We are in a bull market but it does not feel like a bull market. Am I right in saying that?
Well, August was tepid for mid and smallcaps and the largecaps have just played more of a catchup game and selectively, even within the mid and smallcaps, there have been pockets which have continued to run up and march ahead. So, if you look at just August as a single month, maybe yes. If one has not been in largecaps, then obviously one may have experienced some kind of a lag; but otherwise, it has been a great time whether you look at it from a quarterly or a one- year perspective.
It has been fantastic for bottom up stock picking and there has been a very broad-based rally which has ensured that one has not missed out on anything. It was just one month of pause for the mid and smallcaps, before they start moving ahead.
A sector which you have been bullish on and got it right is the IT space. With each passing day, the relevance of Indian IT companies as a business model is going to get more evident. Do you think markets are pricing in all the good news, all the good scenarios for FY23 and FY24?
It looks like. Clearly technology has had a brilliant run though it pales in comparison to what we saw in the late 90s but nevertheless it has been a brilliant move for the entire technology pack and across-the-board, largecaps, midcaps and smallcap technology stocks have witnessed huge amount of rerating given that globally there is a move towards digital transformation and that opportunity has got fast forwarded.
In addition to that, margins have been fantastic, because of which we are seeing valuations at levels at where they are. I would probably think that by and large, a lot of the good news is priced in — be it in terms of revenue growth or even sustaining margin.
My view is that clearly now no longer is the technology pack relatively attractive or relatively cheap and to that extent, one should exercise some bit of caution and not just participate in the kind of rush that we have seen currently. It is time to step back for the entire technology pack and start evaluating other opportunities, where the earnings growth relative to the valuations are way more attractive.
Would you like to filter in a name or an example where you think both earnings growth and valuations are favourable?
We have been positive on the industrial pack and we have been owning for a pretty long period of time. If I were to extend the industrial space and get into the capital equipment space, then a couple of names that we have been very constructive about is ABB Power Products which is now part of Hitachi. That is a business that we have been liking quite a lot, strong capabilities across the power sector, looking at renewables and of course have a bit of role to play in the EV space as well with some of the strategic tie-ups.
The other name that we have been liking in that space of late has been Triveni Turbines. As we see capex happening in the private sector in areas like cement, ethanol and that entire pack, the demand for turbines is expected to be very strong and most of these players are likely to have strong price hikes given the kind of raw material hikes that they have witnessed.
All in all, we believe that sectors, spaces, industries and names like these which are very capital efficient, light on balance sheet, with little or no debt are excellent opportunities from a medium to long-term perspective.
What is going on with real estate? The monthly home sales for August have been the best so far in about 10 years. Given the run up that we have already seen in realty stocks, is it better to play this revival via the ancillaries, paints, tiles, sanitaryware etc?
This has been a very exciting space and so far the best way to play this space is to look at the building material companies like cement, paints, tiles, wires and cables. The entire pack has done extremely well.
Now with public trying to shift over to the actual real estate plays and the home developers out there, we have seen a lot of consumption -led demand over the last four to five quarters from last March to this September. That means actual home buyers are buying homes which is positive and it helps to clear a lot of the inventory backlog. Once the inventory wanes and we see some bit of price hikes happening, investment-led demand will come into the real estate space.
That has been the experience of the past cycles that once other asset classes do well and business momentum picks up, the rally eventually spreads even into the real estate space. And I clearly believe that it is time now to look at some of the real estate stocks. In addition to that, of course, the building material space, especially the wires and the cables space looks extremely exciting and constructive from a medium term perspective.
Poster boy Zomato aside, there have been a slew of IPOs and many more are slated for September as well. Have you participated in any or are valuations holding you back for some of these bigger names like Nykaa, Policybazaar ?
We have been participating post the listing. So far, we have been geared only towards profitable capital efficient players, companies which are more of challengers rather than necessarily the number one players. We believe those kinds of plays will report better earnings growth going forward. So far, we have stuck to profitable capital efficient challenges in this space and we have done that in the
space. We own Angel Broking which is a challenger. We have recently bought into the travel space with EaseMyTrip which again is a challenger. What we like about them is that they are profitable and they aspire to remain profitable and be able to put those cash flows to work in some of the adjacencies that they have identified going forward, thereby creating room for even more long-term structural growth. We have been very selectively participating on a post listing basis in some of these digital names.
One of the factors you mentioned is the aspiration to continue to be profitable. Now, a whole lot of companies are coming to Dalal Street which may not have that feature of making good consistent profits. Does that mean that you would prefer not to bet on these new platform companies like Zomato or would the parameters for looking at these names be different?
We like platforms and we clearly believe that platforms are going to be the core of sustainable business strategy for any form of the future. We really like platforms but at this stage, we have enough choice and within that, our preference has been to pick the profitable names.
So far, we have stayed away from platforms which are not yet profitable but never say no! Who knows, tomorrow we may see a business that is making losses for a few quarters but essentially it is going to create an excellent and a very sustainable business proposition for the future. It is quite possible that we might get constructive at some point of time but as of now clearly we are gearing towards high growth profitable franchises.
How would you approach commodities and metals? These are very cyclical plays and a lot depends on global news flow and commodity prices?
Commodities are a best play on inflation. Globally, inflation has been quite sedate over a long period of time. It could be around 2-3% for the world as a whole. Commodity prices just catch up with inflation. So if you see commodities have not moved for 5 to 10 years and then suddenly over a few quarters they do catch up. Beyond that, there is no case for commodities and to that extent this is a space which we have essentially avoided because while there are a lot of players which have demonstrated scale, essentially it depends on global prices and therefore that is a space we have stayed away from.
Obviously, it has been a paradise for traders and probably the volatility out there gives great opportunities for traders to make the most over a short term. But I believe that these are not strong investment candidates from a medium to long term perspective. There are several more exciting sectors and exciting businesses to participate in.
Your choice of stocks — be it Angel Broking or easemytrip are brutally competitive businesses with no moat around them. There are half a dozen companies which are giving you an option to book online travel. Similarly, Angel Stock Broking is not the only broking company which is now moving digital. There are companies which have been disruptive there. Typically investors look at what is called moat investing. What is the USP in these two businesses?
We have to always keep in mind that disruptors can also be disrupted and this is a reality for even both these businesses. Both these companies have a strong strong positioning towards growth and towards gaining market share and in the process, remaining profitable.
They have currently used these cash flows to get into some other businesses which are adjacent to their current business and trying to create sustainable enterprises. Both these businesses are currently gaining market share and that is a huge positive. We have to keep monitoring them on a month on month or quarter on quarter basis. One can keep riding them as long as they continue to gain market share and grow and return excess cash to shareholders. An exit strategy has to be kept in place for times when you see them lagging behind or getting disrupted.
In a world of constant challenges how sustainable are moats? One has to see whether the disruptors themselves are going to get disrupted in the future or not. No platform is permanent, no opportunity is permanent and no player is permanent.
