markets: Sell-offs create rare windows to accumulate high-quality cos at bargain valuations: Anshul Saigal

“We are finding that situation in multiple sectors, metals; trading companies in pharma, metals, even value retail companies we are finding such opportunity in financials and across the board, even capital goods we find opportunity,” says Anshul Saigal, Founder, Saigal Capital.

So, what is Anshul Saigal buying in Saigal Capital, let us talk about it.
Anshul Saigal: So, very interesting question and as you are aware, you and I get thrill out of finding mispriced bets in the markets and the fact that markets realise what you realise today, tomorrow, that gives you a great thrill.

Of course, you make the money in the process, but it is about the intellectual satisfaction as much as about making the money. In that context, times like the first quarter of this year where markets were really on a risk-off trade and across the board everything was sold, that affords a tremendous opportunity for people like us who look for mispriced bets.
And that combined with what is happening in the US where you have so much of uncertainty because of the tariff situation, it has given rise to tremendous opportunity in the markets. When we speak to companies and we analyse companies, across the board we see multiple companies where, and these are quality companies by the way, not run-of-the-mill companies, where earnings growth in the next two to three years could be as much as two times from current levels and that is on the back of revenue growth, not just because margins are expanding.

And when those companies see correction in prices, clearly there is a disparity in underlying growth and fundamentals and the value that markets are ascribing to these companies, that offers us opportunity.

We are finding that situation in multiple sectors, metals; trading companies in pharma, metals, even value retail companies we are finding such opportunity in financials and across the board, even capital goods we find opportunity.

So, we have been in the first quarter of this year buyers and consolidators of our positions. So, that is where we are at this time.
That is one part of the story, the other one of course is what is it that you stay away from and avoid in this market?
Anshul Saigal: Earlier this month I was in the US at Omaha actually for the Berkshire meeting and what came about in that meeting was two-fold. One is that never write-off US. Of course, that was Mr Buffett’s view, but across the board when I spoke with fund managers that was the view that was coming out. But within US, the view was that you have to bet on the real economy, that manufacturing, that cyclical sectors, metals, etc, those are the spaces which are likely to do very well and so, if you look at the other segment which is the Mag-7, the tech space, which has done exceptionally well over the last say 20 years, it looks like that is the space which will consolidate going forward as also the tech space, in general IT services also.

Now, if that is the trade that is likely to play out in the US, then we will see a similar trade play out in India, with added uncertainty of AI actually subduing the growth potential of many of the tech companies going forward.

Also bear in mind, post covid these companies saw significant tailwinds in demand and in growth, of course; multiples expanded, what used to trade at 15 to 20 times price to earnings started trading at 25 to 30 times and for growth which is between zero and 5%, that is not very lucrative in our judgment in a country where growth is significant on the ground for local companies. So, this is a space that I would be cautious on and within this space, of course, there will be that odd individual opportunity which will make money, but by and large this is a space that we would want to stay away from.

Spoke about few stocks and I am just going to jog my memory. Okay got the names, Global Spirits and coincidence the next tip was actually Tips.
Anshul Saigal: You are right. I mean, we did speak about those companies as case studies.

Let us discuss those two case studies, alcohol beverage. It is an interesting space. It is a space where everybody was excited two-three years ago, but somehow very few stocks have made money and it is a space where almost a dozen companies are listed now. What is the best way to approach alcohol beverages or alcohol-bev space and which are the good case studies there?
Anshul Saigal: This is a very interesting space. If my memory serves me right, the per capita consumption in India of alcohol is somewhere in the region of 3 to 5 litres or maybe 10 litres, under 10 litres and that compares to China which is around 45 litres.

So, there is a significant disparity in consumption patterns and that is largely because of our per capita income itself being under $3,000 while China is being around $12,000. And then let us not even talk about the US which is over $60,000.

Now, as our per capita income rises, clearly consumption patterns in this country will see a sea change and say in the next 3 to 5 years we could well see the market itself doubling. Now, if the market doubles and you have identified a quality business in this space, clearly that business can beat market levels.

So, room for growth in this space is substantial. And what we are seeing is that a lot of companies are building quality homegrown brands and the market is actually veering towards consumption of homegrown brands, that is a phenomenal sort of setup for this sector to do very well.

The company that you spoke about and we spoke about as a case study, that has very interesting dynamics. It has two segments. One is the ethanol space and the other is the alcohol beverages space.

Our judgment is that as the market realises the true potential of the beverages business in this company, there is likelihood that it will get re-rated.

Even if that does not happen, downside is not there because most of the downside is in the price. So, it is a very favourable risk-reward opportunity or case study at this moment, that is how we look at this particular opportunity and there are a few others in the market where we see similar sort of dynamics.

On the other name, they announced their recent results and they reiterated their guidance where they said that 30% revenue and profitability growth is what they anticipate in the music business. Now, if that is the case and the company trades at current valuations which are somewhere close to 30 times price to earnings, for a company that that does 350% ROIC, this looks like a very reasonable valuation.

For these growth dynamics, companies with such ROIC profiles, can go up to 80 to 100 times price to earnings at some point in their journey that is what we are sort of anticipating in a name like this and which is why we spoke about this company last we spoke.