Following is part of an interview on ET Now News channel with Mr.Basanth Maheswari, Author of the book "The Thoughtful Investor". Simple to understand - hence published here.
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Nikunj Dalmia: Some six months ago, you were of the view that one should buy into Page Industries. I doubted your conviction, but the stock has gone from Rs 8,000 to Rs 14,000. Is the stock still looking good?
Basant Maheshwari: The stock is looking good, but the current environment is weak. If you see, there are not too many companies that are growing at a healthy pace. So, the market would be keen to look at the stock of any company, which expects earnings to grow at 25-30 per cent.
At present, you have to understand that if the entire economy is growing at 8.5 per cent, if L&T is growing at 25 per cent and others too are growing, then the exclusive element of these handful of companies which are growing at 25-35 per cent will slowly dilute itself. But what if the economy grows at 8 per cent and the company which is growing at 30 per cent starts growing at 40 per cent? Can it happen?
What I mean to say is, if you can grow at 30 per cent when the GDP is growing at 5.5 per cent, then obviously you can grow at 40 per cent, when GDP growth accelerates to 8 per cent.
So what would happen in that case is the valuations would not compress, the earnings would wait and that the price would wait for earnings to catch up.
Nikunj Dalmia: You are in no hurry to reduce your exposure to Page Industries?
Basant Maheshwari: No. I will tell you the long trends of a stock. If it is a free cash flow company, then the stock price would not collapse in the long term. If the cash flow is negative, then the stock price collapses and comes down to meet earnings. But if the cash flow is positive, the market gives it one two-three chances. So, the trick with these high PE companies is as long as their cash flow remains positive, one should not be in a hurry to sell them. But if their cash flow turns negative, and they are diluting capital by raising capital or are going to raise debt, then there is a problem. Then you have to be very sure of what you are buying.
Nikunj Dalmia: But if you buy stocks which are trading at PE multiples of 40 plus, 50 plus, 60 plus, can you make absolute returns?
Basant Maheshwari: We have been making returns. It is not that we have not been making returns, but whether they are overvalued or undervalued one has to take a call.
Nikunj Dalmia: That is a judgment call.
Basant Maheshwari: Cummins is also quoting at a very high PE, but it says we will grow at 5 per cent this year. See, the problem is you have to look at PE not in relation to the growth for the current year, but in terms of how much predictable it is.
If you give me two options — one company growing at 40 per cent for the next two years and trades at a PE of 20, and the other which tells me I want to grow at 20 per cent for the next 20 years trading at a PE 30 — I would rather go with the second option.
Nikunj Dalmia: You are clear on Page for next two or three years?
Basant Maheshwari: I am happy to own it.
Nikunj Dalmia: Let us move on and talk about housing finance companies (HFCs). These stocks have just gone from strength to strength. So, let us first talk about the housing sector. Do you think that the housing sector is on a cusp of economic recovery becauseinterest rates are coming down, affordability is set to move up and there is a renewed thrust on smart cities and affordable housing?
Basant Maheshwari: In addition, if you just have a look around these companies, they were growing at 25-30 per cent when the GDP was growing at 5-5.5 per cent. So, if the GDP moves up, their growth should also go up. More importantly, as I said earlier, look at the entire scale of opportunity. These HFCs can grow at 20 per cent for the next 10-20 years. But, since the stocks have gone up so much in the last three months, they have been trading sideways. The long-term thesis though does not get challenged over here at all.
Nikunj Dalmia: The only fear there is that the entire home finance space is getting competitive; everybody wants to have a piece of that pie. Banks also have their subsidiaries. What is your view on that?
Basant Maheshwari: Once banks start to recover, they are going to lend at 10.25 per cent. There would be no incentive for a bank to fund. They would rather wish the one can take big loans of say Rs 200 crore. The balance sheet size of banks are so huge and large.
So, sometimes dismissing a stock by saying it is at a high PE is not a correct thing to do because the entire market cap of housing finance sector is so small in comparison to the scale of opportunity. Hence, the high PE will remain there. As long as the predictability is there, these stocks will sustain. They are all wholesale borrowers and wholesale rates have started to come down. The effect will also come over the next year or two.
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