Small, mid-cap auto ancillaries may benefit more than auto cos: Chakri Lokapriya, TCG AMC

Talking to ET Now, Chakri Lokapriya, CIO & MD, TCG AMC, says Filatex, a polyester yarn company, has the potential to be a multibagger.

Edited excerpts:

The so called GST adjustment appears to be behind us. Nifty may have done nothing special but individual mid-cap stocks which were in this underperformance mode for the last two or three weeks, has got corrected and now the list of gainers is much greater and the open interest addition in several of these high beta names is quite constructive?

In fact, you rightly pointed out that this quarter’s earnings are not so important because they will be all over the place. Actually, I have a slightly contrarian view to this whole thing that small or mid-cap auto ancillaries will actually benefit more than the auto companies because the auto companies like Maruti are making good the inventory losses of the auto ancillaries for the next two three months until this GST thing is properly implemented.

Within that, two-wheelers might be looking stronger, four- wheelers might be looking slightly weaker but that is all in the shorter term. Consumer as a space and within that auto, will actually look okay. Earnings are less important because of both inventory losses as well as top line discounts.

Are you only buying in the market?

Yes, in fact some of those ideas look to be very timely. Given this huge thrust on irrigation and also the new Israel partnership, companies like Jain Irrigation and Finolex will do fine. Also, speciality chemical companies like Meghmani Organics, Aarti Industries will all benefit from this current move.

Do you think that the agri theme not just by virtue of the government’s focus , but largely on the back of a good monsoon and a favourable GST regime, will push rural demand? Now that the numbers are being broken down and it seems like there is not going to be as much discrepancy from the erstwhile model as we were expecting, it would be a big thrust for companies like M&M, companies like M&M Financial, Escorts for that matter, that has exposure to rural demand and dependence on it?

The way we are approaching it is we are staying away directly from the fertiliser type of companies. They have given good returns now going forward there may be some kind of delay in payments, reimbursements that these companies get and so rather, we are focussing on the suppliers to irrigation, to agriculture like the Jain Irrigation supplies micro irrigation systems, Meghmani Organics supplies speciality chemicals to that industry or M&M for that matter. So these guys do not impacted as much, actually do not get impacted and benefit as a second derivative of agriculture.

Tata Group of companies with the exception of Titan have been massive underperformers. But with a professional chairman who understands how to run a tight ship and who had earlier managed TCS with the highest return ratios in the industry, can things change for the better for other Tata Group of companies?

Indeed. Many of the Tata Group companies that you mentioned, Tata Steel, Tata Motors, even Tata Chemicals for that matter are very valuable companies. Tata Steel was stuck in a downturn of steel prices and a global slump of economic reasons. Tata Motors currently is part of the Brexit confusion with its impact on Jaguar and Land Rover sales in the UK . But these companies have done a good job of deleveraging themselves and there is this renewed focus to get the ship in order. Against that backdrop, these companies are inexpensive in terms of valuation and therefore will do well.

Pharma and IT may be underperforming groups but they are not underowned names?

Given the way the Nifty and other benchmarks are structured in this country, they are big weights, especially Infosys. A mutual fund manager is unlikely to be big time underweight even though he or she may not like the stock that much. Therefore,the same thing applies to the FIIs as well because they are big weights in the MSCI India index. Against this backdrop, they will continue to be over owned names and therefore the potential upside in those stocks is limited because there are not enough triggers in the companies and there is nothing much that will trigger an incremental buying in those companies.

So you will not be a buyer in a Sun Pharma or an Infosys?

Infosys has industry issues, Sun Pharma has specific company issues. Both will take time to resolve.

What have you bought last?

We are focussing more on the exporters space, more on the smaller companies, mid-cap companies actually. Trident is one such exporter, bed linen, terry towels and all that and while currency appreciations impacts them a little bit, they are one of the largest exporters in this country, will benefit from the China restrictions and therefore and also US, EU are doing very well. These kind of companies will do well where they have two legs; one leg in the export market and one leg in the Indian market.

The other one that we want to focus on is Bharat Forge. US Class A truck data seems to be positive and that augurs well for the business?

Indeed and also recent data points have shown that the US economy is doing fine. The beginning of summer also sees increased transportation and while this time the CV cycle will benefit. Against this backdrop, Bharat Forge will see an acceleration of its earnings in the coming quarter.

Give me your best fundamental idea?

One is SBI that has come below the QIP price, the Essar deal which has been cleared yesterday lowers the NPA risk for SBI as well as the other lenders and the stock is trading at probably one times book value, less than that, that is a good stock. I think there is sufficient upside in it.

Have we heard anything which is going to be transformational and change for Venky’s India?

There is no big fundamental change other than slightly more than expected volumes in this quarter because of the beef ban and other stuff. Also, the input prices for poultry business have come down. In these two things, you will see a good uptick in their overall volumes but will it add so much market cap, that is another question.

In your portfolios, which stock do you think has the potential to be a three or four x in five years?

You know that is a very difficult call to make whenever we buy stocks we just look at what we can forecast for the next one or two years, we see sufficient upside and then keep rolling forward and that is how they become multi baggers. At the outset we do not know that they will be multi baggers.

But there is an assumption. HDFC Bank cannot be a multi bagger, a Reliance Industries cannot be a multi bagger, a TCS cannot be a multi bagger. Those you are buying for the safety and the stability of your portfolio but that 15-20% which you buy in your portfolio is for hat alpha return where you want to differentiate your fund from others. What is that big bet, the high conviction bet in your portfolio right now for the next three years?

Well we have a couple of them; one is a company called Filatex. It is a listed company. It is a polyester yarn company which is moving up the margin curve, new capacity expansion in the higher margin product area, will benefit from lower input prices and higher demand. We bought it about a month or so ago. This could be a strong performer, I do not have an actually number but we thing there is more than sufficient upside, a doubler may be over the next couple of years.