Rajat Sharma | Portfolio Allocation: Now shifting from debt to equity; back to private banks, FMCG, IT stocks: Rajat Sharma

Rajat SharmaFounder and CEO, Sana Securities, says they are going back to the drawing board and moving away from many overheated PSU and defensive stocks. They are returning to a core portfolio of large-cap private sector banks. Sharma says he is also positive on FMCG, a sector that has not performed as well as the market.

Sharma further says that Sana Securities has been in a cash-heavy position for almost six months now and its portfolio is around 38% to 40% debt to clients. So, he feels there is a lot of dry powder. So instead of not waiting for the dip, he is now taking profits and gradually investing in equities.

What do you think about the strengths we witnessed in HDFC Bank, Kotak Mahindra Bank on Friday? Is it finally their time to shine?
Rajat Sharma: First of all, a disclosure, I do not have any of the large private sector banks in my portfolio. Having said that, I agree that HDFC Bank, Kotak and IndusInd Bank are at a price where you can consider adding them to your portfolio, at least gradually. So we are doing that and the reason is that two things have changed for these banks. First, historically, they have not been trading at the valuations at which they were trading about five to seven years ago. HDFC Bank, which was consistently trading at about 27, 28 and 30 PE multiples, is now trading at 18. The other thing that has happened is that the RBI governor has been talking about credit growth as a problem and low CASA deposits in these banks.

Credit deposit was skewed in these banks. The last budget has taken away the benefit of investing in debt funds from a tax perspective and many investors and institutions, especially those who had parked money in debt funds, are likely to return to banks. This way, banks would have much more raw material to extend and advance.

When we compare private banks with PSU banks, we see that the latter have come a long way. I believe that Kotak Bank and HDFC Bank, which have given around 30-40% return in the last five years, are now available at a very good price and one should start adding them slowly. So, we are going back to the drawing board and moving away from a lot of these overheated PSU and defensive stocks. We are going back to the core portfolio of large private sector banks. One of the themes that I am positive on is FMCG, again a sector that has not done as well as the market. So that is my broad view of the market.

Where would you take profits if markets fell even further?
Rajat Sharma: If you are not sitting on any fixed income or cash, meaning you are not investing in fixed income, if you do not have the money to buy at the bottom, then definitely do it. With that in mind, I have been sitting on a lot of cash positions for almost six months now. Right now, my portfolio is about 38% to 40% client debt. We deal with different clients, but overall, if I look at the total size of my assets, a lot of them are dry powder. So I would suggest not to wait for the bottom and take profits now, but gradually invest in equities.

You should consider sector rotation and among the sectors that I really like right now, private banking looks attractive. FMCG is the sector where we have done most of our buying, whether it is Asian Paints, Hindustan Unilever or ITC, which have reported quite flat numbers.

But in the next hundred days, there will be a lot of value unlocking as the hotel business gets listed, large cap stocks in FMCG, private banking, even IT. Don’t compare it to what’s happening in the US, where a lot of IT stocks, especially NASDAQ, have gone up a lot because of the whole AI boom. Indian IT stocks are still very much traditional, legacy businesses. Infosys currently has a dividend yield of around 2-2.5%. So that’s the sector you should be looking at. Frontline stocks from sectors that are available at reasonable valuations and moving away from PSUs, defence and a lot of stocks that have gone up a lot.

What do you think about industrials? Cummins was under pressure on Friday. The parent company’s comments are not very impressive. Does this signal a reversal for some of these industrial names, as even the budget allocation has failed to impress the market as a whole?
Rajat Sharma: I can expand on the point I made earlier about stocks and sectors that look overvalued. Industrials and infrastructure as a whole look a bit stretched. But first, I’ll reveal the stock that we added to our portfolio this week, which is Heidelberg, which is a cement company.

Cement as a business fits my investment style perfectly. It is one of the sectors that will never lose money. Temporarily, stocks may fall, but the long-term fundamentals are always good. Right now, Heidelberg as a stock currently has a dividend yield of around 3.5% and what many people don’t see is available at a price that yields a multiple of 30.

Cement companies took a major hit during Covid when everything was shut down and since then this is one of the stocks that has improved its earnings per share; the EPS has gone up. They have reported a 70% increase in EPS to 7.3 which is a very healthy increase. This stock is trading at a discount. So this is one of the stocks that caught my attention and personally, the market is a bit unaware of it because the way they are improving their profitability, this is a debt-free cement company that is looking to grow. So we have added it to our portfolio.

Dividend payout has been consistently high. Even if markets were to fall, I don’t expect the stock to fall that much. I look at the entire industrial and infrastructure sector as a whole. I think most stocks like L&T and others are trading at extreme valuations. There is a lot of talk about Cummins. I haven’t gone into the details of the stock, so I can’t comment on that.

What’s your take on the earnings season so far? Yes, there have been a few disappointments, but has there been anything that has impressed you in particular, a stock, segment or sector?
Rajat Sharma: Yes. The stocks that I am considering – whether it is yesterday’s ITC, Tata Motors and others, everything that I follow and have in my portfolio – are in line.

Often people try to buy stocks that are not doing well or are not doing well. But looking at the numbers of Tata Motors. I thought that this is one of the stocks that we should add more because despite really strong earnings growth, the stock is doing poorly. Again, this is not in line with estimates, but that’s what I was looking at, their profitability has gone from Rs 3,200 crore to Rs 5,500 crore. So very strong numbers.

They have a leading market share in the passenger vehicle category. They have three front line vehicles and five more in the pipeline. The commercial vehicle category accounts for about 14% of their revenue. I think that share will probably increase. So, despite the growth, the stock looks cheap right now. If you forget what the stock has done in the last one, two or three years, if you just look at the fundamentals, it is trading at about 13. This is the future, electric vehicles are coming, their JLR business is doing well and they have electric vehicles in both Jaguar and Land Rover. They have about 33,000 advance bookings, so everything is looking very positive for the company.

Again, the only doubt is the fear that everything is overvalued and could fall. This is one stock that is not overvalued, but given that it is such a high weighting in many indices, it would fall in line with the markets. This is a stock that you should gradually add to your portfolio. If I may mention one more thing that I mentioned earlier.

Why I said FMCG is something that we are very positive about and we talked about the MPC meeting, of course, is that there will be no rate cuts, food inflation has gone up by about 12.5%, so that’s not going to happen. I hope they don’t raise interest rates, to be honest, but that’s a very seasonal thing.

In the monsoon, food prices are rising, so we have food inflation, which would again help FMCG companies in the second half of the year as inflation stabilises and input costs improve. We have a sector that is already trading at very low valuations and inflation is set to come down, so you can expect Q2, Q3 and Q4 for FMCG companies to be very solid. So look at buying stocks in this sector, the stocks that I have mentioned. We have added HUL and Asian Paints, definitely adding at this point.

Were you talking about ITC, the stock you recommended just before?
Rajat Sharma: I talked about three stocks Hindustan Unilever, Asian Paints and ITC. ITC again reported numbers, they were quite flat, I mean, as expected, but the most important thing that will happen for ITC is that in the next 100 to 150 days, their hotel will be listed as a separate entity and we have seen that whenever that happens in the company, there is some value unlocking.