I guess the markets have surprised us with magical strength.
Yes. The market has been stronger than I would have thought, particularly in May. Before that and after that it has been okay. I would have thought that it would be more sedate as all kinds of things were happening and there was very clear evidence that some sectors would be more badly hit. But this year cannot be a repeat frame for frame for what happened last year because people have been hurt more badly economically, emotionally, psychologically and therefore something has to give. But for the moment, everything is hunky-dory as far as the markets are concerned.
How should one approach this kind of market? The temptation to sell is high but it is buying and participating and not selling that is making money. How does one deal with it?
My theory has been that in the market, all the time, some one-third of the stocks do very well relative to the market. It is just the way the market is defined which is an average of all the stocks. My point is that two contradictory things cannot happen simultaneously which is that every commodity company says that the commodity prices are rising because of what is happening in China or whatever else is happening and then every consumer durable company says that I will normally pass these on in a few weeks or in a few months time.
The same thing happens with the oil companies. On one side, ONGC is going up and on the other side, the guys who consume energy as an input or are oil related are saying we will go up and that is what I feel is different. The whole market going up means that it is not being driven much by fundamentals and we cannot even say global liquidity is driving it right now.
I think it is being driven by retail investors who suddenly feel that they are in control like it is happening in the US. You can call me an old guy or guy whatever, but I do not think that some of these things deserve to go up the way they have since people are only trading off the headline. They are not trading off what was discounted or the valuation but just of the headline.
A lot of new companies will go public soon. Paytm, Lava, Zomato, Delhivery. You like to buy high growth businesses. Is that a high growth space which you would be looking at as a public investor?
There is a big difference with what we did in the 90s with stocks like Bharti or
. We had most of these stocks in the early stage but that was because we were ourselves acting like private investors in the public market and these companies were going public at a very early stage in their life when growth was ahead of them.
For example, Zee in 1998 had a market cap of some $15 million and we owned 10% of the company. It went up some 100 times. Today most of these companies are coming to the market after being around for 10 years and where a high part of the growth has been squeezed out because of private funding before they go public. So this will not be as straightforward as before as these companies are going to come at much higher than market valuations and a large part of the early growth would have already been enjoyed by the private investors. So, it is not going to be the same.
The private companies cannot have it both ways that they first go from zero to ten and twenty and thirty-billion-dollar market cap while being private companies and then come to the public market. Last time when companies like Infosys got listed early, it went up 1,700 times and Zee went up 100 times, remember those companies went public very early. So the new ones will be normal high growth companies. We are interested in one or two companies but we are not interested in the others today without even meeting either of the companies but by just knowing what we know as investors in general.
Some of the more preferred names are already trending at extremely strong valuations. While they may be fundamentally very strong companies, if it is too difficult to get into some of these names for retail investors, should they wait for corrections?
No. In general, the markets have the ability to generally give 13-15% returns per annum not specifically over any one period but annualised over multiple years and that has to do both with the equity risk premium. Like if the debt guys are giving 5-6%, the historical premia would be 5-6%. So you can get 12-13% or you can just look at the economic growth of the country in nominal terms. But what you are talking about is the steady 20% growth companies which are trading at 70-80-90 multiples. The question there is not so much the multiples but of the fact that there is no way of being confident that these companies can grow 20% per annum.
I have one simple thumb rule which can be easily used by retail investors. You have to believe that if the product or the service of that company is underpenetrated, then there is a small chance that that company can grow 20% per annum for 10-15 years. If you look at HDFC Bank and Kotak Bank, When all these guys say that they were underpenetrated because the state-owned guys had 100% market share, you can take their market share plus growth in general. In that environment, they were able to grow 20 odd percent for a long period.
When you have opened in branches or gone into smaller towns and gone into variants, there is no chance in hell that any of these guys can grow 20% per annum for 20 years. That according to me will only be in areas which you can mentally say in some framework that it is underpenetrated and there are a few that we think we have but it is not these paint companies or companies selling chocolates that are underpenetrated in any way.
Do you feel we are gradually finding our own path and getting disconnected from what is happening in global markets? Or do you feel it is a given that we are going to respond to any knee jerk reactions there?
Look at what happens to the mother-ship which is the United States. There is no way that we can outperform or underperform it and the direction broadly will be the direction of the US market in some sense. Also FII flows have not been less in the last one year or even this year so that we can say that we are doing well without them. We are doing well along with their flows but there is no way to suddenly say that the foreign markets and the foreign influence have come down.
In fact, the private equity money is all foreign, the venture cap money is all foreign. I have another bigger picture philosophical negative. I am very positive, my net is very high, we have a long only fund but if I am raising issues where I feel something is going wrong does not mean it has to happen today. So all these old, steady, infrastructure — completed buildings, completed airports, completed roads — have been sold to foreign investors. All the younger generation midcap companies, not all but many, want to sell their stakes to private equity companies because they themselves want to become private equity managers or basically want my job of being a fund manager in an air conditioned office rather than running their factories.
All the new start-ups are basically 95% invested by foreign investors and the starting teams have five, 10, 15% stake. So, the three places where there was a role for large Indian ownership are now owned or will be owned by foreign investors. Effectively, we are hollowing out the entrepreneur in that sense because the new start-ups and the 100 unicorns are basically Indian companies but I do not think any of them — the owner, promoters or the Indian employees — except in a few cases have even 20% stake!
So in all the cases you are not getting the local guys to set up or be motivated to do that because the advantage lies with the foreign capital. So foreign capital will always be a big part of India and even more now as we go along.
But the one domestic space which is holding out is the entire PSU banking story. In our last conversation, you said that you do not hold anything except SBI from within the PSB space, have you expanded that pool after SBI’s earnings?
It is easier to buy more in SBI than to try and buy new banks. We did increase it and now it has become our second largest holding from being the fourth or fifth largest holding. Also because it has appreciated more than other banks, I do not find the need to buy other PSU banks. Just any PSU bank won’t do. It has to be at least like an ICICI in terms of valuations. Even here, you can say we have been late. We came in July, August last year. The next one will need a much bigger mental reset.
Let us look at this home finance company which was owned by PNB Bank and 40% was owned by private equity. Now that the private equity stake has gone beyond 51%, people are interested. It is not as if the PSU owners were very bad. I do not know exactly what was it that they were doing so bad and which will change so much? The point is that the suspicion with which we look at PSU ownership is so high that there is no point in just directly buying any of them.
You rarely buy commodities. How do you resist the temptation of buying a SAIL or a when the entire world is going through this commodity surge?
I have bought Tata Steel and we are single-handedly responsible for stopping the global bull run of steel. My idea generally has been that if we have been given $100 and our job is solely to outperform the market, some sectors which I do not fully understand but which are going up a lot and there is some logic, then you buy 3-4-5% in that and sort of neutralise that effect and with the balance 95% try to do whatever your heart says.
It is not necessary and that is why I totally reject anybody who comes and says that we have a formula or that we have preferred sectors as if the market will first check with me whether I like certain sectors and then do well! We try to neutralise some of these things and in that sense we try to neutralise Tata Steel. Of course, after that it has stopped working and it has been the history for the last 25 years that I can stop some of these bull runs by putting even 2% of my fund in those sectors!
Sanjiv Bajaj said that the financial space NBFCs are trying to become fintech and fintech companies in the start-up space are becoming NBFCs. How would you view a stock like or HDFC Bank?
Some of the NBFCs are trying to become fintechs because fintechs are getting higher valuations. Otherwise, what is fintech? Basically you are trying to introduce the two sides on one platform. Also, if the market cap of a company is $40 billion and you say that I am a fintech, the stock goes up 4%. That means you already have a $2 billion fintech. So we are seeing this change of labels.
I do not relate to the change of label for Bajaj Finance because it was already a very big company and effectively doing the same job. Do you remember Tata Housing said that somebody bought an apartment online two years ago? Please tell me where is the third house that was ever bought online? It was because you had started a new scheme and somebody went to buy a house and they said now you have seen it you like it now and can you please log on to the laptop and book it through that? Therefore it was announced that apartments are being bought online and from that day to today, nobody has bought a third apartment online!
For HDFC Bank it is different. HDFC Bank has to appeal to the people who do not want to go to the branch and the young people who feel that it is easier to do some of these things on app or online and therefore they have to technologically upgrade themselves and compete with the world — not to get a higher valuations but to continue to be leaders in what they are doing. So for them, it is a necessity. For the other guys it is just a label change for which there is no logic to be giving higher valuations for that part of the story. If you are a fintech now and not an NBFC, I do not see any difference.
Individuals matter. In case of HDFC Bank, we say it is Aditya Puri’s vision; when it comes to Reliance, we say it is Ambani’s vision. Do you see merit in the belief and the faith markets have in Chandra’s ability to turnaround some of the Tata companies?
We own three of the Tata companies — TCS, Titan and now a little bit of Tata Steel. I think Chandra’s thing has been that he brought some basic principles which were very much needed like reducing debt, rationalising and consolidating. These three-four things are needed in any company which may have higher leverage or a lack of focus or too many brands, too many businesses. Those simplest things were done one by one in many of these businesses. But in the end, the ones we are owning today and the ones which were always doing well are TCS and Titan.
But in general, if somebody has that discipline, then there is only one name. Look at this one company which announced after many years that they will do capital rationalisation and sell off unrelated businesses, that they would not do unrelated things and then three days ago said oh! sorry we are going to just do new investments in new areas! So that kind of discipline is needed which I think Chandra has brought very well to the Tata Group.
In that sense individual companies do not randomly go into areas which were either nobody’s areas or areas of other companies even if nobody is telling them every day to stick to the briefing. In none of our meetings research meetings, do we say oh! let us find another Tata company to buy! If it comes to that, of course, we will buy. But I do not think fund managers are looking at it like are we underweight or overweight on the Tata Group? It just means that each company looks more focussed, less debt ridden and linked to unrelated businesses.
