Last year was about disruption in IT and technology. This year it seems it is going to be autos. Where within autos do you find opportunity to try and bet on the EV play? Or should one pick from the ancillaries to play the CV cycle?
As far as the auto sector is concerned, in case of the incumbent OEMs or even the ancillary companies, one has to watch out for the EV risk. In two-wheelers for example, big competition is coming up from Ola which is setting up a massive capacity. They are funded by private equity and could be quite disruptive. There could be many others. This is not to say that the incumbents are just going to sit back and watch their market share being taken away, but the competitive intensity in the industry is likely to go up.
At current valuations, we prefer the tractor companies where the risk from EVs is relatively lower and also the growth outlook. The penetration levels are low and therefore the growth outlook is quite strong. Secondly, export oriented two-wheelers are more of a market share gain story. Indian companies have generally beaten their Chinese and Japanese counterparts and the demand outlook over there is extremely strong.
The third segment would be commercial vehicles. As economic recovery progresses and the capex cycle starts kicking in and government activity on infrastructure projects starts picking up post monsoon, some of the CV players will also do well but that is a quarter or two down the road.
If big corporates are reducing and deleveraging their balance sheet — be it or Tata or even Birla Group of companies — why should one buy into corporate banks?
This is a phenomenon more relevant for FY22 where the credit growth outlook is not very strong. Most of it is going to be for maintenance capex or for working capital requirements but this year the growth in the bank’s earnings will come from a sharper decline in their credit cost and in some cases, the much better names. NIMs have probably peaked out and will not improve too much further from here, given that deposit rates are no longer falling any more.
The reason while we are seeing banks is a) we expect credit growth to pick up next year as the capex cycle starts picking up momentum. Bear in mind that while we are seeing deleveraging, a lot of companies are also announcing fairly aggressive capex plans in the steel sector, aluminium, fertiliser, chemicals, pharmaceuticals and so on. Also a lot of MNCs are coming into India. But the outlook for credit growth going into next year and from a valuation perspective, especially in the large cap space, this is one sector where valuations are still somewhat reasonable compared to some of the other sectors.
The near-term concerns about credit growth are temporary in nature and once the economy starts picking up, we will see a very strong pick up in credit growth from next year onwards.
What is your outlook on the HDFC group of companies?
It is also a case of some of the other banks cleaning up their books, raising capital and also asset quality is no longer an issue. So, people are looking for alternatives. It is not a case of high quality banks not being a favourite. On the contrary, they still remain in significant positions for a lot of our global and domestic investors. As and when the credit growth cycle picks up, these larger banks have the lowest cost of deposits because of very strong liability franchise. The CASA ratios are very high and they have relationships with large corporates and can meet their size requirements.
They will be the ones to benefit early on. It is a bit too early to write off some of these higher quality institutions just because credit growth is a bit weak. Let us give it some more time.
How would you advise investors on creating wealth, getting rich and compounding wealth?
First and foremost, do not be overly greedy. Investing is a very long term game. Depending on the investors’ age, one should have at least a 5-25 year time horizon. The longer the better. The first advice would be: Do not look for the next multibagger. Secondly, it is very important to do your research properly and not to make mistakes. A lot of investors in their excitement to make wealth quickly, end up making sub optimal decisions without doing proper research. The most successful investors are those who make the fewest or no mistakes. So by making fewer mistakes and having a mediocre return, we can still end up being better than having two-three multi-baggers.
Thirdly, focus on corporate governance. That is a very important factor in the long term. Invest in companies with good corporate governance.
