Basant Maheshwari’s Two Favourite Sectors And The Four He Stays Away From

For veteran investor Basant Maheshwari, there is no good or bad time to invest, but more of matter of “keeping wickets intact and playing safe.” As long as the stock has the potential to gain, Maheshwari said, valuations and volatility do not really matter that much.

In an interview to BloombergQuint, Maheshwari talked about the stocks he considers investment-worthy, and the ones that are not. While Maheshwari did not name any specific stocks, he said he is “super bullish” on non-banking financial companies (NBFC) and housing finance companies.

‘Highly Recommended’

• Non-Banking Finance Companies
• Housing Finance Companies

‘Avoid’

• Information Technology
• Insurance
• Pharmaceuticals
• State-Owned Banks

The information technology stocks are in a limbo while drugmakers aren't faring any better, he said. "Banks need to recover the money they have lent first."

Maheshwari had made his disdain for insurance stocks clear in an earlier tweet.

He reiterated that view.

Here are edited excerpts from the interview:

We have to understand that 2019 is the election year and 2018 is a pre-election year. So if you are a farmer then you should celebrate the next 18 months, but if you are not a farmer, you are invested, you are a middle-class guy, then you have to deal with the ball. It will swing around a lot, so you just keep your wickets intact and play safely.

And second is GST. I think GST is an old thing. We have been talking about GST for almost a decade now. I don’t think anything new is going to come for the stock market as such, and whatever comes, will be only populist in some way. Because a major section of the market isn’t able to stand on its feet.

Let me give an example. IT is in a limbo, pharma there is a problem, if PSU banks recover the old money first, then they can lend to new ones. So, three sectors out of your entire investing horizon are a problem. So, you are left with private financials, a few auto companies, auto ancillaries, and a few textile companies. So, the choice is limited, and I assume it will stay limited. But if you are the stock picker, you need 3-10 companies to put your money in. You don’t need 50 companies, they are for the index funds. You just zero in on 5-10 companies and then say that’s the way it should be. This is what we are doing and done.

So, if there are 50 companies growing at 30 percent, investors are splitting their money across the 50 companies. If there are 10 companies growing at 30 percent, then investors’ money chases those 10 companies. Throughout the 300-year history of stock markets, liquidity has chased growth.

For example, take the case of Prataap Snacks which got newly listed (it’s not a recommendation). It is 40 times FY20, less than 5 percent net margins. So, 40 times FY20, you can say it is expensive, but I thought it will be expensive at 900. But it went up 20 percent.

It’s not always about valuations but it’s about how many companies are able to grow at that rate. So, if the number of companies which can grow at that rate reduces then the money that chases those companies also create a bigger impact. Obviously, I would like to buy them cheaper but if you don’t buy them cheaper then what you will do? If the growth is predictable, sustainable and sure, then you assume that I won’t make money for one year or 9 months but the incremental earnings growth is going to reduce the valuations. But you have to be sure of what you are buying. If you are sure of what you are buying, then you can make money for 8-9 months or in one year in the worst scenario. But if growth is predictable, then the stocks automatically get cheaper with each passing quarter. That’s how we are playing the game.

For example, insurance is basically a bet. It’s a bet on whether you are going to die or not. I can give 10 percent lower than the competitor but the risk of that will never come to you next month because nobody dies the following month when you have taken an insurance. Over the 5-10 years, you have to create a pool of reserves for yourself. You have to create a pool where you get a sense of how the market is evolving, how life expectancy turns out and the data for that is only with LIC and that will be the blockbuster. I don’t think LIC will grow at that rate. If you have a 50-year view by a bank, by an insurance company then split the money to 50-50 and buy the best risk managers. You could be running an insurance company for 50-70 years and one wrong premium pricing could put you back almost to square one. It is fashionable to talk about how India is an underpenetrated market, insurance could grow because savings could grow, per capita income will be $3000 and all that. But you need to invest a lot in your reserves, you have to plough back and then you will get profits. For Birla Insurance, they were not able to show a profit for 5-10 years. We are not in a position to predict what is going to happen.

As an insurance company, I will say if you have a 20-year view then go and buy them where you will make 15-20 percent CAGR for next 20 years. But it’s easier to talk about 20 years. For the stock market, 20 years is 200 years. I don’t think that’s the way to be.

Also, on an overall scale, the idea of leaving the earth’s orbit was...when I wrote that... because most rockets you launch, don’t leave the earth’s orbit, they come back before they leave the atmosphere. In that context, we have to give lot of time and then can we invest. These private insurances are 15-20 years old and you don’t have the history for that.