What is your view on the markets at large and the fabulous runup in midcaps as well as large cap names? Is this upward trajectory sustainable?
I think so. What is driving this rally clearly is a rotation out of global debt funds into equity and then from the equity of developed markets into the emerging market. India is getting its fair share of flows. I would like to believe that we are in still early stages of that rotation and it will pick up further pace next year. Just driven by flows, the rally should sustain.
It is arguable whether the valuations have run ahead of themselves but what we are seeing is that the earnings upgrades will also kick in as companies report better performance than analysts’ expectations. Barring some unforeseen events, this rally should build momentum from here on.
Financials are at the top of your allocation list. What are the sub segments within the financial theme that you are betting on?
We do not have an extensive financial services portfolio. We have HDFC Bank, HDFC Lt., Bajaj Finance as the three large players in our portfolio and we will continue to hold them and add on to them because we think that if India’s GDP has to grow, at some point of time, at 8% per year these banks and organisations will grow at at least double that pace. We are very confident that in a country like India, people still find it difficult to give credit and also invest. These companies will continue to grow the valuations which even by historical standards are pretty reasonable. So, we will continue to hold and add on to them. These are great franchises. I really do not know much about public sector banks. We do not invest in any public sector enterprise.
ICICI Lombard is one of your top five stock holdings. What is your view on the insurance space?
We are very positive on the insurance space. We have done a lot of global benchmarking and we think that India is just scratching the surface as far as insurance and protection is concerned. Insurance is a word that we use as per industry norms. As demographics change, younger people are coming into the working force. One of the priorities for them is to get protection for themselves and their family. That is a trend that will continue.
Recently we saw that post Covid, the average amount per policy for healthcare has already gone up. For these insurance companies — both life and non-life — there is a huge multi-year, 5-year, 10-year growth runway for this space. We have HDFC Life in our portfolio as our bet on the life insurance space.
Another good thing is that this space has already consolidated very fast. It is not that the industry has many players. The big players are getting bigger. They are taking away market share from public sector insurance companies and that trend will also play out. All in all, we are very positive on insurance space for maybe next 10 years.
Another portfolio activity is your complete exit from two alcohol-based beverage companies. What prompted the move and have you replaced them with any other names?
We had two leading alcohol manufacturers and we were very positive on them for a long time. But then as we started talking to the industry stakeholders, we realised that the government is over-regulating this sector right from manufacturing in terms of the MSP they have to pay for procuring the raw material and that excise duties on manufacturing.
The distribution is completely controlled by the government and advertising and promotion is banned. So, the brands are great, there is customer demand but you are playing that game with both your hands tied behind your back.
Unfortunately with a lot of disappointment, we had to exit these companies. Hopefully, when the industry structure changes, regulations come off, we will look at them again. We have redeployed this money into adding to our bet on consumer internet space which is Info Edge. It owns some absolutely great properties – Zomato, PolicyBazaar, Naukri.com. These are all industry leaders. When we look at their valuation benchmark with global companies, they are still at a very nascent stage. It is a great way to play consumer internet space in India. We have added Godrej Properties which is a real estate leader. These are the two additions.
Since the March lows, what kind of rejig have you done?
We have a very well defined portfolio strategy which is called a leader portfolio. We only invest in the number one company in a high growth industry. Frankly for us, changes have been minimal. We got out of companies in the entertainment and travel space just about the time that Covid struck as we thought they would be impacted in the long term. So, we have got out of companies like InterGlobe Aviation, PVR, Phoenix Mills. Other than that, we have not had to do much portfolio rejig.
These are also great companies. They are just caught up in a tough time and so we watch them, track them and maybe when things change, we will relook at them.
Where would you place your bets? Which sectors would be your top two or hree bets?
We are very clear in terms of where we see opportunity and there is a huge amount of wide space right in front us as far as sectors like healthcare are concerned. Apollo Hospital is one of our biggest holdings because we see it not only as a hospital company but it is a great converging play of hospitals and pharmacy.
The pharmacy revenues are now higher than hospital revenues, diagnostics and also telemedicine. These four things put together give you a very unique business model that is not there anywhere else in the world. You can play India healthcare with just one single company. Then we see a great opportunity in the insurance space as we already discussed. Financial services is also another space but the most interesting emerging theme for us frankly is the PLI driven domestic manufacturing.
I think that would be like a Y2K space for India as far as domestic manufacturing is concerned. It would give Indian manufacturers the scale that they never had to go out and compete with companies like China or Korea in some of the traditional industries like electronics and auto components and even pharmaceutical ingredients.
We think PLI led manufacturing is going to be a game changer and for that reason we have Dixon in our portfolio which has already done quite well and we are very hopeful about that company’s performance.
