- Will strong DII buying persist?
- Trends in India's consumption spends
Niraj Shah in conversation with Franklin Templeton's Ajay Argal on 'Talking Point'.
- Trends in India's consumption spends
Niraj Shah in conversation with Franklin Templeton's Ajay Argal on 'Talking Point'.
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TVTranscript
00:00 (upbeat music)
00:02 - Thanks for tuning into Talking Point.
00:12 And I'm your host, Neeraj Shah.
00:14 And the case for the chat today,
00:16 well, we will ask our guest
00:18 about whether this persistent trend of DIs,
00:21 investing into the market at all valuations persist.
00:24 And in fact, the question on valuations as well,
00:28 that have valuations speak for the period
00:30 or could there be a chance
00:32 of even further valuation upsides for the Indian markets?
00:37 And of course, amongst the other things,
00:39 while everybody's been talking about manufacturing,
00:41 we try and dwell with our guest today
00:44 on the consumption side as well
00:45 and try and understand from him
00:47 about what are the trends of India's consumption spends
00:51 and what investing decisions can be made out of that.
00:55 Our guest today is Ajay Argal.
00:56 He's Senior Vice President and Portfolio Manager
00:59 at Franklin Templeton.
01:00 Ajay, great having you.
01:01 Thanks for taking the time out.
01:02 Hope all is well.
01:02 - Yes, thank you, Neeraj.
01:05 Thanks for having me.
01:06 - The pleasure is entirely ours.
01:08 Ajay, one has to admit that the market has kind of stayed
01:13 or stood on the crutch of DI buying
01:17 for the last innumerable number of months.
01:19 Now we've seen indices being buy on dips
01:23 simply because of flow of money from the retail investor
01:26 and the domestic investor has been very strong.
01:28 My question to a portfolio manager like you
01:31 is that with the valuations the way they are,
01:34 with global markets doing what they are doing,
01:37 while you're getting flows,
01:38 would you be investing that money at the current valuations?
01:43 Are there enough pockets available
01:45 or would you be a bit circumspect
01:47 and take a bit of a cash call?
01:49 - Yeah, so as you highlighted,
01:54 the market valuations are definitely not cheap,
01:59 but at the same time,
02:00 there are pockets where it are not too expensive.
02:03 So if you kind of just segregate
02:06 even at the market cap level,
02:07 there is a clear indication
02:11 that the large caps are kind of reasonably valued.
02:15 They are not on the expensive side,
02:19 but whereas if you look at especially the mid caps,
02:22 then the valuations are definitely on the higher side.
02:25 So Nifty index, if you look there,
02:29 I mean, it is trading at around 21 times
02:31 one year forward earnings,
02:33 which is around five or 10 year averages and median.
02:37 So it's kind of in a reasonable range.
02:42 But whereas if you look at the Nifty mid cap index,
02:46 then it is kind of trading at around 27 times
02:50 one year forward earnings.
02:52 And which is also kind of a 30, 35% premium
02:55 to the Nifty index.
02:58 And we have seen in the past that typically,
03:01 those are the limits at which the Nifty,
03:06 I mean, or at which the mid cap index trades.
03:12 So mid cap on a relative basis to the large caps
03:16 are on the expensive side.
03:19 Can they be more expensive?
03:21 Yes, they can be like they were in the,
03:23 just immediately after post COVID,
03:26 though it was a bit different then
03:27 because the earnings were much more depressed.
03:30 So on a normalized earnings,
03:32 this kind of premium for the mid caps
03:35 definitely is on the higher side.
03:36 So that's why we see that the pockets of opportunity,
03:39 which we are getting when we do our bottom up stock picking,
03:43 it's much more in the larger caps compared to the mid caps.
03:48 And just as an aside, even the small caps,
03:49 they are trading at 10% premium to the Nifty index,
03:53 which is again close to the peak
03:54 which they have traded in the past.
03:56 So coming back to your questions,
03:58 what do we do in this kind of market?
04:01 Our objective is always been to get the better stocks
04:05 within the portfolio, because as portfolio managers,
04:09 our main job is to invest the money
04:12 which the investors have given to us in the market
04:15 on a fundamental basis.
04:19 And we generally don't take too large a cash calls,
04:22 maybe five, six, maybe up to 7%, but not beyond that,
04:26 because we are not kind of,
04:28 the equity funds are not asset allocation funds,
04:30 they are the funds to get the best stock ideas
04:34 into the portfolio.
04:35 So we still see pockets where we think
04:38 that they can do relatively better.
04:42 And of course, equity is a long-term investing
04:45 horizon instrument.
04:47 So you should not be looking at the immediate short term,
04:49 maybe six months, one year.
04:51 So definitely over the next six months to a year,
04:55 the investor return expectations should be toned down.
04:58 But from a longer term perspective,
05:00 all the growth drivers which India have
05:03 in terms of demographics, in terms of under penetration,
05:06 in terms of the young population
05:10 and the consumption which will keep on increasing
05:13 as we go forward over the years and decades,
05:16 those kind of fundamental long-term growth drivers are there.
05:20 So it remains a very attractive market,
05:22 but just a bit of caution from the short term.
05:26 - Got it.
05:27 Caution for the short term,
05:29 opportunities in the large caps,
05:30 not as much in the mid cap space.
05:32 So that is a first key takeaway
05:34 from this conversation thus far.
05:36 Where is it that you're seeing,
05:39 Ajay, the best possibility of earnings growth
05:43 over the course of the next six to 12-odd months?
05:46 Based on whatever assessments
05:48 that you and your team have made about commentary
05:50 in the first nine months and quarter three.
05:53 - Yeah.
05:54 So we are seeing pockets
05:55 where the earnings growth is very strong,
05:57 but you have to balance that with the kind of valuations
06:01 which are there in those stocks.
06:03 So obviously some of the retail stocks, for example,
06:08 have had very good visibility for the growth,
06:12 but it's kind of, in our opinion,
06:13 more than compensated for the valuation.
06:16 So it's just not the growth which you should look at.
06:18 You should look at the combination
06:19 of growth versus valuation,
06:22 and which is where we try to position ourselves
06:24 that we generally get into growth at a reasonable price.
06:28 So from that perspective,
06:29 we are finding pockets of opportunity
06:31 when we combine the growth and valuations.
06:35 We are finding that we are positive
06:39 on the industrial sector,
06:42 though our positivity has kind of reduced
06:45 because the stocks have done phenomenally well,
06:47 but purely from the growth visibility perspective,
06:50 that is a sector where the growth visibility is the highest
06:53 because the order books have been strong
06:55 and the execution by most of the companies in the sector
06:58 has really picked up.
07:00 So the top line growth,
07:01 and then there is the operating leverage,
07:03 so that improves the margins.
07:05 So a lot of companies within the sector
07:07 have good growth visibility,
07:11 especially over the next six to 12 months.
07:14 And the valuations, though they are on the higher side,
07:16 they are not terribly expensive,
07:18 so we are getting pockets of opportunity there.
07:21 The other sector which has not done so well
07:24 in the recent past is the banking sector
07:26 where the growth visibility is reasonable,
07:29 though there is a bit of a tone down of expectations
07:32 in terms of growth as well,
07:34 because the RBI itself has highlighted
07:37 that there are certain pockets,
07:38 especially in personal and secured loans,
07:42 where they want a bit of a lower growth.
07:44 But even then the growth possibilities
07:48 look very sanguine in kind of 12, 13, 14%,
07:52 that kind of band.
07:53 And there the advantage is that the valuations
07:55 are really reasonable.
07:56 This is the only sector where the valuations
07:58 are lower than the last five or even 10 year averages.
08:02 And the margins is kind of normalizing
08:08 because we saw very high margins
08:10 in the last couple of quarters,
08:12 which was because of the timing mismatch
08:14 between the asset pricing and the liability pricing.
08:16 And now that is getting normalized,
08:18 but in spite of that, we have reasonable growth.
08:21 Another sector we see good growth opportunities
08:23 is the real estate.
08:24 So the real estate, the cycle has really turned
08:27 because the affordability has improved substantially,
08:31 especially over the last 10 years or so
08:33 when the real estate prices didn't go anywhere.
08:36 If you go back two years, then 10 year period before that,
08:39 the real estate prices actually didn't move at all,
08:42 whereas the salary is kept on going up.
08:44 So the affordability increased,
08:45 and therefore there is a pickup in the real estate cycle.
08:49 The launches, the presales,
08:52 everything is happening at a very fast pace.
08:56 So the growth visibility is very strong there as well.
09:01 And the other sector where we are positive
09:04 is pharmaceuticals.
09:06 And there it is actually more stock specific.
09:08 So there are a few stocks where we see
09:10 that the growth visibility is very high.
09:12 And the growth in the domestic market
09:15 is anyway quite stable, around the 10% band.
09:20 But certain companies are having specific strategies
09:26 with respect to the export market.
09:28 So there is a company who is specializing
09:30 in the specialist pharma space in the US,
09:34 another company who is specializing in complex generics
09:36 where the competition is much more limited.
09:39 So there in those kinds of companies,
09:41 we are seeing growth visibility
09:42 with a reasonable valuation.
09:45 So these are some of the pockets where we see
09:47 that the growth, especially in the near term,
09:51 is likely to be very strong.
09:53 - Okay, well, we will talk about some of the industrials
09:59 with Ajay as well, because I remember sometime in December,
10:01 if I'm not wrong, Ajay and Frank Interpol
10:04 were very constructive on power, for example,
10:05 as a pocket as well.
10:06 So we'll talk about that too.
10:07 But just one quick broad macro question, Ajay.
10:10 What has made headlines is the fact that FPI ownership
10:15 in Indian stocks is at maybe decadal lows or thereabouts,
10:18 and kind of is probably something
10:23 that is very easy to deduce,
10:26 considering the fact that DIs
10:27 have been the more active investors as well.
10:29 Would you brace your portfolio
10:36 for better valued stocks,
10:39 which may find a flip as well,
10:41 because of technical reasons of FII inflows
10:44 coming in at some point of time,
10:45 if the EM inflows return?
10:47 I'm just trying to understand
10:48 if there is a tactical play out there
10:50 in the minds of a large DII investor.
10:53 - So it is there at the back of the mind,
10:57 but it's not, I would say,
10:58 a significant part in the decision making,
11:00 because we should be, and we are,
11:04 focused on what the growth opportunities are,
11:07 and what the market expectations are
11:10 as we can infer from the stock prices.
11:14 So you can work back from the stock prices
11:17 and try to figure out what is the imputed growth
11:21 that the market is indicating in a particular stock,
11:24 given the current stock price.
11:27 So we try to assess that,
11:29 and then we try to see whether those growth expectations
11:34 are likely to be met in our opinion or not.
11:37 And if you see that they are not likely to be met,
11:40 then obviously we become cautious in those kind of stocks.
11:44 So on the FII itself,
11:47 then there are too many moving parts,
11:50 because it's not only India,
11:52 it's how the other markets are doing,
11:54 and what other opportunities they get.
11:57 So it's kind of a call for them on the other opportunities.
12:01 - Most certainly Ajay.
12:03 - Sorry Ajay, but just--
12:04 - So that's the reason we don't focus too much
12:07 on what their behavior could be.
12:09 - Agree, agree completely.
12:10 No, no, I didn't mean it that way.
12:11 All I was saying was that,
12:12 the common belief is that because FIIs
12:14 were so overrun in banks, right?
12:17 And the FII supplies leading to the kind of
12:20 subdued performance in banks,
12:21 despite the fact that their quarterly performances
12:24 haven't been as bad.
12:25 In some cases they've been pretty good too,
12:27 for the larger ones at least.
12:28 So could that trigger moving,
12:31 either the selling going away,
12:32 or fresh buying coming in when the buying returns,
12:35 be a factor that could serve as an add on
12:38 to the fundamental performance for banks?
12:40 Are you invested in banks in a big way?
12:42 - Yeah, so I mean,
12:45 we are invested in the banks in a big way,
12:46 as I highlighted that it is one of our sectors
12:49 where we think that the growth
12:51 versus valuation combination is the best.
12:54 So purely by the very reason that the banking sector,
12:59 the weightage is the highest in the market,
13:02 in any of the indices you look at,
13:04 especially the large cap indices,
13:05 or even the BSE 200, NSE 200,
13:10 even that kind of diversified indices,
13:12 or even if you look at NSE 500 for that matter,
13:15 the weightages are very high.
13:16 So any investor when he's selling,
13:19 then perforce the banking sector will be the sector
13:23 where the selling will be the maximum.
13:25 So typically you will find that even in kind of
13:29 NSE 500, the banking sector weightage is 30%.
13:34 In a NIFTY, it might be a bit more.
13:36 So if there is any selling,
13:38 whether it is from foreigners
13:39 or whether it is from domestic,
13:41 the large portion will come in the banking sector.
13:45 So that is something which one has to be cognizant of.
13:50 But at the same time, it works in reverse as well.
13:52 When there is a buying,
13:53 then perforce you will have to take exposure to that.
13:57 I mean, those are as far as the technical things
14:00 are concerned.
14:01 So we have all these things in our mind,
14:03 but as I highlighted,
14:05 it is not one of the critical decision factors
14:08 because there are so many moving parts here.
14:10 And within that, I mean, it's not a homogeneous category.
14:14 Even if you look at foreigners,
14:15 there might be foreigners who have been invested in India
14:19 for very long and they're sitting a lot of profits.
14:21 So they might be booking profits,
14:23 whereas some others might be new and getting in.
14:26 So they might have a different thought process
14:28 and same goes for the DIAs and the individual funds,
14:32 which we manage.
14:34 In certain funds, we might be balancing the sector positions.
14:38 In certain funds, we might be kind of having profit booking.
14:42 So it's so many moving parts there.
14:45 If you try to figure out from that perspective,
14:47 it gets very entangled.
14:49 So we don't usually go there.
14:52 - We spoke about industrials and consumers
14:54 as the cases for the chat.
14:56 Consumption is interesting, Ajay.
14:57 This whole recent data that has come in
14:59 wherein the pattern of consumption
15:01 has changed so dramatically
15:03 for households at large India-wide.
15:05 Discretionary spend so much more
15:07 than basic staples, et cetera.
15:09 How are you positioned on the consumption end?
15:11 Are you at the upper end of the K curve?
15:14 Are you now betting on staples
15:15 because they are maybe on a valuation-wise
15:18 as cheap as they have been in the recent past?
15:20 How is it that you're playing this theme?
15:22 - Yeah, so generally over the last many months,
15:25 we have been a bit underweight on the consumption side
15:30 and especially the consumer staples.
15:32 So as you highlighted, there is a dichotomy
15:35 and the mass market on the rural side,
15:40 the consumption is more muted,
15:43 whereas on the premium side and urban,
15:46 the consumption is having a better growth.
15:50 So we still think that going forward,
15:53 that will be the case.
15:55 And we continue to remain substantially underweight
15:58 on consumer staples because we have seen that
16:02 even now most of the companies
16:04 are having a lot of difficulty in having volume growth,
16:08 and especially the companies which cater to the mass market
16:12 or more towards the rural markets.
16:15 And even when they are kind of cutting prices
16:20 the volume growth is not kind of improving.
16:23 So which means that maybe this will continue
16:27 for maybe some more months.
16:30 So we are not positive at all on the consumer staples
16:35 and this is also need to be doubted
16:39 with the kind of valuations they have been trading at.
16:41 So in spite of quite a big slowdown in the growth,
16:47 the valuations have not corrected anything meaningfully.
16:51 So that kind of makes our underweight position.
16:55 Whereas if you look at consumer discretionary,
16:58 we have been positive on the pockets of it.
17:00 So we had been positive on automobiles
17:02 which have already done well.
17:05 So OEMs as well as certain auto ancillaries.
17:10 And then we have some positions
17:15 in the online food ordering
17:18 which is part of the consumer discretionary.
17:20 So there we see that there is a decent growth
17:25 both for the market as well as the market share gain
17:29 from the other players in the food consumption,
17:34 whether it is from the restaurant
17:37 or whether it is from some of the other QSRs.
17:40 So we are having substantial positions in those spaces.
17:46 So there are pockets in the consumption
17:48 where we see that the growth is better.
17:51 And in some cases, the company's profitability
17:56 have improved and they've got back on the,
18:00 or rather got on the profitability path
18:02 if you look at the online food delivery
18:05 which was earlier making a lot of investments
18:08 and therefore not so profitable.
18:10 So these are some of the pockets
18:12 where we see opportunities in the consumption space
18:15 but generally mass market, we are still kind of cautious.
18:20 - Okay, the other thing is industrials
18:22 and I'm gonna focus maybe not as much
18:24 on just pure industrial
18:25 but if I can qualify power as a part of that subset
18:30 and has had a phenomenal run Ajay,
18:33 almost all forms of power related businesses,
18:37 finance, equipment, ancillaries, et cetera.
18:41 But that space has some tall ambitions.
18:43 India has a tall ambitions as a country in power.
18:46 Are you still constructive here?
18:47 - Yeah, so we are constructive from the opportunity
18:52 from the long-term perspective.
18:54 But as you have highlighted,
18:57 these stocks have done phenomenally well.
19:00 So which means that the kind of numbers you are showing
19:02 it shows that the expectations
19:05 is very high in all these stocks.
19:08 So basically the market participants are saying
19:11 that they are very sanguine about the growth opportunities,
19:14 not even in, I mean, not only in the near term
19:17 but maybe even at five year period,
19:20 they will have the kind of growth
19:21 which they have not seen in the last three or five years.
19:25 Whereas this sector itself,
19:28 we see that it requires a lot of investments,
19:36 it requires a lot of execution skills.
19:39 There are many approvals required
19:41 which sometimes take a bit longer than anticipated.
19:45 Whereas if you look at the stock prices,
19:48 in our opinion, a lot of them
19:50 are kind of priced for perfection.
19:53 So they can still give you returns in line with growth
19:57 if they are able to execute the opportunity which is there
20:04 and the expectations which are there
20:06 on a very clinical basis,
20:08 basically they executed perfectly,
20:11 then they might be able to give you some returns.
20:13 But whereas we think that
20:15 that might be a difficult task to achieve.
20:18 So generally we have participated in quite a few of them
20:22 but over the last few months,
20:24 we have been trying to book some profits
20:27 because we think that the markets
20:29 are really getting very, very optimistic on this side
20:32 and one needs to be cautious,
20:34 especially considering what they've already returned
20:39 and considering that there might be challenges in growth
20:45 to the extent that the market is expecting
20:49 they may not be able to achieve that
20:52 and that could lead to some correction in these stocks.
20:56 - Got it.
20:57 Ajay, so good talking to you today.
20:58 Thanks for taking the time out
20:59 and giving us your sense on a few key points.
21:02 Much appreciate your time.
21:04 - Thank you, thank you Neeraj.
21:05 Thanks for having me.
21:06 - Pleasure was ours and viewers,
21:07 thanks for tuning in to this edition of The Talking Point.
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