One of best stock picker of Indian market explains how to analyze commodity stocks, understand cycles of industry etc
Please read our summary of his interview below:
The interview starts off with a question that seeing the environment which supports taper and higher yields would it be right to stay in the market or exit?
Kenneth replies that we have already seen the worst in the March 2020 and if the companies have survived that traumatic period than basically these small corrections won’t really affect them.
He gives a critical insight about portfolio construction; he says that if your portfolio in the times as bad as March 2020 has corrected around 15% than you don’t have to worry too much about it.
Another crucial insight that Kenneth touches upon is capital consolidation. He says that whenever hard times come the weaker link of any particular sector gets wiped out. The company that survives this period or if we say in accounting terms has a strong balance sheet will grow really well when the situation turns good. What happens in the weaker market is what we call supply consolidation.
When we invest based on the cycles, the growth normally stays stagnant for quite longer periods of time but when growth comes in it comes in magnificent ways.
Kenneth talks about the role of energy sector in shaping economy in the coming years. He says that we have not seen investments into commodities for quite some time now. Because throughout the cycle we have not seen much efficiency in terms of utilisation of capacity but the demand was still there. He thinks that even though the government provides subsidy and china leaves that product altogether still the company which is more efficient will win.
It is the simple ratio of asset turnover. If I am able to generate more sales with the given capacity than even though the margins are less as seen in the commodity sector we can still end up generating high returns.
Kenneth brings a crucial point where he says that in the commodity sector the role of price is huge. With the demand of commodities there is a scope of huge price increase. He says that if the company manages to get debt free with two years of cash flow and with rising prices the valuations may go through the roof.
Would the returns be compromised if there is a cap on the price increase? To which Kenneth replies that the same scenario repeated itself with the commodity steel but still there was a substantial shift in the price level because of the huge demand.
Kenneth shares a brilliant insight wherein he talks about some chunk of his portfolio is invested in dollar denominated companies. The reason for that is there is a broad consensus that oil prices will start to increase which is not good for India which can lead to the depreciation of Indian currency.
India is much better placed as compared to previous situation of crises in terms of foreign exchange reserves.
One of the great things about Kenneth is that he is very clear as to what he wants to focus on. He clearly does not own any state owned enterprises, he doesn’t have much opinion on the macros, instead he looks for more micro level stuff.
In the services sector, Kenneth is bullish on the technology space. For BFSI he says that the retail branches segment has become a lot more fragmented considering the entry of fintech, they might see a correction in price level.
Kenneth is of the opinion that the platform businesses are winner takes all businesses. There is no simple way to value these companies.