Warren Buffett: Follow Buffett, go against it to make money in the long run: Siddhartha Bhaiya

“Nobody was talking about defensive stocks like Cochin or Mazagon a year ago. Who led the rally in the last year? It was , , Mahindra & Mahindra and . Now nobody is talking about those stocks” , said Siddharta Bhaiyadoctor, Aequitas Investment advice



India Diwali was extended for Wall Street on Thursday or Christmas came early.
Yes, there was a huge short cover rally on Thursday and the Nasdaq rose 7%. On Friday, Hong Kong was up 5%. Both of these markets were extremely oversold. We’ve seen a bit of short-term hedging rally in New York and Hong Kong, but I don’t think those markets are out of the woods yet. But it’s a totally different story for India. Our numbers look really solid. The Bank Nifty hit a new high and the Nifty hit a 52-week high. So at the national level, things look very good.

The last time we spoke to you, I remember we had a conversation about why you have a differentiated strategy of not buying into banks?
Yes.

The conversation took place before earnings season. After the earnings season, it is becoming increasingly clear that banks are not only in an ideal situation, they are also reaping the benefits of consumer credit, corporate credit and a renewed investment cycle. Is there a change of heart? Do you think it’s never too late to enter the banks?
Errors of omission don’t hurt as much as errors of commission. While the Bank Nifty is probably up 10% on the year, our portfolios are up 17-18%. Although financials have performed well, in the short term we would not want to hold financials in a rising interest rate environment. Yes, in the short term they have shown very good margins, but we have to remember that growth in advances far exceeds growth in deposits.

At some point, banks will have to raise their deposit rates. The creditor deposit ratio in the system is already 75% and from now on banks will have to be progressively very aggressive in pricing their deposits. Silver is only getting tighter from these levels. Economic growth is very strong right now. Two years ago, we had excess cash of Rs 13 lakh crore. Today we are in deficit. The economy is very strong and interest rates need to come back up from these levels.

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The last time we spoke, you were talking about the fact that we are on the cusp of a major investment cycle. I guess this is already playing out when it comes to manufacturing. but you’re just wondering if, in the area of ​​defense, you would also like to add railways to the bag?
Most industries haven’t invested in over a decade and we’re only a year and a half into the investment cycle. It’s going to be a very, very long investment cycle. Most capital goods companies are actually net cash positive at this point. Many infrastructure companies are expected to have debt on their balance sheet, valuations are very attractive. Russell Napier released the report that the world was about to experience a decade-long capital spending boom.

We are very bullish on infrastructure and I think as a sector it should go very well. Again, completely ignore the fact that the industry hasn’t done anything for over a decade. We are very bullish on the media sector at the moment. He’s going to be a big big beneficiary of the growth of the economy, ads are going to explode in my opinion so I think media as an industry as well is still something that hasn’t done well for a long time.

Since you’re betting so big on capital expenditure, that’s obviously going to happen as the banks get more business. I’m still a little confused as to how underexposed you are to banks?
To be honest with you, we have no exposure and yet we were able to outperform all indices. We are more bottom up and not much top down. We are here to make money for customers. So it’s fine if the banks have done well, but we own stocks that have done better than the banks.

So you’re not betting on borrowers, not lenders.
We track where bank credit goes very closely, and for much of the last decade, bank credit went globally to consumers because interest rates were so low. What we’re seeing is bank credit going back to manufacturing, it’s going back to infrastructure, it’s going to go to government because government interest rates are going up. So the government will also crowd out the consumer over the next five to seven years.

It was a good year for consumers, whether in apparel, footwear, hospitality or travel. Even automobiles have made a comeback. As we look to the future, the base effect has kicked in and the inflationary pressures are there. Is it time to get out of consumers? Can we get an output roughly at the top of the cycle now?
For the majority of households, the biggest expense in their monthly budget is IMEs. This has increased and while right now we are seeing an extension of the mandate, at some point the banks will have to increase their monthly EMIs and that is when it will start to pinch.

So globally and even in India, from a banking industry perspective, we’re operating at full capacity and so the NIMs that we see – 75% credit deposit rate – historically, at that time, interest rates are starting to rise and we have no other choice. Banks must raise deposit rates if they are to grow credit. All excess liquidity in the system is gone. As far as consumers are concerned, as EMI increases, the surplus left in their pockets will decrease. More importantly, look at the ratings.

I look at some of the new listed companies that they quote at multiples of 100 PE. One cannot make money by buying stocks at a multiple of 100 PE. We’ve seen this with so many new era IPOs. We are value investors, we do not believe in or subscribe to buying stocks at insane multiples.

Like I said, errors of omission don’t matter, errors of commission do. If you have a Delhivery or a

or one in your wallet and you lose 60-70%, you’ll never get back. So I would stay away from consumer stocks as well.

One of the stocks you are very bullish on is . Why?
Deepak Fertilizers is the only technical ammonium nitrate manufacturer in the country. It is very difficult to import technical ammonium nitrate. They are one of two nitric acid manufacturers in the country and again it is very difficult to import. There is a shortage of nitric acid in the country. Since TAN is used for mining as an explosive, there is a massive increase in the demand for TAN. They have made a massive investment where they are setting up an ammonia plant which will come on line in the next six months. The kind of savings they’re going to make is phenomenal.

The balance sheets of many of these companies have improved dramatically at this rate, over the next year it will be a debt-free business. So, valuations are attractive at a multiple of 7-8 PE, revenues in excess of over $1 billion, a balance sheet that has become very healthy and only improving and it is market leader in TAN, in ammonium nitrate and isopropyl alcohol, not only leading the market, it is the majority of the market. The rest is imported.

Deepak Fertilizers will therefore be a great beneficiary. The rupee has depreciated considerably. For many manufacturing exporters, a 10% drop in the rupee pushes the margin up by 10% because their achievements increase. A big caveat, we have been shareholders here for almost nine-ten years and it is clearly not a recommendation to come and buy at these levels.

You say that you also have to stay away from actions aimed at consumers. Do you also include real estate where we are finally witnessing a recovery after 10 years? In the automotive sector, there is pent-up demand. That doesn’t interest you either?
No, we are very bullish on automobiles. We are very bullish on real estate. I think real estate demand is going to be very strong over the next three, four, five years. Year-over-year real estate inventory in the top seven cities was down 13%. Property developers had a lot of unsold over the past seven to eight years.

This sector did not do well in terms of price. In a city like Mumbai, we haven’t seen prices rise significantly in the last seven to eight years. As the excess inventory in the system is absorbed, that’s when we’re going to see real estate prices go up and that’s when we’re going to see a lot of new launches.

Go back a decade and everyone is so passionate about real estate, ten years later the industry has done nothing and right now we are seeing the signs of a revival in real estate. I think real estate and autos will do well, very well. We are very optimistic on the automobile.

You have identified a large number of stocks that you have held for a long time. but you say it’s not the right time to buy. So what looks good at the current level?
There are certain pockets that look attractive. Infra has done very well over the last year, so you have to be very careful there. While that might work well over a ten-year period, we could also have six-month, eight-month periods. So the media seems very appealing to me. Automobiles look very appealing to me. Pharmacy is something where the value has started to emerge. The infrastructure still seems good.

So yes, there are pockets where valuations are very attractive. There are sectors that have not performed well for a very long time, but there is also a lot of foam in certain areas of the market. Earlier this year I tweeted that this was going to be a stock picker’s market and I think it was a stock picker’s market.

The two big names that were up in the BSE midcap index yesterday were

and . Defense actions, whether Cochin or Mazagon, nobody was talking about a year ago.

Who has led the rally over the past year? These are ITC, SBI, Mahindra & Mahindra and Coal India. Now nobody is talking about these stocks. A contrary long-term approach always works, buying the popular names doesn’t make you money in the long run, as Buffett said.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)