When we spoke last, you were relatively cautious. In fact, today Kotak has come out with the second cautionary note, saying that it is all greed out there. There is no fear at all. Do you concur with their view?
Jyotivardhan Jaipuria: Yeah. What is happening is obviously the valuations are not cheap. And if we go back into history, buying markets at 20 times one year forward has not really led to any meaningful return over the next one-two years. So to that extent all of us are very cautious on the valuations, what it is. The good thing, of course, is though the valuations are expensive, the fundamentals still continue to be good. The result season just ended. I would say the result season produced earnings, which was slightly better than what one would have thought at the beginning of the season.

I think most consensus were expecting earnings growth of 12-13%. We have ended up with north of 15, I think closer to 17% earnings growth. So the fundamentals continue to be good, but at the same time, valuations are not cheap. So for us, probably a time and price correction is required to bring valuations back to normal. So far, it is not looking like we are getting a price correction, but hopefully we will get a time correction which makes it a little more elongated and range bound sort of market.

Does it also mean that you have trimmed some exposure where you have made some major money or it is that you are not buying new, you are staying put with your current position, but you are not buying a fresh?
Jyotivardhan Jaipuria: On the margin, I would say our cash is higher than what it was at the beginning of the calendar year. So in some sense, we have increased our cash position, I would say by around 200 basis points, relative to where we were on January 1. For us, it is slowly building up some cash. So there is a war chest in case the markets correct and some of the stock prices become very appealing, then it helps us to buy at those levels.

PSU insurance stocks have climbed very smartly to the under-owned and unloved area of the market. Do you see merit in any of them? Do you have exposure or you missed it too?
Jyotivardhan Jaipuria: No. So we have not had exposure. Like, generally, we try to take calls, which are more, we do not churn our portfolio too much, our churn ratio is very low. So for us, banking is the space and financials, which are related to the stock market, those are the spaces we have been playing with. So we have not really bought insurance for the last three years.

Okay, fair point. How about two-wheelers? Today, the way TVS Motors and Bajaj are running away, are they discovering something new? Is it new launches? What exactly is triggering this re-rating as far as two wheeler stocks are concerned?
Jyotivardhan Jaipuria: In the whole auto segment, the two-wheelers were initially the laggards in the segment and you know, the cars and CVs were doing better. So the two-wheelers are playing a catch up. Again, we are a little contrarian in some of this. We are actually trimming autos for us. We have seen the best of autos over the last 18 months. I think the next 12-18 months will not be a great period for the auto majors. There are some ancillaries which we still like. But what we will start seeing over the course of this year is that month on month and year on year sales numbers will start to look much more muted because the base is catching up.Interesting. There are some very beaten down auto ancillary names. Today, in fact, we were speaking to this company called UNO Minda and we got the sense that they are bracing for big demand going forward, buying new parcels of land and expanding capacities. Do you have any exposure to any of the auto ancillary names and what is your sense of this space?
Jyotivardhan Jaipuria: Like I said, we still own some auto ancillary names. I would break this auto ancillary into two parts. One is people who cater only to the domestic and people who cater to domestic plus international. So what happened in the last 18 months is people who are catering to international players, which was exports, that part has been under pressure because of a slowdown in demand. Those companies have got hit, the people who are catering to the domestic only, they have done very well and, they continue to do well. We continue to hold a lot of these stocks which are more exposed to the domestic market. But some of these names which cater to international customers are starting to look attractive because they have become cheap, they have underperformed for quite a long time. And for us, it just gets down to, okay, at this stage, what is the margin for making a lot of money and it is probably starting to surface here.

One is getting a sense that in the new environment deposits may continue to remain a bit of a challenge, while credit growth itself is slightly sombering. But when we speak to some of the SME-oriented lenders like U Gro or Poonawalla or some small finance banks, they appear to be pretty comfortable with growth being 30-35% because of the SME nature of their books. Do You find it risky or do you find opportunity here among lenders?
Jyotivardhan Jaipuria: There is opportunity among the lenders and we are playing a mix of NBFCs and the banks. From our point of view, if you look at the way the market is positioned today, actually the banks are standing out as one of the relatively cheaper or relatively less expensive places, because it is not like nothing very, very cheap in the market today but the banks are starting to look good.

In the last few quarters, we have seen disappointment in terms of NIMs, which we were expecting to happen because it is a very cyclical play. To some extent, a lot of the disappointment is starting to get baked in the price. There are some lenders which are trading at very attractive prices to books of less than one time and that is where we have been focusing on.

How is the earnings growth looking for your portfolio right now versus the valuation it is at?
Jyotivardhan Jaipuria: We run two portfolios. One is a largely small and small and midcap portfolio. That part, the earnings growth has been really robust and we have done earnings growth of close to like 30% plus for that whole pack. In general, if you see for the Nifty companies also the earnings growth for this quarter was 17%.

We will probably end the fiscal year with earnings growth of close to 25%. Now, if you just look at this break up, the first half was earnings growth of over 30%. So to that extent, the second half is going to see a slowdown. But 25% is going to be really healthy because if you think of the US, earnings growth is going to be close to zero percent. It is going to be low single digit earnings growth. India is standing out in terms of earnings growth as well as economic growth today.

There was some great commentary from Natco or even Glenmark that sparked big rallies in these two names. What is your own take on pharma? Do you like any of these names or any other which you have bought into?
Jyotivardhan Jaipuria: We like pharma a lot. We got quite positive on the US Generic pharma because our view was that the price erosion we have seen for the last five-six years is starting to bottom out. The price erosion is going to be much lower than what we have seen in the past. And so we bought a couple of names which cater to the US Generic market. And that is one space which had been under owned for quite a long time. The stocks had underperformed and that is where a lot of money can be made.

Even the other spaces like we own a CRAM company in India, is a very exciting space and I think it will do very well. We have reduced our exposure to domestic pharma. Domestic pharma is something we have played for the last couple of years, but that we sold and we moved to more US Generic facing pharma. So in pharma, there are many segments actually, obviously, and each company has its own growth path. In general, the US generic space is something which will be exciting over the next 12-18 months.

A quick view on the PSU pack? The opinion is pretty divided right now. Some say that there is a structural re-rating which is underway and even after the rally which we have seen in PSUs, there is room for more. Others believe it is a bubble in the making and should be avoided. Which part of the argument are you from?
Jyotivardhan Jaipuria: We do not look at PSUs as one basket, but we tend to look at within each segment. Because each of these, they are clicking to a whole lot of segments. So within PSU banks, we look at PSU banks versus private sector banks and we buy whatever seems more compelling in terms of valuation. I would say, somewhere in some of these defence and railway stocks, valuations have probably run ahead of themselves and that is where you could see some price correction.

But some of the other PSU spaces are still okay. Oil and gas is one area where we have not seen any meaningful share price increases. That could get interesting in the PSU pack. I would say think of it more as each sector rather than think of it as a PSU in general.

(You can now subscribe to our ETMarkets WhatsApp channel)