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Below is the verbatim transcript of the interview.
Q: Let’s start with autos. What was plaguing? The stocks have done very well, so we should start with that context first. But these are sharp cuts.
A: Clearly the competitive intensity is coming to the fore. And the bottom line is that these are businesses, which probably at best, will grow in mid-single digits. The Hyundai CEO came in and said that the industry has grown over five years and 10 years at 5%. If you have India growing at 7-8%, why would you want to buy a business, which is going to grow only at 5% over the long term?
I think he probably referred to the volume of sales.
Q: My question was, will you grow with the industry, which is growing at 5%?
A: I am referring to both the industry. Individually, each player will probably gain market share here and there.
Q: That’s the point you are making that if the economy is growing at 7%, do you want to be in a segment that’s growing at 5-6% – that’s a big question. But if I could just ask you something on auto, is this just a cyclical patch because of the high base, etc, or is this a slightly longer structural demand issue? I think that’s what, the debate is on right now.
A: I think the end sales are cyclical. We do have bouts where for two or three years, there’s very strong demand, and then we go through one to two years of a consolidation phase. The big question right now is that, yes, the base is high. So are we going to get into maybe a few quarters of consolidation where basically the sales just don’t grow meaningfully, and that gap between wholesale and essentially the retail sales, that is going to take some time to kind of get bridged? And that is the challenge that the entire industry and the OEM pack is going to face. One has to be very cautious, careful and watchful.
Q: What about the IT numbers? Tata Consultancy Services (TCS) – the numbers were a little bit sombre, but the Street looked through that. There are other numbers that the Street is waiting for. What is your reading of the results that we have got from the tech pack so far? And how do you approach these stocks? What do you like?
A: I clearly believe that in the IT services pack, there’s going to be a huge divergence between the large caps or the big boys and the smaller companies like TCS, and Infosys. They would probably grow at best, low single digit, mid-single digit. You are not going to see growth beyond that. And then you kind of move over to essentially the tier two companies, tier three companies, specialized players, niche companies.
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We had a software products company which came out with these results two days ago. They grew revenues by 20% and their earnings grew by 50% – that’s the divergence. You have that kind of divergence. It just essentially is going to remain challenging for the large-cap names, no matter what you talk about, AI coming in and all of that. But that’s going to take many quarters or years, probably to play out and add meaningfully to them. So I clearly think at this stage, the large caps are a big avoid. You essentially should not be there, especially if you are looking out for those absolute returns. You are not hugging the benchmark, and you probably are better off being in the tier two, and tier three names.
Q: Any names you want to share with us – the midcap names?
A: We have been owning LTTS, Newgen Software, and Oracle Financial Services – these are names that we own. So obviously, of course, that’s the disclosure. And so these are some of the opportunities one should keep looking at.
Q: I want to ask you about two large-cap names and they have been not batting together. One is HDFC Bank, and the other one is Reliance Industries. Now the index needs to move up. We need both of them to bat together and stitch a good partnership, which hasn’t been happening of late. What’s your view on both these two names? They have relatively underperformed in the recent past.
A: We own both the names. We like them. The fact that they have been relatively underperformers, we like that. And in the case of Reliance, it’s probably some of that corporate action which essentially can unlock value and provide the upside and bring about outperformance.
In the case of HDFC Bank, it’s just a question of them being able to have the consolidation or the merger-related kind of stuff behind them, and then it becomes kind of a business as usual.
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The other challenge which both these names face currently is that there’s, of course, a strong ownership by institutional investors, foreign portfolio investors (FPIs) are selling right now, and they are facing the brunt of that as well, which is leading to their underperformance. Once we are done with that, I probably think that their phase of outperformance will commence.
Q: So you would recommend maybe a SIP in both these two because there are large-cap names, good quality companies, well-run companies. Would you recommend that?
A: Yes, absolutely. Both are companies which should be able to grow in double digits in terms of their earnings and the valuations have become meaningfully attractive right now.
Q: Another name which you own is Policy Bazaar. What after?
A: We continue to like the space. The fact that insurance is going to keep growing in double digits, it is a massively underpenetrated space and Policy Bazaar we own that, and we have been owning it for a while. We continue to like it. The execution is top-class. The fact that they have been now publicly listed for maybe 8-10 quarters, they continue to hold the market share. Ultimately, it’s essentially the power of that business, and it’s a phenomenal compounding opportunity.
Q: Have you had more interactions with the management in terms of the hospital bit which caused a bit of nervousness? For new investors, does it muddy the waters?
A: I don’t think so. Because in the overall scheme of things, it is not very material. You could think of it as essentially a bit of a distraction. But the bottom line is that it is synergistic. I think what they are trying to do is that with that investment, they are trying to see if, basically, the customer experience can be better, and if they can do a lot more good to the entire insurance ecosystem and claim settlements and things of that kind. So the intent is good. The commitment is not disproportionately large, which can essentially, pretty much impact the balance sheet or anything like that.
Continue to like it. The stock has had a stellar run for the last two years or so and they might kind of consolidate a bit, but beyond that, if you still have a three to five-year perspective, it’s the best way to kind of play the insurance space and the overall financial services space.
Q: On earnings overall, after many quarters we will probably get a single-digit growth number this time around, Things are where they are. Clearly, foreigners are not rushing to buy India right now. We are just waiting for them to stop selling. There is still a lot of domestic money sloshing around, but it is also being mopped up by these mega IPOs and all the blocks that are happening. Net, net, all things put together, where does it leave us? It’s been a good year so far, but now, as you look at the next 6 to 12 months, what do you see ahead?
A: I do not see the domestic liquidity going away. As long as the rates on bank fixed deposits, which is the other alternative option, remain in this band of 6-7% which on a post-tax will translate to 5%. So the hurdle rate for equities itself is very low. So clearly, I believe that domestic liquidity is not going anywhere. Domestic liquidity will continue.
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In terms of earnings, yes, the H1 might kind of look to be a mixed bag, but I believe the H2 is going to be significantly better. The rural effect, the monsoon effect, and the fact that commodity prices have come off, will lead to better margins in the first half, probably election-related curbs on public spending were there. Expect the capex cycle to pick up significantly in the H2. So I probably think that in terms of growth, probably we have seen pretty much the trough or whatever, on a relative basis. H2 from an earnings point of view will be better. So I still believe that the liquidity momentum from the domestic side will continue.
The Joker in the pack is going to be global liquidity. How much more do the FPIs sell? And that’s a tough call to make, but at some point in time, there are many global investors who are also sitting on the fence that when they sense that opportunity, the money will come in.
Q: But you are sounding optimistic. So the market is looking good?
A: Absolute, markets are looking good barring a few weeks or maybe a couple of months of consolidation. It is quite possible that maybe for the rest of the calendar year, we may not have a meaningful upside. But otherwise, it’s time to start focusing on 2025 and that is looking pretty good.
Q: Disclosure is not to be construed as investment advice. Three ideas for people who are watching it’s not investment advice.
A: I won’t give individual names, but okay, we like a payment bank. There is only one payment bank, so figure it out. Two is, there’s a consumer products company, in which essentially the stock price has fallen meaningfully, but the long-term prospects for beauty and personal care (BPC) and then third is one of the IT companies that we discussed.
The payment space and the consumer BPC space, these two essentially – I honestly don’t know how the next few months or few quarters will be – but from a three to five-year perspective, these to us, look to be very outstanding opportunities.
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