-What's next for markets?
-India valuation still attractive?
Niraj Shah in conversation with #NepeanCap's Gautam Trivedi on 'Talking Point.'
-India valuation still attractive?
Niraj Shah in conversation with #NepeanCap's Gautam Trivedi on 'Talking Point.'
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TVTranscript
00:00 [MUSIC PLAYING]
00:03 Thanks for tuning into Talking Point.
00:13 I'm your host, Neeraj Shah.
00:15 The case for a chat today, especially
00:16 after such a strong move that has happened
00:18 the whole of-- actually, not the whole of last week,
00:21 but mainly Friday--
00:21 is that with the markets at all-time highs, what is next?
00:25 If it's even possible to answer that.
00:27 But we'll pose that question to our guests for sure.
00:30 Do select pockets of Indian markets
00:33 still appear attractive on a valuation basis,
00:35 or is it all expensive?
00:37 I think that's an important conversation to have as well.
00:39 And amongst all that's happening within the semiconductor
00:44 space, et cetera, do manufacturing and EMS
00:46 come firmly into play?
00:49 I think let's pose those questions, amongst many others,
00:51 to Gautam Trivedi.
00:52 He's co-founder and managing partner
00:54 at Nippian Capital, joins us right now on the show.
00:56 Gautam, so good having you.
00:57 Thanks for taking the time out.
00:58 I hope all is well.
00:59 And this buy the Indian market at every dip
01:06 just continues, valuation notwithstanding.
01:08 Is this something that is surprising you as well?
01:11 Or are you kind of of the belief that that's
01:14 how the trajectory will be?
01:16 No, I think it's surprising a lot of the people who've
01:19 been in this market, like myself,
01:21 for over two and a half decades.
01:23 And the fact is that I think we have the baggage of history,
01:27 if I can put it that way.
01:28 We've seen this movie many times before.
01:31 And sometimes we've seen this not ending very well.
01:35 So I think what's different this time
01:37 is the fact that you've got a whole bunch of new investors
01:40 that are entering the market.
01:41 I'm referring to the domestic retail investors who
01:44 are not present in the previous bull markets as much.
01:47 Because a lot of the previous bull markets
01:48 were led and driven primarily by the FBIs.
01:53 And again, year to date, FBIs have been net sellers
01:57 of over $4 billion.
01:58 So I think this is more of a rally led by domestic investors
02:02 as the penetration of the equity culture continues into India.
02:08 Most certainly.
02:09 So Gautam, explain.
02:12 It's interesting you use the term baggage of history.
02:15 And yes, you're right.
02:17 These reels have played out multiple times in the past,
02:19 sometimes not ended too favorably.
02:21 Do you expect a bit of a quote unquote
02:23 hard landing in some sense?
02:25 Or do you believe this flow of money
02:28 kind of helps cushion any kind of sharp blows
02:32 that Indian markets may take?
02:35 You know, that's a very good question.
02:37 I hope there's no hard landing.
02:38 Because the newer investors who are investors for the first
02:41 time in Indian equity markets, I hope
02:44 they don't have a bad experience.
02:46 I mean, a correction is always good.
02:48 And the fact is that if they get a correction of 5%,
02:51 even maybe even a 10% correction,
02:53 I'm talking of an average correction,
02:56 it will, I think, make them wiser, make them more mature.
03:00 And hope that they continue to invest in the Indian equity
03:03 markets.
03:03 Because that's something which this country really
03:06 needs as we have the need for capital
03:09 to grow this economy at 8%, 9%, 10% GDP growth.
03:13 And to see a prime minister's vision
03:16 of becoming Vixit Bharat.
03:17 So I think that equity culture has to come from within.
03:20 It cannot only come from overseas.
03:22 So I think there needs to be a correction, no question.
03:26 Now, if you look at where exactly
03:28 are the two pockets of pain or potential hazard,
03:33 one would be the F&R market.
03:36 So the F&R market, as we know, 180 odd stocks, and of course,
03:39 the index.
03:40 So that's one aspect where I think
03:42 the fraud clearly is, because 99% of the daily traded volumes
03:47 in the Indian stock exchange are F&R. So that's one bubble.
03:54 The second bubble, of course, is small caps
03:57 followed by some mid caps.
03:59 So you've seen that also happening.
04:00 In fact, interestingly, you brought it up
04:02 because we ran a screen last week of the top 1,200
04:07 stocks in India.
04:08 880 stocks, I repeat, 880 stocks, or 73% of the 1,200
04:13 stocks are up 36% or more from their respective 52-week lows.
04:19 And the reason I take a benchmark of 36%
04:22 because the BSE 500 over the last 12 months is up 36%.
04:27 So if I take that as a cutoff, 73% of the top 1,200 stocks
04:31 in India are up 36% or more.
04:32 Of course, so many of them are up 100%, 200%, 300%.
04:37 But the point I'm trying to make is
04:38 that that's where the fraud is, and I
04:40 think that's where the correction needs to come.
04:44 OK.
04:46 Fair point.
04:49 So not the whole bucket, but specific pockets
04:52 which have rallied quite a bit is something that, Gautam,
04:55 I presume you will be worried about as well.
04:58 Tell me something, Gautam.
04:59 There has been this development of this whole new set
05:02 of sectors that have come to the fore, right?
05:05 And I'm trying to wonder-- and most of them
05:07 are not necessarily in the nifty 50 or nifty 100,
05:09 but beyond that.
05:11 Mid-cap, largest mid-caps, or small large caps,
05:14 as the case may be.
05:15 What has impressed you from there the most?
05:18 If 2023 was a year of defense, that
05:20 came to the fore in railways.
05:22 Suddenly, this whole semiconductor play
05:24 is coming to the fore as well.
05:25 What is standing out for you?
05:28 I think you make a very valid point.
05:30 There are certain businesses that didn't even
05:32 exist five, six, seven years ago that are now getting listed.
05:36 So we had only two companies in the EMS space, Dixon and Amber,
05:40 and of course, PG Electroplast, maybe three companies.
05:44 But now we've got about 15 companies
05:45 that are listed in the EMS space.
05:47 And I firmly believe that the EMS space
05:49 is where the Indian IT sector was 25 years ago.
05:52 Valuations are notwithstanding.
05:54 So I'm not saying they're all buys right now.
05:57 Point I'm trying to make is the growth
05:59 that we're seeing in this sector is similar to what
06:02 we saw with the Indian IT space.
06:04 And I think the prime minister has done a phenomenal job
06:06 along with his core team of ministers
06:08 to market India to the outside world
06:11 and bring semiconductors, bring televisions, mobile phone
06:15 sets, et cetera, to get manufactured in India
06:18 and as an alternative to the China plus one strategy.
06:21 So I think that ecosystem that we're seeing is developing.
06:26 It's in its nascent stage in this country.
06:28 And I think you'll see the fruits
06:29 of that over the next five to 10 years definitely play out.
06:33 So I think these are some of the emerging sectors.
06:35 Again, like I said, they're not necessarily all buys today
06:38 only because valuations are expensive.
06:41 But I think from a longer term perspective,
06:44 if an investor has a three to five year view,
06:47 I would certainly start accumulating some of these names.
06:49 - Okay.
06:52 You're not saying you'll probably wait
06:54 for a better valuation or do you think high growth
06:56 will take care of these higher valuations?
06:59 - You know, the question really is more to do with the fact
07:02 that is that a correction that we spoke about earlier today,
07:06 is that correction coming?
07:08 And if that correction is indeed coming,
07:10 then I think it's better to hold off.
07:12 And if you get some of these stocks 5, 10% lower,
07:17 that's the best time to build up a position.
07:19 Again, what I'm saying is true for the whole market.
07:21 It's not necessarily only for the EMS space,
07:24 given the fact that as I said, 73% of the top 1200 stocks
07:28 in India have rallied 36% or more.
07:31 And the list is even more staggering
07:34 when you look at the stocks that are 100% or more.
07:36 So the point I'm trying to make is these are stocks
07:40 to keep on your radar and on your list of stocks to buy
07:45 as and when the correction starts to set in,
07:48 which I hope happens soon for the majority of the market.
07:53 Viewers, keep in mind, Gautam Trivedi is not predicting
07:55 when the correction will happen.
07:56 He's merely saying that at some point of time,
07:58 the correction should happen,
07:59 a healthy correction should happen.
08:02 Gautam, one follow up.
08:03 If at one end we have pockets like EMS and some others,
08:06 at the other end, we have an HDFC bank,
08:10 we have maybe a Kotak bank, et cetera.
08:13 It's befuddling some of the best minds
08:16 of the Indian stock market as to why is it
08:18 that these stocks are not quite moving.
08:20 And yes, one of the factors could be the global supply,
08:22 which has kept them at bay.
08:24 But then the question comes, when do these stocks,
08:27 which have been great stocks for so many years
08:30 and the growth rates aren't that bad,
08:32 say for maybe HDFC bank having these merger related issues.
08:35 What's your prognosis on this?
08:36 - No, I think it's a very valid question
08:40 with respect to the fact that for the longest time,
08:43 you thought private sector banks were the gold standard
08:47 and the PSUs were really not well run,
08:52 no skin in the game for the CMDs who were running it.
08:55 And lackluster investor appeal,
08:59 that's of course gone 180 degrees
09:02 as balance sheets got cleaned up.
09:04 And the fact that these banks, the PSU banks
09:07 became more prudent or seem to have become more prudent
09:10 in their lending practices.
09:12 So I think as a result of that,
09:14 you've seen a gigantic investor sentiment surge
09:18 towards PSUs and away from private, HDFC included.
09:21 So I think that correction in terms of time correction
09:25 is still happening with the private sector players,
09:27 including HDFC bank.
09:29 I think specific to HDFC bank, as you asked,
09:32 there is, I think a bit of a bait and watch
09:35 as the merger of the two entities plays out
09:39 and the impact of that on the balance sheet,
09:41 as we've seen over the last few quarters
09:44 that starts to play out.
09:45 I think people wanna see evidence
09:47 that the issues of the past are behind them.
09:50 And from here on, HDFC bank is back
09:54 on the growth trajectory.
09:55 Otherwise, you would not get this back
09:57 at half the valuation that is historically traded
09:59 over the last 20 years.
10:00 - Okay, point well taken.
10:04 We need to slip into a quick break,
10:08 but just before I do that, Gautam,
10:10 you mentioned this very important point
10:12 about private banks versus PSU banks as well.
10:14 PSU banks have had a rally,
10:16 but we were doing some numbers,
10:18 despite the upticks that we've seen,
10:20 some of them still trade at par on book
10:23 and their internals have significantly improved as well.
10:26 So while there might be better value
10:28 in private sector banks optically,
10:30 are PSU banks an avoid or selectively
10:33 some of the PSU banks also offer value?
10:35 - You know, it's a broad statement.
10:38 And I think you've got, at one breath,
10:41 you've got a state bank of India,
10:43 which is, as always stated at a different valuation
10:48 than the rest of the PSU banks
10:50 and has a different level of respect,
10:52 should I say, from the PSU banks.
10:54 So, but at the same time,
10:55 if you look at the number of stocks
10:58 that are now in the top 100,
11:02 you've seen a lot of other names come in there,
11:05 you know, Canara Bank, Punjab National Bank.
11:08 So, you know, in the top,
11:11 if I look at the top 100 stocks in India,
11:14 that's the large cap definition by SEBI,
11:16 you have a total of 21 PSUs,
11:18 and not PSU banks, but 21 PSUs,
11:21 you know, which is remarkable.
11:23 You always had the OAMCs in there,
11:25 you had OAMGC in there,
11:27 but now you're looking at so many more PSUs coming.
11:29 So I think the overall sentiment
11:31 clearly has improved for PSUs
11:33 from an investor's perspective.
11:36 And yes, you may still have some PSU banks
11:38 that may be trading at, you know,
11:41 sub 0.8 times or definitely sub one times book,
11:45 but again, it's very stock specific
11:49 versus having a broad generalization.
11:51 - The wind industry stocks are in focus.
11:53 The Ministry of Power has decided to bring back,
11:56 potentially bring back reverse bidding
11:58 as wind tariffs rose in the auctions gone by,
12:01 and demand also was presumably low.
12:04 If this confuses you,
12:05 first, let's get in Varsha Chandnani, my colleague,
12:07 to try and explain what is this development
12:10 and how it could impact.
12:11 Varsha, good morning.
12:12 - Good morning, Nia.
12:13 So as you rightly said,
12:14 first, let us see why wind stocks are under pressure
12:17 or rather which wind energy stocks are under pressure.
12:20 So if you see, INOX wind is down 5%,
12:22 Sunway Movers is down 7%,
12:24 and KP Energy is down 5%.
12:26 Now, according to some media reports,
12:28 Ministry had decided to bring back reverse bidding
12:31 as wind tariff rise in auctions.
12:33 Now, Ministry has sent letters to agencies for the same.
12:36 Now, this is on the back of under-subscription
12:38 and high tariff discovery in recent wind bids.
12:42 Now, just for an overview,
12:43 there are two types of bidding.
12:45 One is reverse and the other one is closed bidding.
12:47 Now, under reverse auction,
12:50 bidders continue to bid against each other
12:52 after the initial bids are opened
12:55 until a bid tariff goes unchallenged by a counterbid.
12:58 Now, incidentally, the Ministry had given up
13:00 this reverse auction at the beginning of this financial year.
13:04 The method did bring down tariffs,
13:06 but the problem was company had a lot of inventory
13:09 that they sold the inventory at such a low prices
13:11 which led to poor capacity installation
13:15 which affected the wind industry as a whole.
13:17 So, with this, the reverse auction was given up
13:20 and the closed bidding system was adopted,
13:23 to which tariff did rose.
13:25 But we did spoke, NDTV Proper did spoke
13:28 to INOX Wind Management in Q2 FY24,
13:31 wherein he said that last time there was a problem
13:34 as everyone had an excess inventory
13:36 and sector was also not doing well.
13:38 But now situation is different and government has target
13:41 and company don't have excessive inventory.
13:43 But so, this shouldn't affect INOX Wind
13:46 or any such wind company stocks,
13:49 but let's see what happens.
13:51 - Well, for now, the stocks have certainly gone down.
13:53 So, Viyaz, I hope you got a basic understanding.
13:55 Now, Gautam, I would love to understand from you,
13:57 I don't know if you looked at this space at all or no,
13:59 but the company after companies come and said that
14:03 OEM suppliers are not going to be supplying at losses
14:07 and this may not necessarily impact,
14:08 but there's a change in policy
14:10 and the stocks are down today.
14:11 How do you look at the wind energy space growth per se
14:14 over the course of the decade?
14:16 And are these near term impediments large enough
14:18 or will they be taken into stride?
14:20 - You know, here's the way I see
14:24 what's happened in the wind energy space.
14:26 I think the government's focus,
14:28 and at least until a few years ago,
14:31 was largely on solar and making sure the solar
14:35 manufacturers did well, succeeded in India.
14:38 And that I think was going well.
14:40 What I guess at some point dawned upon them
14:43 was the fact that the solar generation happens
14:48 only from around eight o'clock in the morning
14:50 to about 4.30 or five o'clock in the afternoon.
14:52 So, after that, solar power generation doesn't happen
14:56 and that was impacting the stability of the grid.
14:59 So, as a result, they went in for hybrid bidding
15:02 and basically I think most of the PSUs
15:05 are now doing hybrid projects
15:07 when it comes to renewables.
15:09 So, it's not only solar, it's solar and wind.
15:11 Starting from the 1st of April of last year,
15:14 very clearly the government announced
15:16 that they will auction as much as 10 gigawatts
15:19 per annum of wind projects,
15:22 or 2.5 gigawatts every quarter.
15:25 So, I think that itself was a blessing
15:28 for the wind energy industry.
15:30 And as you said, this whole industry
15:34 was actually in big trouble,
15:36 both financially as well as in terms
15:37 of the overall business.
15:39 But a lot of balance sheets have been cleaned up.
15:41 You've seen the stock prices of the two,
15:44 and there'll be two listed companies in this space,
15:46 both INOX Wind as well as Suzlon.
15:50 So, you've seen a reversal of fortunes
15:53 for both these companies
15:54 and of course for the wind energy sector.
15:57 Now, this new announcement
15:59 which just came over the weekend,
16:00 the way I see it is,
16:02 if the government thinks that tariffs
16:05 are too high and need to be lower,
16:08 and the fact that the reverse auction process
16:10 will end up resulting in lower tariffs,
16:15 frankly, I'm not so sure
16:16 if that's necessarily a good thing,
16:18 because if you get some of the crazy
16:22 competitive bidding that we saw pre-COVID,
16:25 or even 10 years ago,
16:27 we don't need that to come back
16:29 because these projects need to be profitable.
16:32 And I'm not trying to put a number
16:34 as to what that profit level should be
16:37 and or should not be.
16:38 But yes, this does bring about a more transparent
16:43 competitive bidding process.
16:45 And if it does,
16:47 and if the tariffs get driven down,
16:50 I think that itself will correct on its own
16:54 if the tariff structure gets so low
16:57 that some of these companies may find,
16:59 may just not participate in the bidding.
17:02 So I think the market itself
17:04 should be self-correcting
17:06 if the tariffs become too low.
17:08 That's my personal view.
17:10 - I've got it.
17:11 Okay, okay.
17:13 Let's see how the decisions move ahead.
17:18 But the point you're making
17:19 is absolutely well taken, Gautam.
17:21 So thanks for sharing that.
17:22 The other view that I want from you
17:25 is what's happening to some of the other
17:31 power-related themes, Gautam.
17:32 I mean, one is renewable, of course,
17:34 and the kind of capacities being set up.
17:36 We were talking to the coal secretary earlier today.
17:38 He spoke about how the availability of coal is at 19 days,
17:42 which is the highest that we've seen in a long time,
17:44 and thermal capacities are being ramped up.
17:47 What's your view on the conventional power space as well,
17:50 which is trying to wade between the two, right?
17:52 They are continuing the cash flows
17:54 to conventional power projects,
17:56 but at the same time also ramping up renewables.
17:58 So have these stocks moved ahead of themselves,
18:01 or is there potential for investments there?
18:03 - No, I think some of these stocks
18:05 have got multiple other levers
18:07 than pure thermal generation.
18:08 If you look at Tata Power, for example, okay?
18:11 They've got a huge renewable business,
18:13 which includes rooftop solar.
18:15 It includes EV charging,
18:18 setting up a whole nationwide network
18:20 of EV charging stations.
18:22 So, you know, the conventional energy generation
18:27 is not the only earnings driver anymore.
18:30 And you're seeing other multiple businesses,
18:33 newer businesses that are being sort of bolted on
18:37 to the existing traditional power generation business.
18:40 So I think that's what I suspect
18:42 is driving these stocks more than pure thermal generation.
18:47 - Got it, okay.
18:49 Gautam, earlier in the interview,
18:52 when we started off,
18:52 you mentioned about how a correction would be healthy.
18:55 Maybe you are waiting for one as well.
18:56 Who knows?
18:57 But my question is,
18:58 if that's the mindset with which you are currently sitting
19:02 on the large street,
19:03 how are you going about choosing companies
19:06 in which you deploy money?
19:07 Yeah, is growth the panacea,
19:11 or are valuations and low valuations
19:14 the must have starting point?
19:16 Or something else?
19:17 - Yeah, good question.
19:19 So we're actually a special situations fund.
19:22 So the way we approach investing in the market
19:26 is we look for stocks that we believe have triggers
19:29 that will play out over the next three to five years.
19:32 So I'll give you an example.
19:34 We own a company called Eureka Forbes,
19:36 a very interesting company,
19:38 wherein, again, full disclosure that we own it,
19:40 but the fact is, very interesting company.
19:42 Wasn't that well run when it was under the umbrella
19:46 of the Sharper Gipology Group.
19:48 Adven International came in and acquired
19:50 a 74% of that company.
19:52 This is gonna take a longer time to play out
19:54 as they restructure the inner workings of the company,
19:59 they launch more products,
20:00 and they brought in Pratik Kota,
20:03 the former CEO of Jubilant Foodworks
20:07 to come and run this company and turn it around.
20:10 So I think a lot of positives going for it.
20:12 So this is an example of the kind of turnarounds
20:15 that we believe exist in companies.
20:18 And valuation is one aspect of it,
20:20 but the fact is, what's not priced in from our perspective,
20:24 and what will play out over the next three to five years.
20:27 So we are, like I said, more of a special sits.
20:29 And if you focus on those opportunities,
20:32 there are quite a few of them in India, right?
20:34 - Gautam, I have a follow up to this answer of yours,
20:38 and two questions out there.
20:39 Since you mentioned special situations,
20:41 what explains this arbitrage available
20:45 between Enox Wind and Enox Wind Energy,
20:47 since you mentioned that you look at that space,
20:49 because there is clearly very large arbitrage there,
20:51 part one.
20:52 Part two of my question,
20:53 related but unrelated,
20:55 you mentioned Eureka Forbes,
20:56 a large block deal that happened.
20:58 A lot of chatter around how foreign promoters
21:01 are selling businesses,
21:02 and therefore why should people invest in them?
21:05 Clearly Eureka Forbes was in the buzz for that as well.
21:07 Can you talk about that?
21:09 - Sure.
21:10 I think there is still an arbitrage left
21:13 between the two Enox companies.
21:14 And frankly, I think it's before the NCLT.
21:18 So until that happens,
21:20 there are ways to play this
21:22 and maybe get into Enox Wind at a cheaper valuation.
21:25 So, so be it.
21:26 But I think the runway of growth
21:28 for the wind energy space in India is still very large,
21:31 notwithstanding the reverse auction process
21:35 that's just been announced.
21:36 So I think I wouldn't worry about that.
21:39 Specific to your second question
21:42 was with respect to Eureka Forbes, right?
21:44 - The selling, there's so much chatter around this,
21:46 that (indistinct)
21:48 So it's bad news,
21:49 but well, if you're invested,
21:50 you don't see it that way.
21:52 - Yeah, I'll tell you what it is.
21:54 If you look at the last six to seven years,
21:57 the one phenomenon that we've noticed,
21:59 and I've gone on media and said it as well,
22:01 is the fact that global private equity funds
22:04 are coming in buying out promoter stakes
22:06 in listed mid and small cap companies,
22:09 but keeping the companies listed.
22:11 And the objective of keeping that company listed
22:13 is because as and when they want,
22:15 they need to sell a chunk, they can do so.
22:19 Now there could be various reasons
22:20 to sell a small block or a big block,
22:24 depending on when they've come in
22:26 and when they've invested in the company.
22:28 One could be the fact that they've made
22:29 a significant amount of money in the stock
22:32 from the time they got into the company.
22:34 So that's one.
22:35 Two, there could be limitations
22:37 with respect to the life cycle of the fund
22:40 from which the initial investment came in.
22:42 That doesn't mean they can't roll it into the next fund
22:44 that they have raised,
22:46 but there are multiple reasons.
22:47 I don't know specific to why Advent did sell a block,
22:51 but I suspect these are some of the reasons
22:54 that private equity funds end up using
22:59 the fact that these companies are listed
23:01 and use that as windows of selling down blocks.
23:05 Well, the third element of course,
23:07 which I would say is increasing the free floor
23:08 because specific to Eureka Forbes,
23:10 Advent International owned as much as 74%.
23:15 - Okay, fair call.
23:17 Gautam, lovely talking to you.
23:18 Thanks so much for taking the time out
23:19 and being with us today,
23:20 giving us your thoughts,
23:21 completely out of time here.
23:22 But that's the view from Gautam Trivedi
23:24 of Napien Capital.
23:25 And viewers, thanks for tuning in
23:26 to this edition of The Talking Point.
23:28 (upbeat music)
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