% from the all-time high. That is okay as long as you have a big vision and you keep
moving ahead in life. But the point about buying cheap is all well understood when you get a chance to buy cheap. What if you do not get a
chance to buy cheap and there is only selective bunch of stocks that are doing well. We like to chase earnings. If it is expensive, we buy it. Of
course, I would like to buy it cheap but what to do?
What is up with your new phenomenon first-day-first- show? I have been told that you bought Avenue Supermart or D-Mart on day one
of listing. You bought AU Financials on day one of listing. Is this just a coincidence?

Avenue is out in the public but Avenue is again not a recommendation. But it is the only company outside of the NBFC space which is going to
grow at 40%. If you just go and look at the business model, in every four years, they double their store count. So in four years when you double
your store count, you get 18% growth. The existing stores give you 20% same-store sales, so 18 and 20 goes to 38 with a little bit of change in
product and change in the SKUs and all that you can add 4-5-6% there.

It looks set for 40-45 percentage point CAGR over the next couple of years or next two-three years. It has run well ahead of its fundamentals. I
cannot write a value investing thesis on that but again right now it has about 130-140 stores. Up to 300 stores, it is very easy for them to expand
into India. Till then, we are going to get good price and if growth stops, obviously everything is going to stop but we bought it at first day first show
and we are completely bullish and we bought it last month also, so that explains everything.

How are you looking at value in this market? Do you think that given where we stand on the index at 9900-10000, we are pushing
towards the higher end of the valuation range and so finding value is a little harder?

It is very hard. There are two facets to value. One is the balance sheet and one is what it can be in the future. So there is nothing if you can just
pick up a balance sheet and say I want to buy this company because this is there. I do not think that opportunity exists right now. But what it can
become -- that part of value is there and for that there is a leap of faith, the tailwind which I keep talking about because you cannot be buying a
company for example in the IT space which has so much of headwind.

In last one and a half years, from February 2016, the bankex has delivered about 50% growth. There is earnings momentum/price momentum in
the financial space and financials are globally recognised and always do when in a bull market.

Of course, they might do very well or they might do well but they do not underperform a bull market. So except for the financial space, I cannot
see value in the segment. We get Rs 5000 crore every year in SIP, which is about $10 billion every year. Two-three years back, we were talking
of $20 billion annual FII flows. Half of that is already being matched by SIPs. I think the market should go up but I do not know why it should go
up. We are very well invested there.
It is so true that value is a function of what you define and what your belief about future growth is and the best investor in the world
which is Buffett has also made some investments which sometimes may look very expensive because they are done at a premium to
the closing price but then he believes that for next 8-10 years he sees value in them. Without getting into recommendations of buy, sell
or hold, what are your thoughts on AU Financials? What do you see in it?

You want me to take any company and talk about it.

AU Financials. I will be specific here.

Our per capita income is $1500-$1600 per person. Over the next three-five years, it is going to go up to $3000. The $1500-$1600 per capita
income gets roti, kapda, makan and cable tv. The moment, the income goes up to $2500, $2600, $2700, then you have a stream of cash flows
and there is an entire boom happening in terms of disposable surplus. You would not be spending that money but if you get assured cash flows of
some surplus, you can get money on loan. That surplus is coming in the Indian GDP space. This is a big picture thing.

Financials normally would grow at 20% the NBFC space. PSU banks, which form about 60-65% of the entire lending network are having 10%
NPA. The entire PSU space right now would move away from growth. They do not have money to lend and the capital adequacy has gone down
the dumps. The private space has a free run now. Thus the 20-30% of the private lending guys now have a 100% market ahead of them. As long
as this happens and as long as the NBFC space has specialised agencies there will be growth in this sector and it is growing at 20% on an
average. Smart guys grow at 30% and super smart guys grow at 40%. If I come and tell you why not buy a Bank of Baroda because there has
been a management change, then the first question you should ask is yaar dekho so much of NPA where is it going to grow from?

If you have zeroed down on financials, then you see the cost of deposits, the cost of borrowings and whether they can issue debentures, whether
it is an NHB finance loan. So, there are two ways to attack it. One is because you cannot charge more to anyone because nobody is going to
take a car from you if you charge 1% just because you have served him a cup of cold coffee. So you have to look at a company which can keep
its costs under control which is the opex and which borrows cheap and borrows well.

A company which we own -- PNB Housing Finance -- somebody should just go and see that balance sheet. Again, it is not a recommendation.
When interest rates were high, they borrowed short. They said in one year we are going to see an interest rate fall and that is then we are going
to go and borrow long. Most textbooks advise asset liability match so your assets and liabilities have to match but money is made by doing an
asset liability mismatch. What it means is in short term, rates are lower and long term rates are always higher. So obviously you borrow short and
you lend long that is the way to make money. When I visited Repco three years back, they has a one year, two years, three years, five years
asset liability match. At that time I got impressed but now I realise money is made when your asset liability does not match because then you
borrow short, you borrow at lower rates and you lend long, at higher rates. There are too many things to look at about it but basically that is how
we go about it.

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