Industry Experts Share Insights On Promising Sectors In Outlook Money Editorial Webinar
Watch our roundtable discussion with industry experts as they share their perspectives on sectors that hold promise in the current economic climate. From emerging technologies to traditional industries, gain valuable insights on where to invest your money. Don't miss this exclusive webinar by Outlook Money Editorial.
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00:00 Welcome all of you to start with and like I said we are carrying out this exercise for
00:17 the benefit of our readers mostly and also to get an editorial direction. My colleague
00:23 Kundan Kishore who's the Deputy Editor of Outlook Money is also here and he's been working
00:27 with the mutual funds and markets industry for a long time. And during the discussion
00:33 please free to give any stock recommendations if you have if not we can just talk about
00:37 sectors that is completely up to you guys. And I really hope that by the end of this
00:43 discussion we are able to thrash out at least five sectors that investors can consider and
00:48 we can feature in the magazine. So just to give a short introduction today we have the
00:54 market expert Ambrish Palika with us, Devina Mehra, Chairperson MD and Founder First Global,
01:00 Sunil Singhania, Founder Abacus Asset Management LLP and we have Mr. Dheeraj Agarwal, Co-Head
01:08 of Institutional Equities and Head of Equity Sales at Ambit Capital. So Mr. Sushant Bansali
01:14 was supposed to join us but he had some last minute changes I suppose. So Mr. Dheeraj is
01:19 here. Thank you so much Mr. Dheeraj for taking out that time and thank you all of you for
01:24 you know joining this platform with us. So we can start the discussion right away. So
01:30 starting with Mr. Singhania he is also I think he is supposed to leave a bit early because
01:36 he has a meeting. So right now I think everybody is talking about the RBI rates and so one
01:43 thing that we wanted to understand as a team is that what does this RBI rate pause which
01:48 has happened recently mean for the banking sector as such. Because in the recent past
01:53 also the sector has been in the news. You know there has been the US banking crisis
01:58 that has been around and then you know the back to back rate hike. So I mean there is
02:04 clearly you know a lot happening in this sector. So how do you see this sector Mr. Singhania?
02:10 Thanks Nidhi and thanks for having me. So very clearly I think you know post the record
02:16 inflation we had you know based on the high inflation which was again based on the very
02:22 high commodity prices towards the Russia, Ukraine. Prices I think central banks all
02:27 over the world resorted to very tight monetary policy. And as you rightly said even in the
02:33 US we had a record 4.5 percentage point, 450 basis point increase, financial year '23
02:41 for us. And I think RBI also followed suit. The only good thing about India has been that
02:47 interest rates though they have moved up by 125 basis points in percentage terms they
02:51 have been much lower compared to the Western world. And inflation also has been less sticky
02:56 in India compared to the Western world. A function of obviously self-reliance on degree
03:04 and therefore you know the prices of food for example have not moved up. And luckily
03:08 for India you know energy costs, particularly oil has come up. And on the other energy costs
03:16 all in all we are more or less self-sufficient. I think though the market was expecting the
03:22 RBI to follow with a small 25 basis point high, I think it's a very pragmatic step
03:29 which the central bank has taken because you know it was obviously leading to some stress
03:35 coming in demand particularly on the household sector, mortgages and other sectors. And I
03:41 think it has been welcomed. But you know even before this I think the markets had already
03:47 started to factor in a slowing down of the rate hike cycle and in fact at least our view
03:53 is that the second half of '23 globally you will start to see some rate cuts. So the
03:59 yields were at 7.4% had already fallen to 7.3 to 7.33 after the budget because the borrowing
04:06 program came in much or I would say slightly lower than what was expected. And then after
04:11 this pause yields have come down to 7.2%. We are already starting to see the interest
04:21 rate sensitives, particularly banks and some other interest rate sensitives like auto and
04:26 real estate responding positively to this pause. And let's see hopefully you know inflation
04:33 as I said would no longer be the demon which it was over the last one year globally. And
04:40 at least our view is second half we should start to see some indications of rate cuts.
04:47 Okay. So but what does it all mean for the banking sector in terms of opportunity for
04:53 investors? Banking sector has been the sector which is standing out in terms of earnings.
04:59 I think even this quarter, the March quarter, I think the earnings growth for corporate
05:04 India are going to be driven by banks. A combination of hardly any stress assets or non-performing
05:11 assets because of the diligence which the banks have taken up over the last four, five
05:16 years. The initial phase of rate increases in fact are beneficial to banks because you
05:23 know your assets get repriced faster than the liability. And there was a view which
05:29 was getting formed that March quarter numbers would be the peak in terms of the NIMS, net
05:34 interest margin. However, with this pause now at least the view is that each kind of
05:39 NIMS which the banks are making might sustain as we move forward. The other thing is obviously
05:45 if the interest rates don't get increased or in fact we start to have a rate decline,
05:52 the possibility of credit demand to that extent improve. And I think from both the credit
06:02 demand side as well as the spread, I think this should be quite positive for the whole
06:07 lending space for banks as well as banking financial services.
06:12 So sir, where do you see the opportunity, especially in private sector space, private
06:17 sector banks or PSU bank? Because in the last one year we have seen that PSU banks have
06:22 done quite well as compared to the private sector banks. So where is the opportunity?
06:26 So, you know, we had a scenario where public sector banks were trading at non-existence
06:34 kind of valuation. They were trading at 50 and 0.5 time book largely because of the fear
06:44 of NPS coming back. However, as the results started to come in and particularly the last
06:50 six, eight quarter numbers, I think the efficiency in terms of spreads, net off credit cost have
06:58 been pretty decent and, you know, quite a few public sector banks to that extent have
07:03 done much better. Having said that, I would say that instead of focusing on public and
07:08 private, I think we should focus on good franchises because ultimately for the banks, you know,
07:16 deposits are the raw material. Even within public sector banks, we have two or three
07:22 banks which have great brands and they're able to be comparable to the best private
07:27 sector banks in terms of maintaining their CASA ratio. And even in private sector banks,
07:33 we have some banks which are struggling because they don't have the necessary brand to attract
07:39 the cheap deposits. So I think we should focus on banks which have great brands and opportunity
07:47 exists in both the segments. The good thing is on the PE basis, banks are still not very
07:53 expensive and this would include some of the larger private sector banks and obviously
07:59 some large public sector banks.
08:01 Sir, in fact, I would like to ask you about IT and cement because I was going through
08:06 your portfolio and I think IT is there.
08:09 This is for me again?
08:10 Yes, sir. That is for you.
08:13 So you know, see, IT is one sector where Indian companies are the best in the world. This
08:20 is one sector where India is globally competitive. And you know, these, I would say, you know,
08:28 speed breakers keep on coming in where the outlook, particularly in the global sector,
08:34 the outlook pertaining to the user segment, which is predominantly US, you know, comes
08:41 to some extent as a headwind. You know, we had a great 2021 and obviously there was overhiring
08:48 and now we have job loss in the US, particularly on the IT side. But as I said, you know, this
08:52 is one sector where India is globally competitive. Even going forward, you know, we are not looking
08:57 at, you know, degrowth in the sector. In dollar terms, we might end up going 6-7% even in
09:05 a challenging 23. But in rupee terms, I think good companies will still end up going at
09:12 10-15% profit. And the correction has happened both in terms of time correction and in some
09:19 cases even price correction. And now companies by and large are available at sub, you know,
09:25 between 23 and 24. We would be in the camp of, you know, at least ensuring that we don't
09:33 go underweight as far as IT is concerned. If the world revives, which is at least my
09:39 view that the second half of 23, you would see the global economy also reviving and all
09:45 the headwinds become tailwinds, including lower inflation, lower interest rates, China
09:50 coming back on stream and even growth in the global economy, which was looking like a recessionary
09:56 kind of an environment coming back to some extent. I think there's a possibility that
10:01 sentiments might change here. And one thing also we have to remember is that IT companies,
10:08 the profits are completely cash converters. And most of the larger and well run companies
10:14 distribute almost everything they make. So in that respect, also, I think it's a great
10:21 sector to be at least invested.
10:23 Okay, okay. So coming to you, Devina, next, you know, we had the budget like two months
10:29 ago. And so what is the sense that we got from the budget in terms of sector in terms
10:34 of, you know, the government spending and the sectors that can benefit from that? For
10:39 example, I think there was a whole lot of talk about the infrastructure sector. So what
10:46 do you think are the sectors that are emerging in relation to the budget speech, so to say,
10:51 the government spending?
10:53 I don't think you know, the budget in particular has changed the trajectory for anything because
10:59 and it should not also on an ongoing basis. In fact, if you look at the two years after
11:04 COVID started, almost entire GDP growth was coming out of government spending. But obviously,
11:13 that can't do the heavy lifting forever, because then you have consequences on the fiscal side.
11:18 So as the economy has come to a more stable state, government spending is actually going
11:25 down as a percentage of GDP. So you know, that can't be really the engine. Yes, of course,
11:30 I mean, there will be pockets like infrastructure, where spending is happening. So you have to
11:34 look at where that benefits. I mean, that also there is a lot of debt build up there.
11:40 So you know, that to me is the concern on the infrastructure side, which doesn't show
11:45 up in government debt as such, because that's at other levels. But that so I don't think,
11:51 you know, we can look at the budget as being really the driver.
11:54 Okay. So where do you see the opportunities then in terms of sectors?
12:01 Okay. So if you look at, in fact, you asked Sunil this about the rates and all, but if
12:11 I look at both US and India, the central banks are now looking at something else, achieving
12:20 inflation control, really speaking, because inflation has not till if you look at the
12:24 historical data has not been tamed either in the US or in India. In India, whatever
12:29 the headline numbers, you saw inflation coming down a little was entirely out of food prices,
12:35 especially vegetables, no vegetables in one month, and then no other food in the other
12:40 month. So if you look at core inflation, which is excluding fuel and food, that has remained
12:45 quite, you know, that has not come down. US again, you got the low hanging fruit, some
12:51 goods, inflation came down and shelter, which is housing came down. But what is very significant
12:59 for them, which is non housing services that is proving again, sticky. So what the Fed
13:06 said was that, that we had, we are looking at something else may be able to achieve what
13:13 we were trying to achieve through monetary tightening, which is that if credit situation
13:18 tightens because of the banking problems, then it achieves the same thing as an interest
13:23 rate hike by the Fed. In India, I mean, my view is even though RBI did not articulate
13:28 it that they have growth concerns, but given that in nine months till date, manufacturing
13:35 has shown near zero growth, I think it is 0.4%. And, you know, it was negative in two
13:41 quarters and for nine months, it was just 0.4%. And you know, you all know that figure
13:47 that 80 crore Indians still need free food. So there are growth concerns. And I think
13:52 that is the reason why RBI decided to pause and our savior, so to say, can be crude, because
14:01 crude prices are down nearly 35% from the peak. And I had tweeted yesterday that helps
14:07 India on all counts on growth on inflation control on current account deficit, which
14:13 was getting to be worrisome. And it helps a lot of corporate India because crude is
14:20 not just crude, I mean, crude per se, if it gets passed through, will only help the oil
14:26 companies, but all downstream chemicals, also the prices come down. And that helps a whole
14:33 lot of industries from FMCG, chemicals, textiles, paints, tires, you know, to some extent cement
14:42 also. So that I think can, and then, you know, companies can take a call on whether to help
14:50 that improve margins or to pass it on and therefore boost demand because demand has
14:55 been a concern for a variety of industries. So I think that could be the next driver,
15:01 so to say.
15:05 So in that case, where do you see the opportunity, ma'am?
15:09 So the sectors that we like, actually, one sector has not changed for the last year and
15:14 a half, we've liked it since October 21, which is capital goods and industrial machinery.
15:20 And that has been a great performer for us, because the stocks have gone up two, three
15:24 times, we've even booked some profits. So we don't hold as much as we used to, but still
15:29 relative to the index, that would be the biggest overweight still. One sector, which I usually
15:37 don't like, which is banking, which is like, I'm always a very skittish investor, or a
15:44 very wary investor in banks. And as the Silicon Valley episode showed you, that's the problem
15:49 with banks, you don't know where the problems are hiding, where the negative surprises would
15:54 come and having been a banker, I know that all too well. So I'm a very investor. So,
16:01 since we started up EMS in 2020, in 2020, and 21, we hardly had any exposure to banks,
16:08 which was actually a risky move, because that's the biggest weight in the index. But it proved
16:14 to be correct, because in 2020, banking was the only sector that was in the negative for
16:19 that year in that boom year 2021, it went up, but only half as much as the market, I
16:24 think market was up 22%. Banking was up 11% of Bank Nifty. But middle of 2022, we changed
16:31 our stance and we went to market weight on banks. And partly, of course, you know, that
16:37 no sector underperforms or outperforms forever. So you always have to keep a watch for that.
16:42 And also, fundamentally speaking, there were some positives that the NPA cycle was behind
16:48 them, credit was growing. And also when interest rates go up, at the margin, it is positive
16:56 for banks, because it's very simple that on the loan, the interest rates are hiked immediately.
17:03 I mean, people would have seen it in their mortgage rates. And whereas on the deposit
17:07 side, they are hiked only slowly. So for some time, there is a expansion on the margins,
17:12 of course, in Indian banks, because of the large bond holdings, you know, you have to
17:16 take that into account. But we went to market weight middle of 2022. And with price movement,
17:22 it would have become somewhat overweight. So that sector we continue to like. Where
17:27 we have added in the last rebalance, you know, this quarter's rebalance is still going on,
17:33 was a few pharma names, a few auto components. And also, we are now slightly overweight IT
17:42 services software, that segment also. Which of course, you know, did very poorly in 2022.
17:51 But we're liking it more now.
17:53 So coming to you, Mr. Baliga, where do you see the opportunities? Like we've been talking
18:00 about banking, IT, cement, and some of the other sectors that Ms. Vera mentioned.
18:05 In fact, I had found opportunity in PSU banking about three years back, because that was one
18:13 space what I mean, everyone was shunning. And we had the private sector banks doing
18:18 extremely well. But most of these were available at a fraction of the earlier valuation. And
18:24 clearly, I mean, there was a change happening, in the sense that they're clearly looking
18:28 at reducing the NPAs. And then what we saw in the last 12 to 18 months was clearly the
18:34 balance sheet had improved, and the business has started improving. In fact, the credit
18:39 growth was happening for these banks, and they perform extremely well. But at the current
18:44 levels, I mean, I feel that most of them are fully priced, whether we're talking of the
18:50 PSU banks or the private sector banks, although the performance should be excellent in this
18:55 quarter. But then, again, it's always an expectation versus delivery. And the expectation is decently
19:01 high from the analysis as far as the banks are concerned. So I don't think there'll be
19:04 some major surprises. So I mean, there's no reason to sell off, but then I don't see a
19:10 major reason to go out and start buying the banks at this point of time. Because, I mean,
19:14 at least my portfolio stocks, some of the PSU banks have actually become 2x from the
19:18 levels which are bought. So I'll not really be buying fresh as such. But then let me tell
19:24 you that I mean, whatever is happening globally, in the banking space, clearly are not going
19:28 to affect the Indian banks, because there is no direct connection, except for the sentimental
19:33 effect which we had for a while. And we've already seen that. And typically, in a rate
19:38 hike cycle, the NIMS, I mean, expand initially, but then they start flattening out. And I
19:44 think we are in that phase where we should see them actually flattening out. And like
19:49 I said, I mean, although we have seen an extremely good growth of close to 17% in the last one
19:54 year, but with these higher rates, I think at least for the next quarter or two, I think
19:59 we should see the growth slowing down, especially on the SME and the retail side. And just like
20:05 Sunil was expecting, I mean, I also expect that the rate cycle should start going down,
20:13 possibly from the beginning of 24, from January, February 24, I think we should start the rate
20:18 cycle going down. I think that's time again, possibly to start looking at banks again.
20:23 So like I said, maybe for the next quarter or two, I would be a bit cautious and possibly
20:28 in case we see a correction in the banking space, I will start looking at buying into
20:32 banks towards the end of this year.
20:35 So in that case, where do you see the opportunity? As you rightly pointed out that you have just,
20:41 you were very much clear that the PSU bank will do well. So where do you see the opportunity
20:46 for another, in next three years?
20:49 In the various sectors, other than banking you're saying?
20:52 Other than banking, sir.
20:54 So, see, I mean, you look at the budgetary allocation for infra and railways, I mean,
21:01 it's been a record and it's multiple times possibly what the government was spending
21:05 about eight to 10 years back. So I think there's a huge opportunity there. And in addition
21:10 to that, defense, I think that's one focus area, make in India. I think that's clearly
21:16 a focus area for the government. And we have seen these sectors performing to a decent
21:20 extent, but I still see, at least in the foreseeable two to three years, we should start, I mean,
21:24 we should see these sectors performing well. And because of the spend on these sectors,
21:32 we normally see that there's a trickle down effect because, I mean, end of the day, the
21:37 cash flows actually gets distributed across, I mean, whether it's the material suppliers,
21:41 services, equipment providers. So clearly, I mean, I see like the auto sector, earth
21:47 moving, in-plant construction, related sectors, railway equipment and rolling stock manufacturers,
21:52 everything, I think across these sectors, we should see decent growth in the foreseeable
21:57 two to three years. And that's where I think one should be investing.
22:00 So would you like to suggest some names? I know EIA, Engineers India is your favorite.
22:06 Yeah, I mean, Engineers India, I've been recommending for a while, but then it's just
22:12 been a market performance to an extent underperform, but then it should perform over the next two to
22:17 three years. But then, I mean, as far as auto is concerned, I mean, my picks here would be Mahindra
22:23 and Mahindra, Maruti, Tata Motors to a certain extent, and earth moving, it's BML, Infra,
22:29 construction sector is going to be L&T. Railways, equipment, like I saw like the Tata wagon,
22:37 although it's already moved up quite sharply, possibly one should wait for a correction to
22:40 buy into it. Right. So, Mr. Raghavan, we've talked about many sectors and auto has also come up in
22:47 a few conversations. What do you think about that sector and what other sectors that you see
22:52 promising? To start with, let me just try and give my view a little bit top down. So,
22:58 one thing is very clear that this particular budget was a little bit of a game changer in
23:04 terms of the capex drive of the government. So last few years, while the headline capex numbers
23:09 in the government budget has been high, but if you actually add the below the line capex of the
23:15 government itself, it was still middling at 10, 11, 12% kind of a growth. This year, it has gone
23:20 up to almost like 30%. And even in the election year, the government has resisted the temptation
23:26 of pumping up the revenue expenditure too much. So, REVX hike in this particular budget was just 2%.
23:33 So, that sort of set the tone to some extent as to what is happening in the economy. Both Amrish and
23:40 Devinar talked a lot about the whole capex revival and the focus on capital goods names.
23:47 That's one side of the story. The other side is obviously banking, which has been discussed
23:53 also here. Banking earnings have rebounded, there's no NPL issue out here. The quality and
23:59 the health of the banking system is pretty good. In the near term, we'll probably see some amount
24:04 of margin pressure coming in on the banking because we have seen loan growth running at
24:10 500 to 700 basis points higher than the deposit growth for a while now. And time has finally come
24:17 where banks will have to chase deposits a little bit and hike deposit rates to be able to garner
24:22 those deposits. And that typically happens as Suril was pointing out earlier in the discussion
24:27 that when the rate cycle peaks out is when the margin pressure starts showing up because
24:32 during the rising rate cycle, you can reprice your assets a bit faster than you're repricing
24:36 the deposits. So, that's the conundrum in the market at this point of time.
24:41 What I was trying to come to by giving these two examples is the sectors which are doing well
24:46 either have a valuation glass ceiling. So, for example, in capital goods, the sector which has
24:52 done really well, if you look at some of the really high quality names within that sector,
24:59 they're already trading at valuations which is like 20-30% higher than the historical averages.
25:04 Or banking, another sector which is doing well, the challenge is that in the near term,
25:09 at least there'll be margin pressure going forward. So, one has to divide or at least
25:14 the way I prefer it, I would like to divide the market into two parts, which is near term. So,
25:20 let's say next 6 to 12 months. And because of these two reasons, I expect the market to be
25:25 range bound. While some of these sectors get some of these movements or cross movements,
25:30 that's all this tailwinds get priced in. From a longer term point of view,
25:34 we still think banking will be one of the top winner sectors. Once there's a little bit of
25:42 margin pressure, things are digested over the course of next few quarters. Both linked to the
25:49 capex drive of the government, health of the balance sheet on the banking system, and talking
25:54 of the interest rate cycle. All three factors put together will result in reasonably decent
25:59 growth for banking once we cross over this hump of a little bit of margin pressure.
26:03 Another sector that we are finding very constructive at this point is pharmaceuticals.
26:09 It's underperformed now for almost 2 to 3 years. Last quarter was the first in I think about 7 or
26:19 8 quarters that the pharma sector earnings did not disappoint. And the earnings were not cut
26:25 after the result. In fact, for US generic facing pharmaceutical companies, the earnings came 5 to
26:32 8% ahead of estimates. Second interesting data point there is that the erosion in the US generic
26:38 prices is now more in the region of 6 to 8%, which used to be 12 to 14 or 12 to 15% a few quarters
26:48 ago. And 6 to 8% kind of a deflation will continue to happen in US generic and that is something
26:54 Indian pharmaceutical companies can absorb by new product launches as well as productivity gains.
26:59 So that's one sector which has hugely underperformed in the last 2 or 3 years,
27:05 sort of almost on an ignored spot for most investors, this is something that we like.
27:14 So, sir, as you rightly pointed out about the pharma sector, there is another sector that is
27:18 FMCG that sector has also not done well in last couple of years. So what is your view on that?
27:24 So FMCG, I think short term, there is a good tailwind for FMCG sector. So FMCG could be the
27:32 opposite of, let's say banking, over the next 6 to 12 months FMCG is likely to do well.
27:41 For almost 4 to 6 quarters, we used to say gross margin disappointment in FMCG quarter
27:47 after quarter. So, for example, some of the largest FMCG players like Unilever,
27:52 the gross margin spell anywhere between 500 basis points and 700 basis points,
27:57 and in some cases, almost 900 to 1000 basis points, largely because of rising input costs.
28:02 A lot of those input cost factors are now reversed. So for example, palm oil, YY is down 25%
28:09 and many of the other key ingredients for FMCG at this point of time is down between 20 to 35%
28:17 on a YY basis. Companies have taken a lot of price hikes. One would expect some of those price hikes
28:24 to be reversed to pump up the volumes, but not all. Historically, we have seen whenever
28:29 FMCG companies come out of a margin compression cycle, for some time they retain the previous
28:36 price hikes to boost the margins back. So one key metric at a macro level that we watch very
28:42 closely is WPI-CPI spread. For almost 12 to 15 months, the WPI was 400 to 600 basis points
28:50 higher than the CPI, but in the last 2 or 3 months, actually 300 basis points below CPI.
28:55 And that is typically, it gives a huge amount of margin power and pricing power to FMCG.
29:00 The last it happened was actually 2013 to 14. Prior to that, for almost a year, WPI ran ahead
29:07 of CPI and then it collapsed. And those 2 or 3 years post that were one of the best in terms
29:12 of margin expansion for FMCG. So I do not know whether this cycle will be that long,
29:17 but at least for the next 6 to 12 months, FMCG is likely to do well.
29:21 Okay. Sunil sir, I would like to ask you, I mean, what is your favorite now? Which sector?
29:28 See, frankly, you know, I think…
29:31 What is your all-time favorite sector, sir?
29:34 I will give you a very honest perspective. One is the best company in a not so great sector
29:44 will do very well. And the worst company in a very good sector will struggle. And we have seen
29:51 that in FMCG, we have some companies like ITC and all which have gone up 50% last 1 year,
29:57 whereas the best companies, which is included, the favorites over the last 4-5 years have not
30:02 done well. So I think it is also about, you know, being very clear about what to buy.
30:08 Same has been the case in financials, you know, there are so many companies which have done well.
30:12 And even I mentioned that 20 and 21 were not great for the banking index. But if you take out
30:18 the top 3 banks, all the other banks did phenomenally well. I think the index got a
30:23 little bit impacted because of the likes of HDFC Bank and Kotak Bank, which were not performing
30:28 well, not because they are not great franchises, but because they were priced beyond perfection.
30:31 So I think it is not necessary that you, you know, buy anything in a particular sector and you will
30:39 make returns. And I think that is what we are focusing on. The other thing is, you know,
30:44 I might mention to you some sector, but the world is so dynamic. By the time next year your issue
30:51 comes in, you know, you will find the portfolio very different. So, you know, I don't want to get
30:56 bogged down with the same sector, but, you know, sectors continue to be the same. All of us have
31:02 mentioned that because those are based on the views as of now. I still like banking, you know,
31:08 on a B basis, the sector is still quite free. I continue to be quite optimistic on the IT sector.
31:14 Pharma, I agree. I think after a long, you know, period of performance growth on fundamentals of
31:22 the stock, I think we are now looking at demand coming back because of restocking and generic
31:28 pricing also coming back. And also after a long time, you're getting very good companies available
31:33 at sub 20p multiples. So rather than buying some consumption stock at 40, 50, 70p with a slower or
31:42 lower growth rate than a domestic pharma, I would prefer the domestic pharma. We are still quite
31:48 constructive on anything to do with consumption, but value consumption, you know, again, by nature,
31:55 myself and Abhakar Singh tends to be value conscious investors. But I think that is one
32:02 space where demand is going to be constantly there. And after a long time, as Dheeraj mentioned,
32:08 you know, the headwinds of input costs being pretty high are now turning into
32:13 daily. And in some sectors, even the energy costs have started to, you know, reduce quite
32:20 significantly, which can again become daily. So these would be a few of my top sectors.
32:26 I'll have to just take your pardon. I'm very sorry.
32:30 Yeah, sure, sure. No, thank you so much for taking out your time despite having another meeting.
32:36 Thanks for participating.
32:38 Thank you, Sunil sir. Thank you.
32:39 So, yeah, so Mr. Singhania has given us picks kind of so coming to Ms. Mehra, Mr. Baliga and
32:48 Mr. Agarwal, what if we were to thrash out what is coming out broadly from the conversation is
32:54 banking, of course, IT, pharma, FMCG.
32:58 In fact, there's one more sector which I think should perform well, at least in the
33:03 possible future. I mean, this did not perform well in the last 18 months, just like pharma,
33:09 we had extremely good move, it is specialty chemicals, but it's a good move during the
33:15 COVID time. And here over the last three to four years, I mean, we have quite a few of the Indian
33:22 specialty chemical companies, which have actually become world leaders in their specific segment.
33:28 And China plus one and Europe plus one should actually play out extremely well for them going
33:33 ahead. So this is one space where I've been investing in. I mean, Deepak Nitrite, Namin
33:39 Fluorine, Vinati Organics, I think these are a couple of them, which I think one could be looking
33:44 at. And just like Dheeraj and Sunil said, I think pharma is the other space where I've been
33:51 investing and continue to hold on. But one space like FMCG, where again, I mean, I'm decently
34:00 confident of the consumption story going ahead. But then the existing companies which are there,
34:06 which have actually ruled the space for the last three or four decades.
34:11 Over the next four to five years, there could be a major change. And I think that change will come
34:18 from Reliance Retail, which I think could be disrupting the whole segment. Because at the end
34:24 of the day, FMCG sector has been dependent on the distribution network, which each of these
34:31 bigger brands were controlling basically well. But what we have seen in the last two to three
34:36 years is quite a lot of this distribution network is getting disrupted. And we have seen Reliance,
34:43 in fact, controlling a decent part of that right up to the grocery shops. So I mean, the one who
34:49 controls finally, the self space, I think is a winner. And this is exactly what Reliance is
34:56 trying to do both through the unorganized grocery shops, as well as organized retail, where they
35:02 are the largest. And they have been introducing their own brands, which I think they will finally
35:06 build up. They've been buying out old brands, I mean, remodeling that and bringing that back.
35:11 So I think that could be a major disruption going ahead. So that's one space we watch out for.
35:17 In fact, I'm bullish on FMCG space, and the existing companies which have not done too well
35:24 in the recent past. So I think the next 12 months window is there, 12 to 18 months window is there,
35:29 post that there could be a disruption. So do you see that, I mean, the Reliance
35:34 retail demargure is going to happen anytime soon? That should happen sooner than later. I mean,
35:40 we've already seen that with the Geo Finance, I think that's the beginning. We could have two
35:46 more, which could be retail as well as the telecom. I think that that could happen over the next 18
35:52 months. I think Geo Finance also will be another financial disruptor. Absolutely. I mean, what
35:58 possibly Bajaj did, when the PSU banks went off the radar way back in 2013, 14. And then we had,
36:06 we saw the NPA issues come up. I think Bajaj had a good run in that eight to nine years.
36:15 From 2013 onwards, yes. Yeah, exactly. I mean, that's the time they made the hay,
36:21 when the sun was shining, especially in that sector. But then right now I see Geo possibly
36:30 disrupting the space clearly here because of the sort of data and the connectivity which they'll
36:35 have. I think they could disrupt it for Bajaj. Okay. So, you know, we are talking about sectors
36:44 right now in terms of what the market is, etc. But do you guys, and this is for all of you,
36:50 anybody can take this question, is do you also think that there are some all-weather kind of
36:55 sectors which, you know, a retail, a very lay investor, you know, who may not be able to do
37:01 this kind of research that experts do, can bank on? This is something I tell people all the time,
37:09 that no theme runs forever. No geography, no asset class, no sector runs forever.
37:16 Even if the business is a so called steady business, it is not as if it always gives
37:21 returns. You know, in 2020, I did a whole half an hour show on this at that time, FMCG was
37:28 really the much loved sector. And I said, if you because I always go by data,
37:32 if you will go by data, the long periods of time when the so called steady companies do not
37:39 perform, I mean, Hindustan Unilever, right from 1999 to 2010, did nothing much at all. I mean,
37:46 also on the business side, not just the stock, Mata gave zero returns for 15 years. So Nestle,
37:53 all these companies have long periods of not performing. And at that time, I had said that
37:58 any company which otherwise fits the category, but is not performing, you don't even talk about.
38:02 So ITC was in that category. So actually, when we started to go back into FMCG, the first company we
38:09 bought was ITC. So last, but you know, many of those are not really sector calls. So last year,
38:14 for example, you know, among our top performers would be ITC and Raymond, but neither was a sector
38:19 call. So you were earlier asking about sectors I had spoken about, of course, banking and
38:27 capital goods, capital goods still remains number one for us. As I said, we added auto
38:33 components, pharma, but a lot of other sectors, it is really a bottom up thing. So you might end up
38:39 being overweight something, but that is coming out of like chemicals was spoken about recently. Now,
38:46 last year, chemicals wasn't like, it was all over the place, because there were certain chemicals,
38:52 where the prices were going up. So if the company was making that, they it was like bonanza time for
38:59 them. But there was another category of companies for whom it was an input. And therefore, you know,
39:04 their margins went for a toss. So that you have to look at. So unfortunately, you know, there is
39:10 nothing called an all weather thing. And what people must also remember, which is that
39:16 most of your returns come from asset allocation. So I mean, we all look for the multi bagger.
39:22 But first, you have to get your asset allocation right. And number two, I say, first of all,
39:28 you have to know what your current asset allocation is, which surprisingly few people know.
39:35 And I'm not just talking retail investors, I've had large family offices, who have one impression,
39:42 you know, you have a global family office, and they will think that we are mostly in global fixed
39:47 income. And then when you actually do the numbers, you will find they're mostly in Indian real
39:51 estate. So those kind of you know, there's complete disconnect between what people think and how the
39:57 network is actually deployed. So those so there are unfortunately, the market doesn't make it that
40:03 easy for you that. And but one advice, which I would like to give every single investor is that
40:11 you are going to be wrong a whole lot of times. The best investor or fund manager in the world is
40:18 also wrong a whole lot of times. So the best advice is that when you are investing, tell yourself that
40:24 I may be making a mistake, because where most people go wrong is in refusing to admit a mistake.
40:32 So, like, for example, now we use an artificial intelligence and machine learning system,
40:38 we call it the human plus machine system. So the first sort of round is done by the machine,
40:46 which is that you have a system which looks at hundreds of factors, you look at all companies on
40:51 on the same basis with no bias or noise, that will maybe give you 70-75 stocks out of which
40:58 then you put the human expertise to choose maybe 50 or 55 out of that. So we say we have the human
41:05 element on the investing side, but we do we actively do not have a human element on the risk
41:12 management side, because it will always be a human tendency to say that this stock is different,
41:18 this time is different, let's wait a while, you know, so you have to be ruthless on the risk
41:23 management side. So, you know, for retail investors also have stop loss, have risk management
41:29 parameters, have discipline and keep to it, you know, that's the hardest part.
41:34 Right, right. So that's, that's very, very useful for our readers, because, you know,
41:38 ultimately, out of money sticks with the retail investors and you know what they can do. So,
41:43 Mr. Balika, you wanted to add something to that. And also, like, Ms. Mehra was also talking about
41:49 the whole investing strategy around sector investing, so to say, if you could speak about that.
41:55 No, I mean, like, you're talking about all weather. Yeah, yeah. Like, I mean, when you talk
42:02 about the weather itself, there's no uncertainty, I mean, you could have a hailstorm in the middle
42:08 of summer. Similarly, like, nowadays, I don't think there is anything called all weather sectors.
42:15 I mean, there's like, so much churn happening in the global economies. So a good story today
42:21 could in fact, turn irrelevant in the next few years, unless the company is fleet footed and is
42:28 able to adapt to the change. So looking at the two wheeler space, again, I'm not too sure how many of
42:33 the current leaders will remain leaders in the next seven to eight years, looking at the way the
42:37 EVs could change the scenario. And I'll just give you one example. Like, for example, information
42:43 business has ever been sector all through, but then you have the players keep changing. I mean,
42:51 if you go back to the 80s and 90s, you have something called yellow pages, which everyone
42:56 referred to. I mean, they disappeared. And you had a company called, like Ask Me which came in.
43:02 But again, Ask Me could not go beyond telephone communication. Then we had something like
43:08 Just Dial, which came in and innovated the whole space, manage the online information decimation
43:13 extremely well. But again, they couldn't progress from information decimation to transaction well
43:19 in time, and again, was left behind. So clearly, you need to have companies being fleet footed to
43:25 keep changing. I mean, based on the change in the environment, which not too many people are able
43:31 to do that. But then if you still want me to point out one sector, I think that could be telecom,
43:36 basically, because I mean, it's again, one of the basic necessities in life today. So I mean,
43:42 I would say after air, food, clothing and shelter, the next requirement is telecom for
43:49 most of the population. Yes, yes, that's very interesting. Mr. Agarwal,
43:53 you want to add anything on all weather sectors?
43:56 I agree with you. There are no all weather sectors. Everything is a cycle, the duration
44:06 of the cycle may differ. One can still find a few all weather companies. But all weather also with
44:14 an expiry date, it could be 20 years, it could be 30 years, or it could be 10 years. But one can
44:20 still find companies which can grow over a fairly long period of time for it to be confused as all
44:27 weather in perpetuity. But there's nothing called all weather sectors, each sectors go through up
44:32 and down cycles. As they've not given up levers and Nestle and Bata for about 10 years, they made
44:41 no returns. And if you look at the history for 10 or 15 years prior to that, they seem like all
44:46 weather and something that you should always buy and hold and never let go off. So that's a bit
44:51 tricky. And again, since you're trying to find answers, mostly for retail investors, something
44:57 they could really invest in and sort of all weather investing in the sleep peacefully.
45:02 So that my recommendation is very simple, the market has become far too complex. At this point
45:09 of time, it was perhaps a lot easier to find a few all weather names or long cycle names,
45:16 which could make you money over, let's say one or two decades or three decades, historically,
45:22 as compared to today in a lot more dynamic world where disruptions coming from anywhere from
45:28 an absolutely unknown name, unknown startup can come in and put some spokes in your business model,
45:33 which was a lot more difficult, let's say in the 90s, or early part of the 2000s decade.
45:38 And hence, I would recommend that the retail investor should actually use more of experts
45:44 to manage the money rather than trying to manage it themselves,
45:49 and focus more on asset allocation decisions. Again, something which they will refer to,
45:54 how much of your money should go into equities, how much debt, how much you can do high risk
45:59 equity versus low risk equity, because each, you can find vehicles for both. You can do a little
46:06 bit of sectoral thematic investing by finding in vehicles managed by institutional and professional
46:13 managers. For example, if you're really bullish pharmaceuticals for the next two years, you can
46:18 buy all the various pharma funds which exist as a part of your equity allocation. But that's also
46:22 part of the asset allocation decision, more than a stock picking or a sector picking decision. I
46:27 think that would be my recommendation. Can I just add a bit since Dheeraj spoke about thematic funds,
46:37 I have a kind of antiview not on existing thematic funds, but on launch of thematic funds. I always
46:47 think that that is, I mean, it is good for the fund house because it gathers AUM. But if you
46:54 look at the track record, I mean, I again go by data of all thematic funds, whether it is a Nasdaq
47:00 ETF, whether it is a pharma fund or an IT fund, they always but always come towards the peak of
47:07 that cycle. When that thing has run for a while, the retail investor has this FOMO feeling that
47:14 if I don't get onto this bandwagon, everybody is ahead of me. And then it comes at the wrong time.
47:21 I mean, that's the data. I mean, in 2021, when all these Nasdaq ETFs were coming, I said everywhere
47:27 that this is recency bias. Nasdaq has done well for three years, you think it will do well forever,
47:32 it will not and 2022 was such a disaster. And then what happens is that after it is down 40%,
47:39 then they panic and then they will say that should I get out now, which is compounding
47:44 a bad decision, you got in at the wrong time. And now you want to get out at the wrong time. So
47:48 since asset allocation determines most of your returns, if I leave that decision to the retail
47:56 investor, then what value am I adding as a fund manager? That is one of the key things which I'm
48:01 adding as a fund manager, whether it is in terms of geographies or sectors as to where to be.
48:08 And just one other thing that came to my mind, which was what Amrish spoke about in FMCG and
48:15 Reliance Retail, this is a very interesting thing. This is something I did more than 20 years ago.
48:21 So it's like, if you look at the Indian FMCG, and we said, like, let's look at the Indian FMCG
48:27 companies, and let's look at their global parent. And we say these are branded companies with great
48:33 brands. So where does this value of the brand show up? And what we found at that stage was
48:39 that the global companies were making a quite a good EBITDA margin, whereas the Indian companies
48:47 had a far lower margin, but where that cloud showed up was the distribution side. Because
48:57 many of the larger companies used to work on a negative working capital cycle, they would get
49:04 cash in advance from the distribution system. So the brand was showing up there, but the
49:08 consumer didn't have the wherewithal to pay a higher price or give them a fatter margin. But
49:14 that's where it was showing up. And that's the hypothesis we gave at that time that it doesn't
49:21 show up in the global companies, because retail is more organized, because you have a Walmart or a
49:25 Target or so on, on the other side. So that is, and as Indian retail will become more organized,
49:33 you will see pressures on that side, because it's that Porter's model of where does the power lie?
49:39 Is it with the seller? Is it with the buyer? Is it with the distributor? And now you see that power
49:44 equation changing. Of course, over time, Indian companies, the EBITDA margins have expanded.
49:49 But now you are seeing that power equation changing when retail is becoming organized.
49:54 And therefore, they have more bargaining power, they also have private brands or they buy out
49:59 brands. So that's an interesting thing to watch over a period of time. And of course, you know,
50:07 this because we have been following global companies now for almost 25 years. This is the
50:13 other thing that over time, the lifecycle of companies has been reducing. If you look at the
50:18 S&P itself, in the 1960s, the average age of the company was about 50 years. By 2015 itself,
50:26 it was down to 18. Now I'm sure it must be even lower. Now in the early 2000s, when we used to
50:32 cover global stocks, the tech majors meant IBM, Dell, Motorola, Cisco, you know, Cisco, I don't
50:41 know how many people remember was once upon a time the highest market cap company in the world.
50:46 So those companies are still around. But that's not what you think of when you think of US tech.
50:51 That cycle is reducing. I mean, in India, it's not gotten so fast yet. I mean, it's not
51:01 compressed as much yet. The companies that I've got bored of and the hence went global 20 years
51:08 ago, still remain the major, the Infosys and Bajaj Autos and so on. But I mean, it will
51:16 get a bit faster now in terms of the lifecycle reducing. So that's the interesting thing,
51:23 which is why one other statistic. I'm a little into data. We were talking of all weather stocks.
51:33 Now we did this exercise, which is a very simple exercise, which is that how many companies show
51:40 profit growth every year, not even 10% growth, 5% growth, just more than 0% every year for 10
51:48 years. So it doesn't seem like a big thing. So there were 4200 companies listed 10 years ago,
51:56 guess how many of them have showed any profit growth every year? That's all,
52:01 profit growth greater than zero every year. Can you guess how much those were?
52:08 Only 17 companies out of 4200 companies. If you go back 20 years, it's only two companies,
52:16 HDFC Bank and Supreme Industries. That's it. That is it. So you know, all these Excel sheets are
52:23 easy to make, DCF analysis, great to make. And every one of them, I mean, I can tell you,
52:29 99% of them unless the company is currently making a loss will show profit growth every year
52:36 out into eternity. And yet not even 5% of the companies made that. So that is why it has to
52:45 be dynamic and tactical asset allocation. We look at portfolios from scratch every quarter that
52:52 today if I had cash, where will I be invested? It's another matter that from one quarter to
52:57 the other typically 85-90% of the stocks remain the same. But we keep that aside,
53:02 we don't want to look at what we hold just now, because then, you know, again, it will cloud your
53:08 judgment. So that's why investing is fun. Because so many years later, that is still always something
53:16 to learn. Okay. So coming to the end of this session. Thank you so much, all of you for
53:23 taking out your time and being a part of this exercise. I mean, it was a very insightful
53:28 session for us and really helped us get a direction. And we really look forward to similar
53:33 associations in the future. And right now, of course, we'll, you know, the cover will come out
53:39 with all these views and insights, and we hope to make a splash out of it.
53:45 Thank you very much. Bye Amrish, bye Dheeraj.
53:54 Thank you.
54:00 Bye.