I understand you have been travelling across the country meeting your top clients. What is the feedback you are getting?
The entrepreneurial spirit is thriving. Most of the HNI Family Offices are in the process of transforming their businesses and big companies are getting benefit out of this because the small players are going to get squeezed further. So from the industry perspective, there are a lot of changes. Transformation is happening, automation is happening, innovation is coming to the forefront for most businesses. New products are being launched, and the process is being automated. Many companies have already implemented it. Few companies are talking about it and there will be more such implementations over the next 12, 18, 24 months.
So, there is cautious optimism from corporate India and of course, everything is subject to the possibility of the third Covid wave. We are assuming there will not be major damage from a third wave if it comes. So, people are quite positive. The China plus one strategy is also helping in terms of the entrepreneur spirit. The PLI scheme is also giving further confidence about the revival of the Indian economy.
Many of our HNI clients are also owners of large businesses. They are also in an investment mode. They are doing small or medium size capex depending on the size of their own businesses. Overall, it is a good mode for entrepreneurship in the country. Of course, markets are at an all time high and people keep asking what next?
You talked about process automation. The sense which I am getting is that the mid sized corporate are really adopting automation digitisation and process enhancements via technology innovation at a high speed and the order books of Honeywell, ABB are going through the roof. How are you really playing this theme in your portfolios?
The automation theme, the innovation theme is not only helping corporates to survive but also to grow. Traditionally, whenever one talks about innovation, people talk about new product launches. But it is not restricted to product launches only. It is about the process improvement, the product systems, the channels, the distribution network and the services.
One of the biggest global multinational engineering companies in India which is a listed company has launched service as a part of their engineering offering. They are not only going to sell products, but also services.
One of the largest bearing companies are going to offer the solution — if you buy their bearings, then for the next 10 years, the entire bearing system will be owned by them in terms of the solution. So things are changing, the business models are evolving and transformation is happening.
Every year, when we do the deep dive into the annual reports, we counter more about what each of our portfolio companies are doing and most of our portfolio companies being leaders keep innovating and upgrading their products and their distribution.
The largest steel pipes and tubes company has done a completely new colour coated product range. It is a different application which is expanding their market size almost by 30, 40, 50%. We keep observing our portfolio companies in terms of how they are working on automation.
Apart from this incremental theme, what are you playing in your portfolio with a 12 to 18 month horizon from here? Have you made any changes to your existing portfolios?
We keep monitoring of course our portfolio companies. One of the themes which we continue to remain very bullish on is specialty chemicals. The stock prices of these companies have already skyrocketed and people keep asking me what to do at this valuation? But people fail to understand there is not a single specialty chemical company in India with Rs 500 crore of profit after tax. So, the opportunity is huge.
Globally people are looking at Indian companies. Most of these companies are in an aggressive capex mode. One of the largest specialty chemical companies which we own in our portfolio is doing Rs 2,500-3,000 crore capex over the next two years. Growth is going to increase and I am not surprised that most of these companies will also look at acquisitions. If you do a greenfield, it takes about three years. If you acquire a company which has existing land, building or infrastructure with the safety standards and environmental clearance in place, would shorten that cycle by almost 40% to 50%. Many of these companies are going to adopt that approach. So for specialty chemical companies, earnings growth is going to become significantly higher. Of course, one should differentiate between commodity companies and specialty chemical companies .
What about real estate and infrastructure? There is a lot of contra move happening there– real estate has moved up, infra has not. Anything interesting there?
The government decides – -be it the central government or the state government — that they will continue to spend heavily. So, what we are doing is instead of playing infrastructure stocks because their balance sheets are probably not in the best of shape, we keep playing the building material companies, which include cement, pipes, wires, cables and companies like that. These companies have very strong balance sheets, very strong B2C businesses apart from B2B business and now both B2B as well as B2C are going to revive.
Another example, one of the largest wire and cable companies which we hold in our portfolio has a good part of the business doing B2B, EPC. More and more real estate requires wiring for the buildings and so on and so forth. At the same time, they have a very strong B2C business because it is one of the largest consumer brands in the country.
We are identifying such businesses which can tremendously benefit. They are the largest beneficiaries for higher capex done by the government as well as higher infra spend and increasing real estate demand.They are the proxy beneficiaries. So without taking balance sheet risk, without investing in companies which have a very fractured balance sheet, one can invest in the best of the franchises and keep compounding your wealth.
What are you cautious on, what are you staying away from where valuations are getting fully priced in?
What we are cautious about is the quality of the growth. So while growth is good, we check the underlying quality and it is more likely to be bottom up rather than top down. When the economy is going to expand from a low base of 2.5-3% GDP to 5.5-6% and earnings for the Nifty is going to be 15-18-20%, everything is going to do well. But what is more important is what is sustainable and what is temporary.
Another very important point is what quality of growth are you buying into? That is where we are becoming more diligent so as not to get carried away by the momentum because at times everything starts moving up and you underperform because you do not buy the poor quality stocks. But that is fine because it is not going to sustain. If you ask me, stick to high quality, do not invest into poor quality, do not fall into that trap.
