Value-biased and quality consciousness, 4 themes to play now: Sandip Agarwal

Sandip Agarwal, Fund Manager & Co-founder, Sowilo Investment Managers, says “the domestic consumption stories, the domestic building material stories, the home consumption stories, the manufacturing theme – those are the areas where there is quite a bit of juice, although one should be careful about the valuations you are paying for growth. We believe that the best way to look at the markets would be to play the themes.”

What is your hypothesis of the market right now? Are you cautious given the global backdrop? The macro headwinds are making a lot of people nervous. Global markets are 5-10% away from 52-week high. But we have not fallen. So are we vulnerable? Should we be a little cautious and keep some powder dry? How are you approaching?
Volatility is the name of the game and equity means volatility. So I will not say that we will not be volatile. But basically, we are doing extremely well compared with the chaos outside India. There is a very interesting data point. The gap between the yields in US and India is at decadal low at around 260 bps to 50 to 60 bps so that is a phenomenal thing to happen.

With such a low gap in the yields with such a small difference, although there is a risk that the FPI flows could reduce and there could be a sell-off, there could be some pressure on the currency. But on the other side, we have been quite resilient. In my view, it is a positive sign on one front. Although, the export facing sector is still the longer pause or even a higher rate for a longer period from the Western markets. It implies that we will have some pressure domestically as well, particularly in the export oriented sectors.

And that is what needs to be watched. But having said so, the domestic consumption stories, the domestic building material stories, the home consumption stories, the manufacturing theme – those are the areas where there is quite a bit of juice, although you should be careful about the valuations you are paying for growth.

We believe that the best way to look at the markets would be to play the themes. For example, if you are buying jewellery stock, the leader would be very expensive but find good management, good corporate governance and good growth in something which is little reasonably priced and go for it. That is the way we are approaching. So we are value biased and quality consciousness.

What are your thoughts on pharma? It is firing up in trade and we saw some transactions coming in. Glenmark has done a transaction to reduce debt. The rights issue of Piramal Pharma just got over. Is there merit in going back to pharma? There are triggers over there, some launches lined up in October. Is the risk-reward argument positive?
Some portion of that rally has already happened and pharma is not a place where chemicals are today. I think the chemical space is quite close to the bottom or the downside risk may be limited but maybe, time correction could still continue. But in pharma, there has been quite a bit of run up. So I would not say that there is a lot of upside from here. In my view, the valuation comfort is gone, but yes earnings comfort and growth comfort which can give valuation high for some time is definitely there.

So new money should be deployed very selectively in my view in that space because this space is also prone to regulations and USFDA and all those things.

Where exactly would you deploy new money where even if you do not expect a runaway rally right now, in due course, at least you find comfort in valuation?
It is probably unfair to call the stocks, but I will tell you the spaces for example in home improvement like tiles, paints or even the MDF space wherever there is comfort on valuation. We are not chasing the biggest player or the market leader because that comes at a very high multiple. We are chasing the second rung players.

Similarly, in the technology space for example, we are not chasing the leaders because they are quite expensive in our view. We are chasing something which has good corporate governance, which has good management, but likes Tech Mahindra, HCL and Zensar – all these names where the valuation comfort is there.

Similarly, in the manufacturing theme, we are chasing the names where the valuation is more comfortable than the leaders and growth is visible. This is the way we are stock picking. We are a little value-biased with focus on quality. These are the themes which we are playing. We are also playing themes like the branded apparel space. There also, we are trying to find values.

How is the earnings visibility of your portfolio? You have given us a good flavour on where you stand in terms of your composition, but is their 18-20% kind of visibility on earnings in your portfolio?
Well, see, we do not expect so much but we are happy with 15-17% kind of revenue growth because that is something which is more logical, more reasonable, and more achievable. And at 15-17% growth, if we are paying 1.25 to 1.5 PEG ratio with operating leverage playing out and challenges getting re-rated, I would say they will also do some catch-up in the multiple and we will make decent money. Our idea is to capture things which are 15%, 17%, 18% kind of growth with operating leverage and margin improvement and good quality governance. That is the way it should be looked at and the portfolio built. We are building our portfolio on those lines.

15-17% earnings growth, 1.2 PEG. Which are the areas you are researching where incrementally, there is structural growth, but price or valuation may not be in favour? Would you start deploying on any pullback ?
We are looking very aggressively at the manufacturing space and the likes of Dixon, Amber, PG Electroplast. We are also looking quite aggressively at names like Kalyan, Senco and others. We are also looking at Jubilant Foodworks, Devyani, Sapphire. These are the names where we believe the demography helps us to achieve some portion of growth. The increase in per capita income also helps us. We are mixing our portfolio with a little bit of sprinkling of salt, some small infra play.