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"The economy hasn't picked up sufficiently as yet." - Views on News from Equitymaster
 
 
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  • Jan 4, 2000

    "The economy hasn't picked up sufficiently as yet."

    A post-graduate in Business Administration, Mr. Vibhav Kapoor learnt the ropes of the business during his stint in the Unit Trust of India (UTI) as the man in-charge of Corporate Finance and Equity Research. He honed his skills further as a portfolio manager in the merchant banking division of ANZ Grindlays Bank. At present, he is the Managing Director of Infrastructure Leasing and Financial Services (IL&FS) Asset Management Company. The AMC has launched two mutual fund schemes in the domestic markets.

    In an interview to www.equitymaster.com Mr. Vibhav Kapoor, MD, Infrastructure Leasing and Financial Services (IL&FS) AMC spoke about the trends in the economy, the portfolio composition of his fund and the valuations of the infotech sector.


    EQM: Could you tell us something about your schemes?

    Mr. Kapoor: We just had the Bond Fund earlier and then we launched the Growth and Value Fund about a month ago. We will be launching the Technology Fund in January. We hope to mobilise Rs 800 to 900 million for this fund. In all, we hope to be managing Rs 5 bn by March 2000.

    EQM: A word about your stock selection, fund strategy and sector allocation. You seem to have allocated a large portion of your investments to the IT sector. At least your top 10 holdings seem to be revealing that.

    Mr. Kapoor: At present, we have a growth and value fund. We follow the bottom up approach. As far as value is concerned we invest in companies at the low end of the cycle. As far as growth is concerned, at present, it is the infotech sector, which is growing the fastest. Hence a large portion of our fund, I'd say around 50% is into the infotech sector. We can invest up to 25% in software, hardware and IT training each but the overall investment in the infotech sector as a whole would be around that level. Amongst the other sectors we have an exposure to cement and refinery stocks.

    EQM: You are floating an infotech sector specific fund now. Do you still find growth potential in IT stocks at these levels?

    Mr. Kapoor: Investments at these levels are justified if a company is good enough to post compounded annual growth of approximately 50%-60% for a reasonable period say till 2003-2004. There will be many opportunities still since there is room for the software sector to grow. There are good unlisted companies a few of whom would be likely to go public. I am not saying that something like a Software Solutions Integrated (SSI), which has grown over 30 times, will be a ten bagger from these levels. What I am saying is that if the company keeps growing at 50% over the next five years it will give you very decent returns. What I am also pointing out is that if out of 40 companies which make their IPOs you are able to identify even 5 companies which grow into ten baggers the returns will be very decent. For instance in the earlier fund, which I managed, we bought Visualsoft at Rs. 30 and SSI at Rs.60.

    Basically companies which are able to change and adapt their businesses to the internet should do well. Here I am not talking about dot com companies. It is difficult to comment on their future valuations. I am referring to those companies, which provide services to such companies or web enable other businesses. There will always be growth for such enterprises.

    Over the years, one can demarcate three big growth phases for software companies. The first opportunity came during the shift from mainframes to client server. Y2K provided the next big opportunity and the third phase will provide big opportunities for companies, which provide web-centric solutions; companies that web enable businesses and companies that provide services relating to the net. Companies that have exploited these opportunities, and have made the transition successfully have done well. For instance, Satyam Computers exploited the Y2K opportunity but managed to reduce its Y2K exposure at the right time. Other companies such as Visualsoft, which focused on product development, tool development, wireless related technologies have also done exceedingly well.

    EQM: But how would you justify the valuations of the software sector?

    Mr. Kapoor: Assuming the economy grows at 6% and industrial growth is between 8-9%, if the inflation rate is around 5-6% a good company whose growth is dependent on the GDP would grow at 15% over the next two to three years. If a software company were to grow at 50-60% compounded over the same period you can equate their PEG (price earning to growth multiples) and still find software valuations appealing.

    Despite Infosys' stock price (Infosys was quoted at Rs. 9,700 the day we met Mr. Kapoor) having taking off there is still potential for growth considering the fact that Infosys' employee productivity is around US$ 40,000, while there are similar companies in the US with employee productivity of around US$ 120,000. And mind you Infosys' productivity has actually doubled over the past three to four years. Even if one were to take productivity improvements of 5-7% per annum and a rupee depreciation of 4-5% there is still scope for a sizeable jump in productivity improvement itself.

    EQM: What is your view on the IT training segment?

    Mr. Kapoor: I expect the training segment to show a 30% compounded growth. Computer training in schools and universities would provide the big push for training companies.

    EQM: What about NIIT? The stock got hammered the day the management mentioned that they would grow at 30% compounded over the next three years...

    Mr. Kapoor: NIIT has approximately 50% accruing from training, the rest from software development. Assuming that training grows at 30% and software at 50%, you are looking at an average compounded growth of 40%. The 30% growth estimate of the management was actually an understatement.

    Coming to your point of the fact that the stock got hammered, at that point the stock was quoting at levels of Rs 3,400, which was around 65 times. The price subsequently got corrected to mirror the future growth prospects.

    EQM: What other sectors are you looking at?

    Mr. Kapoor: I am optimistic about sectors like cement, select commercial vehicle and auto ancillary companies.

    EQM: The last I met you, you were bearish on Telco...

    Mr. Kapoor: Telco's CV business is doing well, however, the Indica is affecting its profitability.

    EQM: What do you have to say about the pharma sector?

    Mr. Kapoor: Its best to adopt a bottom up approach and not look at the pharmaceutical sector as a whole. There are segments like Indian companies and MNCs, research based companies and ordinary company, bulk drugs companies and formulators. Therefore I look at companies on an individual basis.

    EQM: But with the trend toward setting up 100% subsidiaries by top-notch MNC firms such as Pfizer you anticipate there will be a dichotomy in the multiples that pharma companies get?

    Mr. Kapoor: There is definitely an apprehension among the investors about a wholly owned subsidiary competing with another listed subsidiary. Apart from Pfizer, this is also the case with other industries. That is why Hero Honda despite posting excellent growth still finds its stock going nowhere. This is despite the fact that Honda's wholly-owned subsidiary would be competing in motorcycles 4-5 years later.

    EQM: Your comments on Bajaj Auto's valuation...

    Mr. Kapoor: We are not comfortable with Bajaj Auto mainly because they are sitting on Rs 30 bn and no one has any idea what they plan to do with it. If they don't plan to do anything, they should just give it to shareholders. Besides, it's not the scooter market but the motorcycle market, which is actually growing.

    EQM: But with the stock plumbing to its 52-week low, would you look at it from a value perspective?

    Mr. Kapoor: At some point in time, probably yes.

    EQM: You also mentioned refinery stocks forming a part of your portfolio...

    Mr. Kapoor: Primarily for three reasons first the likely relaxation of the APM before 2002, second the possibility of merger between the stand-alone refineries and marketing companies and third the attractive valuations.

    EQM: Your call on the economy in general and interest rates in particular...

    Mr. Kapoor: I anticipate interest rates to remain around the current levels. I don't expect any cut in the lending rates as long as the interest rates on provident funds are not cut. Inflation too seems to be remarkably under control, which in a way is reflective that the economy hasn't picked up sufficiently.

     

     

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