Raamdeo Agrawal on why he is making changes in portfolio

We often debate about growth versus value right now. It seems value seems to be winning?
For five-seven years, it has been one way. The growth stocks have been doing very well and in a lot of cases, overstretched in terms of valuation. On the other hand, the value stocks were beaten down so much that they got overstretched on under valuation. There has to be some rebalancing of valuation.

What is the desired value pocket and where is it time to exit now?
Yes excessively priced growth stocks may not do well for the investors because ultimately you can get out only as much as the company is worth. If you have overpaid for the company’s worth, you end up making suboptimal returns. If by chance you have underpaid, like for a Rs 10 share, you are paying only Rs 3 or Rs 4 or Rs 5, obviously it will catch up and give a superior return than what the market returns. So, it all depends on the individual stocks. The growth stocks are not bad and all the value stocks are not great. You have to figure out where exactly the opportunity lies.

The other thing the market is playing out is the inflationary repercussions and the kind of bearing that is going to have on growth as well as the margins of the companies going forward?
In the short run, data is all over the place in the sense that oil which was $19-$20 or $25 has crossed $70. So a lot of things are not in place. It is very tough to figure out if these are short-term or long-term trends but today morning, I was reading the paper and business confidence has shot through the roof and gone to 74 from 57-58.

So how are the businessmen so confident? When they are saying they are very confident means not only will the top line grow but they may be optimistic about the profitability of the business. At a company level, all these things will get adjusted in the sense that irrespective of the raw material spike, the demand is very strong and they can pass that on.

Then they can make more profits on higher sales. So, it is a very complex situation. But I can see that inflationary rise in the prices of steel and all kinds of commodities are going to play havoc with maybe even the March quarter results in some cases, which are going to be impacted by the commodity prices. Longer term, only time will tell but right now I am just watching this commodity inflation.

Cyclicals has been the area of focus in the recent weeks. How bullish are you on the opportunity going forward? Within that, financials, we have got a whole spate of privatisation news that has been causing a lot of buzz. Where would you focus in that basket?
BFSI, particularly banking, insurance asset management, NBFCs, housing finance are all very large segments of the market and the banking lenders suffered big time not only in terms of actual losses but also in terms of stock prices.

In the first half of 2020, they were the worst sufferers and from there the government has given a lot of reliefs. There is massive low cost liquidity. All kinds of things have happened in the sector and it looks like they have provided well and the economy is on the mend and just high liquidity and very rapid recovery in the economy is the best news for lenders.

As the business picks up, the ability of the companies to repay to the banks go up and hence the credit cost comes down as the economy recovers. As the economic recovery is expected in the next 12 months at about 11-12%, I expect the stress on corporate books to come down and that explains the optimism in most of the lenders. I hear from the biggest other lenders that their credit cost will be much lower even in the March quarter than what the analysts expected. That is a good sign at the early stage of the recovery.

What is your outlook on broader cyclicals — the whole infra play and ancillaries in terms of building materials and commodities front?
A lot is happening on the infra side. There is a PLI scheme. There are individual companies which are positively impacted and the growth momentum has started. So these are growth companies. In some cases, there has been re-rating also like in cement and steel. Growth momentum and the earnings re-rating is happening across the board. You got to be focussed in your stocks. Your companies and opportunities are coming up from various sectors.

Infra is clearly there and the order book of all the infra companies are building up very rapidly. Clearly, the opportunities to invest in many of these companies are coming up. One is slowly making changes in the portfolio. But too much changes in the portfolio is also not good in the sense that typically you get out of what has not worked and you try to get in what has worked recently, which was not there in the portfolio.

In that process, typically one ends up selling a stock which is undervalued and buying something which has already fully discounted the optimism. So one has to be very careful in balancing the portfolio and to be ahead of the curve. Change in all these places wherever you find something where you are ahead of the curve and valuations are reasonable. We are making those changes.