It's time to look at companies that build houses
Noted manager picks stocks offering 'opportunity of decade' It's time to look at companies that build houses, says Porinju Veliyath, Founder and CEO of Kochi-based Equity Intelligence, a portfolio management scheme that oversees a corpus of Rs 220 crore.
Even as most equity investors are busy weighing the relative attractiveness of consumer versus cyclical stocks, one fund manager has come out with a contrarian call on real estate companies, one that have largely been ignored by the market since their debt-induced bust in 2008.
"I think it's time to look at companies that build houses," said Porinju Veliyath, Founder and CEO of Kochi-based Equity Intelligence, a portfolio management scheme that oversees a corpus of Rs 220 crore.
In an interview with CNBC-TV18's Latha Venkatesh and Reema Tendulkar, Veliyath, who has had a number of multi bagger investments to his credit, outlined Jim Rogers' principle of "cheap and changing" as the philosophy underpinning his investment approach.
"Real estate companies are cheap. They have paid the price for overleveraging. [But now] a lot of managements are being forced to making changes, cleaning up their balance sheets, bring on more professionalism," he said.
He made it clear he was bearish on property prices, and which was a crucial part of his hypothesis. "At some point, you will see prices coming off and becoming affordable. That will be the inflexion point," he stated.
He picked out Anant Raj as a stock that he owned and was bullish on.
Equity Intelligence -- whose PMS scheme returned 71.69 percent in fiscal year 2015 compared to 26.66 percent gain for the Nifty, and has netted 32.9 percent CAGR over 12 years -- also owns Bombay Dyeing and Future Consumer Enterprises , he said.
"Bombay Dyeing is on the cusp of a turnaround. It is a strong brand that is easy to revive. Its decision to sell its manufacturing plant and outsource products [will be a gamechanger]," he said. "Future Consumer has a healthy balance sheet [unlike other Future companies]. It's not a foolproof idea yet but worth tracking."
Below is the transcript of the interview on CNBC-TV18.
Reema: You generally pick all these smallcap, midcap companies. Not much is known about them. Take us through your investment philosophy.
A: My investment philosophy is basically: keep it as simple as possible. I have always noticed most investors who are on the Forbes list have a very simple approach to the markets.
At the same time, the style of investing is different from person to person. Over a period of time, everyone evolves and develops their own style of stock picking. So, I naturally gravitated to the smaller -- midcap or smallcap -- companies in search of values.
Not because I want to buy smallcap or midcap. But in emerging economies like India, midcaps and smallcaps are going to the next level. That is where you can really make big money. The other thing is foreign institutional investors (FII) like to make mediocre money [in largecaps].
Latha: The other wealth creators whom we spoke to also referred to catching them young and watching them grow. But, they have rules of the game. There are some who look at sunrise businesses. Some look at sectors. For instance, Basant Maheshwari [of The Equity Desk] recently talked to us about housing finance. He is attached to Repco and he thinks that housing finance is only going to grow in India. So do you look at that sector or do you look at that company? A lot of people bet on the quality of the manager or a corporate governance change and so they are attached to midcaps. What is your one, two, three things that you look at in a midcap which you think has the potential for a multi-bagger?
A: I appreciate the way Basant has picked multi-baggers but housing finance companies have been fancied since last one year and are all well-priced today. Today, I am looking at not the companies which finance housing, I think it is time to look at the companies that build houses.
Latha: But they are all in a very bad state.
A: Yes, that is why I like them. When companies are in bad shape, you get it at those [cheap] prices. Whether these companies can turn around...
Latha: So, you like a buy in distress?
A: I do not like a company just because it is in distress. I do not like to buy, say, JP . If the market perceives a company to have a problem: whether it has a distressed balance sheet or management issues, [the key thing to look for is whether] this company can change.
The biggest opportunity today for individual investors is the changing profiles of companies. It could be in relation to management quality, promoter ethics, improving balance sheets, companies learning from past mistakes of over leveraging. They have paid a price, they are regretting, they are ready to change. So, why do we not look at those companies?
So, [in many of] these companies, next generation of promoters are taking over after coming from Harvard and Boston. There could be a change in the professionalism in the company and they could become better managed and have better balance sheets.
And India has a lot of them. I find this is the best opportunity, I like to call it an opportunity of the decade at this point of time. It may not always be there. It is an inflection point, a lot of companies are changing.
And even coming to bad managements, some of them are being forced to change because of new developments, new guidance from government on black money and the kind of corporate governance, compliance or disclosure requirements by SEBI. All these kinds of things are changing investors should look at these changes very seriously. That will make big money for stock investors.
Latha: Those are some hints, but let me stick to the sector you spoke about. I will not look at housing finance companies, I will look at those who build houses. And then you went on to many of them have balance sheet problems and that fits the sector. How will you pick the winner in this? I would have liked to ask who will you pick, if you will answer.
A: I do not want to make this sound as a recommendation for individual stocks. But companies like Anant Raj and some Ansal Group companies. In Mumbai, there is DB Realty and some stressed companies like Unitech . At this point of time, at these valuations, there is a huge gap between what these companies own and what these companies' liabilities are. This gap is not a small gap.
For example, a company like Anant Raj, it is priced at around Rs 1,000 crore of marketcap. Maybe it has some Rs 1,000 crore of debt. It's enterprise value is at Rs 2,000 crore. [But] what they own in today’s not-so-good market conditions could be anything above Rs 10,000 crore. It could even be Rs 15,000 crore or Rs 20,000 crore - and they are not the bad kind of management. So the potential of creating wealth is there.
At the same time, I am not saying this industry will turn around very soon. There is no visibility. It may take years because of so much extra debt. Affordability is the biggest problem. A lot of flats and properties are available [for sale] but people cannot afford it.
So, the price has to adjust. I am bearish on real estate prices. Property prices should go down 10, 20, 30 percent. It may take two to three years. But, at some point, you will see activity, some reasonable pricing, affordability and these companies are going to do well.
Reema: Give us a few other ideas where financials are weak or the companies are in distress, but the valuations are fairly cheap and there are signs of a turnaround. Where the prospects are looking attractive to you?
A: I was looking at Bombay Dyeing , It is totally ignored in the market for last many years. It is a very old company. Bombay Dyeing is stopping...
Latha: ...stopping dyeing altogether.
A: So, it has great wealth in Mumbai. They have hugely-priced real estate. They are developing a lot of it and cash flow is coming. I noticed this company because in one of their Bombay Stock Exchange (BSE) announcements, they sold a manufacturing unit for some Rs 230 crore and they are reducing debt.
I think this is the beginning of a turnaround for the company. If they do it further, they will have much more assets to be sold and the brand Bombay Dyeing is very big. Everybody in the country is aware of it. It is very easy to revive it.
If they focus on the brand and retailing, sell the manufacturing and outsource the products, along with the cash flow coming from real estate, it could have much higher than today’s enterprise value.
Please do not rush to buy this stock because I said it on TV. It is already up by some 20 percent recently. It can give correct and events in Greece are an opportunity if you want to buy your favourite stocks.
With Bombay Dyeing, people say Britannia is a great management but Bombay Dyeing is not when both are the same people. If the stock price goes up, [people say] it is good management, if it goes down, it is bad management. This is the investor perception in India. Such wrong perceptions and market imperfections are opportunities.
Latha: You wanted to talk about Future Consumer Enterprise.
A: Yes, Future Consumer Enterprise (FCEL). It is not a well-known company. We were talking about fast-moving consumer goods (FMCG) growth. We were talking about Rs 1 lakh crore kind of turnover and 4,000 outlets [that Future Group is targetting].
Now, this company is the only one which I comfortable with in the group. There is some clarity on the balance sheet and the business model looks futuristic and maybe it is too early to write off Biyani. So, this is the company which can really create wealth in the future.
At the same time, it is not a foolproof value investment idea, you have to monitor the company’s developments. But you have to take these kinds of bets to find multi-baggers. When you buy a stock, you cannot be sure that this is going to be a 10-bagger or a 5-bagger. It happens over a period of time, it evolves after investing.
Latha: We have to ask you about your disclosures for all three stocks you mentioned.
A: I hold all three stocks. Please do not take this as an individual stock recommendation. There are hundreds of such stocks where you will find some negative, which will make them an opportunity as they will sell at throwaway prices.
Now Greece is an opportunity. I felt good when the news broke out. Greece is going to impact a genuine value investor in India unless he has lent money to Greece or has bank deposits in Greece.
People try to complicate life in investing. They will say: this will spill over to Portugal and Spain. All these complications will not have much impact on Indian equities. This is nothing but an opportunity. Remember, when we had this quantitative easing (QE) withdrawal, the market was panicky before that...
Latha: In June, 2013.
A: I remember even you used to make people panic about it.
Latha: [Laughs] That's not true at all.
A: Ultimately when it happened, it was a non-event. Nobody talked about it. So, these kind of negative developments are good for markets. And in India, lots of domestic investors are still shying away from the market.
These events will help them get attractive valuations in the market. We are definitely in a secular uptrend in the stock market. I am very bullish on the market.
Not on the Sensex or Nifty, as it is. There are hundreds of opportunities to pick multi-baggers in India. Investors should focus on that rather than discussing all those things.
Happy Investing
Noted manager picks stocks offering 'opportunity of decade' It's time to look at companies that build houses, says Porinju Veliyath, Founder and CEO of Kochi-based Equity Intelligence, a portfolio management scheme that oversees a corpus of Rs 220 crore.
Even as most equity investors are busy weighing the relative attractiveness of consumer versus cyclical stocks, one fund manager has come out with a contrarian call on real estate companies, one that have largely been ignored by the market since their debt-induced bust in 2008.
"I think it's time to look at companies that build houses," said Porinju Veliyath, Founder and CEO of Kochi-based Equity Intelligence, a portfolio management scheme that oversees a corpus of Rs 220 crore.
In an interview with CNBC-TV18's Latha Venkatesh and Reema Tendulkar, Veliyath, who has had a number of multi bagger investments to his credit, outlined Jim Rogers' principle of "cheap and changing" as the philosophy underpinning his investment approach.
"Real estate companies are cheap. They have paid the price for overleveraging. [But now] a lot of managements are being forced to making changes, cleaning up their balance sheets, bring on more professionalism," he said.
He made it clear he was bearish on property prices, and which was a crucial part of his hypothesis. "At some point, you will see prices coming off and becoming affordable. That will be the inflexion point," he stated.
He picked out Anant Raj as a stock that he owned and was bullish on.
Equity Intelligence -- whose PMS scheme returned 71.69 percent in fiscal year 2015 compared to 26.66 percent gain for the Nifty, and has netted 32.9 percent CAGR over 12 years -- also owns Bombay Dyeing and Future Consumer Enterprises , he said.
"Bombay Dyeing is on the cusp of a turnaround. It is a strong brand that is easy to revive. Its decision to sell its manufacturing plant and outsource products [will be a gamechanger]," he said. "Future Consumer has a healthy balance sheet [unlike other Future companies]. It's not a foolproof idea yet but worth tracking."
Below is the transcript of the interview on CNBC-TV18.
Reema: You generally pick all these smallcap, midcap companies. Not much is known about them. Take us through your investment philosophy.
A: My investment philosophy is basically: keep it as simple as possible. I have always noticed most investors who are on the Forbes list have a very simple approach to the markets.
At the same time, the style of investing is different from person to person. Over a period of time, everyone evolves and develops their own style of stock picking. So, I naturally gravitated to the smaller -- midcap or smallcap -- companies in search of values.
Not because I want to buy smallcap or midcap. But in emerging economies like India, midcaps and smallcaps are going to the next level. That is where you can really make big money. The other thing is foreign institutional investors (FII) like to make mediocre money [in largecaps].
Latha: The other wealth creators whom we spoke to also referred to catching them young and watching them grow. But, they have rules of the game. There are some who look at sunrise businesses. Some look at sectors. For instance, Basant Maheshwari [of The Equity Desk] recently talked to us about housing finance. He is attached to Repco and he thinks that housing finance is only going to grow in India. So do you look at that sector or do you look at that company? A lot of people bet on the quality of the manager or a corporate governance change and so they are attached to midcaps. What is your one, two, three things that you look at in a midcap which you think has the potential for a multi-bagger?
A: I appreciate the way Basant has picked multi-baggers but housing finance companies have been fancied since last one year and are all well-priced today. Today, I am looking at not the companies which finance housing, I think it is time to look at the companies that build houses.
Latha: But they are all in a very bad state.
A: Yes, that is why I like them. When companies are in bad shape, you get it at those [cheap] prices. Whether these companies can turn around...
Latha: So, you like a buy in distress?
A: I do not like a company just because it is in distress. I do not like to buy, say, JP . If the market perceives a company to have a problem: whether it has a distressed balance sheet or management issues, [the key thing to look for is whether] this company can change.
The biggest opportunity today for individual investors is the changing profiles of companies. It could be in relation to management quality, promoter ethics, improving balance sheets, companies learning from past mistakes of over leveraging. They have paid a price, they are regretting, they are ready to change. So, why do we not look at those companies?
So, [in many of] these companies, next generation of promoters are taking over after coming from Harvard and Boston. There could be a change in the professionalism in the company and they could become better managed and have better balance sheets.
And India has a lot of them. I find this is the best opportunity, I like to call it an opportunity of the decade at this point of time. It may not always be there. It is an inflection point, a lot of companies are changing.
And even coming to bad managements, some of them are being forced to change because of new developments, new guidance from government on black money and the kind of corporate governance, compliance or disclosure requirements by SEBI. All these kinds of things are changing investors should look at these changes very seriously. That will make big money for stock investors.
Latha: Those are some hints, but let me stick to the sector you spoke about. I will not look at housing finance companies, I will look at those who build houses. And then you went on to many of them have balance sheet problems and that fits the sector. How will you pick the winner in this? I would have liked to ask who will you pick, if you will answer.
A: I do not want to make this sound as a recommendation for individual stocks. But companies like Anant Raj and some Ansal Group companies. In Mumbai, there is DB Realty and some stressed companies like Unitech . At this point of time, at these valuations, there is a huge gap between what these companies own and what these companies' liabilities are. This gap is not a small gap.
For example, a company like Anant Raj, it is priced at around Rs 1,000 crore of marketcap. Maybe it has some Rs 1,000 crore of debt. It's enterprise value is at Rs 2,000 crore. [But] what they own in today’s not-so-good market conditions could be anything above Rs 10,000 crore. It could even be Rs 15,000 crore or Rs 20,000 crore - and they are not the bad kind of management. So the potential of creating wealth is there.
At the same time, I am not saying this industry will turn around very soon. There is no visibility. It may take years because of so much extra debt. Affordability is the biggest problem. A lot of flats and properties are available [for sale] but people cannot afford it.
So, the price has to adjust. I am bearish on real estate prices. Property prices should go down 10, 20, 30 percent. It may take two to three years. But, at some point, you will see activity, some reasonable pricing, affordability and these companies are going to do well.
Reema: Give us a few other ideas where financials are weak or the companies are in distress, but the valuations are fairly cheap and there are signs of a turnaround. Where the prospects are looking attractive to you?
A: I was looking at Bombay Dyeing , It is totally ignored in the market for last many years. It is a very old company. Bombay Dyeing is stopping...
Latha: ...stopping dyeing altogether.
A: So, it has great wealth in Mumbai. They have hugely-priced real estate. They are developing a lot of it and cash flow is coming. I noticed this company because in one of their Bombay Stock Exchange (BSE) announcements, they sold a manufacturing unit for some Rs 230 crore and they are reducing debt.
I think this is the beginning of a turnaround for the company. If they do it further, they will have much more assets to be sold and the brand Bombay Dyeing is very big. Everybody in the country is aware of it. It is very easy to revive it.
If they focus on the brand and retailing, sell the manufacturing and outsource the products, along with the cash flow coming from real estate, it could have much higher than today’s enterprise value.
Please do not rush to buy this stock because I said it on TV. It is already up by some 20 percent recently. It can give correct and events in Greece are an opportunity if you want to buy your favourite stocks.
With Bombay Dyeing, people say Britannia is a great management but Bombay Dyeing is not when both are the same people. If the stock price goes up, [people say] it is good management, if it goes down, it is bad management. This is the investor perception in India. Such wrong perceptions and market imperfections are opportunities.
Latha: You wanted to talk about Future Consumer Enterprise.
A: Yes, Future Consumer Enterprise (FCEL). It is not a well-known company. We were talking about fast-moving consumer goods (FMCG) growth. We were talking about Rs 1 lakh crore kind of turnover and 4,000 outlets [that Future Group is targetting].
Now, this company is the only one which I comfortable with in the group. There is some clarity on the balance sheet and the business model looks futuristic and maybe it is too early to write off Biyani. So, this is the company which can really create wealth in the future.
At the same time, it is not a foolproof value investment idea, you have to monitor the company’s developments. But you have to take these kinds of bets to find multi-baggers. When you buy a stock, you cannot be sure that this is going to be a 10-bagger or a 5-bagger. It happens over a period of time, it evolves after investing.
Latha: We have to ask you about your disclosures for all three stocks you mentioned.
A: I hold all three stocks. Please do not take this as an individual stock recommendation. There are hundreds of such stocks where you will find some negative, which will make them an opportunity as they will sell at throwaway prices.
Now Greece is an opportunity. I felt good when the news broke out. Greece is going to impact a genuine value investor in India unless he has lent money to Greece or has bank deposits in Greece.
People try to complicate life in investing. They will say: this will spill over to Portugal and Spain. All these complications will not have much impact on Indian equities. This is nothing but an opportunity. Remember, when we had this quantitative easing (QE) withdrawal, the market was panicky before that...
Latha: In June, 2013.
A: I remember even you used to make people panic about it.
Latha: [Laughs] That's not true at all.
A: Ultimately when it happened, it was a non-event. Nobody talked about it. So, these kind of negative developments are good for markets. And in India, lots of domestic investors are still shying away from the market.
These events will help them get attractive valuations in the market. We are definitely in a secular uptrend in the stock market. I am very bullish on the market.
Not on the Sensex or Nifty, as it is. There are hundreds of opportunities to pick multi-baggers in India. Investors should focus on that rather than discussing all those things.
Happy Investing
Source:Moneycontrol.com
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