Is it getting slightly troublesome now to eke out returns in the market because the liquidity taps are slightly on the lower side, growth is slowing down as you have also mentioned in your views? So from here onwards, do you think the investor return expectation should also be on the moderate side?
Yes, clearly, I think there is some slowdown in growth and it was expected as higher interest rates start to bite in a little bit and inflation has its full impact. You would obviously see some growth slowdown in the economy and which will also have its cascading impact on the markets as we go forward.
So yes the environment at least for the next few quarters will remain slightly challenging and I think it will therefore lead to maybe a little bit of a lowering of expectations from a return perspective especially in light of the fact that we are coming out of very strong last three years post-COVID.
What are your thoughts when you speak to your portfolio companies or generally among the corporates in corporate India? I was just looking at one of the corporate India surveys, which one of our partners, Deloitte, has also conducted. How is business sentiment, how is their outlook on earnings in general because of this global slowdown? Are these corporates in your portfolios? Are they also bracing in for this slowdown and foresee a bit of moderation in their earnings growth?
My sense is that as we enter into the first quarter of the calendar that’s when you will start to see that more meaningfully. So therefore, I think it will be only in the fourth quarter financial year 2023 commentary that you will start to see that more across the board. But yes there will be some growth moderation, I am sure. But that does not really change the outlook for slightly medium to long-term growth prospects for most of these companies. So my sense is that yes, next few quarters will be slightly more difficult but that really does not have too much of an impact in terms of the more medium to long-term outlook for most of our companies.
You have seen so many cycles in the market. What stage of the market cycle is Indian markets in right now because last year we had very good year, today, rest of Asia is rallying we are not. Some mean reversion, perhaps but if I were to ask you from your experience of almost three decades, if you mix economic cycle with earning cycle and then produce a picture, where are we on the market cycle because markets usually factors in or pencils in a lot of economic indicators coming ahead in advance?
If you look at the overall economic picture, I do not think we have had a better economic picture. If you look at the balance sheets of government corporate India, banks or even individuals, they are looking in a very good shape. I think some of them are in the best shape that they have been in maybe last 20-30 years. So my sense is that overall, from an economic standpoint, I think all these factors are very, very heartening.
Yes, there is some short term blip because of higher inflation and therefore higher interest rates but as I said from a long term or even medium term perspective the country is very well poised.
Hopefully we should be able to sustain higher growth rates for a much longer time once we pass through this phase of high interest rates and I think that is the biggest change. India has always grown at 7% or 8% in a cycle for about two-three years and then kind of fallen away. Hopefully, once we get to that rate of growth this time over the next two-three years, we can hopefully sustain it at a higher pace for a longer period of time.
From an economic cycle standpoint, yes there is some near term headwind, whether it be global slowdown or inflation or higher interest rates but from a country perspective I think we are in the best shape that I have seen in many decades.
Let us talk your portfolio then without getting into the details of individual ideas but I would like to understand your philosophy, your portfolio selection criteria, what kind of companies are you looking for or is there a formula you have in place? Are you playing the China reopen theme as well in a way or are you more domestic centric because India has a good runway, superior growth etc. if you can talk about what, how do you select stocks in your portfolio, your selection strategy?
From our perspective, we are more bottom-up investors. We look at long-term horizon and when we say long-term, we really mean it. Our average holding periods are about five years so once we buy a stock, we own it for about five years so we are really not somebody who churns too much in the portfolio. All our stock selection is completely bottom-up, we are more growth at reasonable price kind of investors. So we are very cognizant of the price we pay when we buy into a name. And typically, if you look at our portfolios today, generally, we are early cycles so we try and identify opportunities early in the cycle.
Therefore, we have two advantages. We get them at a reasonable price, as well as we can own them for a longer period of time. So if you look at our portfolios today, we are far more, forward looking.
In terms of today, our largest holding is pharmaceuticals. Also, telecommunications is where we have two telcos in our portfolio.
So our portfolio is bottom-up and if you look at our current selection, it is very different from generally what you see and we have a high active share. So our divergence from the index is quite a bit, it is almost 95% so that is the current complexion of our portfolio.
What are the triggers that you like in the domestic side of the pharma story, which some say should ideally trade at consumer valuations, because they are almost consumer stocks?
We like the domestic side of the pharma story much more. And that is really the bent of our portfolio stocks that we have today. Most of the stocks that we have definitely have a very strong domestic business. A lot of these pharma companies and some of the other stocks that we have would have offshore presence or export business but mainly these companies are focused on the domestic market, because we believe that as you rightly pointed out the opportunity in the domestic market, we see it being significantly larger, as well as far more steadier.
Even in pharma, we think that the domestic market offers a great opportunity. It is still very fragmented. We think that the consolidation will be a theme for the next five to 10 years. The top 10, 15 companies will continue to consolidate and grow faster than the market.
So if you look at the domestic pharma it is significantly more profitable than their offshore businesses. So we like the pharma story, mainly the domestic pharma.
In fact, we believe that pharma is where maybe FMCG was 10 years back and the growth, certainty and the growth opportunity for pharma in a fragmented market is today even more, than FMCG. In FMCG, you are seeing more fragmentation, in pharma you do not see more consolidation.
What makes you so bullish on the Indian media space because we have seen the ad spend trajectory being all over the place slightly wobbly I would say, incremental ad spends go in the digital side, not the traditional media. But the name which you have in your portfolio has also undergone a very large transaction as well. I want to understand your thought process on media, especially general entertainment side; what kind of observation you have regarding the viewing patterns of the country?
There are two-three things to look at in media. One is consolidation. As you rightly pointed out, media is undergoing a significant consolidation and the top three players, whichever way you cut and slice it whether you take broadcasting, OTT, which is basically the digital part, will control 75-80% of the market once these transactions go through this year.
So, the consolidation is a very big theme in media and that media is not a easy business to enter. So, once you have an entrenched player in media, like we will have the top three companies, it is going to be very difficult for anyone to enter this space in a meaningful way in the near to medium term.
Second is the whole spending pattern shift and as I and you can both relate to, we are spending more and more time on screen. Screen proliferation is happening. First, you just had the larger screen which is basically your TV at home, then you had the phone, now you have various kinds of screens. So, the screen proliferation is going to lead to a significant amount of time being spent by people on media and entertainment. One of the studies pointed out that 80% of the time that people spend on phone or smaller screen is also on actually entertainment of various kinds. So, that is the take on media.
The broader trend is that there is a huge consolidation happening. You are absolutely right the advertisement spent is slower and we think it will pick up as economy gains momentum over the course of this year. The other thing which you have to keep in mind is the NTO 2 which has been in limbo for about three years now is finally going to get implemented from 1st of April which hopefully will give a fillip to the subscription side of the broadcasting business.
We think that the whole digital space is just exploding so whether you take OTTs, whether you take any kind of digital advertising and interestingly in India the conventional media companies are also actually gaining leadership position in the OTT space.
So I think all these trends point to a very exciting future for the media and entertainment business and more importantly most of these companies are available today at a very attractive valuation. So I do not think people are really factoring this because they are coming out of a difficult patch in the last two years.
We are getting them at a reasonable price and we think that there are very exciting times ahead for the whole industry as we get into a slightly faster growth.
