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00:00 [MUSIC PLAYING]
00:03 Thanks for tuning into Talking Point.
00:12 I'm your host, Neeraj Shah.
00:14 Our guest today, you could argue that not just
00:18 in the recent past, but otherwise, his performances
00:20 have been great.
00:21 But the recent past would make some people
00:23 believe that does he have the Midas touch,
00:25 because his prophecies around what's
00:27 happening in the market near term and his positioning
00:30 as well, self-proclaimed positioning about what
00:32 he's doing with his portfolio, has turned out
00:34 to be very, very spot on.
00:37 And the question, or the big question
00:39 that we're asking our guest, Siddharth Bhaiyya, today,
00:41 is this, which will come up on the wall right now.
00:44 That's the big question.
00:45 And it's something that you should never ask people,
00:48 but you'll still ask, will markets continue to correct?
00:52 Siddharth.
00:52 You know, we always keep on saying, Neeraj,
00:54 let's not predict the markets.
00:56 And we always try and do that.
00:59 So will the markets continue to correct?
01:02 Look, you're in the markets.
01:04 You're here to take a call.
01:05 And sometimes you go right, and sometimes you go wrong.
01:09 I think the way I look at it, Neeraj,
01:17 we had a fantastic four years, right?
01:19 March 2020, we talked about the government doing--
01:23 globally, the government's doing quantitative easing.
01:28 Our guess was that a lot of this money
01:32 was going to come to the stock markets.
01:37 And we've had a fantastic four years over the last--
01:40 you know, the small cap index has gone up 400%
01:43 in the last four years.
01:45 We see a lot of excesses in the markets right now.
01:47 So we are cautious.
01:49 We are cautious, particularly in the small cap index
01:52 and the SME index.
01:53 We see a lot of excesses.
01:55 We're seeing valuations like never before.
01:58 So my sense is, yes, we're going to see a correction,
02:01 a big correction.
02:03 Is this the end of the bull market?
02:06 If you ask me, I'll stick my neck out here and say,
02:09 maybe there's a 60%, 70% probability
02:12 that we are past the peak as far as the bull market is concerned.
02:15 Wow.
02:16 OK.
02:16 I'm going to challenge that as well a little bit.
02:18 But first, let's try and talk about some of the things
02:21 that you said.
02:21 You mentioned this in this tweet on March 13,
02:24 which is yesterday, that we had a fantastic four-year bull
02:27 market.
02:27 There was greed like never before.
02:29 The correction of the bear market
02:31 doesn't get over in a week.
02:32 Are you calling this the start of a bear market?
02:35 As you said, I'd put a 60% to 70% probability
02:39 that we've probably seen the top of the bull market.
02:43 As I said, I can go wrong.
02:45 And you look at history, right?
02:50 And what is it that you see?
02:52 I read a lot of history.
02:53 And what is it that you see?
02:55 Bull markets typically will peak on good news and very good news.
02:59 You will see-- there's a saying that once your shoeshine boy
03:03 says that, buy stocks.
03:06 It is the top of the markets.
03:08 And I'm hearing horror stories all around of people
03:14 never done anything in the stock markets wanting to come and
03:17 invest in stock markets.
03:19 You're seeing so much as far as options trading is
03:21 concerned in the markets.
03:24 Yes.
03:24 Typically, you see a lot of IPOs coming in this.
03:27 And we have seen a plethora of IPOs,
03:29 particularly if you look at the SME space and everything.
03:32 We are seeing massive amounts of promoter selling
03:36 like never before.
03:37 So these are all indications of a bull market,
03:41 of a roaring bull market.
03:43 And this is pattern recognition for me.
03:45 So somewhere, I feel that probably we
03:48 are over the hump as far as the bull market is concerned.
03:53 I can be wrong.
03:54 Of course.
03:55 And I don't want people to take their decisions
03:57 based on my opinion.
03:58 Most certainly.
03:58 Yeah, but we value your opinion, and hence the idea
04:01 to have you here, and particularly
04:02 in times like these.
04:04 Some people would counter, Siddharth,
04:05 that you would worry a lot if you
04:08 are at the end of the later stage of a valuation cycle,
04:13 which we certainly are.
04:14 And maybe we're at a later stage of an economic cycle.
04:16 It doesn't seem like we're at the later stage
04:18 of an economic cycle, right?
04:19 I mean, economic growth looks like to be buoyant.
04:22 If the RBI is to be believed, 7% FY25 as well.
04:25 And that will bring about a 10%, 12%, 15% earnings
04:28 growth for FY25.
04:29 As you said, markets will always top out
04:33 when the economy is at its peak.
04:37 Any bull market starts with short covering.
04:41 It never starts with fundamentally good--
04:44 you know, the bull market started when the lockdown was
04:46 announced, when fundamentally things were very bad.
04:49 That was the day when the markets bottomed out.
04:51 So it was essentially a lot of short covering.
04:54 Today, everything is--
04:56 could you have imagined four years back, Neeraj,
04:59 in March 2020, when nobody wanted to touch small caps?
05:04 And today, you have the SME index and the small cap index,
05:09 where people are just buying left, right, and center.
05:11 So I am a little worried.
05:13 I'll be very honest with you.
05:15 Yeah, well, if your tweet on Feb 9 is to be believed--
05:18 and let's get that up--
05:20 if your tweet on Feb 9 is to be believed,
05:23 all the testosterone and the bull
05:27 will be killed in this ensuing bear market.
05:29 So you are obviously putting your money where your mouth is,
05:33 because I know in some sense you also
05:35 mentioned that you're taking some positions
05:37 of your portfolio as well.
05:38 So you're kind of preparing for a very sluggish 2024.
05:41 All I can say is December 2017, we were at 30% cash.
05:46 And after that, the small cap index fell more than 50%,
05:50 55%.
05:51 So we are now at 30% cash, only for the second time
05:54 in the last 11 years.
05:56 Wow.
05:57 Is this fear for a particular sect of the market, which
06:01 is small caps and micro caps?
06:03 Or do you reckon even large caps have issues?
06:06 I think large caps, Neeraj, are very well-positioned,
06:08 to be honest with you.
06:09 But eventually, look, the way it starts
06:11 is people first in the bull market, the way it starts
06:14 is people will first invest into mutual funds,
06:17 large cap mutual funds.
06:19 Then they'll buy large caps on their own.
06:20 Then they'll go into mid caps, then into small caps.
06:23 And eventually, they will start speculating in the SME,
06:28 which is what we are seeing.
06:30 So there is going to be a ripple effect.
06:32 The large caps, according to me, are much better placed
06:35 than what it is for--
06:37 the small cap index is quoting at something like 30 times
06:40 earnings or something.
06:42 I don't even want to look at what is there in the SME.
06:45 I don't even look at it.
06:46 But you can see a froth when you can,
06:49 when the way stock prices are going up.
06:51 So as I said, that's my--
06:55 What can counter this thesis?
06:57 Because I know you are a pragmatic person,
06:58 a realist person.
06:59 What will make you change your prognosis
07:02 about the direction of earnings growth and valuation
07:07 matches at the broader end of the spectrum?
07:10 Or if I make it as a larger question,
07:12 what will challenge your thesis of this looking
07:14 like the start of a bearish phase?
07:17 So to be honest with you, Neeraj,
07:18 this is the first time where I have
07:21 taken a call on the markets and sold our stocks.
07:25 Typically, we just kind of tend to ignore the markets
07:27 and focus on our companies.
07:29 But what we see--
07:31 our companies had record profitability last quarter.
07:33 We expect a very good March quarter for all our companies
07:37 as well.
07:38 So earnings growth, order book, outlook for all our companies
07:42 is very, very good.
07:43 Valuations are extended for a lot of our companies.
07:48 But as I said, what I see around overall with the IPOs--
07:53 look, my biggest concern is I focus on what the promoters do.
07:58 March 2020 and through 2021, you had massive insider
08:03 buying by the promoters, massive insider buying.
08:06 Last one year, I barely see any insider purchases.
08:09 They've been busy offloading their stakes.
08:13 You have international MNC companies like Whirlpool,
08:17 like Hyundai, like BAT.
08:20 They are coming and offloading their stake
08:22 in the Indian markets.
08:23 Clearly, those guys understand their business
08:25 better than what we do.
08:28 Whirlpool globally quotes at eight, nine times P multiple.
08:31 In India, it is quoting at 50 P multiple or whatever.
08:35 Their annual profit-- 60,000 people
08:37 working throughout the year.
08:38 Their annual profit is $500 million.
08:41 And they just sold 24% stake and made $500 million.
08:45 Yeah.
08:46 Yeah, but historically, Siddharth, I mean,
08:48 I'm just saying, for example, Unilever
08:51 has always traded at a discount to HUL, Nestle Global
08:54 to Nestle India.
08:54 So that is not a new phenomenon, right?
08:57 Yes, we've always quoted at a premium.
08:59 But the premium, to a large extent, Neeraj,
09:01 was limited.
09:02 What we are seeing is a blowout as far
09:05 as the premiums are concerned.
09:07 I'll give you examples.
09:09 We've started researching international companies.
09:13 Like Singtel owns a significant chunk in Bharti Airtel.
09:18 Singtel's market cap is $39 billion.
09:20 They own $30 billion worth of Bharti Airtel.
09:22 We're looking at China Mobile.
09:28 China Mobile's profitability is 15x of Bharti Airtel's.
09:32 And their market cap is only 2x of Bharti.
09:36 So there's an 80% valuation differential.
09:39 You're talking about an 80% valuation differential, which
09:42 is phenomenal.
09:44 So we've always quoted at premium
09:46 for the quality of companies that we've had in the Nifty.
09:49 Look, there is Nifty, which is very, very high quality
09:53 companies.
09:53 And we also have to remember that you
09:55 have a lot of unscrupulous companies.
09:58 We have serious corporate governance issues
10:00 in smaller companies, which we have had in the past.
10:03 So we're not-- which people tend to kind of forget
10:08 in the markets.
10:10 So yes, Nifty, as I said, very high quality company.
10:14 Some of the premium is justified.
10:16 But not all the premium is justified.
10:18 Not all the premium is justified.
10:20 And just to counter that point, March 2020,
10:23 Maruti's market capitalization in India
10:26 was higher than the market capitalization of Suzuki.
10:29 And then we all know what happened to Maruti stock
10:31 for the next three years.
10:32 I think it was March '17 or '18 where Maruti's market cap had
10:36 gone-- when Maruti first touched 10,000 crores, 10,000 rupees,
10:40 their market cap had crossed Suzuki.
10:42 And then I think Maruti did not do well for the next three
10:44 to four years after that.
10:46 We're talking about some of the things that he's put out.
10:48 I mean, most of these things would make
10:50 you know that he's cautious.
10:51 So actually, let's pull up a series of his tweets
10:53 that he's done.
10:54 We've shown you the latest one, which was done on March 13,
10:57 and maybe the first one on Feb 9.
10:58 But if you can get some of the other things
11:00 that he's put out on Twitter as well.
11:02 So this is him on March 13.
11:04 Of course, we saw this.
11:05 Let's move on to the other one, because he has already
11:08 spoken about how there is--
11:10 OK, this is good.
11:11 So Siddharth, can you explain what
11:13 you're trying to say with this?
11:14 Because you were saying that short covering peak on leverage.
11:17 You believe there's this massive leverage unwinding
11:20 that is undergoing, and we are underway that?
11:23 We saw that yesterday, right?
11:24 There was a very broad-based sell-off.
11:26 While the Nifty was down only 1.5%,
11:29 it felt like the overall markets were down probably 5% or so.
11:33 Yes.
11:34 So as I said, what explains?
11:36 What explains?
11:37 It is leverage within the system.
11:38 So you have to understand, Neeraj,
11:40 markets are six months ahead of the economy.
11:43 They're always six months ahead of the economy.
11:45 So this is what we are seeing.
11:49 Typically, March 2020, there was no fundamental reason
11:52 for the markets to rally, but there
11:54 was a lot of short position that got--
11:57 and which we are seeing in some of the global markets
11:59 as well, which have quoting at 15, 20-year lows
12:02 that we are seeing a big rally over there,
12:05 and it is being attributed to short covering.
12:08 OK.
12:09 OK, let's try and challenge some of these thoughts
12:11 as well, Siddharth.
12:12 We've done a little bit of that, and we'll
12:13 get a table with numbers out there
12:15 to make some reference points to.
12:16 But while we get that table on the screen,
12:19 here's one more question.
12:21 What about some of the themes which are necessarily
12:23 present only at the broader end of the spectrum?
12:26 They're not present in the large cap space.
12:27 What do you do if you want to participate
12:30 in some of the growth themes?
12:31 They're not present in the large cap space.
12:33 Earnings growth looks very strong.
12:35 Valuations may be a bit of a challenge.
12:36 What do you do in such scenarios?
12:39 I would always say investing is all about the future.
12:42 So if you've read about history, you
12:47 will realize that in the '90s, a lot of projects
12:49 were announced, and many of those projects
12:52 never saw the light at the end of the tunnel.
12:56 Look at something like a double power plant,
12:58 or so many other power plants.
13:00 And a bank like SBI was in a big soup
13:04 because of the double power plant.
13:06 So to me, margin of safety is very, very important.
13:10 Look, and we bought a lot of these growth themes four,
13:12 five years back when the valuation was attractive.
13:15 And then the future played out, and even we
13:17 didn't expect that, the way-- who would have predicted
13:21 four years back that you're going
13:22 to see an infrastructure boom like that in our country?
13:25 So I'll be cautious.
13:26 I'll be very honest with you.
13:28 I'll be very, very cautious.
13:29 Look, we've made a lot of good returns for our clients
13:32 over the last four years.
13:34 They're happy.
13:34 We are happy.
13:35 We don't want to pile on any more stress
13:39 at a personal level.
13:41 So taking some chips off the block, and then we'll see--
13:44 or taking some chips off the table,
13:46 and then we'll see when we want to re-enter again.
13:49 OK, now, OK, I'm flipping the question now on its head.
13:52 And that table will show you the extent of the fall, viewers,
13:54 that has happened in the past.
13:55 Now, that is not to say that the same thing will happen.
13:57 But I want to question Siddharth on that.
13:59 That thus far, Siddharth, based on the moments
14:02 that we've seen from the top around Feb,
14:04 when you put out that first tweet,
14:05 the last line shows that we are about 12.5% lower
14:09 on the small caps.
14:10 Now, the past history has shown-- no,
14:12 let's keep that table, please, on the screen.
14:14 The past history has shown that we've
14:16 declined anywhere between 24% to 41% as well.
14:20 Could we go down that much in the current fall
14:23 as well, at the smaller end of the spectrum?
14:25 So, Neeraj, you can either predict the direction,
14:29 or you can predict the extent.
14:30 You can't predict both.
14:31 I'm not asking for an exact number.
14:33 Sorry, I'm not asking you for an exact number.
14:35 But you're going to have cascading effect.
14:38 You're going to have cascading effect.
14:40 I've never seen retail participation, at least,
14:43 not even in 2007, '08, to the extent
14:45 that I'm seeing in the markets right now.
14:47 And through-- the biggest change has
14:49 been your apps, which have made transacting very easy.
14:54 Earlier, when I started my career,
14:56 you had to call up your broker.
14:57 You were a small guy.
14:59 Your call got picked up only a half an hour
15:01 after the markets opened.
15:04 Then you put up trade.
15:05 The price didn't come.
15:05 Then you-- to do one transaction would probably
15:08 take one whole day.
15:09 Today, at 9.15, at a click of a button,
15:11 you can do the transaction.
15:13 It has made life very convenient for people.
15:15 But as I said, that convenience is going to come at a cost.
15:19 So I've never seen retail participation
15:22 at the rate at which-- and we all know.
15:24 As I said, there is 400, 500 years of history.
15:27 And don't get me wrong.
15:28 I started-- I was not born with a silver spoon.
15:32 I was retail-- I started off as a retail guy.
15:35 So you have to-- the stock market also
15:36 gives you an opportunity to transcend that barrier
15:39 from being a retail.
15:40 But we all know history, 400, 500 years of stock,
15:42 that people eventually-- a majority of the people
15:45 end up losing money in the stock markets.
15:47 That's true.
15:48 OK.
15:49 OK, so no-- we are not predicting here.
15:52 But you believe that the extent of the fall
15:53 need not be contained right now.
15:55 There could be more exaggerated selling--
15:57 And it is not going to be a one way.
15:58 A bull market happens over four, five years.
16:01 A bear market has to play out over 18 months or 24 months.
16:05 So it is not going to be a one way decline where everything
16:08 gets corrected.
16:09 No, it's going to be declines.
16:10 There are going to be false rallies.
16:14 And you might, again, see this.
16:16 And at the same time, you're going
16:17 to see much more sell off in companies which
16:21 are not part of the indices.
16:23 So the NIFTY over a period of time will go higher.
16:27 The small cap index, the mid cap index
16:29 will go higher because there is survivorship bias over there.
16:32 But a lot of companies today which
16:34 got listed in the last two, three years,
16:36 I see majority of the promoters are unscrupulous over there.
16:40 Those are the companies which are eventually going to delist.
16:44 Wow.
16:45 OK.
16:46 Interesting.
16:47 So within this construct, Siddharth,
16:50 where is it that fundamentally you are constructed?
16:53 You have 30% cash, which means you are 70% still invested.
16:57 Wherein you believe that chances of these companies
16:59 and these stocks doing well are higher.
17:02 So what are these businesses?
17:04 What are these themes?
17:05 I mean, I'm not asking for stocks.
17:07 Essentially asking the nature of the business.
17:08 Yeah.
17:09 So again, as you said, Neeraj, we've
17:11 been invested in the stocks for the last four or five years.
17:14 As a fund manager, 30% cash is a very, very aggressive bet
17:18 that you are taking.
17:19 There are very few-- again, only two times in the last 11 years
17:25 that I've been sitting on cash.
17:27 So as I said, while we're sitting
17:31 with a lot of margin of safety as far as this is concerned,
17:34 and do you want to call it a personal bias?
17:38 But our stocks are showing good order book growth,
17:41 good visibility.
17:46 But we are cautious.
17:46 We're not buying anything more.
17:49 Our buying prices are much lower.
17:50 So we're OK holding onto some of our infrastructure names
17:54 or cap goods name or manufacturing names.
17:58 Got it.
17:59 They necessarily have to be available at a decent valuation
18:04 for them to fall in your funnel.
18:06 Yes.
18:06 So you are not the kind who's bought in
18:09 into a capital goods stock, which
18:12 is MNC, which has delivered fabulous performance
18:15 but trading at 70, 80 times.
18:16 You've kind of avoided that completely.
18:18 Most of our names would be, yes.
18:20 There was a time, Neeraj, in 2009,
18:23 when all these MNC stocks were available at 10, 12 P
18:26 multiples.
18:27 I can share the list with you.
18:30 From KSB pumps to SKF bearings to FAC bearings,
18:36 they were all available with 20%, 25% net cash
18:39 on the balance sheet and at 10 to 12 P multiple.
18:42 So cycle, those companies will also
18:44 hopefully at some point in time come back to those levels.
18:48 Or if they don't, you'll always find something else.
18:51 OK.
18:52 May I ask you, Siddharth, last couple of questions.
18:55 May I ask you that within this landscape,
19:02 are there opportunities wherein--
19:04 and I'm not asking for names here again--
19:06 but while you may be overall not buying,
19:09 but what is it that you would keep on your radar?
19:11 Because the opportunities may be real
19:13 and they might be performing well.
19:15 Sure, your buying decision will depend on a lot of things,
19:17 including the sentiment around the market.
19:19 But where are these pockets?
19:20 So Neeraj, I'll be honest with you.
19:23 We kind of as part of our research,
19:25 we also research or broadly look at the valuation parameters
19:29 for international companies, for companies
19:31 which are in similar businesses.
19:33 And right now, we find opportunities outside India
19:38 in some of these names at a significant discount.
19:41 You are able to buy consumption companies
19:44 in some of the Eastern Asian countries
19:47 with net cash on the balance sheet
19:48 at single digit P multiples.
19:50 These are serious cash flows.
19:53 So as you said, and then if there is a global investor,
19:57 eventually they're going to see that.
20:00 And money is going to flow.
20:01 And money flow and cycles tend to happen gradually and slowly
20:04 over a period of time.
20:05 So I find a lot of opportunities in the international markets
20:08 right now, to be honest with you,
20:10 as compared to the Indian markets.
20:12 Got it.
20:14 My final question, Siddharth.
20:16 Usually, I heard you say that bear markets take about 12
20:19 to 18 months to play out.
20:20 It's not one way, so on and so forth.
20:23 It's also true that these days, cycles
20:25 have gotten a bit compressed.
20:27 So could it be possible that with the tailwinds
20:30 that India has around growth relative to the rest
20:32 of the world, that a cycle which is bearish in nature
20:35 or is a bear market could be swift instead of it
20:39 being a prolonged one?
20:41 So how do I judge history?
20:43 I judge history over a period of 400, 500 years for this.
20:47 I would not look at the last 7, 8, 10 years
20:50 as a barometer for the stock market behavior.
20:55 And look, we've barely seen a bear market since 2009.
21:01 So majority of the people who have composed that
21:03 have never seen what a serious drawdown is.
21:06 Maybe bar, say, 2019, 2020.
21:11 So as I said, I learn from history.
21:16 And I tend to kind of see how history does
21:22 tend to repeat itself.
21:23 Got it.
21:25 Leave us with maybe a book recommendation
21:27 since you read so much.
21:28 What is a really good one that you've read recently?
21:30 I think I read a very good book, and particularly
21:33 for people who are into startup investing, who
21:36 are into FinTech, EdTech, health tech, whatever.
21:41 I just read this book, "Pyramid of Lies."
21:44 It's about a UK unicorn, which got a valuation of $3.5 billion
21:55 or something within four or five years,
21:57 where General Atlantic and SoftBank came in and pumped money.
22:01 And it went belly up.
22:03 And it was David Cameron who was on the board.
22:06 So it's a very interesting read.
22:07 And you're going to see-- unfortunately, nobody
22:10 is going to write a book on by byju's like that in India.
22:12 But it is the Indian equivalent of byju's.
22:15 And you'll see a lot more like that in the unlisted space
22:18 in India.
22:20 Siddharth, so good talking to you.
22:22 Thank you so much for taking the time out and being with us
22:24 today.
22:24 Thank you.
22:24 Thanks a lot, Neeraj.
22:25 And the pleasure was entirely ours.
22:27 And viewers, thanks for tuning in to this fascinating episode
22:30 of "The Talking Point."
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