How should one look at the portfolio? Value investors must be wondering what we are doing here?
There are a lot of opportunities out there amidst the high decibel media frenzy over the new IPOs. These are all cyclical things in the market. This will die down and maybe when one or two IPOs fail, the enthusiasm will wane. But there are still a lot of opportunities in very high quality sectors and companies which are turning around.
Look at some of the results of discretionary consumption companies. Look at some engineering commodities. There are opportunities across the spectrum but right now, everybody is caught up in the new IPOs and that is good for people like us because we can silently go where the crowd is not there and pick our stocks. There is enough money to be made in the high quality businesses that are not getting all the attention today.
In terms of building a portfolio, the leader of this bull market is technology. The leaders of the previous bull market were private banks and NBFCs. This time technology will lead but a lot of other sectors will also participate. We continue to be very bullish on specialty chemicals but as I said, from here on, we will have to be very selective. The days of easy money making are over. One will have to be very patient, pick the stocks and it is going to be a great time for active managers because it is very difficult to time a situation where the Nifty does nothing for six, eight, nine months and just consolidates in a range and valuations will normalise. There is a lot of opportunity in the broader markets.
Where are these hidden gems, throw some light on that please.
The entire consumer discretionary space which got impacted by the lockdowns in 2020 is likely to do phenomenally well. And there are two trends that are playing out there which is that there is massive consolidation that is happening in favour of some of the larger, more formalised companies and consumption is coming back.
Demand destruction last year was temporary but supply destruction was permanent. A lot of companies are out of business and therefore as demand comes back, this demand is going to be distributed amongst fewer players. In my opinion, after tech, it would be consumer discretionary and specifically autos and auto ancillaries which will do well because these companies are currently facing headwinds due to chip shortage and supply chain issues.
Demand continues to be very robust but supply is lagging. Once supply catches up, we will see tremendous improvement in operating leverage and profitability.
Small consumer goods companies are likely to see significant improvement. We are also very bullish on the liquor companies. These companies have reached an inflection point and discretionary consumption and premiumisation is likely to accelerate in the future.
The market is busy focussing on short-term hurdles like the semiconductor chip shortage and how it is impacting production. Auto companies are looking at increasing their EV portfolio. A billion dollar funding has come in for Tata Motors; TVS Motors may be going the same way and M&M said they are open to all channels for funding their EV expansion. Is EV the way to go?
EV is going to be a reality. It is still early days but every OEM will have to move to EV because that is the future. But it is not going to happen overnight. Certain companies are very well positioned. Tata Motors has some very successful products in the EV range which are out there and they are probably off to a very early start there but not too far behind will be many other companies whether it is M&M or the two wheeler companies who will also join the bandwagon. So I think EV is going to be an interesting space. These are early days but we believe that demand is very strong in the entire auto space now.
Most of these companies have been able to raise prices to ward off raw material inflation. Once commodity prices cool off, in the next 12-24-36 months, we see a very good cycle for automotive companies going forward from here. But here again, you will have to pick and choose the winners.
Ancillaries will also do well because they have the twin engines of both supplying to the domestic OEMs as well as exports. We have exposure to both. For example, the Q1 result of Eicher Motors was fantastic. It was the highest ever per vehicle EBITDA that they delivered despite volumes not having recovered fully. So, whether you look at Tata Motors or Eicher Motors and a clutch of ancillaries, we will continue to remain reasonably bullish.
Which is the one auto ancillary company that you think could be a pure bet on EV?
EV is still a very small portion of most of the ancillary companies right. Incrementally things will improve from there. I think the way we have played the EV theme is to bet on a few midcap software service companies which actually are better levered to the whole EV theme not just in India, but globally. Companies like Tata Elxsi or KPIT or LTTS are far better positioned to take advantage of not just the electrification of vehicles in India but on a global scale. In our view, the best way to play the EV theme is to play it through some of the very great software companies like Elxsi and KPIT.
You like consumer discretionary but these stocks with the exception of auto are not cheap. Liquor stocks are expensive, consumer durable companies are expensive. The raw material element has been an irritant for Voltas or Havells. The spike in molasses and sugar prices which has been an irritant for Radico and United Spirits. How do you view that?
Consumer discretionary is a very large space and within discretionary, from a risk reward perspective, autos look very interesting. Liquor companies could look expensive but the runway for growth is phenomenal and the bull market in liquor companies in my opinion is just about getting started in India. We have exposure to United Spirits. We continue to love that company. There are also some other areas like hotels or other opportunities in discretionary consumption where the entire premiumisation trend is yet to play out .
For example, luggage companies or hotel company stocks have not yet delivered to their full potential. We would invest in airlines stocks but they will also benefit because of the opening up. But there are restaurant chains, hotels and liquor companies right and there are a lot of opportunities in the discretionary consumption space where things are just about opening up.
I would not go by current valuations in these companies because the profitability has not yet reached normalised levels. Optically the high valuations will seem reasonable over the next two-three years as the top line starts to recover post pandemic and the margins are already at very healthy levels. Once the top line recovers, one can start to see very strong earnings growth over the next few years..
What is the entire asset allocation shift which is visible now? The SIP portfolio is at almost Rs 10,000 crore. The PMS Schemes are seeing fresh inflows. Do you think the trend of asset allocation change at ultra HNI level is here and do you see that increasing?
Absolutely. There were two inflection points which got a large part of India starting to invest back in equities. One was demonetisation and Covid was the second inflection point where people realised that equities is a superior asset class given the fact that the alternatives are not so great. So, there is a structural shift and we are just about getting started. Even today, despite the fact that so many new demat accounts have opened up, these new IPOs will also bring a whole lot of new investors into the market.
I believe that this trend is likely to accelerate going forward. Today it does not really matter whether FIIs are buying or selling. Domestic institutions and domestic retail participation in equities is strong enough to absorb any FII selling. So I think we have come a long way. We used to shudder earlier when we had a big negative FII selling and $10-15 billion would move markets one way or the other. Today they are just one of the players in the market and they do not determine the direction of the market.
Domestic money is now mature enough and the flows will only accelerate. We have something great going on here and this trend will accelerate. With the advent of the new age fintech online brokers, younger investors are coming into the market and that is good because they start at an early age and are likely to stay in the markets much longer. It is a great trend and it bodes very well for continued and sustained equity flows into the markets.
