Saregama is an interesting one, I mean, ultimately they have a monopoly. Now, whether it is retro music or the music library, they are the ones who actually have the rights. And given that it is now easy to hear whether it is streaming, whether it is apps, whether it is music on the go, is this one of those businesses which you think you should just buy and keep? Why, because that library what they own, in a sense, it cannot be replicated.
Sandip Sabharwal: Yes, I have analysed the company many times, but the issue I always grappled with was what would be the growth prospect beyond a point of time, so which I think is something which will be tough for them, like library can be perennially utilised and they have done innovations in terms of coming out with their products with the music library and different kinds of products, etc, also. But then, beyond a point, I cannot see growth because new additions will not be so much. So, I think that is an issue I particularly grapple with. The stock has actually done reasonably well.
What is on your radar which you would say that you would start buying on a 5% decline, you will add more on a 10% decline, and you double it up if it goes down by 20%?
Sandip Sabharwal: I think post result seasons, like some companies which seem to be on the turnaround path are companies like UPL, I think they went through a tough time.
Now they have done some inventory correction, etc. Crop outlook could be improving. And a big concern for them has been refinancing of their global loans, so if the interest rate cycle globally moves down, that might not be such a big issue, so that is one company I have contrarian bet. We did pick up post results somewhat and would look to add if it corrects more. Then, during the budget time, I had said that a company which we own and which has also done reasonably well, SH Kelkar, which is on the flavours and fragrances side, so they have got a big order, the entire profitability cycle seems to be improving, and valuations are not so demanding, so I think these two. And then among the companies we own, which has corrected because of poor results in the first quarter, but the outlook because of order book continues to be strong is something like Ahluwalia Contracts, it has given up I think 15 odd percent from the top. If it corrects more, I think that could be something because the long-term outlook is good.
Why do you like UPL because in the past I know you owned the stock even in different roles in different capacity. Some would argue and say that, look, they have multiple acquisitions, lot of debt, and forget that. I mean, this play on that UPL will do well and agri will keep on growing, somehow that thesis has not added up historically. Do you think it will play around in future?
Sandip Sabharwal: Yes, it has not added on because I think they did the large acquisition and then they took on a lot of debt and then the cycle turned negative and two years we had a very bad crop cycle globally. So, those concerns are there.
We did own the stock for a long time now, and I keep on tracking their quarterly results. This was the first time then that one could see that possibly things could be bottoming out.
It is more a play on, maybe we would not get into a secular upside, but then in such markets where valuations as it is are high we are not looking at 100% gains from stocks.
I think companies which can give 20-30% also, those are very good companies in current market environment. So, it is more a contrarian kind of bet.
Where is it that you have eased off or loaded off position and have you exited private banks completely or not?
Sandip Sabharwal: No, ICICI Bank we continue to hold. We have some Axis Bank also. Where we exited was Tata Motors post last quarter results because I thought that domestically things are slowing down and globally also the outlook does not look to be so exciting, so I think that is one stock we sold off.
We sold off many railway stocks because in my view the growth cycle was peaking out. So, they will still continue to grow, but the valuations became very extended.
So, stocks like Titagarh, Texmaco, etc, which we bought at a very low level, we exited. So, with all of that, we have generated cash and we are just waiting for newer opportunities.
You bought into Kotak if I recollect, that time Kotak was going through two problems, transition issues and RBI diktat. And some would say that those issues still linger. There is no clarity from Reserve Bank of India as to where they want their digital payment business to move or digital app to move and well, the transition continues. I mean, the management will take two-three quarters before they demonstrate that the new man means business.
Sandip Sabharwal: So, it is a small allocation on a contrarian sort of strategy where you buy when the bad news you think is peaking out and then you wait and see when the stocks would perform, which could happen when the RBI restrictions are removed.
On the asset quality growth side, there has not been much issue. We saw earlier also with some other financial, like specifically I think Bajaj Finance, when those restrictions got removed, the stocks rallied. So, I think it is more of that kind of story.
But it is more something where you buy when you think valuations have bottomed out and it could outperform.
I go back to that point which we were initially discussing. There are two trends staring in front of us. One metals have corrected, but there is weakness in the dollar index and there is cut in Fed, which means typically this could be a time when commodities could make a comeback. So, play commodity for a bounce. The second trade staring in front of us is that commodities have corrected, so go for commodity consumers rather than producers. What to your mind holds better chance in the next three months, producers or consumers?
Sandip Sabharwal: I would think consumers because the only thing which matters for commodities in the current environment is what China is doing and how China is doing.
And China continues to slow despite all measures by the government because of the kind of over investment they have done over the last 10 years or 15 years.
There are so many zombie projects, real estate, infrastructure, which are not generating any returns. And what most people do not realise is that even now, 50% to 60% of the consumption of most industrial commodities, steel, copper, aluminium and many others is because of China.
If there the growth is actually slowing down, then there is no case to make for a big commodity upside. So, typically, historically, we have seen dollar index moving down has been positive for commodities. But if you look at the last few months, that has actually not played out.
So, largely, how is it that you are recommending, commodity sensitivities across the board?
Sandip Sabharwal: Gold is a different commodity because gold is more about economic uncertainties, about allocations, about people wanting to hold an asset other than which could be a hedge against maybe currency volatilities, etc.
So, I think gold is separate, I think gold will continue to do well. But rest of the commodities I think we should be very cautious on, most commodity stocks.
And what allocation does gold have in your portfolio, percentage wise?
Sandip Sabharwal: Could be around 12-13% today.
