What do you make of the start for 2023 so far, India is underperforming, gold is outperforming, emerging markets are getting inflows and India is getting outflows?
Maybe last year we had our stroke of luck when FPIs decided to not look at Russia and China. But this time around the New Year is coinciding with China opening up and their markets doing better and forcing some amount of realignment. To my mind at this point in time it is nothing more than that Indian flows are way more structural than FPI outflows and in periods of outflows the domestic money gets a great chance to get itself invested for returns whenever the selling subsides.
At Motilal Oswal AMC your big holding essentially is financials. Financials have done rather well and if the quarterly update and the numbers are anything to go by it looks like the momentum is here to stay. Do you think financials per se are in a two, three year kind of a bull market?
If we look at the capital intensity of an economy it increases as the economy gains in size. We expect the same to happen in India as well which means on the sale side total income of the financials should grow faster than the economy itself. There if we look at market share gains then you have a few names which can do significantly better.
Now what makes the financial space volatile and cyclical are margins and NPAs. The margins have sustained for a very long period of time in India and the last bad cycle we saw NPAs like never before. If from that the financials have learned lessons, tightened the processes and if that is not going to reoccur in future then I think the financials could become a multiyear play. Else, it is almost always two, three good years and then we get again the NPA cycle and the sector takes a back seat.
Where within this market are you finding comfort to buy afresh, I mean, have there been pockets of value which have emerged in the recent bout of underperformance?
This is a market which we have been saying is fully valued so no spaces which are very cheap. If something is cheap then there is a reason behind it. So a good way of investing in such a market is to probably look at spaces where there are tailwinds which can result in some positive surprises as we go ahead in time.
Banks, lenders I think will continue to be the theme and that we are focussed on for the immediate term. In financials I think we are increasingly focussed on life insurance companies and health insurance companies. So for one, we will see probably EVs rising in line with new business in the immediate future and then as the interest rates peak out and starts to decline maybe EVs will rise ahead of new business momentum.
And for health Covid is behind us, it does not seem to be coming back which means the payouts could decline. Similarly, in healthcare we do believe that versus generic-generic or branded generic businesses something like hospitals stand out or maybe even pharmacy chains. So apart from the older themes like China plus one benefitting chemicals, defence, engineering continues to be the sectors to look at. Then also a big-big alpha could be made from lenders and insurance kind of spaces.What is your outlook in terms of what the expectation will be from the budget and thereby any particular sectors like say cement or infrastructure that you would be looking at closely?
Budget to my mind would continue to focus on nation building and growth. The world is doing that, we should not be an exception. Government finances are looking good so I think we should hope to get more of what we got in the last budget.
In most cases newer themes do not emerge anymore because budgets are an exercise more and more in continuity. So if PLI schemes are being rolled out we may see more of allocations for railway for example where there is a big bump up in capex expected going forward.
It may provide handholding to stressed out sectors which always happen. Government lends a helping hand but then that is simply a trade. For long term investors one should be focussed on spaces which are doing well and are expected to continue to do well at least slightly deeper into the future rather than get in and get out at the budget time period kind of a trade which is very-very difficult to execute.
I speak to lot of retail investors now and the simple view is that we are getting 9% return in banks, mutual funds have not given me great returns in last two years why should I not put my money in banks where I am getting 9% versus a promise of 12-13% because maximum upside from here in next 12 to 18 months looking at the valuation is 12% to 13% that is also not guaranteed. Here you get 9% which is guaranteed and if you are in lower tax bracket the tax bracket also will take care the taxation is not very high?
Completely agree and we have been saying this in our write ups and videos that today on risk adjusted basis debt looks better than equity. Now this thing can sort out in many ways. One interest rates peak out and may be decline a bit towards the end of the year. So yes it will make more returns but then equity will get competitive or equity will move sideways for a quarter or two and then for the rest of the year if you make the same call of 12% odd versus 6% then debt will become compelling. So in sum and substance of what you are saying is you expect equity to consolidate for a quarter is entirely possibly also in my view.
China opening up disbalance things, we are already seeing a huge spike in metal prices for instance in just a week gone by. Bitcoin has made a comeback. I do not know if there is any correlation here but back home you think the chemical sector would continue to have the China plus one advantage?
Yes, so those are long period themes. The West wants to now source from more than one geography. In chemicals we are the only other ecosystem that exist and most chemical companies that one speaks to talks of growth sustaining if not accelerating. So this is volume growth on top of that you build in pricing and margins. So there we may see some amount of volatility and a downtick but for somebody who can hold through longer periods I think this is a space which should outperform given the very-very strong volume growth that we see going forward.
You recently gave a view that you find new age tech companies attractive now after the recent sell off. Help us understand where within this large pool do you scout for opportunities and whether you have already added something to your declared portfolios?
I do not give names but I will give you the thesis. There was a time when the IPOs happened and these tech companies wanted to do everything under the sun which meant that the losses could be there for a very-very long period of time which is something that in a listed space is very-very difficult to get clued on.
After the battering they have received post listing most of the guys are talking of path to profitability at least on the EBITDA level and that too in foreseeable future.
I think we would be watching that if it happens these are spaces which can result in very-very sharp turnaround in profit from a minus x crore to plus x crore and may be 2x-3x crore. So the profits when they emerge could very rapidly become multiple of the losses that have been incurred. So far that is the promise of the space.
The trajectory in many businesses point towards that and I think we are very-very clued on so many of these businesses.
Valuations make sense to me now. So these are businesses where we may have stressed investors who may be wanting to get out. So a lot of volatility will be there because of change in hands. These are not businesses mostly where the promoter entity holds a large stake. So practically everybody is a public shareholder and the change in hands will cause some volatility but good businesses and not so strong hand is the manner of looking at this space.
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