Below is the verbatim transcript of the interview.
Q: We are living in very interesting times. We wake up to new tariff announcements, new geopolitical news and announcements and so much more, but what do you think? I mean, it’s been about two months of cooling off. October-November a sobering month with the Indian market. What lies ahead? How do you think we will end the year?
A: If you think about it, what has happened over the last couple of months, it has been multiple things that have come together. On the fundamental front, the consumer demand environment has been weak, which has led to significant earnings misses in aggregate for corporate India. In addition to that, there has been a significant supply of paper, both from the IPO markets as well as from FII. So, purely from a demand-supply perspective, the demand from the mutual funds, while it has been robust, has been struggling to cope with the supply.
So, how do I see things going forward? I think the narrative right now in the short run appears to be that the US remains one of the most interesting places to invest, and that is taking the shine off markets like India in the short run. In the longer run, the economy and the earnings will rebound. My sense is first half was a little bit unusual because we had a lot of slowdown in government spending, excessive heat during the summer followed by excessive rain and wedding season getting shifted to the second half of this financial year for some Hindu calendar reasons. I am not very clear how that works, but that is how I am told it is, I see some demand rebound happening in H2, but because the starting point of the valuations was high and the earnings disappointment has set in, the market will wake to see an earnings recovery before it takes a big leap upward.
We found some sort of support at about 10% below the highest for Nifty, for example. But this is similar to what we saw in the September 2021 to March 2023 period, or more specifically, the September 2021 to June 2022 period, where we may hang around here with plus-minus 5% on the Nifty for some time.
Q: I remember you saying that some sort of correction was expected. The correction has come by. You did like a couple of tobacco names in the past as well. We have been talking about the FMCG staple space. How are you positioned on the market right now, with this decline, did you add on to some of the names?
A: Yes, I did put some cash to work. But my approach has been very bottom-up, and that is how at least, I am looking at things. So, I am looking for companies where I see high visibility of earnings over the next two to three years and reasonable entry points on valuations. Reasonably, it is very subjective, so it depends on the sector and the industry, but I am looking for earnings growth. So, I continue to find earnings growth, on a bottom-up basis, in pharmaceuticals, some auto components, chemical companies, in financial services selectively, though the MFI space will continue to provide headwinds to the overall banking and financial services space, so we will see how that pans out. So, those are some of the areas that I am looking at. Some textile exporters, for example, are talking about very robust order book indications from their customers in the US. So, exporters are a basket, especially US-oriented exporters should do very well. So, those are some of the areas where one can look for ideas, and that is what I have been doing.
Q: Could you get a little more specific when it comes to the categories here you did speak about pharmaceutical and textile, but there are a lot of infra names as well, which are looking to export to the US. Are you in the camp of any of those?
A: Yes, you could. I mean, there are companies. So, I do not want to take any individual names, for obvious reasons, but some companies are exporting, and if exports are a substantial part of the revenue, then you will see tailwinds. And there again, the last couple of quarters, saw significant delays to shipping because of the Red Sea crisis and higher shipping rates, and some of that has started to normalise, and the working capital cycle has also normalized. So, that benefit will also feed through.
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So yes, I would say, if exports are a significant number or as a percentage of the total revenue, then it makes sense. But, in infra, the only caveat I would have is that most infra companies in India have a significant government exposure and valuations are not easy to digest. So, for an investor like me, those do not work, but that is an area you could look at if you can address the concerns around valuations, exposure to government, etc.
Q: Speaking of exposure to government. What about the government itself? I mean, the companies that are run by it. There is a debate out there whether some PSU stocks, maybe defence or railways deserve a bit of a relook now that prices have cooled off, 25-50% in some cases, JPMorgan put out a note, for instance, that they are rallying behind stocks like Hindustan Aeronautics, BEL and a bunch of others. What is your view?
A: What I like in the PSU space are the PSU banks. The PSU banks will do reasonably well over the next couple of years, at least. They will continue to experience very muted credit costs because they have been late to the cycle of cleaning up. So, the recovery cycle for them will continue to feed through to lower credit costs over the next couple of years. Also, what you are seeing with them is that as government expenditure increases and some of the new investments in India come through, you will probably see an improvement in the loan growth as well. And on the deposits front, they are very well placed, and valuations are still quite reasonable. So, that is one space that I like, and you are right, in some cases, in the defence or electronics manufacturing areas, stock prices have taken a huge beating, and now they might be approaching some sensible valuations. I have not dabbled in that area yet, but yes, it does look interesting.
Q: What about the non-PSU infra names? The street believes that post Maharashtra elections there would be a fresh impetus to capex once again. We have seen a couple of these decisions that came by overnight. The cabinet has approved close to around ₹8,000 crore worth of projects in the railway space itself. So, what do you think of the rail stocks and some of the other infra names?
A: As I mentioned, I am very sensitive to entry valuations. So if the valuations upfront are expensive, then I do not want to go in there because then what happens is you need everything to go right for you to make money because otherwise you have an earnings miss and a PE derating, and it’s a very powerful combination.
Unfortunately, for a lot of the infrastructure names in the area that you mentioned, in railways in particular, the starting point valuations continue to be quite expensive for my taste. So that is one challenge. The other one is that while that problem has historically not been there for rail, domestic infrastructure companies have significant exposure to government and government payments and government disputes in the past have derailed many such stocks. So, I continue to be a little bit wary.
Yes, there might be opportunities out there. I am not denying it, but the way I think about it is that there are other areas where I can find better risk-adjusted returns. So why bother?
Q: We have not touched upon the mind and the might of the consumer at all so far. And I think this remains one of the most interesting aspects in the market today, right? Whether there is a slowdown, not slow down, is rural better, is metro, urban consumption slowing down, and then the channels themselves, there is just too much going on. Do you like anything over here, whether the platform companies or the traditional retailers or the guys who are making all the products, FMCG? What are your thoughts on consumption, and what part of it would you play, if at all?
A: I think the debate is whether the slowdown is structural or cyclical. My view at this point in time is that it is a little bit cyclical more than structural, and therefore I am hoping to see some recovery or rebound in the second half. Now, whether it is rear-ended or it is front-ended, I don’t know.
Coming to which areas that I am looking at. I am typically focusing on the top end of the consumption pyramid. I think that is where the sweet spot is, and that continues to be where I tend to focus. So, there are several players out there. Some people retail expensive products whether it is watches or it is sarees, or it is cars and so on. So, some of those things could be interesting if you can convince yourself that there is a moat around the business, and that is a very key thing because, like you mentioned, there is a lot of disruption taking place in retail and if you are looking at a business that is prone to a disruption or may not exist five years down the line, then you have to be careful about what you pay. So that is one area that that I am looking at.
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The other one I would talk about is real estate. In my mind, real estate cycles tend to be very long ones, typically lasting between five to eight years on the upside and 10 years on the downside. That is at least been the experience for the last three decades. And we are relatively early into the real estate cycle. So, real estate stocks may continue to do well. Yes, they have had a massive run and we are seeing some slowdown of demand, but I do not expect that real estate will let up anytime soon – that is my personal view.
