In the last three months, have you added positions or sold something in your portfolio or at least taken some chips off the table?
In the last three months, we have taken some money off some of the IT names which had a good run and got a bit expensive. We added to corporate banks. These banks have severely lagged the market from the fear of fintech or the impact from the second Covid wave. These banks offer deep value. So we have added to corporate banks.
There have also been some interesting IPOs. One is watchful where one is investing in. One likes companies that have the ability to execute and face no strong competition. We have looked at some of these IPOs in the food delivery space. In some of the auto component spaces which are a good play on the moving EV sector. So selectively looking at some of the IPOs and seeing the parts of the portfolios which are a bit expensive and do not have that pricing power, may get negatively impacted by higher raw material prices. So, we have taken some money off the table there.
Will the Sensex hit one lakh anytime soon or not?
We have never really looked at the numbers. What matters are the underlying reasons. As we talk today, the underlying reasons look fairly robust. When we look at internet or tech companies for India, for software services companies, the demand is resilient. These names would be close to 18% of MSCI India, the key benchmark we look at. They can easily compound at 10-15%.
Banks give higher compounding of at least 20-25% because a multiple rerating can happen. So between these two and plus Reliance, one can look at up to 60-70% of the benchmark. This should compound at least 15% for the next three years and then one can put the index targets.
The index could expand because of PE multiple and earnings, assuming that in the last couple of years, the returns have been in line with the moderate, average returns. Do you think that in the next couple of years, we could overshoot before we normalise? Markets overshoot in the bull market on the upside and on the downside in a bear market.
We cannot really have that as a base scenario. It is a bonus which plays out but invariably that is how the market works. If the view is to make the policymakers realise globally that deflation is a bigger concern and not transitory in nature, then the Fed is likely to err on the side of caution in terms of being dovish for longer. As we have huge capital flows, then we have huge nominal GDP growth and that is where India benefits. Should that situation happen, we would see an overshoot.
But the base case cannot be an overshoot. The base case has to be earnings growth and historical or slightly higher than historical multiples and if the story plays out well then the overshoot would be a bonus.
There is a consensus that earnings recovery is real and we are in a growth cycle but there are assumptions about what the earnings growth could be. It is said a lot of good news in consumer durables and consumer staples is in the price. What is your benchmark to understand that?
The staples companies are at six, seven, eight years record high margins. If one is a business owner and you do not want to give in to a new or existing competitor to gain market share. In this period of high gross margin pressure, there would be an impact on their operating margins. They may trend down by a percentage or two. They will get revenue growth but the operating profit growth would be very subdued. So unlike in the past, where the compounding for some of these consumer staples was close to 15% for operating profits, that number may be a high single digit and with other parts of the market offering better growth opportunities, these names may go through some multiple deratings.
That’s what plays out and that is where these names may do well when globally the markets are falling or when the moves are very pessimistic. But in a normal economic uptick, these names would be underperformers.
How excited are you about the primary market issues? We have already seen how the markets lapped Zomato. Nykaa, Policybazaar, Paytm and a clutch of others are in the offing?
Some of these are very interesting companies. The best part about IPOs is you get phenomenal management access and you can do a lot of research at that point of time. One may not be comfortable with subscribing to all these IPOs because some of the recent ones are priced for perfection or show flawless execution. One may participate with marginal exposure through IPOs and watch these names over next six-nine months and then increase exposure. But when we have good interesting companies which get listed, it just attracts a new set of investors. It just expands the investment universe for the overall pool of investors.
Should one look at IT from a valuation perspective? I would say Indian IT tech plus digital is going to see a big boon going forward. Would valuations be the right parameter to ascertain whether or not to buy into them?
Between mid ‘90s and 2010, these companies traded at much higher valuations because the growth rates were much higher and from 2010 to nearly 2018-2019, because the core business was getting commoditised, they were facing huge amounts of price pressures. Obviously valuations also contracted to between 15 and 22-23 times.
At current level, some of these companies have defined the concerns one had on size limiting their growth but three-four years from now, when the size becomes bigger and a lot of this digitisation efforts are behind us, again there would be a question on valuations. But things look okay from a three to four years perspective.
