How will rising geopolitical tensions and surging crude prices shape the domestic markets?
An in-depth financial forecast with #OldBridgeCapital's Kenneth Andrade. #BQLive
An in-depth financial forecast with #OldBridgeCapital's Kenneth Andrade. #BQLive
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00:00 Thanks so much for tuning in to Talking Point.
00:02 I'm your host, Neeraj Shah, and our guest today at a very important juncture for the
00:06 market, Kenneth Andrade of Old Bridge Capital.
00:08 Kenneth, always a pleasure.
00:09 Thanks for taking the time out.
00:10 The pleasure is mine, Neeraj.
00:11 Always lovely talking to you.
00:13 Thank you.
00:14 Kenneth, you've been on record saying that while corporate India at large has passed
00:23 many stressors and therefore the worry is not at the corporate level but maybe at the
00:28 valuation level or if there is an event or two which kind of upend the momentum of the
00:33 market.
00:34 Is the current geopolitical situation that we're seeing possibly an event that could
00:40 do that to risk assets?
00:42 Yes, I think geopolitical events always have to be passed out for, especially if they escalate
00:50 to a regional level rather than get localized.
00:55 So that could affect, I think, primarily one significant thing, which is capital flows.
01:01 And India has been a mix, or regions across the world have been a mix of capital flows
01:07 or liquidity, which drives asset valuation or market capitalization, so as to say.
01:14 Now what we need to watch out for is if any of these events actually escalate at a regional
01:19 scale and how many people do get involved.
01:21 Now there's a good part to it and there's a negative part to it.
01:27 The negative part to it is that yes, this is an event which goes regional.
01:32 Regional is a lot of capital flows are sitting in, capital is sitting in that entire region.
01:38 And you get an inflationary spike which is not good for any asset class on the ground,
01:43 not good for any economy, especially an importing economy.
01:46 And that's a negative for large, for countries that have a current account, I should say.
01:53 Now I flip to the other side and just talk about the positive spin to all of this.
01:59 The positive part of it all is that capital flows, however limited they might be, will
02:04 look out for countries or places which have got a lot of stability.
02:10 And the region that we are in, or the country that we are in, along with a couple of other
02:15 Asian countries, seems to be an oasis of calm at this point in time.
02:21 And that could attract capital.
02:22 Now I'm saying this with a pinch of salt because something like this has not happened before.
02:28 So that's the positive, giving it a positive twist, but we'll have to see how it actually
02:32 comes through.
02:33 Now, I don't think either of us are going to be right about taking a call on the event,
02:39 we'll just have to participate with it.
02:42 Got it.
02:44 Having said that, because it's a hypothesis, I'm just trying to understand, Kenneth, and
02:48 because this has never happened before, is this time really different for India in that
02:52 sense?
02:53 Because yes, one, it is calm.
02:54 Two, the point that, independent of what happens to foreign flows, the domestic flows are soaring.
03:01 And that kind of, even in the minds of the foreign investors, puts a lid to, or a bit
03:06 of a bottom in place, because all bottoms are getting bought into.
03:09 Yes, yes.
03:10 I should have mentioned that, yes.
03:12 This time in terms of capital flows, we have largely substituted international capital
03:17 with domestic capital.
03:18 And that's really creating a base for liquidity flows into the economy.
03:25 So yes, that adds an added advantage to it all.
03:28 And of course, if you look at liquidity in the entire system, domestic liquidity in the
03:32 entire system, and I'm taking you on corporate manages, there's an enormous amount of it
03:36 that's out there.
03:38 Got it.
03:39 Right.
03:40 So that's going to hold us through this entire storm.
03:43 So you might see, I'm not too sure, but I'm pretty positive that you won't see a sell-off
03:51 in the true sense of it all.
03:54 But anytime you get a decline in this, and I go back to the phrase that valuations might
04:00 be a little stressed, but if they come into your comfort zone, I think it will give you
04:05 a good time to allocate capital to this market.
04:08 Okay.
04:09 And it's difficult to lay out percentages out here, Kenan, but I'm just kind of tempted
04:14 to ask you that if you were sitting on a bit of capital, let's say, to deploy during this
04:22 period of not turmoil, really, but a rough period, if you will, would you be tempted
04:28 to do that at a nominal 3%, 4%, 5% fall, assuming that the geopolitics doesn't worsen too much?
04:36 Or would you reckon that the correction could be larger as well, if the world is slowing
04:42 down and geopolitics stays constant, even if it doesn't worsen from where it is right
04:47 now?
04:48 I mean, in all these cases, we will do better.
04:53 So I'm not too sure.
04:54 I've been terrible at trying to time the market.
04:55 Every time I've got it on the wrong side.
04:56 So this is not in the, that's not something I'm going to attempt in terms of whether it's
05:06 a 5% or a 10% or 15% fall, I don't know.
05:07 But yeah, it's a good opportunity to buy into the marketplace.
05:08 As we currently stand, we've got an average of about 10% of cash on balance sheet invested.
05:09 But that 10% is not a lot because 90% is already invested.
05:10 So I have to look at that 90%.
05:11 That is not 10%.
05:12 But a 10% does give you a little bit of flexibility to allocate to what you want, rather than
05:13 to allocate to equities.
05:14 Sure.
05:15 Okay.
05:16 The other aspect, Kenan, is that you mentioned that there's a lot of uncertainty around
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12:32 And we can pick a company or pick a set of companies in India who have got zero leverage.
12:38 That is the opportunity that you are playing into.
12:41 Non-pharma?
12:44 Are there other options too?
12:46 You will get that in the chemical space sooner than later.
12:51 You had it in IT services.
12:56 So there are a few of them that are happening.
13:01 But I don't think they are at the scale that it is set out in this one particular industry.
13:08 Okay.
13:09 So pharmaceuticals, that's an interesting point.
13:11 Thank you for that, Kenneth.
13:12 By the way, speaking of exporters, services, US, I'm inclined to ask you, what are you making of this whole…
13:18 How do I say?
13:21 The conundrum that the street has around IT services.
13:24 Total contract values being announced are great.
13:28 It's not translating to revenues immediately.
13:30 There is a bit of a guidance cut that is happening.
13:33 And lack of clarity.
13:35 Because when I ask companies about whether they are able to look out 18 months, 24 months, which they usually used to be able to do,
13:41 they themselves are saying, no, we are not looking out more than two quarters because it's difficult right now.
13:45 How does an investor like you, therefore, gauge IT services businesses currently?
13:51 These are fairly mature businesses and they are large.
13:55 And the contract values that they are getting are also significantly large.
14:00 And either which way that we look at it, these are all cost takeout issues and they are fairly…
14:10 And they've got a social implication for it in the West also.
14:16 So, while the order books look large and everything looks fine, I think you want to pace this environment a little bit.
14:26 It's going to move slower than you expect it to be.
14:29 And all these businesses used to be fairly well priced.
14:38 And if we ever get to the point where we get a sell-off, I think top of your entire matrix, top of your entire mileage should be these large IT businesses.
14:52 Because very rarely, at least in the India context, you will see such large cash flow generating businesses available at yields which are this high.
15:04 So, I wouldn't play this industry for growth.
15:10 I'll just look at it from a cash flow yield point of view because assuming that these companies can grow at 20% is not the right way to think about it.
15:24 Got it. Got it. Lovely. Thanks.
15:28 Kenneth, my final question to you, and that is around businesses which have done really well in the recent past.
15:40 Maybe there's a bit of a correction that has happened, for example, in railways, etc.
15:43 But railways, defense, a clutch of other businesses are trading at valuations that they've never traded in the past.
15:52 Now, my question is, is that a sign of worry?
15:54 And there are other sectors too, by the way, there.
15:56 So, is there a sign of worry?
15:58 Or is it that the market is giving them due recognition for the kind of growth that could come in?
16:04 Market always anticipates growth, and anticipates growth based on a macro environment.
16:14 And prices a lot of future earnings into current market price, which is what has happened with this industry.
16:20 Okay. Now, it is left to the execution of these individual businesses.
16:26 Right. And if they, some of them execute well, they continue to maintain their current valuation, so as to say.
16:35 We think about it a little differently.
16:38 And if we are right, 50% of the time, I mean, we get the desired results in our output.
16:46 But we'd like to get into an environment where one, valuations are cheap and there's no growth expected.
16:53 And once the growth actually happens, because of the cyclicality of a business, then everything becomes an even.
17:01 Okay. So I think that's how we like to participate with how we like to do portfolio building.
17:12 Right now, I mean, we're very averse to buying into a trade, which is expected to happen, but valuations already there.
17:20 Point well taken. And sorry, I'll make this the last question and then wrap up.
17:26 But a very quick answer. You've been constructive on real estate as a space.
17:30 That space has done really well. And the pre-sales numbers for Q2, the fact that we are entering the festive season,
17:37 which could actually be a busy season, all augur well. Are you still constructive?
17:41 Real estate companies in India?
17:44 So you have to see not all the real estate companies are doing well.
17:49 Sure. And this is about a market getting polarized into the top five.
17:54 And this is from a customer level.
18:00 Okay. While everyone does well, the bigger ones are doing far better than the rest of them.
18:06 So it's left to execution. You have to be early into trades like this because you do not want to be the last one getting into the smaller businesses, which have no pricing power.
18:17 So that's how we tend to look at it. I'm fairly optimistic on how this asset works.
18:24 It's probably the only asset class in India which has legs. I mean, the only real estate asset class across the globe which has not developed into a bubble yet.
18:42 Got it. Okay. Okay. Well, last 10 years, hardly any price movement.
18:49 So, yes, the asset class is certainly not into the bubble territory. But interesting point, Kenneth, about how there is disparity between the large and the not so large companies.
18:57 It's something that we look into deeply as well. But thank you for taking the time out today and speaking to us on Talking Point.
19:03 Always a pleasure, Dinesh. Thank you.
19:05 The pleasure was ours. Viewers, thanks for tuning in.
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