Classic compounders, tactical trade or concept stocks? Safir Anand’s top 3 buckets

Safir Anand, Strategist & Investor, says “in non banking PSU stocks, I feel that there is a good wind in place. They could be engineering companies, infra companies, there could be pockets like private sector infra companies and more mature names like L&T. There are pockets where the market behaves very strangely. ”

What about a list of 13 stocks that you would bet on?
I will tell you that but my point is whenever you have been kind enough to invite me on your show and whatever stocks we are speaking about they end up doing well, so the question is do you penalise something that is doing well? I do not mean well in terms of stock performance, I mean well in terms of earnings. Many of the stocks have been re-rated four to five times and therefore there is technically more reason for you to sort of get out because still after getting re-rated they are within the realm of reasonable valuation commensurate with their growth.


But the sector that appears to be very well positioned continues to be banks and the PSU sector. I think that positions in the banking sector and the PSU sector seem to be rewarding very well. I just gave you an example of the kind of profits that are expected out of BPCL as an example. The spending on infrastructure is so large and we are not hearing the stories of problems in terms of payment or defaults. In fact, more work is moving towards the organised sector because the scalability of the projects is going up and they are able to execute in a much better way. So, within the same pockets, whatever you want to own or whatever basket you want to own is working the best for you.


Let us make a list of two or three buckets; stocks, which you think can be classic compounders from here. It is like the old Hero Honda ad; fill it, shut it, forget it. So buy it, keep it and forget about it. Second bucket: stocks where it is time now to perhaps have a tactical trade, which is that either they are on the cusp of a market share gain or perhaps, the sector could do well like OMCs, they are at the cusp of a profit curve now. Third bucket is stocks that are pure concept stocks.
Banking would be in bucket one. And in banking, historically I have been for the last few years been in favour of the PSU banks but I now believe that it is also a time to look at some of the private sector banks.

In the private sector banks, I have owned and spoken about banks like ICICI and many of the stocks have done exceptionally well. Now I also feel that some of the more obvious names such as the HDFC Bank may have a greater attraction from here on considering the impact of many of the 13 factors that I spoke about. I also believe that defence is a long-term play. While defence may see corrections because somebody or other may come and book profits, there will also be an equal number of buyers.

A lot of people talk about the price to earnings ratio in the defence companies as having run up too much. I believe that the sector is going from a complete substitution of import into a Make in India sort of feeling. And the third would be pockets of manufacturing because the private capex cycle has just started. I feel that the cycle does not start and end in a matter of six months and therefore there could be large benefits there.

The second pocket that you are talking about like you referred to OMCs right now. I am buying selectively or I have bought selectively PSU stocks and I am not talking about banking, but non banking PSU stocks because I do feel that there is a sort of a good wind in place. They could be engineering companies, infra companies, there could be pockets like private sector infra companies and more mature names like L&T. There are pockets where the market behaves very strangely.

For example, Eicher got drubbed because of the fact that there was a Harley Davidson launch but actually I believe that Siddarth Lal is not a guy who sits quietly. He avoided media during that time but you obviously can anticipate that something must be in his mind. The market is now looking at Himalayan but I am also very interested in what he does on the Volvo side, which for now should be a business that should pickup particularly with the kind of changes that have happened on the road front.

There will similarly be problems even in a company like Hero MotoCorp. if you saw that there was an ED action and there was a huge reaction on the stock but then you come back into basics so how many motorcycles are being sold and what is the business potential? And you look at those kind of stocks. Some of these stocks have moved up 20% odd for the month, so you know there will be opportunities there. There are good companies going through bad cycles and you can look at some of the opportunities.

The third pocket to me right now are the smallcaps where there seems to be certain pockets of exuberance. Smallcap companies which people talk about on social media in terms of the kind of returns that they have given and nobody talks about their business. Nobody actually knows their business. When you go to the real market, which is not the stock market, but in the real market, you really do not know anything about these companies. Many of them resort to QIPs and other fancy forms because that is the history of the market that the promoter knows when to sell, so those are the pockets that I typically avoid.

I am also avoiding the consumer sector until I find that the inflation in rural India is more under control. Also if rural India shows greater traction towards growth, which is very evident in the housing and infra sectors but not so evident on the consumer side. Those are the pockets where you asked me three and I have given four. So I have tried to justify one more for you.


What about power? This was a sector, which was considered to be ugly duckling; low return on equity, always dependent on government policies. There was no clear coherent arrangement for most of the private sector companies but today power stocks are going higher as if there is no tomorrow. Do you think there is a froth in power as a theme and as a category?
You have been in the market and you have been a veteran for so many years and you analyse the market in so many ways. First of all, I have participated in it, so there are profits. But do I believe that exuberance is like the mining story that happened in California? You do not own the mines but you own the company that enables the extraction.

So technically, if you look at the power sector, it causes an indirect benefit on cables and wires and segments of that sort, even the pump sector because the pumps are also required. The ability to extract goes up. Pumps are used in mining. They are used in construction, in housing etcetera. So, you can look at some of the indirect beneficiaries of that. Then there could be pockets, for example, some of the public sector companies that are coming in the PSU bracket have done exceptionally well but there have also been pockets such as Adani Power, which is one of my top holdings.

Adani Power had come down to maybe about 175. And then I was hearing all the statements coming from one of its largest investors, which is the GQC Group. You could basically look at that and you come and say that if the reforms happen and you are also trying to see what is the diversity in the power coming, for example, are the only dependent upon power or they do solar and they do wind and they do other things. The last time we talked, I spoke about Suzlon. Now, many people drub it as a bad company for historic reasons. But they do not see the management, there is a change in government policy and the valuations then become attractive and the QIP gets mopped up immediately. I participated at the same time. Now those are the kind of reforms, but like they would probably go in bucket three, which is that you are playing the trend for now.

If the trend continues, bucket three could move into bucket two. But if the trend does not continue, for example, the valuation goes way above your head then you will say that I do not mind taking profits because historically they have not been wealth creators. But I am also not as rigid as I used to be, for example, I may dislike the company, then there may be changes in the company and we like the company and I keep telling myself that that is how you evolve.