- Are markets due for a correction?
- Emerging themes in markets
Niraj Shah in conversation with #AlchemyCapital's Hiren Ved on Talking Point.
- Emerging themes in markets
Niraj Shah in conversation with #AlchemyCapital's Hiren Ved on Talking Point.
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TVTranscript
00:00 (upbeat music)
00:02 - Hello and welcome to Talking Point.
00:13 I'm your host, Neeraj Shah.
00:15 And the case for a chat today,
00:16 well, after all the regulatory actions
00:18 that we've seen coming up in the recent past,
00:21 there was anyways a question around valuation.
00:23 So therefore, one primary question,
00:25 are markets due for a correction?
00:27 I don't think anybody can answer that per se.
00:29 We can, I think our guests can merely talk about
00:31 whether the risks are on the upside or the downside,
00:34 but we'll try and ask our guests about that.
00:37 Will headwinds continue for financials,
00:39 considering that there is a fair degree
00:41 of coordinated action happening between regulators as well.
00:45 And we've seen some statements around practices
00:48 by a couple of NBFCs in the last couple of days.
00:51 And of course, our guests today spoke about
00:56 multiple emerging themes over the last two or three years.
00:59 Well ahead of the street.
01:00 We'll try and ask him if there is emerging themes
01:05 or there are emerging themes
01:07 that is looking at constructively.
01:09 Our guest is Hiren Veth, director and CIO, Alchemy Capital.
01:12 Hiren, so good having you.
01:13 Thanks for taking the time out.
01:15 - Thanks, thanks, thanks Neeraj.
01:17 Thanks to be back again.
01:18 - Yep, great to have you back.
01:20 Hiren, the age old question,
01:22 which usually doesn't have an answer
01:23 and I wouldn't hold you to it,
01:25 but just looking at the concoction of events
01:29 where in global growth isn't quite firing,
01:31 China data isn't the best currently,
01:34 our valuations are not necessarily cheap,
01:36 even if not dramatically expensive.
01:37 And there is some regulatory action being taken
01:41 or voices being sound out even by Amphi
01:44 around the valuations at the broader end of the spectrum.
01:47 Is there reason to be cautious?
01:48 - So Neeraj, you know, I've been saying this
01:55 from the beginning of the year that
01:56 because we've had such a strong run up in the markets,
02:03 it's almost become fashionable to be cautious
02:07 going into early this year, right?
02:11 And I'm not saying for a moment
02:13 that one should throw caution to the winds.
02:15 Obviously, you know, we have to be cautious
02:18 in terms of where we are investing.
02:20 You are absolutely right.
02:22 We are not cheap, but we are not expensive either.
02:26 And I think we have been saying this for a while
02:31 that whether you look at the last nine months
02:36 of this fiscal year,
02:37 the way the broader market earnings have panned out,
02:42 or if you look at a four year picture from COVID till now,
02:46 it's quite staggering how earnings
02:51 for the top 500 companies have grown, right?
02:54 They've almost compounded at 38% a year.
02:58 So if you take the nifty 500 companies,
03:00 you know, the four year compounding,
03:03 if I were to annualize the first nine months
03:06 and then look at March 20 to March 24,
03:09 we've seen a pretty staggering compounding of earnings.
03:14 So to that extent,
03:17 the fundamentals of this bull market are very solid.
03:20 They are based on earnings.
03:22 Now, obviously in any bull market,
03:24 we do see excesses, which build up.
03:29 There can be pockets of exuberance.
03:32 We are seeing in this market that, you know,
03:37 a lot of the returns because of the high visibility
03:40 over the next few years could be front loaded, right?
03:44 And therefore, obviously, you know,
03:48 this market can be susceptible to both price
03:52 and time wise correction.
03:54 So it's quite possible that that may happen.
03:57 And to me, it looks like that, you know,
04:02 there is, as you mentioned, a coordinated regulatory action
04:08 to kind of preempt any bubbles or so-called excesses
04:16 that might happen in any part of the market, right?
04:21 So I think these kinds of cautions, breaks
04:26 within bull markets are actually healthy
04:28 because then, you know, people tend to dial back.
04:33 You know, if there is unbridled fear,
04:37 and if every day and every week the markets keep going up,
04:40 you know, it's a sure recipe for building up of bubbles.
04:44 So I think occasional cautions,
04:47 whether it is external intervention or corrections
04:50 because of, you know, whatever global macro or whatever,
04:54 is actually good in a bull market.
04:57 But I think this bull market is alive and kicking.
05:00 You know, yes, we should all be responsible and cautious,
05:05 but I don't think that it's gonna change
05:09 the basic direction of this market.
05:10 I think we are very clear, we are in a solid bull market.
05:14 - And viewers, to be fair, while the markets have rallied,
05:17 even at this 21,200, 300 levels when we first spoke to Iran,
05:20 when the concerns were existing as well.
05:22 I think I've heard concerns about markets all the way
05:25 in the last 2000 points on the Nifty
05:26 that are we overvalued, are we stretched, et cetera.
05:29 He had mentioned that he's constructive,
05:31 and, you know, conversation can be replayed
05:34 when he was in the studio,
05:35 and I think it's worked out well.
05:36 So again, good call there, and I look forward
05:38 to hopefully the market staying steady and creating wealth.
05:43 Specific pockets, Iran, and I wonder if the consistent
05:48 commentary from the regulator around the need for caution
05:54 in lending practices in certain actions being taken
05:58 by NBFCs, whether lending NBFCs or in yesterday's case,
06:02 a non-lending NBFC as well.
06:04 Is there a message being sent to the lending system
06:09 at large to be cautious?
06:12 Could that impact growth rates?
06:14 Could that impact valuations?
06:15 Because investors like yourself might be saying that,
06:17 what's the need to go out and buy NBFCs
06:19 at premium valuations when there is an overhang
06:22 of regulation?
06:23 - I think you're absolutely right, Neeraj.
06:27 All the recent actions by the regulator point to the fact
06:37 that they want to preemptively pull down unbridled,
06:42 unsecured lending.
06:46 Now, whether it comes by way of soft advice,
06:53 whether it comes by way of strictures when it comes
06:59 to adhering to certain operational processes
07:05 and risk management processes, I think that this will
07:10 definitely take the focus of the lending institutions
07:15 away from growth to sort of look at their internal controls
07:24 and processes, and it may impact growth in the short
07:28 to medium term.
07:29 In the long run, it's all good because, you know,
07:34 strict regulation is painful initially,
07:38 but it's always beneficial in the long run.
07:41 But unfortunately, there is a cost to be paid.
07:44 And the cost for that would be in terms of growth,
07:48 we don't know.
07:49 We'll have to watch the fourth quarter numbers
07:52 and then look at it.
07:54 But certainly I think all the players will be focused
07:58 on kind of getting their house in order,
08:04 relooking at their systems and processes.
08:08 And I do believe that this is an environment
08:13 in which it is quite difficult for the sector
08:18 to deliver returns in the near to medium term.
08:21 You know, I use this analogy that the financial services
08:26 industry may be going through its USFDA moment, right?
08:33 So if you know what I'm saying in 2015 and 16,
08:38 when similar regulatory interventions were done
08:44 in the pharma industry, first we thought,
08:48 oh, it's just one off plant, one off company.
08:53 And then one after the other,
08:55 you had almost every pharma company coming under
08:59 very severe scrutiny.
09:00 Obviously the intensity was different.
09:03 In some cases they got an import alert.
09:06 And now something similar is happening that the RBI
09:10 is actually asking you to stop a certain line of business.
09:15 Obviously that's going to impact growth.
09:20 And to some extent in the near term,
09:21 it could even impact the sentiment of the sector.
09:26 You know, as I said, longer run, it's all good.
09:30 But in the short to medium term,
09:32 I do believe it will have an impact.
09:35 - I like the correlation, the USFDA moment
09:37 for the financial services industry.
09:40 Could banks thrive in such a scenario, Dohirian?
09:42 Because they've kind of taken it on the chin for the last,
09:46 if not taken it on the chin, certainly have stagnated
09:48 or gotten devalued, at least the larger ones
09:51 in the last six to 12 odd months.
09:53 Could it be their moment?
09:55 People are looking for quality financials,
09:56 which are not impacted, which have got good practices
09:59 and which have growth, which is reasonable.
10:01 Could the HDFCs, KOTACs, ICSEIs thrive in such a scenario?
10:04 - Well, I think, you know, they also got a rap
10:11 on their knuckles at some point in time, right?
10:13 So I hope that it's not one versus another.
10:18 But yeah, I mean, I think, you know, for funds,
10:24 which to some extent have to be benchmarked
10:29 to a certain weight in the sector,
10:32 and they can't go completely underweight or zero weight,
10:37 right, there will be some rotation away from,
10:41 let us say, the NBFCs to the bigger banks,
10:44 because there might be a perceived safety there.
10:49 But, you know, I mean, my big point, Neeraj,
10:53 has been that I think overall, you know,
10:58 private financials were the leaders
11:02 of the previous bull market.
11:04 And that's a space which had done quite well
11:10 between, let's say, 2010 and up until, you know, COVID.
11:15 And then obviously because of COVID, there was a disruption,
11:22 but, you know, most of them had to make heavy provisions,
11:26 had to raise capital.
11:28 But broadly speaking, if you look at it,
11:31 that entire lot has underperformed the market.
11:35 And my sense is that, you know,
11:40 their sheer weight in the index kind of has peaked at 37, 38%.
11:45 And while I'm not making a case
11:49 by saying that they won't deliver returns,
11:52 I think they will, you know,
11:53 quality financials will deliver returns.
11:56 But if I take a slightly longer term view,
11:59 my sense is that their relative weight in the index,
12:04 you know, will keep falling.
12:07 And some of the other sectors in the index
12:13 whose weight was highly compressed
12:16 will actually relatively rise, right?
12:20 So I think that there will be bouts
12:24 where these companies will deliver
12:26 both absolute and relative returns.
12:29 But if I take a slightly, you know,
12:31 five, seven year picture,
12:34 my sense is that they will broadly underperform the market.
12:40 - Let's talk about something that is sulking.
12:43 City Units Note has put out today that a minister,
12:48 the minister is quoted as saying
12:50 that they are concerned about the fact
12:53 that the benefits of lower gas prices
12:56 have not percolated down to the end consumers
12:59 and they will not be hesitating in taking any drastic action
13:03 as a result of which Mahanagar Gas
13:06 has corrected quite significantly.
13:08 In fact, some of the others too.
13:09 They've also cut gas prices.
13:11 Mihika, fill us in on the details.
13:13 - Yes, so all the gas, most of the gas stocks are in the red
13:16 and Mahanagar Gas is the top loser in terms of that.
13:18 It's down about 12.9%.
13:20 So City's Note basically,
13:23 it downgraded Mahanagar Gas to a sell rating.
13:25 It also cut the target price by 5% to 1,405 rupees.
13:29 Now this was back on regulatory risk
13:31 on the company's margins.
13:33 Why the worries were prevalent for cities
13:36 because of the latest statements made by an oil minister
13:38 in an industry event where the minister said
13:41 that the full benefit of the gas reforms
13:43 have not been passed to the end consumer
13:45 and that the government is willing to take measures,
13:48 even drastic steps in order to ensure
13:50 the full benefit for the consumers.
13:52 Why does Mahanagar Gas stand to lose?
13:55 The most is mainly because of their premium EBITDA margins
13:58 that they do enjoy versus its peers.
14:00 City highlighted that the per unit EBITDA margin
14:03 of Mahanagar currently stands at rupees 13
14:05 per standard cubic meter of gas
14:07 while that of Indira Pasta Gas and Gujarat Gas
14:10 stand at rupees eight and rupees five.
14:12 So any drastic steps could renew concerns about exclusivity
14:17 and the margins and impact Mahanagar Gas even more.
14:20 Additionally, lastly, the Petroleum
14:22 and National Gas Regulatory Board in Feb did announce
14:24 that they will be getting a high expert level committee
14:29 to look at the CGD framework
14:32 and this also raised more concerns in terms of
14:34 how the impact would be margin life for the company.
14:38 - Megha, thanks for that.
14:40 Hiren, can I bring you in on this?
14:42 Market generally doesn't like regulatory action.
14:46 Is this a sign that the market is giving
14:48 that we'll not pleased by comments from a minister
14:53 who says that we'll not be hesitating to take drastic steps
14:57 for achieving our ends?
14:59 - So, you know, this is a very potent time
15:08 where the government wants,
15:13 especially where there is any sector
15:16 that reaches the end consumer, like a B2C sector.
15:19 The government would want that if there are any
15:26 input benefits or other benefits,
15:31 then those should be passed on to the end consumer.
15:35 We must understand that usually during election times,
15:40 the tolerance for inflation or anything
15:44 that is inflationary is very, very low.
15:47 And while in general, this government has stayed away
15:52 from intervening, but I think this is usually
15:56 a very sensitive time where pre-election,
16:01 they don't want any flare up in inflation anywhere.
16:06 Look at a series of things that they've done, right?
16:08 So for example, it's quite possible,
16:12 and it has happened so many times that you will see that,
16:15 you know, if there are certain agri commodities,
16:19 which are likely to see an increase in prices
16:24 because of either weather issues or production issues,
16:29 they would ban exports, right?
16:31 They did it for some variety of rise.
16:34 Then they came up with an ethanol policy
16:36 where they said that you can't use sugarcane
16:39 to make ethanol because they realized that,
16:43 you know, sugar prices could go up.
16:45 I think if you look at the sum total of the picture,
16:49 it is very clear that when it comes down
16:54 to B2C industries and where it impacts the common man,
17:00 I think the government would want that any benefits
17:05 that arise, whether because of taxation,
17:10 whether because of input costs,
17:12 needs to be finally passed on to the end consumer, right?
17:16 So all of that is what I look at is part of the same team,
17:21 that, you know, they want the impact of inflation
17:27 to be felt lower onto the general populace.
17:32 - Fair point.
17:34 Now, Viren, I drive back to the point that you made
17:36 in the first part of our conversation, weightages.
17:41 We're looking at weightages since 2004.
17:43 If financials as a weightage has to go off,
17:46 what could possibly come in?
17:47 What are your thoughts here?
17:49 Just add it up with a view on energy,
17:51 because when we looked at what happened
17:52 in the last 20 years, energy has had this very large weightage
17:55 which has dropped quite considerably now.
17:58 Is that one of the themes as well that come to the fore?
18:00 - Yeah, you're absolutely right.
18:03 So if you look at the weightages from 2003 to 2019, 20,
18:08 the weight of financials went from 15 to almost 40%,
18:14 and now they are receding.
18:16 While the weight of so-called cyclicals,
18:18 and cyclicals, you put four or five sectors in that,
18:22 which includes power, energy, capital goods,
18:26 autos, real estate, infra, cement, right?
18:30 What you call as industrials or cyclicals or energy,
18:35 the weightage of that, all these sectors put together
18:41 had fallen from 67% in 2003 to almost 30%.
18:50 And this had happened when the markets
18:52 had gone up seven times, right?
18:54 So I think the time has come where weightages
18:58 of these sectors are likely to slowly and steadily move up
19:05 in the indices.
19:07 And therefore, I think with the theme
19:10 that I've talked about with you in the past,
19:14 the whole manufacturing renaissance,
19:16 the fact that this time the growth is not led
19:21 by consumption, but it is led by the CAPEX cycle,
19:25 initially triggered by government CAPEX post COVID,
19:30 which continues till date.
19:33 Every year, the central government is spending more
19:36 and more on infrastructure, coupled with the PLI schemes,
19:40 coupled with the supply chain diversification
19:44 that is happening globally, coupled with the demand
19:49 for power that is rising.
19:52 To me, it looks like that those neglected sectors, right?
19:56 Which we all shunned during the previous full market cycle,
20:01 where it was essentially financials and consumption
20:05 that did very well, are all going to come back, right?
20:10 So I think that power, energy, cap goods, auto,
20:15 real estate, hotels, infra, cement,
20:18 I mean, all of these sectors, to my mind,
20:21 will see an increase in their weightages
20:25 over the next couple of years.
20:26 But you must understand that it's a slow, steady change.
20:31 It happens in a very stealth manner,
20:33 and slowly but surely people realize
20:39 that what they are owning is not really delivering returns,
20:44 right, because we all have the biases
20:46 of the previous cycle.
20:49 And because in the previous cycle,
20:52 when nifty earnings growth was in single digits,
20:56 and these high quality franchises were delivering
21:01 double digit earnings growth with high ROEs,
21:05 that's when all the money gravitated towards.
21:08 And then eventually these sectors became over-owned,
21:11 which means that their relative weight
21:14 in all the benchmarks went up,
21:17 while the relative weight of the benchmarks
21:19 in all the so-called cyclical or dirty sectors,
21:23 went down dramatically, right?
21:27 I mean, real estate, for example, was 7%,
21:32 and went down to almost 0.7.
21:37 And now from 0.7, it's just gone up to 1.2, right?
21:41 So many of these sectors are likely to come back.
21:44 And I think that what most investors and managers are doing
21:49 is they are grappling with this transition
21:52 that is happening, right?
21:54 Suddenly the PSUs and the real estate,
21:57 actually, if you see from COVID,
21:59 it's the PSU banks and the real estate
22:01 have the best performing sectors,
22:03 and which is where people have the least exposure today.
22:08 So I think this is a trend, as long as this trend persists,
22:14 there are some early adopters,
22:18 and then over time, everybody catches on to the trend,
22:21 by which time the trend has significantly played out, right?
22:25 So it's always interesting in markets
22:27 how these things happen,
22:28 but I think this is what we believe is likely to happen.
22:33 And that's why you see that people keep justifying
22:38 owning private banks and financials endlessly,
22:42 and they're all great franchises, nothing wrong,
22:47 or even the great consumer franchises, right?
22:50 But on a relative basis, they keep underperforming,
22:54 and the under-owned area of the market keeps outperforming.
23:00 - All right.
23:01 Cognitive biases, a great point to discuss
23:04 at some point of time
23:04 in a separate conversation with Hiren,
23:06 but Hiren, this was lovely.
23:07 Thank you for your time and the insights.
23:09 Great having you on Talking Point.
23:11 - Thanks, thanks Neeraj, great to be there.
23:13 - Thank you, and viewers,
23:14 thanks for tuning in to this edition.
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