Not a market for bargain hunters; look beyond June 4 for investment opportunities in next five years: Abhay Agarwal

Abhay Agarwal, Founder & Fund Manager, Piper Serica, says this is a market where once the event is over, people will refocus on earnings, refocus on growth, refocus on India's long-term economic potential and the resultant expansion in market cap due to that and which companies will benefit the most. So, the whole conversation will change into that direction. Investors should look beyond just this June 4th date and look where the investment opportunities are for the next five years


You have seen many election-led volatility, nervousness, something which is going on in the market right now. But you are recommending to your clients that the best strategy is to walk through this volatility, staying fully invested, isn’t it?
Abhay Agarwal: Absolutely right, I have seen that these kinds of volatile environments are the best friends of long-term investors because this is a time that you get very good opportunities to buy high-quality stocks at reasonable valuations. I do not think this is a market that people who are looking to bottom fish or bargain hunt should be looking at. This is a market where once the event is over, people will refocus on earnings, refocus on growth, refocus on India's long-term economic potential and the resultant expansion in market cap due to that and which companies will benefit the most.


So, the whole conversation will change into that direction. I think the investors should look beyond just this June 4th date and look where the investment opportunities are for the next five years and focus on that rather than getting too distracted by just one day’s outcome.

Grasim has entered the paint segment and I have seen Mr Birla after a very long time give guidance of Rs 10,000 crore revenue and profitability from this business in three years. The jewellery launch is something that is making Titan nervous. What is your hypothesis? Cement, of course, capacity addition is fine, but the cement prices have not gone up in 10 years, I was looking at the data. What is your hypothesis of Grasim?
Abhay Agarwal: In the case of Grasim, we can very clearly see that it is an amalgam of very good businesses, but for some reason, the market has not appreciated those reasons for a bit of time. But now, these businesses are coming together in a way that there is a very strong top management drive led by the founders of the group to make all these businesses work.

As a group, we expect that the Birla Group will get re-rated because of various things they are doing in the group; like the Novelis IPO was pending for a long time, it happened finally or it is in the process of happening finally which will unlock capital for Hindalco.

Similarly, we expect Grasim to go through a similar cycle. On cement, you had tweeted today about the excitement around a 10% expansion in the infrastructure capex spending plan by the government. In rupee terms, it is a very large amount. Once those capex projects get going, the demand for cement is going to rise and the industry is highly consolidated.

So, as you said, for 10 years, the prices have not risen and that is so true and I think that is one of the reasons that while these cement companies promise to be the next big multibaggers, they do not end up as that. But going by that demand and the consolidated industry nature, it may take off. That is the reason we have added Grasim. We see it as an underpriced largecap opportunity that we are happy to hold for with a three- to five-year perspective.

Another interesting point which you make is return for insurance. Now, insurance stocks have not made money for investors for the longest of years, in some cases or the other, on some issue or the other. Star Health and IPRU is what you have added. Star is the dada of its own space, health insurance space, but still not done much. What is your hypothesis here?
Abhay Agarwal: Two things, one is that the demand is very solid and the proof of the pudding is even LIC is now looking to enter this space and they are welcome to because the whole healthcare business in India, healthcare insurance can become 40-50 times in size, that is how big the market is. Most of the players like Star have limited themselves to agent-led business generation, which is currently the model, but it will change.

More digitisation will come into play, which is already coming into some startups that we are seeing. So, one is that the whole market opportunity being so wide and increasing. The second is that the government policies towards healthcare insurance are contradictory to what the government wants to do. For instance, it is very difficult to understand why there is an 18% GST on health insurance policy when the government on the other hand says that it wants to provide protection for health insurance.

I think some GST rationalisation will take place in healthcare insurance, in insurance overall, which will further make it easier and cheaper for people to get insured or buy insurance policies. And the third is that as the healthcare costs keep going up, we are seeing it and it is not only limited to the richer segment, it is also to the lower segment which is not fully covered by Ayushman Bharat scheme and the other government schemes.

It is fair to conclude that large players like Star Health with a 33% market share in standalone health insurance will benefit more. Stock has underperformed I think more for technical reasons, we saw some exit by existing private equity fund investors coming up. So, it is giving a good opportunity to long-term investors to get into this space at a very juicy valuation when others are kind of given up on this whole space.

You have also added Hindalco. I want to understand if a special situation is playing out there in the form of Novelis IPO though we still do not very clearly understand where that money will be utilised. Do you have any ideas?
Abhay Agarwal: No, we see a secular turn in non-ferrous metals space, so which is your aluminium, zinc, copper, lead, tin, nickel and Hindalco is the best play in that space because of their large presence and the group understands the commodity business, B2B business very well. They do it at a global level and they do it very-very well.

One of the most efficient producers in the world and they are expanding beyond aluminium into copper, they are bidding for copper mines, they are into silver. I think China will surprise the investor community globally by the pickup in domestic demand and what that will do is drive the non-ferrous prices, metal prices, they can almost double from here in the next two to three years' time. That will provide bumper profits to the large efficient manufacturers that have become leaner in their costs using good technology, have acquired good assets and Hindalco again is right up there in that space.

I think the money that they are going to raise from Novelis sale is probably going to be used for bidding for newer mines. It is a good bet to have in the portfolio as a non-ferrous play. It will also make life difficult for the non-ferrous metal users, like auto industry, infra companies and all, but we will have to see how they are able to pass on those costs to their customers.