Banks and NBFCs, auto, economy, growth and other highlights from interview with Shankar Sharma

In an exhaustive interview with CNBC-TV18, Sharma laid bear his thoughts a raft of topics. Below are the key takeaways:

Sharma said prefers small- cap stocks but clarified that those are a collection of “very bottom-up companies”.  “When I say I like small caps, the reality is that I don’t like a small-cap index but 10-15 small caps.”

Sharma said the past 18-19 months have been obviously very brutal for such stocks and as a result, the sentiment on small caps have become extremely negative.  “If you see a revival in the market on a technical basis — even if not on a fundamental basis — even on a high beta end of the market, it usually does well.”

Sharma said his biggest bet in the last two to two and a half years has been in the chemical space.  “You go and look at the list of 7-8 stocks in that space. They have done phenomenally well,” he said. But Sharma said his portfolio does not just include stocks of chemical companies. “There have been other names as well.”

People say I lost money in investing, he said, adding that his responses are two. “One is, if you look at a player like Virat Kohli or Sachin Tendulkar. Are they going to get hundred every innings? It is not possible. Okay. Their average is 50.”

“What does that mean? That in the other innings, they will have a low, you will have a zero, you will have a five, you will have a ten and you can have a whole series also in which you won’t anywhere get close to your averages. That is the nature of the beast. “

The second thing, according to him, is the way to look at the losses in the market. You can look at it in two ways, he said.

You can look at it as a penalty and you can look at it as a fee.

“So think about it as an entry price, if I take you to an amusement park and the guy tells you Rs 500 entry fee, you will happily pay but the guy at the ticket counter tells you, it is a Rs 500 penalty, you will never go there.”

Banking or non-banking financial companies (NBFCs) are businesses of pure leverage, Sharma said. “It is essentially a bad business and I am not pointing names. I am not taking names.”

As a category, banking or NBFC is a bad business, pure and simple, because the risk and the reward are never going to make sense, according to him. That is why worldwide, no bank consistently over decades makes — or it is a very small list. “They also go through a huge amount of crisis because you are making a wafer-thin margin, a wafer-thin return on equity (RoE) and you are amplifying that with a use of large amounts of leverage.”

Sharma cited the example of Hindustan Unilever Ltd (HUL) to buttress his point. “HUL doesn’t need to do that. It has no leverage and yet it will make a 40-50 percent return on equity. To make a 30 percent, you are leveraging yourself 10 times.”

I absolutely think so (need measures to help financial markets). Corporate tax rate cut is addressing the supply side, which means you put more money in the hands of the companies, which they spend or invest and boost supply. But we also need a demand push.. Personal income tax cut should definitely happen.

Sharma said it should go — “as simple as that”. I Again one of the biggest problems in India is you don’t have continuity of policies, he said.

“Why not let it remain what it was … what was the problem that you were trying to solve by imposing capital gains tax?”

The worst part of the market has been the industrials, said Sharma. There are companies in the small cap or even in the midcap space that are in some degree the pipes or plumbing of the economy, he said. “If the government is looking at a data, and I am sure they are, they will need to direct stimulus to these problem sectors and if they do that then you have beneficiaries.”

Sharma said he has a very different view from the consensus. “My view is that you cannot sell or you should not sell these assets. It is an admission of failure as a manager if I sell my company. Who is the manager of public sector undertakings (PSUs)? The government. It is a clear admission of failure.”

Sharma said people voted this government to power because of their ability to manage not just economy, but to better manage PSUs with better governance, with better transparency, less corruption. “Are you saying you have failed in that endeavour?”

Sharma reiterated that he is against selling strategic assets.

“Every country is built on the platform of their strategic assets. Is China selling strategic assets? Why can we not manage them better? That is where your question - selling is the easy part. Get the world-class managers. If the same businesses by private sector can be run well, what suddenly changes if it is a public sector?”

Sharma said automobile firms were quality companies and it is just a “tough business right now”. “But maybe the market is thinking that a minus 30-35 percent sort of decline cannot remain permanently so. So at some point you might see a sequential bottoming out. I think that is what the market is betting on.”

Sharma said he believed the economy is still hurting. One of the ways one can re-stimulate this economy is through bringing some degree of inflation, according to him. “I think this war on inflation has actually resulted in a war on growth.”

In any case some inflation is good, he said. “Excessively low inflation in a growth economy — that is a developed market thinking. That is not necessarily relevant for an emerging economy like India because through inflation producers gets pricing power, through pricing power they can have better margins, through better margins they can reward employees better.”