Let us talk about the big picture. What stage of the bull market are we in because every bull market follows a stage of extreme pessimism and disbelief, then recognition, over extension, euphoria and bubble. Where are we in that bull market cycle?
Last November also there was disbelief when Nifty was at around 13,000 or 12,000. I do not remember but if I look at parallels, I always try to search for anecdotal evidence. If I go to it because I believe that the economic environment is very similar to what it was post 2001-2002. Between 2001 and 2004, in four years’ time, the index doubled.
In the last four years, between 2017 and 2021, the index doubled. But we had very strong GDP growth from 2004 onwards and we are likely to see similar GDP growth now. So after the index doubled in four years, in the next three years it went up by 2.75 times. I do not think this time it is any different.
So for the next three years what is the possibility on a scale of 1 to 10, that markets can give double digit returns CAGR?
At least 8 out of 10.
Okay and this is after the base effect which would kick in?
There is nothing like base effect because base effect is there in the GDP also. If your GDP was at $450 in 2001-2002 and today it is at $2,000, there is a base effect in GDP but by global standards, if you look at the opportunity, the GDP may go up 2.5 times in the next five-six years.
If that happens, then the market will go significantly higher than 2.5 times and that is what gives me confidence that we will have a very strong market growth. I am not saying that markets will go in a straight line. There will be corrections. During 2003 to 2008, at least four times, the correction was anywhere between 12% to 20%. Only once, we have seen a similar correction because of Covid. I would not be surprised if we have some more corrections going forward but from that point, the market could definitely give double digit returns CAGR for next three years.
Every time we have spoken, you have said that you hardly change your portfolio because you invest with a three to five year minimum timeframe but the market conditions are dynamic you know boom and bust cycles are getting created. Stocks fly 15%-20% on a weekly basis. Have you reduced your time horizon to two to three years and if yes, in the last six months what changes have you done to your portfolio?
So my exposure to consumption remains the same because I believe that there are times when you will underperform the markets — though fortunately I have been able to outperform — because for six months to one or one and a half years, commodity stocks have done significantly well and if you do not have commodity, it is possible that one particular portfolio could underperform. But I also believe that in the longer term bull market, stocks where a lot of growth is possible and which basically are managed by a decent set of managers give you significantly higher returns over a longer period of time because of the compounding effect.
So sometimes even three years may not be sufficient to see that kind of growth but Trent in 2003 was Rs 60, 10 rupee paid up, today it is about Rs 1000-Rs 1050 one rupee paid up. Look at Titan; also Rs 40, Rs 10 paid up to Rs 2,400 one rupee paid up and these stocks have underperformed in between for a couple of years. But over a longer period of time, the CAGR they give is mind boggling and that is the reason why I prefer to hold my stocks as long as I am confident that these stocks will do well.
Coming to your question, yes I have made some changes in the portfolio. We did include sectors like hotels in our portfolio because we thought that because of the pandemic, hotels were available at a very low price. So we went and bought hotels when we were certain that the vaccine is likely to come out and that was in last November and they have done pretty well.
We look at these and do changes in our portfolio as and when required. We would be getting out of certain stocks but the core portfolio which probably is consumption will continue to hold until we think that per capita income is slowing down or the kind of growth which we had expected in the particular companies is not coming in.
How would you look at pure staples, you have been a big votary of PEs not being the only way to look at benchmarks. When consumer demand and the boom in the housing sector come back, will stocks like , , Kajaria do well?
Yes, that should do well because my basic theory is that we will reach what everyone is talking about — the $5 trillion dollar economy. Is it a pipe dream? My answer to that is no because if one goes back to 2002-2007, the actual GDP of India as per World Bank in dollar terms actually went up by 2.5 times. If I try and put some logic to it, it is very clear that though GDP grew at about 7.5-8%, it was helped by a significant fall in dollar vis-à-vis rupee.
The dollar came down from 47 to 40 and that drove the per capita or even overall GDP of the country. When the environment is such that if your GDP is likely to grow at 8-8.5%, automatically the corollary will be that your currency will strengthen and that is the reason it is in the realm of possibility that in the next six to seven years, our GDP could go up by about 2.5 times and may reach $5,000 dollar. If that happens, then even staples will do well.
You have bought insurance companies, especially life insurance companies but they are going through a downturn, Covid write offs, top line has been sluggish, underwriting cost has gone higher. What is your view given that LIC IPO hopefully should see light of the day before March?
Fear is the time to invest. It is a great opportunity also and I think insurance as a sector in India is likely to do very well. I am convinced that it will grow at about 18-20% year-on-year for quite a long time, maybe even 15-20 years. And when you are looking at this type of a sector where long term 18-20% growth is possible, then you use this as an opportunity to invest more.
It has been underperforming for the last one year and it could underperform for another six months or so. I do not know but our long term view is extremely positive on insurance.
What will be the ultimate wealth creator in the financial world in the next couple of years? Should I buy within financials and could it be a disruptive player like or PolicyBazaar? Or should one bet on a comeback of corporate banks like SBI and Bank of Baroda or keep it simple with HDFC Bank and a Kotak?
I think fintech is the way to go because those will be the companies which will show significant growth over a longer period of time. So a combination of fintech and retail centric banks could deliver a fantastic return going forward.
What is your view on those who are recommending a buy on cyclicals and industrials as the capex cycle is about to start? The view is that the corporate recession is getting over after many years now and that is where the earnings surprise would be?
I have always said that cyclical is something where my expertise does not lie but having said that, we are already towards the end of the cyclicals and now what will drive the economy and the economic growth is per capita consumption.
Having said that, within industrials, some segments could do well especially because the government is going to spend large amounts in the power sector and also in the railways. One could look at some of the larger companies which are present in these sectors. I am not so comfortable with the generators in the sense of generators of power not power generating companies. I am not so comfortable with them because they are frankly fixed ROE businesses. That is why I am not so gung ho about them but the others which supply equipment to the power sector or something like power exchanges could be of interest.
Where is your favourite stock Trent headed in this decade?
I am still extremely positive on Trent because Trent has a turnover of about Rs 2,500 crore as of now. So looking at the increasing per capita income and looking at the opportunity which it has in the other joint venture companies, I am talking more of Star Bazaar. there is a humongous opportunity there. I am very confident that it can grow comfortably at a very reasonable pace especially looking at the rising per capita income. I am quite confident.
Big returns are made when you have earnings expansion and PE expansion for some of the consumer and retail names. PE expansion is unlikely to happen and if interest rates go higher. Can investors make money in that kind of an environment while you may get 15-20% growth but the PE multiples may not expand further?
PE multiples may or may not expand and I completely agree with you but if a company is growing at 30% year on year for the next three years or two and a half years, its turnover could double and profits could double. Compound that for another four-five years and the company will continue to do very well. As long as I have confidence that the companies can show significant growth going forward, I will continue to hold companies where the PEs are high provided they are profitable and are likely to grow at a pretty fast pace. If we have a GDP which is growing nominally at 12-13% and these companies are growing at say 30%, we will get significant value out of these companies.
