Stock investing is all about good businesses at low prices: Parag S Parikh

In an interview with ET Now, Parag S Parikh of Parag S Parikh Financial Advisory Services, gives his views on the markets and investment tips. Excerpts:

At 4700, do you think Indian markets are close to a bottom?

If you are a value investor, we are not looking at what the market is. We are not trying to time the markets. But it is only in times of chaos, times of difficult situations that values emerge in the markets. Sometimes, values emerge even in bull markets when bad things happen to good companies. So as a value investor, it is exciting time to invest when things are going down and values will start emerging every now and then.

So, is the price correction over for Indian markets and now time wise correction could start?

Price correction, time correction, I do not think they have really a meaning on a good value investor. Correction is looked as an opportunity rather than whether it is going to end or not.

Where to your mind then this market is throwing up a value?

When you are looking at investing in stocks, the common mistake people make is to buy a stock which will go up. Now stock investing is all about buying a business. So, if you are considering stock investment as buying a business, then what should you be looking at: whether it is run by a good credible management, it has a good moat around it, it has got a strong brand, a strong distribution network, a business which requires least amount of capital, a business which has a good ROE, a business which has a pricing power.

Stock investing is all about identifying good businesses available at low prices. These low prices you get when everyone around is fearful and that is why you have to be more greedy to pick up such businesses.

But good businesses at least the ones which we believe are good and booming companies have not corrected, names like HDFC Bank, Nestle, stocks like HUL?

Now you see Axis Bank. After HDFC, I would like Axis Bank. Axis Bank is available at 12 to 13 times earnings. That is a good price to buy a stock of a good private bank. Another stock is Noida. It is a good infrastructure play. All the pains of an infrastructure are over. All the getting of your debts is over.

Now the bridge is built, it is running at 50% capacity utilisation. Cars or scooters go left or right, it gets a toll. There is no further capital expenditure to be given. Now I love that stock. Last year also when we talked on this show, it was about Rs 35, today it is a steal at Rs 23, on the contrary.

What went wrong, why this stock corrected from Rs.35 to Rs.25?

It is more of sentiments. If you look at the way the company is going, it is all perfect. There is a sentiment that last year the UP government did not allow it to raise its toll. This had created a sentimental dent into the company. But all such things happen in our country. Yesterday there was a rate hike of about Rs.1 on the toll charges. So things will improve. Today, this stock is available at Rs 23 price and Rs.23 is the book.

So, what is your eventual price target for a stock like Noida Toll Bridge?

Value investors do not look at price targets. If you have got a good business, then we should be with it till certain things change drastically. I would only sell a stock, if I have a better opportunity to buy another good stock.

The reasons to be bullish on the financial stocks or the financial space, but within the financial space why are you bullish on Axis Bank?

Because it is really cheap, it is available. Plus, all fears of non-performing assets are not there. It is a well run bank. If I find HDFC much more expensive, then I think this is the next band because I would definitely get into the private sector banks.

What about a franchise like State Bank of India, India’s number one bank. It is available at a price to book of something like 1.2 times based on FY13 earnings that is where the real value is, Axis Bank is still trading at what three times book?

The value is not there in State Bank. Yes I like State Bank. Everything is good. Good distribution network. But what happens if the government tomorrow gives a loan waiver? Now when these government controls are there and we are a poor economy, certain things have to be done and these things can only be done through public sector banks. This is the main worry and that is the reason the values are there.

So you would say avoid large cap/midcap PSU banking stocks?

Yes, means they do not fit into my value investing strategy.

Last two years global markets have been pricing in too much of risk, global volatility index CBOE vix is above 30, which means globally also markets are a bit nervous. Do you think for next one year we should learn to live with an extended period of high volatility?

Volatility has been a part of the markets. The markets are interesting because of this volatility. Some people feel that stocks are cheap, some feel that they are expensive. There is so much of news which is flowing and so much of capital which flows across borders with a click of a button. You have humans doing all these things who are actually running between the greed and fear and that is why this volatility is there.

If you have rationality and self discipline, look at all these things and look at the opportunities. They will always be visible, but keep your emotions under control.

For those who bought defensives, for those who have bought classic FMCG names one year ago, they have managed to make money. Now for next one year do you think it is time to re-orient portfolios, get defensive out of portfolios and throw in a bit of risk?
I do not think that we should be too much bothered about what should we do in a year. What is the year? It is something which human beings have invented. But if you have got a stock and it is just doing well and if you are confident about the business potential, then why should you be just changing or revamping for the sake of revamping?

So what is on your current buy list, what is on your current sell list and what is on your current hold list?

There is nothing like; this is on the sell list, because if it becomes a sell, you will sell it the next minute. You cannot be having it on the list. Buy list: There are a lot of good opportunities opening up. Axis Bank, Mphasis is on our buy list and of course even Gujarat Gas.

What makes you bullish on a stock like Gujarat Gas?

Well, fuel prices are rising. It is a well-managed company, virtual monopoly in their own region and about 18 times earnings.

To your mind where exactly are markets mispricing growth a) on the higher side, b) on the lower side?

As far as the markets are concerned, human beings make decision out of their heart. So when they are making decisions out of the heart, they make it based on what the information flow is. That is where the chaos is created. So, markets are not whether good or bad or right or wrong, but it is human beings which are creating all this chaos.

What are your key assumptions for interest rates and inflation for next one year?

I am a bit perturbed with why people make so much fuss about inflation. Stocks are the best hedge against inflation. I like days when the inflation has gone up and the markets react and they create values in the market. When you are buying a stock, you are buying a business which sells a service or a product at a profit.

A business generally has land, machinery, knowledge workers, and plant with it. In inflationary situations, the value of these things goes up. So a new person with similar plans will not enter. Secondly, if a business has a pricing power, it can take that money from the customers.

Inflation is something which is good for the stock market. Why should we be so much worried? If you are an equity investor, I would be very happy with the inflation. Everywhere else I am seeing erosion of capital, but not with equity investments.

Which is your favourite FMCG stock?

P&G is my favourite.

How come not something like Levers or ITC?

My real favourite is VST Industries and we have been holding that in our PMS.

Why do you like VST Industries, what is so special about that company?

You see the balance sheet. There is 24% return on capital. Plus, now cigarettes can’t be advertised. So no competition can come into take on VST. There are so many other factors here.

You are also bullish on gas utility businesses, you mentioned Gujarat Gas, the other holding which you like is Indraprastha Gas Ltd. So what makes you so bullish on that stock, the stock already had seen a run up of about 110% in last one year?

It is in a good business, it has got a good product and a good monopoly in its own sphere of interest. Due to these factors, it is available at a good price. You are looking that it has gone up 100%, but I am looking at how are the profits are going in this last one year. If they are in tune with the price size, then there is nothing to worry about it.

What about real estate? There is an argument there that real estate stocks have cracked by about 99% and for someone who believes in value there is enough value out there because they still own land bank?

Value investing does not mean that the price goes down that a value emerges. One has to look at a business. Is it the right business to be in, run by a credible management, does it have a pricing power? In real estate I cannot answer any of these questions because the balance sheet of a real estate company is not right. Today, in our country cash changes when you buy any piece of real estate. It is an open fact, then how can I trust the balance sheet of any real estate company. Am I getting the right information?

So you have never bought real estate stocks and you will never buy real estate stocks?

I love real estate, but no, never real estate stocks. I am not sure what I am buying,

You have never bought telecom stocks also I have been told, why is that?

Everyday my mobile bills are going down. Why should I be buying something which does not have a pricing power.

What about the 3G opportunity?

No idea, I do not know about that business. I will not get into that. They do not come into the category of value investing.

You also like rating companies ICRA, CRISIL, what makes you bullish on them?

Great businesses, requiring least amount of capital. Any tom, dick and harry cannot enter the rating agency business. A client comes to you, gives you the balance sheet, gives you its figures. You give him a rating and he gives you the money and the best part is every year he has to come to you.

What about the reputation problem because globally rating agencies no longer enjoy the same goodwill?

Correct. Has it changed in 2008, they created all these things. Has it changed? It has not changed because there are certain things in life which does not change.

Within the infra space what do you like and what do you dislike?

We will not like anything in infra space because it requires huge amounts of capital. In the initial years when a company makes profits, it is working only for the creditors. Value investing is really tough because you do not get so many opportunities. In last one year I have been only talking about Noida Toll Bridge, Mphasis, and all those things.

So how many investments you made in last one year?

In the same companies which I have been talking, not any new company because these companies are offering much more better opportunities than last year.

So which are the stocks you are buying on every decline then?

Piramal Healthcare, Noida, Mphasis, Gujarat Gas, ICRA.

So for someone who just wants to invest in two stock ideas that is a compulsion which some of our retail viewers they do face, so identify your two best ideas for next three years and one line on them why?

If you have the capacity to hold on for the next three years because patience is very important - if you are looking at an aggressive idea – Mphasis, and if you are looking at something really safe, it is Noida Toll Bridge.

For an economy like India which is growing at 8% plus, classic value investing always works?

Value investing is like a universal principle. It is like the law of a farm. You cannot sow something today and reap tomorrow. The problem is that everyone is going in for instant gratification. They want it everything now. But value investors believe that it takes time to identify a good company and we have to stay with it. That is how the returns from such investments come. You are only supposed to follow a process and stick judiciously to that.

When do you sell a stock, how do you judge that the business or that thesis is not working out the way you thought?

Well, we have been also learning over a period of time. The value investing which I really talked about 10-15 years back, may not work today. Business cycles are getting compressed, but with new information, one must try to fine tune that retaining the same principles of investing.

When would you sell that stock: first, when I get a great opportunity? When a company is good and nothing has gone wrong with this company I will go on holding that stock. Secondly, if something goes wrong with the company, the business dynamics change, then I will ask myself whether the dynamics have changed for a permanency or the business have just changed and the company will be able to bounce back. There are so many things which you normally see which you keep your eyes and ears open and your humility under control.

Over the years as a value investor which is a biggest mistake you have committed?

We have been making mistakes now and then. But we learn from the mistakes. In my 30 years of experience, I have realised that there are no geniuses in the market. Everyone is learning and if anybody has the humility to accept that you are learning, then you are just going forward.

There is so much of information flowing, nobody can claim to have knowledge of everything. I realised this in 2000 during the tech boom. I was against the tech boom & would tell my clients you sell. They will come to me after one week and say; good I did not listen to you, the price has doubled. The key answer to stock markets is understanding behavioural finance.

The businesses of the stocks which you identified for us, are you confident that these companies will grow or these businesses will grow irrespective of global conditions?

If you see what is happening in our country, there is a lot of action which is taking place. Start with the way the cleansing up is happening. So many things are happening. The Anna Hazare movement a totally non-violent movement. India is in the threshold of a big change and that is why all this chaos is happening and a change is always for the better. So I am very excited about the Indian corporates. Some corporates, who will not go by the change which is coming, will be thrown out and new corporates will emerge as it is you are seeing new corporates emerging.

Do you think it is time now to sell gold and invest in equities?

Well, as I told you if equities are the best hedge against inflation and inflation is a demon which we always fear, I would definitely be always with equities because I am guiding businesses, I am a businessman having interest in 20 other businesses and I have certain managers running for it, running those businesses.

Personally how have you invested your family wealth?

It is in the stocks which I have been talking about. It is not only family, I invest my clients money also over there.

Last three years fixed deposits have managed to beat equities, do you think next three years equities will once again beat fixed deposits?

This could be for you but for me my equities have always beaten the fixed deposits because I have bought the right stocks, right businesses at the right price. So I do not think that the thing fixed deposits have beaten my returns.

So I am going to revisit the list which you just pointed out this is just for the benefit of our viewers, stock number one is Noida Toll Bridge, stock number two is Mphasis, and third you want to throw in a stock like IL&FS Managers?

IL&FS Investment Managers or even a Piramal Healthcare is a damn good stock.

At these levels are these stocks attractive enough?

Yes.

Do you expect the stocks or the four companies which we have discussed they could appreciate by about 30% in next two to three years?

See today the markets if the sentiment changes they could appreciate 30% in next one month. That this thing I would know. But I know one thing: I am guiding great businesses and great valuations.

So a good business at a bad price or bad business at a good price which one will you go for?

How can you buy bad business at a good price? So always the business has to be good, the price has to be good.

Between value and management which deserves a greater degree of attention?

Management, because see you are partnering with that person and if he cheats you because you are going to be a minority shareholder and if cheats you, you cannot do a damn thing about it. So ultimately it is management which is important.

The four companies which you have discussed what could go wrong with them and what will challenge your conviction?

So many things could go wrong with them.

Let us look at all the individual companies, what could potentially go wrong with them, where is the margin of safety?

I will tell you how you look at the margin of safety. Is not what can go wrong because you cannot predict something. The margin of safety you look at is this: is the business at this price available, that is the margin of safety. Not whether it anything can go wrong. So margin of safety starts when you make the investment decision, it is not after you make the investment decision.

For last one year dividend, diversification and being with defensive that strategy has worked, for next three years what will work?

See going with defensive is not a strategy, it is a way of investing. FMCG stocks would always be in my portfolio because everything is there in those stocks, a good brand, a good distribution network, a pricing power irrespective of whether the global economy goes up or the Indian economy goes up or down, everything is going to have a bath, everybody is going to brush their teeth. So there are certain FMCG stocks which will always do. There could be ups and downs not because the businesses are bad or wrong, it is because the price of the stocks in the market they go up or down. There may be nothing wrong with the businesses.

Personally you have authored two books, when is the third one coming out?

Well not yet decided, not got that spark. Once I get that spark.

For someone who follows Warren Buffett, Buffett has given 99% of his wealth away. Are you thinking on similar lines?

When I have so much wealth, I may thing on similar lines.