Kenneth Andrade on why he is avoiding banks & financials; betting on power, pharma stocks
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Synopsis
Kenneth Andrade anticipates significant growth in the power market, emphasizing massive investments in energy capex equivalent to India's GDP over the next 15 years. He discusses the impact on various sectors and the rationale behind his pharma holdings, focusing on profitability potential. Andrade says he is avoiding banks because he chooses to be on the asset side and not on the liability side.
Kenneth Andrade: It is a buoyant market, so there is not much to do. What you have is going up and what you sell is also going up. So, no complaints about that. One has to be very watchful of where the earning cycle and valuations are, converse to where we were coming out of 2020-21, The entire industrial pack is doing extremely well compared to where the consumer part of the economy is and I think that is interesting because some of the companies in the industrial capex side of the market is now trading at significant premiums to where any of the large consumer names are. So, watchful of that and how that transitions.
That is a great point that capital goods and capex dominated stocks are trading at multiples which are higher than that of consumers. So, time to sell capex and go back to consumers?
Kenneth Andrade: I would not say that way. I think it is an allocation trade because very simply the macros are completely in favour of what is happening in India as well as what is happening across the world. Now you step back to 2020 where governments globally seem to indicate that they would start the entire capex cycle when they all wanted to bring back capacities home and I think you have seen this continuation of the trend happening.
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You have pharma as your top holding. Why? If I look at the top 10 holdings in public domain, it is Aurobindo Pharma and there is Marksans Pharma. That is very unusual of you. You normally like to buy companies which are in a monopoly and are not deeply cyclical. There is Aurobindo Pharma and Marksans Pharma. These are cyclical businesses and they have gone through volatility of what has happened in the US generic market.
Kenneth Andrade: Simply put, maybe we have got four names out there and all of them lead their entire verticals or their categories whether it is in India or whether it is across the entire world. So, one of the names is the world's largest generic manufacturer of pharmaceuticals and it is going backwards and the capex cycle for them is almost over.
So, capex in place, category leader and over the course of the last five years, the industry actually has cleaned up its balance sheet, so they are net cash positive rather than having debt on their balance sheet. So, they are net cash positive. Their ability to generate a significant amount of profitability from the existing capex is in place. It is a cycle that I think started off in 2020 and this 2024 and probably 2025 will be years where this industry will hit its all-time high in terms of profitability and cash flow generation.
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Kenneth Andrade: I think it is across the board and not specific for pharma. The only gap that is missing in all of this is where valuations are and that is a tricky one because when you have a corporate India at historic low, debt to equity valuations will be at its all-time high and converse to that is when debt expands or when corporate India starts leveraging up its entire balance sheets, we will see valuations actually correct.
You do not have banks, you do not have financials, why is that?
Kenneth Andrade: Oh, that is a historic trade. We chose to be on the asset side and not on the liability side. The way we think about it is that if you have an economic expansion, not just the liability side of the bank, lenders will grow, we will also have the other side of the entire business which is what the banks lend to and I think that is where we prefer to stay because on the asset side you have got free cash flow generation which is very important to us, you have got no debt which is extremely important to us, so you have no modality risk as far as that is concerned.
So, this is the place I prefer to play and it is also where you are as far as valuations are concerned. We did one lending business transaction that was there. One transaction in lending, and it was when it was at its historic low in valuations plus it was generating free cash because the leverage cycle for this business was not going up. So those are spaces that we like to be and whether it is banks or financials or whether it is the other side of the balance sheet, which is asset businesses, it is paramount to us to keep hygiene in our investment thought process.
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