Coal India IPO to be a game changer: Parag Parikh

In an exclusive interview with ET Now, Parag Parikh of Parag Parikh Financial Advisory Services Ltd, gives his views on the Indian market and the margin of safety in this market apart from his stock ideas. Excerpts:

20000 on the ticker, 6000 plus on the Nifty. Are these levels sustainable because for the week gone by, markets now are consolidating and it is no longer a vertical gain what we experienced in the month of September?

That you are saying because in last few days, the markets have been going down. This is typical of the markets that when the markets are going up, people start predicting 22-24, and when they start going down, they would start okay with 18-16. So it is too early to predict that the markets are just going to go down. Of course as I have been always maintaining, the Sensex is made up of 30 stocks, and Nifty of only 50 stocks. So we are looking at a very small sample size to judge the markets and there are a whole lot of more than 6000 stocks in the market, a lot of value approach over there rather than this.

So where is the margin of safety in this market?

Margin of safety is only when you are doing bottom up stock picking. There will be a lot of stocks which would be neglected, and you can definitely buy good values at an index of 21000 or even 25000.

A word on Q2 numbers and next week, Q2 numbers and Coal India IPO, these are 2 events which could be a game changer for Indian markets.

Coal India IPO would definitely be a game changer because I am very happy, I never believe in IPOs because they are always overpriced, the merchant bankers are greedy. But this Coal India, we have our government who is really concerned that the investors cannot be butchered and we have seen what has happened in the bits of big bull markets. Private guys, they just come and take people’s money and the stock prices go down and if people make money in Coal India and if the sentiment stays intact because it is important the sentiment stays intact, so it is a chicken before the egg and egg before the chicken. If people make money, the sentiment will be good. At that time, we have got a whole lot of real estate issues coming in and if people start losing money over there, then you could have some sentiment break, but Coal India, I am very happy, has been so fairly priced. There is money on the table for the investors, but investors have got to realise that investment is a long-term gain, you just buy and then sell on listing, that should not be the criteria. You can use that criteria with all other stocks where you are only looking at trading, but not something like Coal India where the government has been very fair to investors.

So for retail investors watching the show, your verdict on Coal India is that they should subscribe?

Yes, they should definitely subscribe for Coal India.

Subscribe and then hold on?

Yes, hold on. Tat is because let the traders, let the punters play the game for the first 3-4 months. They will buy-sell, buy-sell, buy-sell. During those times if the stock price goes down, you will have an opportunity to buy also.

Coal India is a commodity stock and I know you do not invest in commodity stocks. What is so different here?

One is it has been very fairly priced. I do not invest in commodities. So as a business we do not like it, but any business which is fairly priced is something people like. Secondly, who am I to say that Coal India is such a big issue which is coming and do not invest for it? It is not common sense to say that you do not invest just because I do not like commodities.

What about market valuations? At these levels, markets are trading at PE multiples of 15-16 times, 17-18 times depending on the estimates you track. Do you think we still have a long way to go because historically every time an Indian market has peaked out, valuations have been crazy. PE multiples have gone beyond 25 times, they have gone beyond 30 times. So if I use history as the benchmark here, we have a lot of room to go.

Yes, first is we cannot judge stocks by only PEs because what if the profitability is going to come? I will give you an example. During the bear market of 2008-2009, Mphasis was beaten down to as low as Rs 130 and the quarterly results were always growing. However, the sentiment was so bad that the stock was not moving up. Similarly over here what happens is if the profits are growing and if the stock prices are growing, then we should not be scared, but then we also cannot assume that every quarter to quarter is going to go up. There are going to be breaks. You cannot have something which is going on just one way, but the market has become such that even a 2% drop in the profits, people go and dump the stocks because analysts come out with sell reports and all. Now when such stupidity is going in the markets, a good value investor is going to look at well, you are giving me an opportunity to buy and investor is going to understand that you are going to see sustainable earnings of a company rather than one up or one down.

Let’s look at some names, your No. 1 investment idea for our viewers.

My No. 1 today is Noida Toll Bridge. I personally do not like infrastructure stocks.

Is this one different?

Yes, this one is very different because infrastructure stocks require huge amount of capital and they have got a long gestation period, plus you have always cost overruns and all those things. People are getting into building airports, this, that and all. Then when you enter the airport, they have got such cost overruns that people who enter, they pay charges to enter that because of the cost overruns and infrastructure companies are highly debted. So the interest factor. So they are actually earning money for the creditors. Now this is a company which is very unique. It came out with convertible debenture issues some way back in 1997 and like any other infrastructure company, they had rosy pictures, this will happen, that will happen. Then the project had cost overruns everything. That is why it has got a bad name. Now that is a bad thing that has happened to a company and now all that is passed because this came when the interest rates are about 20%. So all that debt restructuring, everything has happened. The company has taken about more than 10 years to go through the process, everything is in place and now the company has started making profits and they have declared a dividend also.

So what is your price target for Noida Toll Bridge?

I would not like to give a price target because price target is just making people happy, but it is a great investment because now all the problems of the past are over. Someone is sitting over there. Cars go left or right, you get your toll and then it requires a minimum amount of upkeep and now is the where the profits are going to come and investors are just selling and how do we know that the company is really making profits? Only when it gives a dividend.

And they have given a dividend.

They have given dividend, 50 paisa per share.

So a good business available at a bad price.

At a bad price.

That is the perfect time to buy the stock.

Yes, if investors are buying stocks on infrastructure, paying such fancy prices, why not this stock?

The challenge for Noida Toll Bridge is that the asset which they own is only one asset and beyond that asset, they really do not have any other business avenues, which could be a restriction?

It is a restriction because do not you believe in core competencies that suppose if this is an asset. Secondly I forgot to mention this earlier that they had a 30-year lease but the way the terms were situated and way they have not been able to make profits, this will go up to 60 to 70 years also and they have also got certain land which they can develop -- about 90 acres.

It is a virtual monopoly.

Yes, it is a virtual monopoly. Are we concerned with them making money for us or are we concerned that like some other industrialists in our country, go into every piece of business or action which is there, it is whom you choose.

Let’s get one more idea?

This idea is based on a different concept since everyday the newspapers and everyone talk about India doing great, that India’s figures are very good, the stock markets in India doing great and the world over there is recession and we take pride that things in India are very good. I am also happy being an Indian, but if I am looking at good investment opportunities, why did people make money or are making money today? Because they bought two years back when the markets were down and out. Now today if you really want to make money in the future, would you be putting your money only in India or somewhere where you are getting valuations one third the cost of what is in India?

So look outside India?

Yeah definitely, look outside India.

Even if you are buying equities?

Yes. I will give you an example of a very good share, Standard Chartered Bank. Now today what is the fancy in the markets is buy Indian banks, Indian PSUs, very good. I would say that Standard Chartered Bank, which is listed in the London stock markets, you know all UK, US, all markets are really down and out. So today most of the companies, which are listed in such markets, although if they are doing good also, you are getting a chance to get them at very good valuations.

So buy a Standard Chartered, which is listed over there?

No, you can either buy it, which is listed over there or you buy Indian repositories, which are listed over here. It is quoting at around Rs 118-119 and it is available at 1.6 book value and you compare that with HDFC. You are paying HDFC five times book value when you are buying an HDFC.

What about the basic growth? If you are buying a global company, yes, there is a bit of pessimism, but what about business growth?

First is today in a globalised world, you have to look at companies. Even if they are listed somewhere else, where is their business coming from? Standard Chartered Bank, 21% of its business is coming from India and the emerging markets. A lot of things are happening over here. So the company is growing over here also and if you see most of the M&A deals and all, we always read about Standard Chartered Bank. They have got money, they have got good muscle power, now these are globalised banks and a very lower percentage come from the developed markets like the US and UK. It is all from the emerging markets.

So the global risk is not very high?

No, not at all. Only thing you look at it not as risk, it is an opportunity because it is listed in the London stock markets.

What about local banks? At these levels, are they fairly priced?

Yes, definitely. I would not be buying those banks at these levels. They are fairly priced. They may go up, that’s a different thing, but today if I am making an investment decision, then I am looking at buying a value and I see a great value in an IDR of Standard Chartered Bank.

Are you fully invested in the portfolios you manage?

No, we are sitting on cash till we get certain opportunities like this, Standard Chartered, NOIDA Toll Bridge, that is the time we buy. Of course NOIDA we bought it long back also, so just now we are pretty in cash. I would say we are scared to be in the Indian markets and we only buy when an opportunity comes and these opportunities will come at every index rate also.

Are you booking profits also selectively?

Yeah selectively, we are booking profits.

Which are the themes, which you think markets are now mis-pricing growth?

One is we look at the companies, what are the PEs. Suppose if you ask me HDFC Bank, it is very expensive. So I would definitely ...

Even though the business is growing?

Let the business grow, but it is not only that business is growing. If I do not have any other opportunities, I will be with the business which is growing. But if I am getting certain opportunities, then I will definitely go, and secondly it is not at all painful to be in cash. In 2007 we were in cash for over an extended period, about one year, and then when the opportunities come, it takes care of all the opportunities, which you have lost in 2007. So it is a misnomer in everyone’s mind that being in cash, you miss out on the opportunities because the stock market offers opportunities at every rise or every fall.

At these levels, is it advisable to really stay away from the leverage market, futures and options, options and futures, call and puts?

I would say that investors are only playing into these games. If they are doing it for hedging purposes, it is fine, but normally what happens is all these options and all, they turn into speculative elements and that’s where it becomes a crocodile’s pond and you see the crisis in 2008, which we saw is because of these options and these futures/options, they are not able to give us the right value of the stock. Like gold, the way the gold is going up because you can buy in futures, you can have your options trading, all those derivatives are making the thing, the price rigging very easy. That’s happening with Nifty, that’s happening with the BSE Sensex, it is happening all over.

You have identified two stocks for us, NOIDA Toll Bridge and Standard Chartered IDR, which is listed in India. But again a lot of our retail viewers have limited appetite to buy only one stock. Should they split the money into two or only buy one stock?

As a matter of discipline, you should not be putting money in one stock, however good the idea may be. Between 5-10% in a single stock of your total net worth.

So divided the money into two, do not just buy one NOIDA Toll Bridge or Standard Chartered, if you have limited appetite, so be it but divide that limited capital?

Now today if you can invest into the international markets also, now we can. Now a company like Nestle is quoting here at more than 40 times for India, I will not buy a Nestle over here. Now Nestle is basically a Swiss company, it’s a global company, a lot of its business is from India.

What about the currency? If you are buying global denominated stocks, you are buying them in dollar. Dollar is looking weak. So if you are investing right now, if dollar falls down, rather than appreciation, you actually will have a net depreciation?

I agree with you but those risks we every time take and since we have not invested in the global world, then these are the things, which we will have to be with. But if I know that Nestle is available about 14-15 times in the US markets, I will buy those stocks. It is a great company, I love it over here. It is too expensive over here. Why not buy the same company when it has got major of its businesses in the Asian region?

From here to March and from March to next Diwali, which to your mind are the biggest challenges for Indian markets?

Actually if you go to see the way the real estate prices and all are going up, what does that show, that our money is losing purchasing power. You have got a lot of poor people in this country. The growth has to percolate down to them and in real estate, most of the people buying this expensive real estate properties are investors thinking they will make money. You go to realise one thing that whom will you sell to. It is something like in stocks also and can a poor person getting a salary of a lakh of rupees a month/year, can he really afford the prices which are prevailing today not only in South Bombay...

So real estate prices are a bubble or real estate stocks also are a bubble?

Real estate stocks definitely I do not like and real estate itself is a bubble because when will people go when it is affordable. Today everything is becoming beyond the reach of affordable.

But real estate always has been unaffordable. If you look at the Indian market’s history, five years ago when Bombay was available at 50% rates, flats were unaffordable.

Yes, then how many times a slump also followed that? They are unaffordable is one part, but it just cannot go, then there becomes a slump. When the slump comes, there are people who get in and then again you have craziness going on. We are talking about the market craziness, we all require real estate that’s why we believe that is there, but what is the pricing. Just now the demand is there for the investors because banks are giving loans, but then over a period of time when you find what are the outgoings, what are the variable, what is that interest factor, how it eats away into your capital, that’s where people start realising, that’s where the bankruptcies come.

Do you still like ICRA?

Yeah definitely. It is a great business, easy to understand, credit rating agency. A client goes to them, gives their own balance sheet. On the strength of the balance sheet, this company rates them and they get a fee every year whether they get a B+ or an A+, they have to ultimately go and get themselves credit rating. Then what does this business require? Office space, which can be leased out, not very smart people, adequate people who are able to crunch the numbers, they have a software in place, it is a great business to be in.

But if I look at the top line growth rate, it is about 15-20% that’s very mellow?

What do you mean mellow? Do you think 15% growth rate compounded over a period of....

Markets historically have always peaked out when there is retail euphoria. Is that the current judgement to really understand the market behaviour?

Two ways to see it is that retail investors have become wiser because we always learn from our mistakes. So they may be learning from the mistakes, but when the retail investors get crazy and they pay anything for an IPO, that is where it is time to worry and if you see IPOs are getting a lukewarm response. On listing, people are not making money. So they are really going slow and that’s the maturity of Indian markets.

Retail investors are now separating wheat from the chaff?

Yeah, they are, but the problem with this is this market never has institutional memory because more and more youngsters come into the market. So when those people come, the institutional memory on the market is lost because those people come with no institutional memory and they get into instant gratification and then they start buying anything at any price, then they lose, they become wiser, either comeback to the markets or go out of the markets.

Do you still like the MNC pharma names, the ones you recommended last time?

Yeah if I do not have any opportunity in the pharma sector of a good stock, then I would really hold onto the pharma sector, but some of them if they are becoming highly expensive, we definitely take a call.