Talking Point: Unpacking Sector Turmoil, Commodity Prices & More
Talking Point | #InCredAssetManagement's Mrinal Singh on sectoral margins, #Nifty's risk-reward dynamics and #IsraelHamasWar's impact on commodity prices, in a conversation with BQ Prime's Niraj Shah. #BQLive
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00:00 Thanks so much for tuning in to today's Talking Point. I'm your host, Neeraj Shah. And yes,
00:03 today's Bernal Singh of Intel. Bernal, great having you. Thanks for taking the time out.
00:06 It's a pleasure always, Neeraj. Thank you.
00:09 Now, the pleasure is ours. Bernal, a bit of, I mean, you could say a bit of a tug-of-war
00:16 between risk-on and risk-off, so to say, but the market's largely not going anywhere. Now,
00:20 what is, to your mind, the next set of triggers coming from? Is it global factors which,
00:26 if they're done benign, help risk assets largely? Or could it be a factor of what we do in quarter
00:32 2 in earnings, which could be the principal driver? What happens next?
00:36 So very clearly, the macro, the global macro is weighing down on the market.
00:41 And elevated crude prices are kind of worrying the projections. We also have election domestically.
00:50 We've already announced election for the five states, and we have the general elections.
00:55 So the market is obviously a bit more nimble-footed, clearly. But the earning season
01:01 that we've entered matters a lot, lot more from a medium-to-long-term perspective,
01:05 no doubt about it. But then the global macro combined with the local, I would say, uncertainty
01:13 because elections are almost there, I think that is what is keeping worried. Also, participants
01:19 are getting a bit jittery because maybe they expected the interest rates to come down faster,
01:27 wherein the global central banks continue to remain hawkish. And that's due to the inflation
01:34 being where it is. And crude being higher for things in Middle East or even more in Europe,
01:39 I think that is kind of worrying investors. So we are seeing a range-bound market, particularly
01:45 because the earning trajectory is positive, but the macro is clearly weighing on the market.
01:49 And you can believe therefore that it stays that way for a better part of the next couple of
01:56 quarters because the election anticipation overhang, by the time the state elections are
02:01 over, we'll enter into the national election season, so to say. So does it kind of stay as
02:06 an overhang which caps any possible upside, if you will? Well, in simplistic terms, it would be
02:14 an extrapolation of current environment. But generally, I've seen the markets don't work like
02:19 that. The markets generally don't believe in being stagnant. They will either break through this,
02:24 the trigger could be upward, it could be earnings, or it could be mulling down of the global macro
02:31 concerns, or they will adjust for those concerns and the prices will come down. So the equity
02:37 markets don't have a habit of being dormant. They will not remain dormant for long. They will,
02:43 obviously, accept one version of either the concern or medium term India perspective.
02:49 So, could it well happen, Vidal, that the broader end of the spectrum,
02:56 very specific pockets due to earnings growth, or due to triggers by the government? I mean,
03:01 there's a note of how the next six months the road awarding will actually pick up even more,
03:06 and that might well play into the hands of the government wanting to do something for the rural
03:10 consumer, right, because that is clearly ailing. So, would it well happen that the indices by and
03:16 large stay kind of very, very range bound, but specific pockets would have sharp reactions,
03:24 either on the upside because of policies, or downside because of earnings disappointments?
03:28 Excellent observation, Neeraj. I think that is exactly what we believe is going to happen.
03:34 Calendar year 24 belongs to the rural consumption. Clearly, that has been the lagging part of the
03:41 economy. We've always seen that approaching election, the government becomes a dominant
03:47 player in the economy, through spending, through MSPs, through elections, whichever way you want
03:53 to call it. Their policy framework clearly moves in that direction. And there is genuine need for
03:58 the government to intervene to pull the rural folks out of this flood that they've got into.
04:03 So, I have no doubt that the calendar year 24 belongs to rural consumption. And all businesses
04:11 generally have both an urban phase and a rural phase, but some businesses have a bigger rural
04:15 phase. Those are the ones which have been struggling last three years post COVID. And
04:20 those are the ones potentially which could do better going ahead. And it's not only about a year,
04:26 rural is more than two thirds of the population, it's almost 60% plus of the volumes across
04:32 sectors. And India grows stories about penetration and that is the uncharted place where goods and
04:37 services haven't yet reached. So, I guess the genuine growth, the real growth is where we
04:42 would walk into the next calendar year. The skeptics of this argument, Mrinal,
04:47 are arguing that it is flattened to deceive a couple of times in the last three years.
04:53 And yet, if you want to buy into, let's say, for example, staples, which could be a part of the
04:59 rural consumption story, then you're paying a significant premium or not so significant
05:06 a growth number. What would the response be to such an argument?
05:10 So, that's a valid fundamental query, or I would say at times very often in investing language,
05:18 disgust, because very good businesses price too well. So, all investors want to buy them at a
05:23 price we've been watching them forever. But that rural is not only about staples,
05:29 there are businesses, for example, two wheeler is a very rural business. Some people miss,
05:34 but the largest portion of cement consumption is in rural. So, well, there are plenty of sectors
05:39 itself, which are very rural. Staples is definitely going to gain. But then if the
05:46 valuations are uncomfortable, there are other sectors, which we are looking at as well.
05:51 You know, I named a couple, and there are plenty of others, which also have a rural face and good
05:55 benefit. Yeah, well, that's true. Okay, so let me try and expand a bucket and just probe that a
06:02 little bit more. So, for example, building materials would well fall into the argument
06:10 of gaining from rural, but at the same time, having substantial benefits from the ongoing
06:16 residential upcycle or infrastructure by the government, both in rural and urban,
06:21 would that be a safer pocket part one, but part two, is it being captured in the valuation? So,
06:27 do you reckon there is room for positive returns into let's say, for example, building materials?
06:34 So, well, let me shake people a bit on that. I think what has started happening last 10 years,
06:42 the growth has been so meagre, that I feel that people have started thinking small.
06:48 People are not realizing where we as a society, as an economy got to go is going to be multiple
06:55 times from where we are. I mean, if you're trying to look at three months, six months,
07:00 you might see some percentage growth and all that. But if you start thinking five years,
07:03 10 years, you'll realize that we are talking multiples from the size we are. So, is building
07:08 materials going to be three times the size in next seven to 10 years? The answer is yes.
07:13 If the economy is going to be double, and a lot of it is going to be led by infrastructure, housing
07:20 and capex, I have no doubts that building material will be a significant part of that growth.
07:26 And because of last 17 years, or maybe a bit more, we have had meagre growth in the system.
07:33 So, we have started thinking small is what I have, you know, kind of sense, but I guess we just need
07:39 to expand the horizon both in terms of size and scale. We are looking at multiples in the economy.
07:46 Our economy is roughly 4 trillion, give or take some, we are going to be 6 to 7 trillion very,
07:53 very soon, in the next five years, maybe. I mean, we are talking about very, very large
08:00 economic activity being added. So, people need to think in those lines, you know, thinking 5,
08:04 7, 8%. I guess they're going to miss the bus, you have to think that what, where is it going? Where
08:10 is the growth getting driven from? If the economy is going to double in the next less than 10 years,
08:15 then there are sectors which might actually do far, far better than that.
08:18 Got it. Okay, so let me try and ask you a bit on that. There would be themes within this growth in
08:26 economy beneficiaries, which would be discounting a lot of the near term and maybe some medium term
08:33 benefits in the current foundations. And then there will be some which are still not being
08:38 played because maybe the near term might be a bit sluggish over the next three to six months,
08:43 but then the long term comes into play as you say. My question to you is, where is it that you are
08:48 betting the larger portion of your current portfolio on to play that?
08:55 We call it mean reversion. So, there is a set of sectors or the economy which has driven the growth
09:00 in the last three, five years, urban has been a dominant part of it. But I think the next four,
09:06 five years, Capex, for example, has been lagging for 10 years, I think the next 10 years, a lot
09:10 of Capex will happen. Then we will see the rural part of economy kickstarting somewhere next year.
09:15 The green shoots are already there. We will see building material, manufacturing oriented,
09:22 consumable business, there is going to be mean reversion into sectors like healthcare.
09:27 And by healthcare, I don't only mean pharma, there is an entire umbrella. We have got diagnostics,
09:32 we've got insurers, we've got hospitals, and we've got more. I mean, healthcare is a very
09:36 expanded sector now. We don't have a great representation on education. Otherwise,
09:42 that's also a place where households will significantly spend. Entertainment, travel,
09:46 and leisure is going to be a large part of spending as household incomes move up. It's
09:51 historically seen in every economy, it's going to be no different in our household economy.
09:56 We are going to see government-led infrastructure push. Last 15 years, we've seen highway, port,
10:02 airport kind of things. I think urban infrastructure, mass transport system,
10:07 expressways, that is the place that the governments will spend in the next 10, 15 years.
10:12 So there are plenty of places, very, very brick and mortar. Obviously, financials will benefit.
10:18 Housing finance is a very great area to be, I think the runway is very long and strong.
10:22 We also think telecom and infrastructure-related businesses would be interesting. It is a
10:28 challenge from an equity perspective to invest in infrastructure. So we do all kinds of roundabout
10:32 things around it. And I also feel that there is too much of talk about the US recession. I think
10:41 US Fed is particularly very well placed. They can deal with the recession if at all it happens,
10:46 or a slowdown, if I may say. Because the Fed rates are at 5.5, they moved up from zero to
10:53 that number in less than 18 months, somewhere in that vicinity. They're pretty comfortably
10:57 placed to take it down if they need to support the economy. And I guess the seeds of next
11:02 technology growth engines are already there. AI is going to drive things for the next 20 years.
11:08 It is going to meaningfully change everything that we do and conduct. Like internet has changed
11:13 everything that we do and conduct in the last 20 years. So would be things like drones,
11:17 so would be things like IoT. So there is plenty. It's just that, as I said earlier,
11:21 it's just you have to just look ahead of the hump. Start thinking a bit farther and you think there
11:27 is plenty of sunshine around. Yeah, so actually, I was gonna say that this is a very diverse
11:33 set of themes that you've given us and a lot of these could benefit some more and some less.
11:38 If I were to, for the benefit of our viewers, try and understand where is it, Badan, that you are
11:45 particularly focusing on? And it may not be necessarily just by the weight that you allocate
11:51 in your portfolio, but could be because you are thinking slightly differently than the rest of
11:55 the field. So may I ask you to tell us where is it that you are particularly focused on? More so
12:00 where you might also be a bit concentrated and why? Auto ancillary, very clearly, very large
12:07 ecosystem and very capable businesses. And you have choices of valuation and management. Cement,
12:14 very big pack. There are large names, there are mid names, there are small names.
12:18 There are industrial consumables, power utilities, and capex oriented businesses. Housing finance,
12:26 clearly a favorable stock or sector for us. These are three, four spaces we are very gung-ho about,
12:32 and obviously we have taken our names in terms of our choices of investment over there.
12:36 Interesting. Auto ancillary, so just probing one or two more. And Hitar,
12:41 doing all of these pockets that I've heard you say, I haven't heard IT services. So that'll be
12:45 my last question. So you did mention IT, but not IT services. So that'll be my last question. But
12:50 before that, auto ancillary. The nature of the auto industry is shifting meaningfully. We've
12:58 already seen that big change in India in two wheelers and globally on the four wheeler side
13:02 as well. Do you reckon that traditional favorites would well make segues into electrification or
13:08 hydrogenation as the case may be? And would you bet on some of those or would a completely newer
13:14 set of auto ancillary names dominate the games for the next 10 years? So well, the future of
13:21 mobility is green. No doubt about it. Is it electric? Is it hydrogen? Is it something else?
13:27 I think the science and economics are still trying to find it out. The final call is not done over
13:32 there. It could be a combination as well. But no matter what it is, it is certain that it is green
13:38 and there are some natural trends that we are seeing. Electric vehicles are heavier. So they
13:44 need similar kind of adjustments in the car. The wear and tear of tires are more steeper.
13:51 We also need, we are talking about automatic driving at some time, driverless car. So we will
14:00 need safety devices. Car designs will change in a way that backseat drivers would be the whole
14:07 idea of as of now, most cars are designed globally from a pleasure perspective, performance
14:12 perspective. But then it will become something where there is no driver, but you sit behind.
14:17 So it will be designed in that respect. No matter what it is, there are lots of trends in the
14:21 mobility, but there are some things which will remain. A heavier vehicle needs some bit of
14:27 better cushioning, some bit of better shock ups. They need tires to be of a different variety.
14:34 We need safety devices to go up. That's a trend irrespective. Even if there is delay in adoption
14:39 of greener mobility, we will see safety devices because now we are seeing expressways permitting
14:44 in India 120 kilometers per hour, which used to be 80 kilometers per hour. That would mean that by
14:50 law, you will have to have better safety devices in car, otherwise we will have more accidents.
14:54 Historically, there have been very high fertility rates in India due to accidents. So that's
15:01 something that I'm sure the government is aware about. We will see that trend.
15:04 There would be need driven by regulation, driven by demand for safer cars. And there would be need
15:10 for more DC motors because people want more electric chairs. They want the owners to move
15:18 up and down on their own. So those kinds of comfort effects. So we clearly have an insular
15:24 ecosystem. It is so large and so capable. I mean, you can have people specialized from locks to
15:31 DC motors to indicators to cameras and they are businesses who just do that and they keep
15:38 improving their product and go to market value match with the clients. So plenty to choose from
15:46 and it actually creates no conflict in terms of which way the mobility future is going. It could
15:53 be electric, it could be hydrogen, it could be something else, but there are some things that
15:57 are not going to change. So that leaves plenty of space for us to choose to invest in.
16:01 Other way to split it would be two wheeler and four wheeler. And in two wheeler, four wheeler,
16:06 there are mass two wheeler, there are mass four wheelers, there are volumes. That's where we are
16:10 focusing on because it gives us a rural exposure as well. Two wheeler is a very heavy rural product.
16:16 And I guess as and when rural does pick up, it will show up in those volumes and the entire
16:21 supply chain will kick start. Got it. Pranav, we are very close to wrapping up. So 60 seconds,
16:28 but just 60 seconds, a word on IT. What do you think of IT businesses and what's the call ahead?
16:34 IT great businesses, I think they are going to for the time being show some growth related issues.
16:40 But for a price, we would definitely look to invest in them. They are very well poised to
16:48 drive or facilitate their customers move towards the new engines of growth like the AI and the
16:55 IoT and all. So we have to, we will obviously add them up for a price. And we have I think
17:02 somewhere in the next six months, we might just get that price. We will look to add them.
17:06 Got it. Great. Pranav, we'll leave it at that. Thank you so much for taking the time out and
17:12 being with us on Talking Point today. Thank you so much, Nitesh. Thank you.
17:17 Viewers, thanks for tuning in.
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