- India Vs EMs: Valuation convergence at play?
- PSUs vs private lenders
- Budget: Substantial stride or fiscal formality?
Niraj Shah in conversation with Kotak Mahindra AMC Harsha Upadhyaya on 'Talking Point'. #NDTVProfitLive
- PSUs vs private lenders
- Budget: Substantial stride or fiscal formality?
Niraj Shah in conversation with Kotak Mahindra AMC Harsha Upadhyaya on 'Talking Point'. #NDTVProfitLive
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TVTranscript
00:00 Thanks for tuning in to Talking Point. I'm your host Neeraj Shah. The case for a chat
00:05 today with our guest, well, is a valuation convergence in play between India and other
00:11 EMs, specifically China? I think that's a key question to be asked because of the FI
00:16 selling that we've seen. Banking has been the top draw. We asked the question about
00:22 whether PSBs go out and outperform private banks, considering the fact that private banks
00:27 have had a brutal last few days/weeks. Now, of course, the key question remains about
00:35 whether this will be a budget which will bring into account some changes and therefore remain
00:39 a become a budget to watch out for or it largely remain a voter account and the key focus therefore
00:44 shifts towards the July budget. I think all of these questions become very important in
00:49 light of the fact that we've had a bit of a corrective move in the market and rises
00:53 are being sold into. Our guest today is Harsha Upadhyay, CEO of Equity, President Kotak Mahindra
00:58 AMC. Harsha, great having you. Thanks for taking the time out. I hope all is well.
01:02 Good morning, Neeraj. All is well.
01:06 Okay. It doesn't seem to be all that well from a bull's perspective recently. Is the
01:12 market kind of succumbing to the valuation pressure or the valuation numbers that the
01:18 market may itself be sitting in? Or could there be a case at some point of time and
01:21 people see that not just from an idiosyncratic perspective or valuations, but from a relative
01:26 perspective, maybe markets like China, maybe some of the others might be attractive and
01:31 therefore at the start of the year, global money flow might be coming out of India and
01:36 going into some of the other markets.
01:38 Neeraj, yes, that is possible to some extent, but it will be more of a tactical shift if
01:44 at all if you see anything of that sort in our view. Clearly from a medium to long term
01:50 perspective, India continues to be one of the favoured markets even for foreign institutional
01:54 investors. The growth has been very, very strong relative to other emerging markets.
01:59 It's been very, very resilient. And we are also less dependent on global growth. So to
02:05 that extent, in a scenario where global growth is still sluggish, people would have more
02:10 confidence on Indian growth continuing at current pace. Then when you look at our rating
02:16 in the emerging market basket, that's also become 16% plus. You can't ignore the market
02:21 anymore. And if you simply talk about valuation premium, India has always traded a premium
02:28 to many other emerging markets. Yes, these days the valuation premium has increased even
02:33 further. But I would say that if somebody is looking at India from a next three, five
02:39 year perspective, I don't think one can ignore India in that sense. So with a little bit
02:44 of volatility in terms of flows, we can still expect reasonably strong flows over the next
02:50 three to five years into it.
02:53 So Arshad, would you reckon that, I mean, there's a statistic that we have, the math
02:57 that we've done at about 19, 19 and a half times FY25, India, not on an absolute basis
03:04 you could argue to be in line with long term averages, recent long term averages, if you
03:08 will, but on a relative basis, much, much higher than the single digit numbers for Bovespa
03:15 or China or some of the others. So therefore you saying that that could usher in some near
03:20 term volatility, but the longer term flows might still continue to come into India because
03:24 of the growth picture.
03:27 That's exactly what I'm trying to say. If you look at India, I think there is not only
03:31 strong growth, but also a steadiness in terms of that expected growth, which is unlikely
03:37 in many of the other markets that you mentioned because of the focus they have on the commodities
03:42 and which are in tune, dependent on global growth, etc. And also our return ratios have
03:47 been very, very strong compared to many of these markets. So it's just not about growth,
03:51 but also the quality of growth that we are exhibiting in the recent times. And everyone
03:56 knows that the policy push that's coming from the government is also making sure that the
04:01 current growth rate not only continues, but possibly improves as well over the next few
04:06 years. So given all these things, very unlikely that the long term money will shy away from
04:11 India for a long time. Yes, there will be points of time where people will be worried
04:16 about relative valuations, absolute valuations, etc. But as I said, over the block of next
04:22 five years, we should be getting more money than what we have got in the past five years.
04:28 Now, you know, Harsha, a part of it also has to do with the fact that FDIIs like yourself
04:33 have been large investors all through 2023. I would love to understand what have you done
04:39 in the last couple of months? I mean, tactically, were you sitting on a bit of cash? Are you
04:44 starting to deploy it if you were sitting on cash? Are you fully invested? And what's
04:48 your stance? Because we are clearly seeing FI selling continue in some fashion into January
04:54 as well, even as DIIs have been buying. The latest numbers of the FI sale numbers are
04:59 also very high. So I would love to understand as a large domestic institutional investor,
05:04 what is your stance been? Has it changed with the turn of the year? Neeraj, our stance will
05:10 always be driven by what happens to our fund flows from our investors. So we have been
05:16 receiving flows from domestic retail investors for the entire 2023 and it still continues
05:22 as we speak in 2024. So to that extent, as flows are coming in, we would have to look
05:28 for opportunities to invest. As a policy at Kotal Mutual Fund, we do not keep too much
05:33 of cash in the funds because the understanding is very clear. The moment the investor has
05:38 put in money, he has taken a decision to invest in the equity market. So to that extent, we
05:43 may keep a little bit of cash to manage our liquidity and take time in terms of deploying
05:49 once the money comes in. But it's not that we are going to build cash if we are negative
05:53 on the market or if we are worried on the valuations. We will look for sectors and pockets
05:57 where there is a bit of relative comfort in that sense and try to invest there. So if
06:02 you look at our stance in the last couple of months, we have been a little cautious
06:05 on middle and small caps. While they have done quite well, not just in the last two
06:10 months but over the last couple of years as well, we believe that the relative valuation
06:15 comfort is more in large caps. So to that extent, wherever the mandate allows, we are
06:20 building a little bit of large caps rather than middle and small caps. But there are
06:24 also strategies such as mid-cap fund or a small cap fund where by mandate, we need to
06:29 be in those categories predominantly. And if the flows come into those categories, then
06:33 we have no choice but to invest in the same categories.
06:37 Got it. So, flows, Harsha, to be fair, have been very high at the broader end of the spectrum
06:44 as well. So how have you then gone about choosing the men from the boys from a performance perspective?
06:52 Because we have seen the markets price some of the promising growth stories, yes, at egregious
07:01 valuations as well. So I am just trying to understand how have you managed in such an
07:06 expensive broader end of the spectrum market to deploy or put some money to work?
07:11 It has been quite challenging, especially the year 2023. Look at the overall mutual
07:17 fund industry in the mid and small cap categories. Most of the active funds have seen a challenge
07:21 in terms of beating the market. That's purely because the reason that you mentioned, the
07:26 broader end of mid-caps, the broader end of small caps have done much better than the
07:30 overall market or overall mid and small cap segment. So to that extent, if you are not
07:34 comfortable on valuations in any of those pockets and still if you want to invest, that
07:38 becomes a difficult decision. And as a policy at Kotak Mutual Fund, we are very, very fundamentally
07:44 focused and we do not chase momentum. We would rather take that underperformance in our stride
07:50 and try to build a portfolio from a medium to long term perspective, which is not only
07:55 fundamentally sound, but also has some bit of valuation comfort. So that's how we have
08:01 gone about. And in this market, as you go down the market cap curve, as you go down
08:06 the liquidity curve, the speculation has been rampant and not all of the stocks have gone
08:11 up just because of the fundamentals. They've also gone up because of various other issues.
08:17 So to that extent, yes, it's been a challenge to draw money in mid and small caps, but that's
08:22 how each market phases. And to that extent, we have to be cautious in terms of the current
08:29 valuations and also look at possible ways to manage that.
08:34 Let's talk about some of these pockets. So, for example, yesterday we were talking about
08:40 the egregious valuations that some of these PSUs and we identified real PSUs as a pocket
08:47 to talk on, but we've seen a clutch of these PSUs move up. Now, I would love to understand
08:51 what is your overarching stance being on PSUs per se and is there a change there? And two,
08:58 particularly on some of these pockets like railways, for example, high promise of growth,
09:05 large allocation in the budget to that pocket, enough announcements there, but egregious
09:11 valuations in select cases.
09:14 Neeraj, for us, ownership is not the only determining factor. We look at the business
09:22 first, then at the management, and then finally the filter is always valuations. So to that
09:28 extent, we have always looked at companies from these three lenses. And unless we are
09:33 comfortable about the business and management, we will not go to the third stage, which is
09:38 on valuation. So just because something is very cheap or very attractive on valuations,
09:43 if the business is not fundamentally sound or is not scalable, then it will not stop.
09:49 Similarly, if we are not confident on the management in terms of alignment, the minority
09:54 shareholders, then also we don't enter into those businesses. So as far as PSUs are concerned,
10:01 by and large, the valuations were very, very attractive to begin with. And that has been
10:05 the case for most of the PSU companies even in the past. But as I said, that's not the
10:10 starting point for us. We have to be comfortable about the business as well. So within PSUs,
10:15 wherever we have believed that there is a resilience in terms of the business model
10:20 and they can deliver growth on a sustainable basis over the medium to long term, we have
10:25 evaluated and we have taken position in medium to long term. So that's how we go about it.
10:30 We just don't decide whether to invest at the ownership level, as in whether to build
10:35 towards private sector or towards the public sector. That's not the way we would go about
10:40 it.
10:41 Okay. So railways, Harsha, just trying to understand. Did you like that pocket or even
10:46 if you like the pocket, are valuations expensive?
10:50 We believe valuations are clearly expensive in this pocket, while the medium term growth
10:55 is very, very attractive and a lot more could come in. But most of the current valuations,
11:01 I would say, will kind of discount the immediate upside or even the medium term upside in that
11:07 sense. So one has to be a little cautious here. One has to be looking at probably very,
11:14 very long term with higher interim volatility if you're investing at current levels. That's
11:19 how I would see it.
11:20 Okay. Harsha, we're doing a bit of a barbell approach to this conversation. We're talking
11:24 about the mid caps right now because we were on the topic. I would love to talk to you
11:28 towards the second half of this conversation on banks and IT too. Since we're on the topic
11:31 of mid caps and small caps, however, I'll extend this conversation to some of the others
11:35 as well. Yesterday was a brutal day for rate sensitives in general, real estate in particular
11:41 as well. Now, most people talk about this being an upcycle which will last for a number
11:46 of years. Again, out here, did valuations run ahead of themselves or that is not necessarily
11:52 the case and you believe growth will take care in some of these pockets? What's the
11:57 overarching view on real estate as well as ancillaries?
11:59 Neeraj, again, the same view. From a medium to long term perspective, I think we are definitely
12:06 in an upcycle in real estate and that should help most of the allied industries supplying
12:10 to real estate or getting growth driven by real estate cycle. However, in most cases,
12:20 the valuations have already discounted most of the short term upside as I said earlier
12:24 as well in the context of some other sector and some other segment. To that extent, whenever
12:30 you see a little bit of disappointment in results or a little bit of nervousness for
12:34 any reason, then the moves have been very, very exaggerated. That also shows that this
12:39 is not typical of a trending market which we have seen for a long time in the recent
12:44 times. Probably, we are close to an inflection point at this point of time given the way
12:50 the exaggerated moves that you are seeing post announcement of results either on the
12:54 positive side or on the negative side. In many cases, for example, the results have
12:59 been broadly in line with some internal showing weakness or strength and market does seem
13:04 to have focused on those particular parameters and have reacted very, very sharply. This
13:10 typically happens when either there is a fear of missing out or when people are nervous
13:15 about valuations. Either of that can drive such exaggerated moves in the very short term
13:21 and that is what we are seeing. Clearly, I think one by one pocket still believes that
13:27 the markets can go further and one does not want to miss those opportunities and wants
13:31 to get in at an early development. There is also another section of investors who are
13:39 cautious and who want to see those little bit of weakness in those results as a first
13:44 sign of caution and want to dump the stock. I think both of these things are happening
13:49 in the market at this point of time.
13:52 Okay, fair call. The other aspect and again, broader end of the spectrum question, like
14:00 I said, post the break we will talk about the larger themes, but we have seen government
14:08 impetus give benefits to sectors in meaningful way. I mean, there was a small study that
14:13 we did that from the time PM Modi spoke about PSUs in the parliament, I know you do not
14:18 look at ownership that way, but I am just making this point, PSU stocks in general had
14:22 a fabulous rally. We have seen what has happened to some of the PLI link sectors as well. Now,
14:28 two days ago, Harsha, we have seen the government talk about a crore households having rooftop
14:34 solars and we know that going green, etc., is in the DNA of what this government is trying
14:39 to do. I would love to understand how you think about this whole green energy, solar,
14:46 etc. Right now, solar is the case in point, but we have seen what has happened to wind
14:50 energy, we have seen what has happened to solar by and large as well. How do you think
14:54 of this space because it is very large, it has got a lot of ancillaries and there are
14:58 multiple ways to skin this cat. If you are looking at this, how are you looking at it
15:03 and how are you playing it? Clearly, if you look at it from a next decade
15:09 perspective, green energy as a proportion to overall energy source will be much higher
15:14 in proportion. That is definitely going to happen and within that, since we are a tropical
15:21 country, solar energy is also going to drive that energy requirement over the next few
15:28 years, I would say. As you mentioned, government has also focused on solar energy and probably
15:34 you will hear a lot more about that over the next few months, few quarters, few years as
15:39 well. From a policy push perspective, I think it is very clear that we would be seeing a
15:46 lot of push coming into this sector as we go forward. Now, the question is, what are
15:51 the listed plays that are available to play this uptake in solar energy or renewable energy?
15:57 And when you look at that, you will not get too many names at this point of time. So,
16:02 that is a challenge. But over the next couple of years, I am sure that you will see many
16:06 of the existing players also shifting a little bit of focus on this area and getting a reasonable
16:10 proportion from solar energy or renewable energy. We could also see more IPOs coming
16:15 in from this sector. So, overall, I think it is a very, very interesting sector at
16:20 this point of time, maybe not too many listed plays. However, over the next few years, you
16:25 will see many of the companies become larger in this sector.
16:30 Got it. Harsha, stay on, so much more to talk about. We will slip into a quick break, come
16:35 back and talk more. And that is the first bit of views, do not look at ownership-based
16:41 investing. So, PSUs, they might buy into some of the PSUs because of the valuations that
16:45 they enjoy and not necessarily because they are PSUs or not PSUs. Constructive on green
16:50 energy plays as well. Real estate longer term, very, very positive. Short term valuation
16:55 hiccups could be there. We will be right back and in conversation with Harsha Upadhyay,
17:00 CEO of Equity at Kotak Minor IMC.
17:12 Thank you.
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19:38 Back with Talking Point in conversation with Harsha Upadhyay of Kotak Mahindra AMC.
19:42 Harsha, we spoke about a clutch of broader end of the spectrum topics,
19:46 but let's not talk about banks.
19:48 Now, the last few days, there's been a brutal sell off in some of these,
19:53 whether or not the results were okay, not so okay.
19:57 We're largely seeing a corrective move, say for ICSE bank.
20:01 Now, I just want to understand, what's your stance on private banks currently?
20:05 Because there are question marks around the nature of growth and
20:10 the profitability or the nymphs over the next 12 months.
20:15 And the market is paying due cognizance of that,
20:18 at least the FI seem to be doing that.
20:20 >> Clearly, the market focus as far as the private banks are concerned,
20:25 seem to be on the deposit group or the lack of deposit group.
20:29 And the pressure that you're seeing on net interest margins.
20:33 I think these were the talking points even earlier before the results and
20:37 continue to be the focus areas.
20:39 For us, it's not come as a surprise.
20:41 However, the market reaction seems to be very, very exaggerated,
20:45 as I mentioned.
20:46 Overall, when we look at the banking sector,
20:49 we do believe that valuations now be a lot more comfort as compared to
20:54 other sectors.
20:55 And also as we discussed earlier during the show,
20:58 the large caps themselves are at a better valuation as compared to small caps.
21:03 And within large caps, the banking means offer a better valuation comfort.
21:07 Yes, the next couple of quarters may not be very, very strong.
21:11 So to that extent, some of the trends that we have seen now in terms of
21:16 slow growth in deposits or pressure on net interest margins could continue for
21:21 most of the banking means.
21:23 But we do believe that the economy has to grow at 7, 7.5% kind of GDP group.
21:29 The credit growth has to continue.
21:31 And at some point you will see credit growth coming back or
21:35 growth faltering, in which case I think in either of those cases,
21:40 banking will continue to outperform because of the valuation comfort on one
21:43 side and because of the high on the other side.
21:47 So overall, we continue to remain positive on this pocket,
21:50 but I would agree that in the very short term,
21:53 probably you will continue to see pressure on banking.
21:57 And, you know, we kind of saw that in 2023.
22:00 I know you don't look at ownership while investing,
22:03 but since the market buckets PSU banks and private banks separately,
22:08 we saw PSU banks outperform the Nifty Bank by a considerable margin the whole
22:12 of last year.
22:14 Could we see an encore or do you reckon that there could be a return of the
22:17 private banks? Because I see you or I hear you say that there is valuation
22:21 comfort now, which may not have been there maybe 12 months ago.
22:26 Neeraj, what has happened in the banking sector as a whole over the last four
22:31 or six quarters, I would say is that there is no more a concern over the asset
22:35 quality issues.
22:37 If you look at the private banks or PSU banks,
22:40 most of the banks have strong asset quality.
22:44 So to that extent, that has not been a determining factor,
22:47 which was the case in the past decade.
22:50 And that's where I think private sector actually did much better than PSU
22:54 of last decade. And also the valuation is depicted in that.
22:58 And when we look at today, the growth rates are more or less similar,
23:02 and there are no asset quality issues that is very,
23:05 very different across PSUs or private sector.
23:08 So to that extent, the valuation differential that was there between PSU
23:13 banks and private banks has got kind of narrowed.
23:16 And we have seen a kind of a uniform rally across PSU banks for 2023.
23:23 To our mind, probably in 2024, you may not see a uniform rally,
23:28 not just in PSU banks, but across many sectors, I would say,
23:32 given that the valuations have kind of readjusted to new levels.
23:37 Probably from here on, it will be more of a stock specific moves,
23:40 whether in banking or in other sectors, in our opinion.
23:45 What about IT? They're seeing a bit of resilience now,
23:48 either in the earnings conversation or when we met them at the
23:53 World Economic Forum, the conversation from the IT majors seemed to be
23:57 a lot more constructive than what the markets anticipated, Harsha,
24:01 or at least some section of the market anticipated, let me put it that way.
24:04 My question to you is, does information technology provide a space
24:11 to invest in, or has the recent run up taken care of some of the
24:16 low hanging fruit that might have been there in early December?
24:21 Neeraj, clearly the valuations have moved up in the IT sector.
24:24 Yes, probably at the margin, things have been better than what the market expected,
24:29 but it's not that growth rates are going to significantly change,
24:32 at least in the next few quarters.
24:34 And the valuations possibly have kind of discounted any turnaround
24:38 that you can see in terms of the growth rates.
24:41 Especially the mid and small cap IT names are probably trading at
24:45 valuations which are very, very expensive in our opinion,
24:48 much higher than that of large cap IT names.
24:51 So to that extent, again, the large cap IT names probably offer
24:55 better risk reward at this point of time as compared to mid and small cap
24:59 IT names, and that's where most of our positioning has been across our funds.
25:05 The subset within that, Harsha, is ER&D, right?
25:09 And we've seen enough sell-side notes talk about how the predictability
25:13 of growth there in ER&D might mean that valuations could potentially stay higher.
25:18 Or product companies in mid-cap IT, I mean, we saw what Persistent did
25:21 yesterday in terms of numbers, et cetera.
25:23 I'm not asking you to comment on the stock, of course,
25:25 but I'm just trying to understand, do you reckon that IT services,
25:27 large cap IT could do well?
25:29 Is there a case for continuing to remain bullish on product companies
25:33 stroke ER&D companies or not quite?
25:36 See, definitely when you look at the growth rates of ER&D companies
25:40 or IT services companies, you will see that there is significantly
25:46 different rates of growth in both segments.
25:48 So to that extent, valuation differential is justified.
25:52 But what is that justifiable valuation differential is the question,
25:56 and how long can you keep re-rating this basket while not looking
26:00 at overall market valuations or sector average is another point.
26:04 So I would say that at higher valuations, obviously, you need to have more
26:09 growth on the next trajectory.
26:11 It has to continue at the same expected levels or it has to be better
26:14 than what the market is going to expect every quarter.
26:17 If that happens, the valuation will sustain or probably inch up in some cases.
26:21 However, if you see any weakness in any of the internals going forward,
26:26 I don't think there is a cushion in terms of valuation.
26:30 So earnings delivery from this basket, the growth momentum has to continue,
26:35 and these will be crucial points to remember.
26:41 Okay, Harsha, we will leave it at that.
26:43 Thank you so much for giving us your insights on so many topics today.
26:48 Much appreciate your time, and thanks for joining on Talking Point.
26:51 Thank you, Inderjit. Have a good day.
26:53 You too.
26:54 And, well, so that's the sum and substance.
26:56 I think the last point is very interesting that when you're looking at ER&D,
27:00 you've got to look at it from a perspective of what the overall valuation
27:03 of the market is as well before you try and keep on re-rating these companies further.
27:09 It's a point to ponder over.
27:11 Well, we've come to the end of this edition of Talking Point.
27:13 Thanks so much for tuning in.
27:14 Stay tuned to NDTV Profit for more news and updates.
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