There are a lot of side themes which are popular now; ESG, EV, are themes which are getting globally recognised. Do you think we are in for more of the same which is that energy stocks, coal companies or even power companies are likely to underperform and ESG is going to get rerated more and more?
Absolutely. The theme has got global recognition. ESG and EV can be seen across the board, not only in India. Globally, the terminal value is getting challenged for a lot of companies based on fossil fuel or thermal power and so and so forth. Our approach towards it is to recognise the change which is happening and make sure that the portfolio is adjusted for disruption. The question now is when and not whether it will happen. Some are saying by 2030 and some are saying by 2040. But the path towards that transition is clearly happening.
Globally, companies are talking about carbon footprint, decarbonisation and that is a big theme to go over the next decade or so. We are extremely cognisant that even if the near term is looking extremely good, we should be mindful of the terminal value because if you do a DCF of any company, 30-40-50% of the value comes in the next 10 years but a large part of the value is in the terminal value for any company.
Our view is that if terminal value gets challenged over a period of time, it may be a value trap. In 2015, globally we were looking at many of the E&P exploration companies. The giants had six, seven PE. Five, six years down the line, the E has just evaporated and there is no PE. So our sense is that we need to be really careful in recognising the change in trends that are happening in front of us.
There are two ways to invest: either you play terminal value or you play duration. You play terminal value when you buy something cheap and you play duration when you decide to hold the stock. Where are you playing duration and where are you investing based on terminal value?
In terms of overall market, our approach is more towards duration. We do not know if the terminal value is challenged. Markets will be too charitable in giving higher multiples to those companies. We have seen time and again that in many of the companies, the near term is also good in terms of earning but if the terminal value is challenged I think there is a problem. Hence our approach is to look at companies which are agnostic to this change. We are finding many such companies among auto ancillaries.
Similarly, in the near term, thermal power plants may do well because there may be a mismatch of supply and demand but over a longer period of time as more and more countries sign the Paris Climate Convention, you would see that the change is inevitable. Finally, renewables are taking over. The storage costs are coming down and that is the big change we are seeing.
Recently, an auto battery manufacturer announced its plan for a giga factory in India and our sense is that over the next three, five years, more and more corporates are plunging into this green mission. We saw the largest company of India announcing a $10 billion capital commitment which is not small by any means. Our view is that change is inevitable. We would not like to bet on companies where terminal value is challenged. We would like to play more for companies which have longevity and which can survive this change.
Do you see the Covid crisis recalibrating the business and revenue lines for some of these pharma companies?
Absolutely. We are seeing stock specific opportunities in the pharma sector. Our thought process is like this; after every crisis the sector which leads that crisis sees massive changes either in regulation or in terms of demand and supply. Look at what happened after the 2008-09 crisis that was led by financial institutions. We saw a huge regulatory overhaul for banks, insurance companies, pension funds and so on and so forth. This has been a health crisis and most of the countries were caught by surprise.
Our sense is that Covid is not going away from us. We are not experts on that but the way things look like right now, some or other variant will keep on coming. Also the memory should be fresh for some time to come and I do not think any country would take a chance in terms of inventory of medicines, inventory of important drugs.
There is a good opportunity for a large number of pharma companies. Also, there are new things like biosimilars, injectables and many Indian companies are making good progress on that and the pipeline is looking good. On a 3-5 year basis we believe that there are decent opportunities in the Indian pharma space, but one has to be stock specific. We are evaluating companies more on their pipeline over the next three, five years and we are seeing some interesting opportunities there. We believe pharma is an interesting place to be in if one is looking at a slightly longer tem but you need to be extremely stock specific and can’t paint the entire sector with the same brush.
