Sectors Where Dalal & Broacha’s Milind Karmarkar Sees ‘Massive’ Opportunities
An employee poses while holding a large rough diamond with tweezers during the sorting process at the Namibian Diamond Trading Co. (NTDC) diamond processing and valuation center (Photographer: Simon Dawson/Bloomberg)  

Sectors Where Dalal & Broacha’s Milind Karmarkar Sees ‘Massive’ Opportunities

A rebound for India’s stock market is around the corner and it’s the right time to start investing, according to investment adviser Milind Karmarkar.

Indian equities have remained volatile in the last few months because of a consumption slowdown that’s hurt everyone from makers of biscuits to cars. Global trade tensions have only added to the uncertainty. While the benchmark indices scaled new records after Finance Minister Nirmala Sitharaman reduced corporate tax rates, the rally has remained confined to a handful of heavyweights. Karmarkar expects that to change.

“We are probably in the trough [of the market correction] and things will start improving hereon,” the director at Dalal & Broacha Stock Broking, which manages about Rs 900 crore worth of investor money, told BloombergQuint. “Even otherwise, it’s always a good time to invest in stock markets.”

He expects consumption-driven sectors to continue doing well as the opportunity is “massive”. For him, the sector encompasses not just fast-moving consumer goods makers or consumer discretionary, but also banks and non-bank financial firms. “One could include pharma, one can include hospitals, or turn in new sectors such as insurance. So, these can be extremely powerful growth drivers.”

The slowdown-battered automobile sector will also do well, Karmarkar said. The auto index has fallen almost 12 percent so far this year, with Bajaj Auto Ltd. being the sole gainer, as sales for most makers of all kinds of vehicles declined amid a liquidity crunch and a slowing economy.

“If the market will grow four to five times in seven-eight years, then these [auto stocks] also will grow four to five times,” Karmarkar said. “That’s what my belief is. They will be a market performer, there will be no underperformer.”

While the NSE Nifty 50 Index has risen more than 9 percent so far this year, the NSE small- and mid-cap indices have declined 12 and 6 percent, respectively. Karmarkar sees opportunities in India’s beaten-down broader market. He favours small and mid caps that have the backing of strong managements.

Watch | Dalal & Broacha’s Milind Karmarkar talk about the sectors he prefers…

Here are the edited excerpts of the interview...

I have known Dalal and Broacha as this age-old brokerage firm. Now, I see on your card- “Dalal and Broacha Portfolio Managers Pvt. Ltd.” What is this about?

So, we were managing assets under the portfolio management scheme for about close to 12 years now and we also decided to start an AIF. So, we wanted to have a separate company managing that. That is the reason we started Dalal and Broacha Portfolio Managers. So, the focus will be asset management. The first fund is an AIF which is launched from this company.  

So, you have a broking service and you also have a portfolio management service under the Dalal & Broacha umbrella?

That’s correct

Just wondering, if it’s a good time to start a portfolio management services distribution or a portfolio management services platform simply because, the conversation is around whether this time is really different or no, is at sky high levels.

As we were discussing earlier on also, I don’t think it’s ever different, it’s always the same. So, if we go back to 1993-2003, in those 10 years, the market didn’t go anywhere. We had an extremely bad period between 1998 and 2001-02, barring the software boom. We had bank NPAs at 10-15 percent, we had passenger vehicles sales falling by about 25 percent and there were many companies which had to declare lockouts. There was a reduction in staff. Basically, what had happened was, in 1993 everyone thought that liberalisation was there, and economy will boom, and a lot of things will change, and nothing happened. That was the reason what happened was, that initially everyone expanded and then, nothing happened. So, in 10 years, they had to restructure.

Come 2017-18, we are seeing the same thing. We had a lot of hopes. I wouldn’t say nothing happened, but the economy has not gone anywhere since 2008—rather, I would say that the stock market has not gone anywhere since 2008. And the economy is slowing down. We had NPAs going up to 10 percent, we had passenger vehicles falling, we had banks going bust and we had the GDP coming down to 5 percent. In fact, this year they say it may go down further and there is a Moody’s downgrade which has come in. So, everyone thinks that bad days (are here again). But if I look back to the earlier period which I was talking of, even at that time, the GDP growth had come down to 4.8 percent. But in the next three years, it bounced back to 8 percent. So, I don’t think this time it is different. We are probably in the trough and things will start improving. Even otherwise, it is always a good time to invest in stock markets.

What gives you the confidence that the GDP could grow at whatever pace (because it’s very difficult to predict right now since all predictions in the last 12 months have gone wrong)? Also, if we just look at 2016 onwards till now or 2014 onwards till now, there is a clear dichotomy in the way the markets are moving versus what the GDP growth has been?

Yes, but the issue is, if you look at 10 years, we’ve had a GDP growth of 6-7 percent. We had a 4 percent inflation or so. GDP continues to grow at 10-12 percent, the way it has grown in the past 35 years. So again, as I said, this time it is no different. Last 10 years, probably the GDP has doubled, the stock market hasn’t. So, the stock market has not kept pace with GDP.

In fact, the stock market is lagging behind and that is the reason why I think that we are not at the top but there is a lot more steam left. Certain things can go sideways and maybe, even down. But longer term, things seem to be going better. (For instance) banks have been beaten down. So that is what has happened in the financial sector because they have passed through the worst phase. Now I think, it’s coming to an end.

Ridham gave us this statistic that if we look at the Sensex market cap, over the last 10 years, it stays stagnant despite the GDP growing. Therefore, would you reckon that the next growth leg; whenever it comes, (if it comes in six months, one year, post one-and-half-years)- will usher in the growth for quality, non-large-cap names or it’s futile to make that discussion because even in the last five years there have been quality mid-caps which have given fabulous return?

So, it’s like this. When we talk of mid caps, when we talk of small caps, we are looking at a country where per capita income is only $2,000. So Indian large caps typically by global standards are small caps. If we believe that the Indian economy will be a large economy, as our Prime Minister says, a $5-trillion economy, then these are all small or mid caps. So, there is a huge opportunity for the large, mid and small caps.

So technically, over the last 30 years, whatever experience I have, what I have found is, whenever we have asked our clients to invest in companies which may be mid or small cap but which are backed by a strong group like the Tatas or Birlas; those stocks have always done well. So, one has to be extremely cautious about the management and the strength of the management because economies go up and down, and you need the strength to survive those ups and downs.

So, you are not stacking them up by the size of the market capitalisation; maybe the size of the business opportunity ahead of them is more like it?


A lot of these ‘new-age’ businesses, which are quality names, may not have strong groups backing them but are doing really well. Are you still sticking to debt being a core filter about the pedigree of the group behind it or individual standalone entities with stronger fundamentals would stand the test of time as well?

So, it’s always bottom-up, right? As long as the promoter is good and strong, (things are okay). Infosys, if you go back, like I’ve said, can serve as an example. They were all entrepreneurs and look at the kind of wealth they have created for investors. So, it’s not necessary but what happens if a small group or a large group is supporting it, but yes there will always be companies which are promoted by dedicated and strong promoters with enough knowledge in the business which they are doing and those businesses can do very well.

As I see it, you are trying to navigate through these uncertain times that we have of sluggish economic growth, difficulties around the globe with regards to trade war, etc. by sticking to the age-old principle of picking up good quality, bottom-up stocks to sticking with them and watching the earnings grow eventually the stocks give return over the long term?

Yes, you are absolutely right.

So, where do you see such opportunities? The views out there are dichotomous simply because there are a bunch of stocks which are doing so well and on those two, there are people who believe that there is quality in the bubble and there are enough fund managers who are saying that we are happy to stay invested because of the prospect of growth. What about the side one which is painted white by the market, valuations are sky high, yes there is growth but as they say, everything is good at a price. Where are you in that argument?

I agree. So, there could be some excesses there, I don’t deny that. There is a possibility that there could be excesses. But when you are looking at these types of stocks which are predominately (not all) into consumption, (we see that) probably the reason why they are doing well is that the opportunity in consumption is massive. As I was saying, in the last 30-35 years, GDP has grown 65 times and the stock market has grown 135 times. It’s simple math that you have a 7 percent GDP growth, 5 percent inflation, 12 percent nominal growth, so any good business working in this environment has to grow at about 25 percent higher than that. That is what market has given.

So, if you look at consumption as a sector (the opportunities are massive). When I say consumption, I don’t restrict myself to only FMCG or consumer discretionary, but I would say it ranges right from the sectors which we discussed (discretionary and non-discretionary). They could also include consumer goods, they could include FMCG, but I think one should also include financials like banks, non-banking financial companies, etc. One could include pharma, one can include hospitals, or turn in new sectors such as insurance. So, these can be extremely powerful growth drivers.

The other day, my driver came to me and I just asked him what he did during Sunday, so he said I took my wife out to Juhu. So, I said, did you take your car? So, he said, yes, I took my car, I didn’t take my bike. So, I asked him why. He said, no I have not renewed the insurance and now, the fines are high. So effectively, you go back six-eight months, these insurance guys were cribbing that in two-wheelers no one renews insurance but that is happening. So, the opportunities in these cases are massive.

But I was talking to my team and I was asking them how many of them have insurance for their house and interestingly, none of them had it. So, the opportunity there can be massive; with insurance, finance, pharmaceuticals, hospitals. So, there are a lot of places where consumption can make a play. If you move from 2,000 to 6,000, the kind of growth which can come in these sectors can be massive.

There are two things that will happen, right? One, people who do not have access to a good or a service will make use of that and then. (On the other hand) people who have a particular good or service, will go to the premium end. Now, within the investable universe, where is it that you find favour? I’m guessing everywhere, but where do you think the winners would be more pronounced?

I think finance could be a very interesting area. So, finance and banking probably have not moved up in the last 10 years; more or less. As I said that “not-moving” is going down significantly, so that could be a huge opportunity. As the per capita income moves up, the demand for finance also goes up. As it is, we are saying, most of the banks are growing because of retail loans and I think that will continue. Insurance is another sector. So banking and finance could be somewhere where I would think that interesting things could happen. Long term, big growth is possible there.

Do you think that growth will take care of the punchy evaluations that some of these seeming to be trading at?

Yes, I think so.  It’s very simple, take a stock which trades at 60 times but if it can grow at 25 percent year-on-year, in three years, the valuation comes down to roughly about 30 times. In another three years, it comes down to 13-14 times. So that’s what it is.

So, you believe that there is a punchy price-to-book? I mean, you own these names, but I am just using them as an example. HDFC Bank at about three-and-a-half (times), Bajaj Finance at about post QIP at 7, 8 or 9, whatever your assumptions again. Those are not punchy simply because of the trajectory growth in the next four-five years.

Another thing that happens with these companies is more financial engineering. I don’t want to argue if it’s right or wrong but they come out with QIPs time and again because all of these companies, cash is raw material and they come out with the raw market value. So that effectively brings down their price-to-book ratios also. That has what has happened in many other names and think that will continue to happen.

The one small argument for them in addition to all the many that are being done, is that for them to grow at the numbers which they have been growing at, it’ll be a lot easier to grow at those numbers with much better asset quality simply because the markets were bombed out that the quality names are right now able to pick and choose where they want to grow and therefore the ROEs, the NIMs, the valuations will actually inch higher?

I agree with you.

So therefore, you are not playing for growth but for a higher multiple as well.

Yes, absolutely.

What happens to the other half then?

They need to improve. There is a private sector bank which is of very low ROE as of now, but they say that in the next two years, the ROE will grow 3X. So that is what the ROE and others need to follow because the opportunity is for everyone. So, as I said, we are a bottom-up player, so we’ll keep watching them. Maybe someone from a PSU also will do wonders. Who knows?

So, bottom-up approach across the board, would that be in NBFCs too? Or NBFCs you are being very picky?

Technically, I am being very picky, especially after the debacle. But yes, good names and a good management supported by a large group I think is a safer bet.

What about the discretionary consumption? Leave out the staples; FMCG, etc. We have seen for example in second quarter, despite unseasonable rains, cooling solutions do very well. However, some of the most bankable names; the Titans, the Pidilites, etc. have shown some change for one quarter at least. What do you do in such scenarios?

It’s very simple. If they fall, you buy some more. Because the opportunity is massive. Take for example Titan, I think it has just 5 percent share or 7 percent share of the overall marriage sector and marriage is a huge expenditure for an Indian family where the maximum purchase of jewellery comes in.

Interestingly, the other day I was in Pune and I was visiting PN Ghatgar. This was post-Diwali and the store was packed. The consumer has not stopped spending. The consumer continues to spend but the issue is, one or two quarters may be bad but unless and until you believe that consumption itself will slow down or per capita income will go down, then it’s a different story. Then, you may have a problem. But otherwise, one or two quarters I wouldn’t say bother me because I will keep it on a watch but it doesn’t deter me from holding on to the stocks.

What about the other half of the market? It would be slightly easy because the growth is there, because people like them, what do you like? What do you dislike?

So frankly, I don’t understand commodities because it depends a lot on how the global players move and things like that. But if we believe that India will do well going forward, if we believe that India will continue to some extent, protect their economy by putting in anti-dumping duties, then even some of the commodity names could be interesting who are very well positioned or the lowest cost producer of certain commodities. I think (they) can do well.

What about autos? They are wedged somewhere in between. They have been beaten down, have recovered a bit and the future as of now definitely looks uncertain despite the growing population, despite growing demand? It does look a bit difficult to predict.

So, let me put it this way. When it comes to autos, I think per capita ownership at least till the time is significantly lower when you compare some of the large countries in the world. But in metros like Bombay for example, the issue is that, owning a car has become a pain. So that is the reason; there is a possibility. The finance minister talked about it. There is a possibility, because of that the best days for auto are over. So, the continuous 20-25 percent growth may not come in.

Having said that, it will continue to be a market performer. So, if some think that market will grow four to five times in seven-eight years, then these also will grow at four-five times. So that is what my belief is. They will be a market performer, there will be no underperformers.

So, you don’t need to own them? Because you don’t need to own every stock in the market. You just those 10-15 which matter.

Yes, absolutely.

So, within the bombed-out space or the not well-performing space, where is it that you have conviction? You are not too sure about commodities; you are saying that autos at best would be a market performer. Where is it that there is a possibility of an uptake if things fall into play?

See, if you look at the way spending is happening by the government, if one goes back to 2003 to 2008, maximum growth came in from the capital goods sector. But the environment was right and there was a large push from the government. Currently, I see a large push by the government coming in the railways. So, there is a possibility that anyone who is connected with railways could deliver better results in economy-focused companies.

Could you make a distinction for us because whenever the railways come, the four-five names that crop up have always been well distinguished?

Not those. It could be anyone, but I cannot give the names. Yes, one should look out for places there linked to railways.

A lot of arguments are made against the spaces that never mind the fact that EV per tonne might be at very low levels, etc. Just the return ratios and the quality of earnings of these companies largely have come off so much that barring one or two, that space doesn’t seem to be investable. What are your thoughts because you’d have looked at it for a long time?

So, when I look at a company, when I look at anything to invest in, I would say that I would look at the growth opportunity. We were talking about retail. So, in retail if there is a 40-lakh crore retail business in retail in India and its growing at 8 percent, you have a 3-lakh crore new business being created every year in that space.  So, companies in that space, then you can pick and choose. In cement, I don’t see that. I don’t see a massive growth coming in.

So, either one will have to be an expert in the cement industry which I am not, to invest in that company, to make money by buy and hold because there are some smart brains in the industry who can trade. Unfortunately, I cannot. So, the only way or the easiest way is a no-brainer where you buy and hold and then believe that the market will continue to grow and believe that then the economy will continue to grow. So, cement doesn’t fit in that. That is the case.

So, then let’s talk about the space wherein if the per capita is to inch up, people already have access to that but therefore might move to the premium end of that pocket. Where is it that you find the argument to be compelling?

There are many places. Interestingly, hospitals are an area where a lot of opportunity can come in. Not from the top end but mainly from the lower end because in India, healthcare is unaffordable. But as of now, when we talk to hospitals, they say that for them Ayushman Bharat is a loss-making proposition, but I am sure that they would talk to the government and things would improve there. That would be a big opportunity.

For example: when I met Mr. Devi Shetty long back, the first thing I asked him, are you for charity or are you for business? Because you’re for charity its great but not a good investment. So he said, “no, we are not for charity, we are for business.” He says the problem is that, everyday I meet many mothers with a child in their arms and she has only two questions. One is, whether my child will be fine for which I have an answer and the second is, whether I’ll be able to afford it for which I don’t have an answer.” So that is the key here. As per the per capita income goes up or as insurance penetrates more and more, affordability comes in and that is where I think hospitals as a business can do well. Again, this is not a recommendation.

Your answer seems to suggest that insurance, which is such a widely spoken about topic, not just on my platform but other platforms as well, the largely spoken about space which is life insurance. Your answer seems to like the general insurance space a bit more.

Yes, I do like the general insurance space more as well. The opportunity lies there because as I was discussing about home insurance, as I was discussing about two-wheelers, many of the places the insurance penetration is low. So that is why, the opportunity there could be higher.

In this uncertain scenario, the export-oriented pockets, is there merit in trying to look at them? I mean, textiles is forever a small pocket. Auto ancillaries would probably be a function of what has happened but software, pharma, etc.?

So right now, I am looking at pharma as a consumption story. I believe it was always a consumption story because long back, I remember, 20 years back, I met Dr. Reddy himself and I asked him what his sales are based on and he said, rising per capita income.  So that is very interesting, and it is true as well.

Another is, unless and until you have money, you can’t think of putting it on healthcare. So yes, pharma is a great place but right now, there are a lot of riders on that because of quality issues, U.S. FDA issues, then generics, there is a lot of competition in the U.S. but that is a good space to be in. Maybe, it will consolidate for some time, but pharma is a good space to be in.

IT, any thoughts?

When I meet a company, the first question which I ask them is what is the kind of opportunity at which you can grow? Because I have a simple theory as I told you. If an economy is growing at 12 percent, and if anyone says that he is growing less than 12 percent or 8-10 percent, I don’t think over a longer period, I can make money in that.

If a company can grow at 10 percent and is in software, then I will look at it because there also, the opportunities are large but the dependence on the global economy is very high there and I don’t see the global economy growing at more than three percent at least in the next five-six years.

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