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00:00 [MUSIC PLAYING]
00:03 Thanks for tuning into Talking Point.
00:12 I'm your host, Neeraj Shah.
00:13 And our guest today is Pratik Agarwal, Executive Director
00:17 of Motilal Oswal AMC.
00:20 The case for a chat with Pratik Agarwal
00:23 naturally veers around whether India continues to remain
00:26 in a spotlight in 2024.
00:29 Within that, does the regulatory action
00:32 or the spate of regulatory actions
00:33 recently deter the investor mood?
00:37 Key question for a tenant to ask.
00:39 And of course, the last four days or five days,
00:41 we started to see the small caps in particular starting
00:45 to underperform the large caps.
00:48 Is this just the beginning of that phenomenon?
00:51 Pratik, great having you.
00:52 Thanks for taking the time out.
00:53 I hope all is well.
00:56 Thank you.
00:58 Pratik, let's start off with the more pertinent question,
01:01 which is in the minds of everybody,
01:03 because we've been talking about how large cap valuations seem
01:06 relatively much better than mid caps and small caps.
01:09 The last five, six days at least, if not longer,
01:12 we're starting to see that bout of underperformance
01:14 creep into the small cap space.
01:16 Is this just the beginning?
01:17 Do you think there is more to go before the valuations
01:20 sanity comes into play?
01:24 No, sure.
01:24 So as long term investors, the lower the better.
01:29 That said, but you are actually deliberating on the same.
01:36 Now, if you look into what goes into valuations,
01:44 it is not the size of the company.
01:47 It is basically the growth of the company in cash flows
01:54 and the discount rate that one applies.
01:58 Now, the big change is--
02:00 are you there?
02:02 Can hear you loud and clear.
02:04 Yeah, so the big change is that after 2020, bottom of COVID,
02:11 the small and mid have seen earnings growth, which
02:15 is significantly higher than large.
02:18 Now, ballpark, a percent higher earnings growth
02:22 should result in 2% higher valuations
02:26 of a particular space.
02:29 And hence, we say that if the growth
02:32 delta of mid and small continues to be significant versus large,
02:37 the premiumness should sustain.
02:40 Yes, the riskiness associated with this space
02:44 on account of lower liquidity remains.
02:47 So that's a risk that you are taking
02:49 versus a more liquid, generally speaking, large cap space.
02:53 But for a 5% growth delta that we believe
02:57 could sustain going forward, given
02:59 that this is a whole new ecosystem coming up
03:01 in many, many spaces, versus earlier when these spaces used
03:07 to trade at a discount to large cap,
03:10 part is that it could continue to trade at a premium
03:13 to large cap.
03:15 The only thing is the growth delta
03:17 should continue to sustain.
03:21 OK.
03:22 A lot of these themes which are showing this growth delta
03:25 fatigue are themes which are maybe benefiting from--
03:28 I mean, these are sectors which have come to the fore,
03:30 especially in the smith space at the recent past.
03:33 Some of them are not present in the large cap space.
03:35 The China Plus One benefits are going
03:37 to some of these companies quite clearly,
03:40 which are not there in the large cap space as well.
03:42 Do you reckon that these near-term concerns not
03:44 withstanding, the smiths are still the pocket
03:48 wherein the creation of alpha has a high probability?
03:54 No, so the short answer is yes.
03:58 OK.
03:59 So if you are a long period investor,
04:03 you don't come into this space for momentum.
04:07 But if you are a long period investor,
04:10 then this space should see earnings growth way higher
04:15 for the same reason that you are saying.
04:17 Many of the growth themes are predominantly present here.
04:21 So longevity of growth is here.
04:23 A lot of new businesses, new business lines
04:26 are coming up, something which wasn't there in the country,
04:29 let's say, two, three years back.
04:31 So all of them present in this space,
04:33 longevity of growth is there.
04:35 So if you are a long-term investor,
04:36 this is a space which should continue to deliver alpha.
04:41 Now, your presentation, Pratik, the note
04:44 that comes in from your desk has some very interesting thoughts.
04:47 And one of the things that stood out for me
04:49 was you saying that the highest quality and the highest growth
04:52 sector wouldn't be the same always.
04:55 Now, could you explain this point to us?
04:59 So let's look at this period, 2000 to 2021 and beyond.
05:08 OK, now, 2000 to 2008 is one period.
05:13 2008 to 2021 is next period.
05:16 And I'm not taking bottom of COVID, which is 2020.
05:19 I'm taking '21.
05:21 And '21 and beyond is another period.
05:24 Now, if you look at '08 to '20, the large-cap index earnings
05:31 growth was 5% in a ballpark.
05:36 Mid-caps you thought would grow faster than large,
05:39 but actually the earnings growth of the mid-cap index was 4%.
05:45 And the small-cap index was 2.8%.
05:50 OK, so this was a period which saw a lot of disruptions.
05:54 For various accounts, and we all know that,
05:57 starting from Lehman and ending with COVID,
06:00 in between taper tantrums, et cetera, et cetera.
06:04 Now, the highest quality part of the market,
06:09 let's take a consumer index, delivered earnings growth
06:14 in this period at 12%.
06:17 So this is the highest quality part of the market.
06:20 And incidentally, in this very long period,
06:24 also delivered the highest earnings growth.
06:26 Now, that has changed.
06:31 So index itself, after '21, has been growing earnings
06:37 at a clip beyond 20%, even in the last quarter was 17%.
06:43 And even if one assumes that consumers continue
06:45 to do what they were doing, they are now
06:49 delivering earnings growth significantly lower
06:52 than that of the broad index itself.
06:55 So they are no longer the growth leaders.
06:59 Is the key thought.
07:01 For some space which has done so well over 13, 14 years,
07:07 it takes the connotation of quality did very well,
07:13 quality does very well.
07:16 It may actually be that growth did very well,
07:19 growth always does very well.
07:22 In this '20-'21 period, the highest quality part
07:25 was also the highest growth part.
07:28 And which is not the case in '21 and beyond period,
07:33 wherein all of these newer spaces have come up.
07:37 They are delivering growth vastly
07:39 in excess of the index itself.
07:42 And index itself is delivering earnings growth,
07:44 which is higher than, let's say, the consumer
07:48 part of the market.
07:49 I'm using consumers repeatedly just
07:52 to say that this is the highest quality part in the market
07:55 as measured by a indicator like return on capital employed.
08:00 So if one holds the thought that earnings growth is where
08:08 markets ultimately go to, it went to the highest quality
08:13 part in '20-'21.
08:15 For example, at 12% compounding of earnings in a consumer
08:22 index ended up with a 15% compounding of the index
08:26 itself.
08:29 And now when the, let's say, Nifty earnings
08:33 is higher than that of consumer, the opposite is true.
08:36 And when a mid-cap and small-cap earnings
08:38 is higher than Nifty itself, those are doing better.
08:43 This is one.
08:44 Second, continuing on the first question that you asked me,
08:50 in the '80-'21 period, there was no period
08:56 where the mid and small had consecutive years of growth.
09:01 Three consecutive years of growth were not present.
09:05 Both mid and small had one instance
09:08 of two consecutive growth years.
09:11 So you start to look at a place, a space,
09:16 you make up your mind to go there.
09:18 And by the time monies get positioned there,
09:21 the earnings growth simply evaporated.
09:24 So when I speak, a lot of what happened in that period
09:29 would come back to the fore.
09:31 You actually saw a bet in the mid and the small space
09:37 hold you massively in that period.
09:39 Now, from '20 onward, if one takes '20 base of COVID,
09:44 you've got four years of increase in earnings now.
09:47 24, just one quarter is left.
09:50 Mostly, it will be a good, nice growth over '23.
09:54 So which is what is feeding into sustained performance
09:58 of this space?
09:59 So if growth sustains, I think valuations and performance
10:06 should come.
10:10 When I then compare this-- so by the way,
10:13 the highest quality part didn't perform in the 2000 to 2008
10:17 period.
10:18 So what are the similarities of the current period
10:20 with 2000 to 2008?
10:23 Before 2000, you saw a burst of reforms.
10:26 2000 to 2008, you saw capex-led growth.
10:29 Gross fixed capital formation increased for eight years
10:33 from, if I remember right, 2.7% of GDP to 3.5%.
10:39 The start point, again, is very similar.
10:41 We have seen three years of growth.
10:42 We had a huge dollop of reforms just before, and they continue.
10:46 So we have-- or one should assume--
10:48 we should have at least four or five years more of growth,
10:52 of apex-driven growth going forward.
10:55 Now, in 2000 to 2008, again, this highest quality part
11:00 didn't perform if one takes the consumer's part of the market.
11:04 And we hence believe the same could
11:06 be true in this part, in this period as well.
11:13 Now, the key difference is 2000 to 2008
11:16 was a period of debt, which hurt companies a lot
11:21 in the post-Lehman period.
11:24 Now, this time around, the part which is doing well
11:28 has a very sustainable level of debt, if at all.
11:30 30% debt equity or lower is the usual thing
11:35 that one experiences.
11:37 So in many cases, in many ways, this period,
11:43 the mid and small are not what was the case earlier.
11:51 Prateek, some of the India numbers
11:56 seem to be pretty strong.
11:58 I mean, port volumes for select companies may be one.
12:01 Some of the growth numbers--
12:02 I mean, the Indian GDP number itself is looking so strong.
12:06 What's happening here?
12:07 And are you inclined to have a larger exposure to India
12:13 domestic inward-facing sectors, as opposed to--
12:20 relatively as opposed to the export-facing sectors?
12:25 The short answer is yes.
12:28 And the thought is that if India is
12:31 the bright spot in the world for growth,
12:35 and we are growth-focused investors,
12:37 larger part of the money is-- practically all of the money
12:40 should be focused on India, Indian businesses.
12:46 So which is what it is.
12:47 So as a part of risk control, some
12:50 of the export-oriented businesses
12:53 are large in the index.
12:55 So we do have some presence in spaces like IT.
12:58 But otherwise, our portfolios are
13:01 dominated by domestic-focused businesses.
13:05 Now, Prateek, tell me, are--
13:08 sorry, just a segue--
13:11 are export-facing businesses currently
13:15 available at valuations where starting to nibble selectively
13:21 might be a good idea, or that is ruled out completely?
13:26 So it depends on what is it--
13:28 how are you going to build your portfolios?
13:34 This question is best put to a value-focused guy.
13:39 We are out-and-out growth-investors.
13:42 In today's market, given what is happening,
13:45 given how the opportunities are being thrown up,
13:49 we believe our portfolios reflect growth
13:54 like no other portfolio.
13:56 So that, when you say, then, in the larger export-focused
14:02 spaces, chances are that you would have a growth in EPS
14:08 number which is trailing that of the index itself.
14:12 And that is our reason to be not there, say, for risk control.
14:17 So we have some tolerances of how much
14:22 we can deviate from the index.
14:26 This is that.
14:26 Some exposure may be there.
14:28 That's not.
14:29 So that is how it is.
14:30 But yeah, there are some export-oriented businesses
14:35 which may have tailwinds.
14:37 So for example, if US wants to source or disengage,
14:44 they're sourcing away from China.
14:46 In certain spaces, Indian businesses
14:49 get benefited strongly.
14:51 It could be solar panels, for example.
14:54 So that's a space that we are focused on.
14:57 Now, the country is also signing double-taxation-treated
15:03 agreements with European blocs.
15:06 So we signed it with four countries.
15:09 Those are small.
15:11 But maybe, when the larger part of the Eurozone and Britain
15:14 get signed over the next period, it
15:17 could open up good, nice export-oriented opportunities
15:21 for our businesses.
15:23 So it can change.
15:26 And we are clued on.
15:28 But when you look at us, think growth.
15:32 Think if a space offers more growth
15:35 than the index for the next several years,
15:38 chances are you will find us there.
15:41 Got it.
15:42 OK.
15:42 From all the newer spaces, Pratik,
15:49 that have come to the fore, there
15:52 are companies which are now setting up
15:55 semiconductor manufacturing facilities
15:58 or doing tie-ups for those, which is very interesting.
16:02 PLI schemes for a whole lot of new sectors
16:04 have come to the fore as well.
16:06 What has stood out for you as something
16:10 that has got the highest longevity of growth?
16:13 I mean, the near-term growth aspects may not be very clear.
16:15 But the longevity aspect is probably more clear.
16:19 In many, many spaces, longevity is quite--
16:26 how should I say-- long.
16:28 Longevity is long.
16:29 [SPEAKING HINDI]
16:30 [LAUGHTER]
16:32 Yeah, man.
16:34 So for example, spaces where government policy is not
16:41 the tailwind, but maybe changing demographics of the country
16:45 is.
16:46 So yes, we are a young country, but what's
16:49 is 10% of the population today, which is sub-60 years old,
16:55 20% of the population will be over 60 in 20 years.
17:00 And when that happens, well, the need for health care
17:05 will increase.
17:06 I mean, I keep saying this.
17:08 This is a generation which has accumulated wealth
17:12 versus the earlier generation and slogged their way
17:15 through their lives.
17:17 So chances are when these guys get old, I will get old by then.
17:22 We would want better quality health care to be there.
17:28 So things like hospitals, you feel the need of it
17:34 all around you, except maybe in certain small pockets
17:39 where public infrastructure is very strong.
17:42 The rest of the country, you need.
17:44 I mean, in Bombay, given how traffic is,
17:50 I mean, even for the best of localities in South Bombay,
17:56 there is no way you can reach anything in time.
17:58 So the need is very, very palpable.
18:02 That is one thing.
18:03 Second, of course, manufacturing as a part of policy,
18:07 make in India, et cetera, et cetera,
18:09 will have a large, long way of growth.
18:13 Manufacturing of stuff which used to always happen in India
18:17 will grow, yes, but newer stuff is getting added to it.
18:22 Newer stuff in many ways has strategic importance as well.
18:27 The good thing is while a lot of this new stuff left on its own
18:33 may not be very high ROC businesses,
18:36 but with the helping hand of the government,
18:39 these businesses are making a lot of sense
18:43 for people who are able to get the benefits
18:46 and put those facilities up.
18:48 Now, the runway of growth is super long.
18:50 The Indian market itself is large.
18:53 And if we are able to export a significant part
18:59 of what gets done here, the opportunity
19:02 can be very large and sustainable for several years.
19:08 Then on the same theme of India getting richer,
19:14 anything luxury, luxury hotels, et cetera,
19:18 should all do well for longer.
19:20 Challenge here in some of these spaces is regulations for sure.
19:25 Got it.
19:25 OK.
19:27 And point well taken, but unfortunately, out of time
19:31 completely, so we'll have to wrap it up here.
19:33 But Pratik Agarwal, thanks for taking the time out
19:35 and being with us today.
19:37 Thank you.
19:37 Have a good one.
19:38 Thank you.
19:38 And viewers, thanks for tuning in.
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