Expert Portfolio Manager Porinju Veliyath’s Betting On A ‘Turnaround’ Revolution In India
It may be sheer coincidence that the S&P BSE Sensex hit a record high of 31,074 on the same day as the Narendra Modi government celebrated three years in power.
But well known investor Porinju Veliyath, of Equity Intelligence India, attributes the unrestrained bullishness to actions taken by the Modi government -- namely demonetisation and the implementation of the Goods and Services Tax (GST).
Veliyath shrugs off fears that the markets are overbought, insisting that the benchmark indices are not at their peaks.
He tells BloombergQuint’s Niraj Shah that there’s money to be made in stocks of “badly-managed, small companies” thanks to the government’s efforts to formalise the economy.
Below are edited excerpts...
Why do you believe that badly managed companies will change, will become well-managed companies?
There will be symptoms. For example, a company which was siphoning of money and would sell in cash without paying excise duty and (other) taxes, that is why they are small companies. If they weren’t doing this in the past, they would have already become big companies. So those companies, some of them will be changing voluntarily or because of generational changes and those who are still not changing, they will be forced to change in the new economic environment in the country. We are looking at reducing corruption, reducing black money and we are moving from an unorganised to an organised sector. Everyone knows this and talks about it. My only point is that this is a huge development. You cannot know it and ignore it. This is the background with which you need to invest in equities. So these small companies, a lot of them will be five and ten baggers, and some of them will die.
So you need to pick and choose?
Being choosy is also important. A small company with a relevant, futuristic business, not managed well in the past, why should they remain bad? That’s the question. So there is an environment for them to change, and there is no incentive for them to remain bad. See the income tax raids happening in the country. This was required five or ten years ago. Instead the rate of scams, corruption was going up. So that has peaked out three years ago. We are already experiencing the decline (of corruption) at the top level in bureaucracy and politics. Anybody will agree there is a significant decline in corruption levels. Now it has to come down to the middle and lower levels. It will take time but it will happen.
Which themes in the equity market look ripe for making money due to demonetisation? Is that game still on or was that stock picking available a few months ago?
Niraj, the game has just begun because of demonetisation and related events. Demonetisation was done for the government to get control of graft, corruption, and ‘’beyond permissible levels’’ of black money usage in the country for transactions. So that was the purpose. Once this is done there is a lot of advantage for facilitating an anti-corruption movement which I really appreciate. I wrote a letter to investors on the November 12 talking about an equal opportunity to every Indian. Till now what we had was that the bad people, criminals and the bad fanatics were all having an advantage of using black money and paying no tax. People who were honestly paying tax were at a disadvantage. Now it’s evening out. That is what’s called equal opportunity for every Indian. This is what is required. So we are moving towards that.
How is this is reflecting in the stock market is your question, am I right?
So why I have been talking about this on many platforms, the listed companies, that is our subject. They are basically organised businesses, even though some of the smaller companies (are) not very professionally managed, family-controlled businesses, not very ethically managed. Those companies had many options or loopholes to remain bad. Now they are getting blocked by the government, and GST is the biggest thing, more than demonetisation, GST is going to block such kinds of manufacturing companies.
So Porinju, what do you buy? Where within the “chor-management”/unethical companies/badly managed companies do opportunities exist because of demonetisation and GST?
Infact in my personal portfolio, I have been buying only the so-called “chor” companies in the recent past. That doesn’t mean every promoter is bad. You know “chor” is used with a wider meaning.
I feel there are symptoms of change. There is an urge in promoters and management to change. Everyone is getting more ambitious in this environment. Everyone wants to create wealth via market capitalisation rather than siphoning off money. So these promoters are holding 50 percent, 60 percent, and even 75 percent, they also will be encouraged and motivated to do wealth creation by market capitalisation. So the minority shareholders will be the biggest beneficiaries of these companies. Now investors have to identify which sectors have the maximum black money dealings, illegal dealings, tax avoidance.
What have you identified?
Recently I bought 5 percent of a company, I think we discussed it personally some time back- a plywood company.
Are you at a liberty to share the name?
I bought a company, I can’t call them ‘’chor’’ or anything. Sarda Plywood Industries Ltd. is what I bought. It’s one of the oldest and biggest names in plywood. DURO is the name of its brand.
I bought it at a Rs 40-45 crore market cap recently. This can be a Rs 1,000-2,000-crore company if properly managed. If I manage this company, I will make it into a Rs 2,000-3,000 crore company in the next five years time. So that is the potential of the business, that is the potential of the operating environment in this business. So it’s amazing, there are hundreds of stories. Because these are small companies, I don’t want to give any names. Even Sarda Plywood has already moved up, I am not asking anyone to go and buy it.
Let me add a standard disclaimer here. If you are an investor please invest after thorough research. Do not buy or sell a stock, simply because an expert, even if he is Porinju Veliyath, is saying so.
Another disclaimer. With smaller companies you can’t get all your calls right. Only by a miracle that can happen. Even the smartest person will go wrong atleast 20 percent of the times. Even if he picks ten stocks, two of those companies will not exist after five years. You should always provide for that. But that does not mean it’s a risky game. It’s a risky game only if you put all your money in one or two companies. So when you go into smaller companies, with a potential to turnaround by various aspects, make a basket of eight to ten stocks and even if 2-3 of them perform, go multi-bagger five or ten times, you make big money. That is a pocket of opportunity in the next 2-3 years.
Now I have a few viewer questions. Karan Thaker has asked is this is a good time to enter pharmaceutical stocks?
To “enter pharmaceutical stocks” is again a myth. Unless an investor has got $5-$10 billion invested, I don’t think he should look at a sector in this country. In India, every sector has got relevance. There can be challenges at some point of time. Look at the pharmaceutical sector. Last year it was down. But I picked two pharma stocks (in the portfolio management scheme he manages) Biocon Ltd. and Jubilant Life Sciences Ltd. Both the stocks doubled. So which pharmaceutical companies he’s talking about is important.
We have a question from Rishabh Vinayaka. He’s asking for your views on Jubilant Life Sciences?
We sold off. We booked profit. It doubled in 4-5 months after we bought it last year. I think the price is near all-time highs now so I don’t find it exciting. I look at stocks only when there is excitement. If somebody says a stock will go up by 20-30 percent I’d rather keep my money in a fixed deposit.
A viewer named Kunal Shaw has asked 2-3 questions. The question that struck me was, “besides small and mid-caps, can a theme-based approach be taken for investment? For example - infrastructure”.
Now I know you’re saying there is no such thing as sector-based investing, but is infrastructure an exception?
Themes can work - I’m still very bullish on infrastructure. If you remember we had a long chat a while ago about infrastructure. I talked about Simplex Infrastructures Ltd. and I spoke about a company called Pratibha Industries Ltd. The Pratibha stock went down very badly which I had also mentioned in public domain that it was a mistake. I had expected a turnaround but there were events that led to the breakdown of the company. So this can happen.
Take J Kumar Infraproject Ltd., it has doubled in the last few months time. These kinds of companies will see huge orders from the government. Because the government is talking about lakhs of crores of investment and capital expenditure in each and every aspect of infrastructure, whether it’s roads or railway. So I think there will be a lack of bidders to execute these projects. And that is where you will have higher margins. I’m extremely bullish on infrastructure as a sector for the next 2-3 years. But stock picking is more important. Identifying a sector will not help you.
I remember a conversation we had at your farm. You had spoken about a number of themes then. A lot of companies in those themes have done well, such as sugar, infrastructure. There were a couple of others as well. What as a theme looks the most promising? What is the one top theme according to you?
I would say ‘India’ is the theme. Within which, ‘turnaround’ companies is the real, real useful theme. Forget the theories and bookish kinds of things. This is where investors can mint money in the coming years. Identify companies, whether they are small, midcap or large cap. Hundreds of them are really turning around and this opportunity will not be there after the next 1-2 years.