stocks to buy | Dixon | Amber: Why Abhay Agarwal prefers Dixon & Amber to Voltas or Blue Star

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stocks to buy | Dixon | Amber: Why Abhay Agarwal prefers Dixon & Amber to Voltas or Blue Star

Abhay Agarwal, Founder & Fund Manager, Piper Serica, says “outsourced manufacturing as a concept is here to stay and it will reward large players. While there is nothing wrong with branded players like Voltas or Blue Star, we would like to back very efficient, large and getting larger manufacturers like Dixon and Amber purely for the reason that in India, nobody has seen the benefits of size and scale. I think these companies will demonstrate that. They have already demonstrated that in terms of their market price performance also.

There is a manufacturing renaissance happening in our country right now. Just seven households out of a thousand have an air conditioner at home. The number of those having washing machines is even lower. In the last two, three years, washing machine and air conditioner sales in our country had stagnated a bit. Industry was on a slightly slower growth. Would you buy an air-conditioner player like Voltas and Blue Star or would you go in the direction of those who are manufacturing for them like Amber or Dixon?
Abhay Agarwal: I think our bets are already in the latter category because we like scale and manufacturing as a segment rewards scale. So the larger you are, the bigger you are, you can drive tremendous efficiencies of size. And that size gives you higher margins, higher growth ability to get large customers. We have seen this play out very closely through Dixon, which has gone on from strength to strength, from just being the largest LED TV manufacturer to getting into mobiles, other segments.

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Look at what their peers like Foxconn, Winston are doing. They are really pushing the envelope where Foxconn is saying that they may actually start building electric vehicles, four-wheelers for their customers. I think outsourced manufacturing as a concept is here to stay and it will reward large players. While there is nothing wrong with branded players like the ones we mentioned, we would like to back very efficient, large and getting larger manufacturers like Dixon and Amber purely for the reason that in India, nobody has seen the benefits of size and scale. I think these companies will demonstrate that. They have already demonstrated that in terms of their market price performance also.

Nomura and CLSA have had a bit of a cautious view. They were both quite positive on financials. The updates that we have got from HDFC Bank or PSU banks like Bank of Maharashtra, Central Bank, or even the smaller names like RBL, have been quite positive. Even NBFCs for that matter, a case in point being Bajaj Finance. Why is it not reflected in the stock price with the enthusiasm we are seeing in the rest of the sectors like real estate, for instance?
Abhay Agarwal: I think the reason is that some of the largecap financial services, companies, banks, and NBFCs are already fairly owned, so they do get incremental flow, but this is not a new story. I mean, this has been a story fothe r last five years. We have seen the Bank Nifty do very well year on year for the last five years. As a result, this is already a very large part of portfolio allocations.

As fund managers look for newer stories, newer opportunities, financial services, unless there is a very high growth stock, there is very little appetite to add now, right now. Where the action is still emerging in the financial space is in slightly smaller players, players that are focused on microfinance or smaller banks like say a CSB bank or say microfinance company like Credit Access or Spandana Sphoorty because these are growing faster and they are able to target a very large customer base just because of their business model.

My expectation is for a while, just because these large banks and large NBFCs are fairly owned and fairly priced also by global standards. In the US, the large banks have underperformed the indices, they are almost down 25% over the last 12 months. In that environment, the appetite for larger banks would be limited, I would say.

The Dabur commentary on Q3 updates seemed to be suggesting early signs of some recovery being visible on a sequential front. As it is they are a very conservative management. We have seen that some of these stocks like HUL, Dabur, Maricos of the world have already bottomed and started gradually moving up. Would you look at this space at all?
Abhay Agarwal: No, I would. We are looking at it because the good thing is the valuations are not stretched, compared to what the volume growth can be over the next three or five years. And these are very well-run companies. In that whole segment, there is Lever, Nestle, Marico, Godrej and Dabur – a bunch of large companies that have already built absolutely amazing distribution. With downwards adjustment in their valuations, they would be tempted. We would wait to see the quarterly results, their commentary on volume growth and impact of lower commodity prices on their margins and then make a bet.

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