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00:00 [MUSIC PLAYING]
00:03 Thanks for tuning into Talking Point.
00:13 I'm your host, Neeraj Shah.
00:15 Now, before we get to the case for a chat with our guest,
00:18 I think insurance deserves a mention today,
00:22 because clearly insurance is the big talking point.
00:25 And my colleague Mihika joins in to talk about what is it
00:28 that some of the brokerages have said
00:30 when it comes to the insurance stocks
00:32 on the back of clarifications that
00:35 seem to have come in from the insurance regulator.
00:37 Mihika, good morning.
00:38 Good morning.
00:39 So yes, with the Insurance Regulatory and Development
00:42 Authority of India's final norms largely unchanged
00:46 to the existing norm, Morgan Stanley
00:47 has stated that their initial discussions with insurance
00:50 companies suggest low risk, if any,
00:52 to the value for new business margins.
00:55 The regulator has retained the existing surrender value
00:57 guidelines, easing the December overhang on the insurance
01:00 companies.
01:01 However, there are some changes to the special surrender value
01:04 computations.
01:05 Morgan Stanley has stated that the final regulations are
01:07 largely focused on simplifying the process and the ease
01:10 of doing business, whereas also providing
01:12 fairer and more equitable treatment
01:14 for the policyholders.
01:16 The brokerage expects HDFC Life Insurance
01:18 to perform better in the near term
01:20 because of its underperformance in the last three months,
01:22 as the stock was the one that was mainly impacted
01:26 since the changes with the regulations
01:27 were announced back in December 2023.
01:31 OK.
01:32 Mihika, thanks for putting that into perspective.
01:34 So clearly, some of these insurance firms
01:37 firmly in focus, and we'll talk about that with our guests
01:39 today.
01:39 But let me establish the case for a chat
01:41 for getting in our today's guest on Talking Point.
01:45 He's, of course, Tahir Bhatia, president and CEO of Invesco.
01:49 The question remains whether macro triggers are already
01:52 priced in or no.
01:53 So we start off with the last point first.
01:56 We ask Tahir Bhatia whether it's wiser
01:59 to wait for valuations to moderate
02:02 and whether private banks, which is the unanimous focal point
02:07 for most investors, will that drive the BFSI pickup
02:10 or will it be something else?
02:12 He's the president and CEO of Invesco Mutual Fund.
02:14 Tahir Bhatia joins me right now on Talking Point.
02:17 Great having you.
02:18 Thanks for taking the time out.
02:19 I hope all is well.
02:21 Morning.
02:21 Everything OK?
02:22 I need it.
02:23 Tahir, great having you once again.
02:25 And I will start off with that argument, Tahir.
02:27 A clutch of your colleagues, maybe your fund as well,
02:31 has taken the step that let's be a bit more
02:34 cautious at the broader end of the spectrum
02:36 because the valuations out there are substantially higher.
02:40 A lot of telltale signs being cited,
02:43 including promoter blocks, including small cap stake
02:47 sales, et cetera.
02:48 I wonder how you think about the core fundamentals
02:52 versus the other high-flying indicators around
02:57 and how does that translate into your view on markets currently?
03:01 So, Neeraj, between those two factors,
03:07 essentially the fundamental factors
03:09 or the core fundamental factors that you mentioned
03:11 and some of the other elements also,
03:14 which essentially come as part and parcel of a reasonably
03:19 decent bull market.
03:21 I think there is a fair bit of predominance of the former.
03:25 And that probably makes this rally a little different
03:28 compared to what it used to be in the past.
03:30 It is not probably the first time
03:31 that we are seeing a reasonably decent broad-based market
03:34 rally and fairly strong performance, as we all know,
03:38 of mid-caps and small caps, particularly
03:40 in the space of the last 12 odd months.
03:44 But I think this time it is different from the perspective
03:47 that it's supported by, as you know,
03:49 reasonably decent earnings trajectory and earnings
03:52 growth as well.
03:53 The outlook and the forecast as things stand today
03:55 is looking also reasonably healthy.
03:57 So I think under the circumstances,
03:59 therefore, if I were to probably contrast it
04:01 with, let's say, the last mid-cap, small-cap rally,
04:04 which we saw around the end of 2017, early 2018,
04:07 or towards--
04:08 or during the period of 2017, if I replay it right,
04:12 it was a very strong rally at that point in time as well.
04:15 But would you argue that it was also
04:17 supported by strong earnings growth at that point in time?
04:20 Probably not.
04:20 I think in that year or two, we saw a very strong performance
04:24 of the broader market in India, probably
04:26 led by different kinds of factors at that point in time,
04:29 which were at play.
04:29 But I think this time around, therefore, to that extent,
04:32 it gives that added layer of confidence,
04:34 not to, therefore, say that we can't have periodic drawdowns
04:38 but we will, and especially if the market tends to, at times,
04:43 get a little ahead of itself versus even the good
04:46 fundamentals that we see.
04:47 I think that's likely to happen.
04:49 And probably we will see those kind of instances,
04:51 as we saw in the last couple of weeks,
04:53 where there was a reasonably sharp drawdown.
04:56 But I would like to think that's par for the course.
04:59 And if you get those kind of corrections and valuations
05:03 at some level, therefore, do become a little more amenable,
05:07 relatable, I think those will only
05:10 be good entry opportunities.
05:12 We still see the overall economic configuration
05:14 as reasonably healthy.
05:15 I don't really see a lot of devil in it at this stage.
05:19 Got it.
05:21 We were talking to the Motilal Oswal wealth team, Tahir,
05:23 and their research seems to suggest
05:25 that with the kind of earnings growth that
05:27 has happened in the Smith space over the last four years
05:31 and the basis having moved so high,
05:33 could there be a case that the earnings growth--
05:37 the pace of earnings growth may come off?
05:40 And if that comes off, does it naturally
05:43 bring down the valuations?
05:44 My question is, would you believe
05:45 that this, whatever, between 28 to 33 times,
05:48 whatever number you peg it at, the Smith valuation,
05:52 will it come off because the pace of earnings might come off?
05:55 Or do you reckon that at that end,
05:58 with the kind of growth promises that a lot of new sectors
06:01 are making, we might see elevated multiples
06:03 for a while?
06:06 No, so you're absolutely right in saying that.
06:08 Look, I mean, if the growth rate tapers off,
06:10 and particularly tapers off meaningfully and materially,
06:13 I think obviously that will lead to a fair bit of compression
06:16 in the valuations as they stand today.
06:18 But I would like to think that it's not
06:22 as much only about tapering.
06:23 I mean, that's likely to happen at any base.
06:26 You will have to contend with the fact
06:28 that you can't have 25%, 30% compounding every year.
06:32 You will slow down to some extent.
06:34 But if it is reasonably healthy, and if it doesn't slip down
06:37 too much, I think what the market will probably focus on
06:40 is reasonable lower, but is it longer enough?
06:44 And is it sustainable enough for a relatively longer duration
06:50 compared to what it has been in the past?
06:51 And if that were to be the case, then probably what
06:53 we can argue for is valuations being perhaps
06:59 at least a couple of notches higher
07:01 than what they used to be in the past averages
07:03 at the same point of time in the cycle.
07:06 I hope you know what I mean.
07:07 So basically, what I'm just saying
07:09 is that you probably have a case for a re-rating, probably
07:14 of a somewhat better magnitude on a longer history.
07:19 And especially if earnings growth
07:23 is of a better trajectory or a better magnitude
07:27 compared to what it has been in the past,
07:29 and the longevity is probably somewhat better
07:32 than what it used to be in the past.
07:34 The other aspect that is confounded,
07:36 I'm squeezing in themes here, Tahir.
07:40 Let's say power.
07:42 Let's say renewables, oil marketing, what have you,
07:47 or PSU-linked or policy-linked spaces.
07:51 OK, that's my clear question.
07:52 Policy-linked spaces.
07:54 Now, the conversation always has been
07:56 that people cite past history to say
07:58 that look at execution slippages that
08:00 have happened in the past.
08:02 Intentions that have been expressed in the past,
08:05 but not quite fulfilled.
08:07 And therefore, the run-up that we've
08:09 seen in some of these themes on the current promise
08:12 deserves to be brought down.
08:14 At the other end, the bulls are saying that this time does
08:16 seem to be different, because in select pockets like power,
08:19 renewables, et cetera, the targets are so tall.
08:22 And the policy push is there for the companies
08:24 to execute and execute well, or having the ground
08:28 to execute well.
08:29 And therefore, earnings growth might surprise on the upside.
08:31 I'm trying to ask you, which side are you on?
08:34 So we ought to be on the side where you see visibility.
08:40 And I think you see visibility for, as you said,
08:43 in the camp where there is a possibility of growth
08:46 being relatively stronger compared to what
08:49 it used to be in the past.
08:50 There have been policy initiatives.
08:52 Earlier, there have been policy initiatives now as well.
08:55 But you ought to just try and understand
08:59 as to what is the stability of these policy reforms
09:05 and probably what kind of longevity it can bring.
09:09 You can be in one camp, but you don't have a choice
09:11 but to then keep assessing and reassessing
09:13 at all points in time.
09:14 So even though we may be in the positive camp,
09:17 as of now, we don't have a choice
09:18 but to continuously reassess as to what the landscape is
09:21 looking like and how are our assumptions being fulfilled.
09:27 And if there is any detraction from that,
09:31 we as money managers, we don't have a choice
09:33 but to take the reality into account
09:35 and start trying to see as to what kind of precautionary
09:40 measures we need to take or reallocations
09:44 that we need to do in our portfolios.
09:46 But as things stand, I think, like I said,
09:49 it's all about assessing the visibility.
09:50 And you know that there are certain factors which
09:52 are driving and likely to drive the growth
09:54 of a particular theme.
09:55 I think if those come into question
09:58 and you strongly believe that those questions are merited,
10:02 I think you don't have a choice but to--
10:03 irrespective of whatever camp you are,
10:05 you need to reassess the situation.
10:06 So, Tahir, where is it that you find the strongest visibility?
10:09 So today, it goes without saying that, look,
10:17 I mean, the industrial cycle, which
10:18 has been in reasonably strong momentum
10:20 and which we all actually should wish
10:23 continues for a relatively longer period of time
10:26 for the good of India, I think is still in good shape.
10:29 And that is where much of the incremental opportunities,
10:32 at least from a point of view of not
10:35 having to worry about the visibility of growth,
10:37 is going to come through.
10:38 And that is where a larger part, a larger section of our
10:40 portfolios is obviously directed.
10:45 But be that as it may, I mean, we have to--
10:49 we don't have a choice but to also look
10:51 at value opportunity, which might unfold
10:53 as a result of the market being significantly attentive
10:57 or concentrated towards one particular area.
10:59 It always happens that if a larger section of the market
11:02 looks at only a certain set of companies
11:06 and certain set of stocks and industries,
11:07 there will be lagards, or there will
11:09 be value which will start developing in some
11:11 other parts of the market.
11:12 And so I think from a growth standpoint,
11:17 clearly the industrial segment is--
11:20 and everything which is related to the investment cycle,
11:22 by and large, is likely to continue to do well.
11:26 But we try to mix it with some of the value opportunities
11:30 that we might probably spot at various points in time
11:33 in different sectors.
11:34 It could be consumption at some stage.
11:36 It was pharma, let's say, about three, six months ago,
11:39 which is trying to make a reasonably decent comeback.
11:41 It's played out pretty well, pharma and health care.
11:44 It could be banks at certain points in time,
11:47 although we may probably find it difficult to actually see
11:49 the triggers around it at this stage.
11:51 And I will probably also be constrained
11:53 to give you what would be the catalyst which will probably
11:55 take some of these banks up in terms of the valuations
11:58 from year on.
11:59 But value does tend to develop at certain points in time.
12:03 And if you believe these are franchises which
12:06 are reasonable to bet on and they provide value,
12:09 I think we don't have a choice but as managers
12:11 to reflect those in our portfolio.
12:13 He cited that financials and banks in particular
12:19 could be a pocket to focus on amongst this wider market
12:23 view that don't be too perturbed about valuations
12:25 because if growth story stays on,
12:27 then some of these valuations could well get
12:29 justified in the times to come.
12:31 I think that's the aggregate that I got.
12:33 Tyre, please correct me if I'm wrong there.
12:35 But since you--
12:36 I probably need to go on to add that, as you mentioned,
12:39 along the way that these valuations sometimes
12:42 probably become a little--
12:44 we don't really know whether these valuations are true
12:49 or not in the sense that you might probably get earnings
12:51 upgrades along the way, especially
12:53 if the cycle is strong.
12:54 So what appears to be high valuations
12:57 might be a bit of valuation which are high but underlying
13:00 if-- and we've seen that happen a fair bit in the last two,
13:03 three quarters where some of these companies
13:06 in these sectors which have looked apparently
13:09 very expensive have turned out to deliver relatively
13:13 robust earnings.
13:14 And once upgrades to earnings come in,
13:16 then the upgrade cycle itself is sufficient enough
13:18 to drive these stocks.
13:21 Yeah, fair point.
13:22 OK, so watch out for earnings upgrades in select pockets
13:25 as well.
13:25 Effectively, no easy money out there.
13:27 Please do your own research.
13:28 Study well before investing or choose mutual funds.
13:31 Tyre, now you spoke about financials.
13:33 And that was-- at the start, you spoke about banks.
13:36 But at the start of the show, you also
13:38 spoke about the newsmakers of the day-to-day.
13:40 And that was insurance.
13:41 And this IRDAI-- sorry, excuse me, tongue twister out there.
13:47 But IRDAI regulation, status quo on the surrender value
13:51 of the non-linked products, et cetera.
13:53 Do you look at life insurance as a bucket?
13:56 And do you like it?
13:57 Or do you think there are better plays out there?
14:00 And why so?
14:03 We do have some exposure to life insurance companies,
14:06 and very selectively, though.
14:08 But we like the proposition in a couple of cases,
14:10 especially where the product basket is reasonably
14:12 well-diversified.
14:13 And last year, when we saw that the changes which
14:20 were brought about in the 2023 budget with regard
14:24 to the insurance companies, I think
14:28 was a reasonably decent value opportunity which
14:32 got created at that point in time,
14:33 and some of the reasonably decent frontline insurance
14:37 companies.
14:37 We did approach it from a value standpoint at that time
14:40 to reflect it in many of our values
14:42 and in some of our value strategies,
14:43 or at least a value proportion of some of our funds.
14:48 So I think that is something which we were able to play,
14:53 but from a value standpoint at that point in time.
14:56 I think in general, there is a sector which still
14:58 has growth characteristics.
14:59 We know that, right?
15:00 I mean, we might not be under-penetrated as far
15:04 as life insurance is concerned.
15:05 But it is still a reasonably decent growth
15:09 portion of the economy, and the financial services segment.
15:16 Incrementally, I think the approach
15:18 that we've had to financial services, banking
15:20 and financial services, is also a little different compared
15:23 to what we've been used to in the past.
15:25 I mean, five years ago, we were always largely focused
15:29 on lenders, so with the banks and the NBFCs.
15:32 Today, the landscape has changed as far as financial banks
15:35 and financial services together is concerned.
15:37 And there are a good number of opportunities
15:40 on the non-banking, non-lending financial services side.
15:45 And I think insurance is one part of that opportunity.
15:49 So it does make sense to look at some of them,
15:53 particularly where we see the product basket, as I said,
15:58 being relatively more broad-based and appropriate.
16:02 Got it.
16:04 OK, Tyre, there is the formation of the newer teams,
16:10 as we've seen in the last two or three years.
16:14 Some have taken rebirth, right?
16:16 Defense, PSUs, railways, et cetera.
16:19 And some like PLI formed in the last three years,
16:21 EMS schemes, EMS companies in the last two, three, four years,
16:25 if you will.
16:27 Maybe potentially strong green hydrogen companies
16:30 coming up in the next few years as well.
16:33 Where is it that you have the strongest conviction
16:37 from things that have gotten created or re-Christianed
16:43 in the last three years?
16:44 We've started off with conviction
16:50 around a couple of them about a year, year and a half back.
16:54 And those have kind of been--
16:55 then a couple of others have joined the party
16:59 or joined that proposition as we've gone along.
17:03 So I still particularly personally
17:07 like the defense team.
17:08 That's something which I believe is
17:12 something which would probably have stronger legs
17:16 and more visibility as we go along.
17:18 And I think that sector is reasonably concentrated
17:22 in the sense that you have a few players who
17:27 are dominant in their respective sub-segments
17:30 of their defense ecosystem.
17:32 And each one of them have their own important role to play.
17:36 There are within that as well, we probably like a couple
17:39 of them over a couple of others.
17:40 But by and large, I think I'm reasonably
17:42 constructive on that space.
17:44 I've been for a reasonably good period of time.
17:46 And that still seems to be the best place
17:48 to be around in this thematic driven or policy driven
17:56 part of the market.
17:57 I think railways is another where we've probably not
18:02 been able to have a lot of exposure,
18:04 but that's something which is, again, quite exciting.
18:06 Because there could be a couple of players which are even
18:10 in that segment which are not necessarily capital intensive
18:16 based in the sense that they're probably not as balance sheet
18:19 driven as what probably other parts, other such segments are.
18:26 So I think that's something which is another area
18:29 that we'd like.
18:30 I think power along the way has provided some opportunities
18:33 either in the form of certain utilities
18:36 or probably even in the case of certain financiers.
18:40 Those are clearly the ones which have made a strong cyclical
18:44 comeback after a very long period of time.
18:47 Obviously, the cycle as of now is still in their favor.
18:51 And we're still in the early stages of that cycle
18:53 probably is what you would like to think.
18:55 But then we have to be watchful.
18:57 I mean, these are some of the segments
18:58 which have shown certain challenges as the size has
19:07 grown and as the cycle has tended to become more peakish.
19:12 So I think we have to be careful about those.
19:14 We have to be watchful and careful about some
19:16 of those challenges and risks which are associated.
19:20 But at this stage, we would like to think
19:22 that these are still either in the early
19:25 or in the mid-cycle stages of the new cycle.
19:30 Got it.
19:31 One final question, really, and that's on consumption.
19:34 The volume growth has been absent now for a while.
19:38 The recent developments around commodity prices shooting up,
19:42 we hear cocoa is at multi-year highs.
19:44 Wheat is at three-week highs.
19:45 Palm oil has gone up, so on and so forth.
19:47 So the input costs for a lot of these companies
19:49 are starting or will probably start to pinch.
19:53 Hunt for value there or avoid it?
19:58 Hunt for value to some extent, but it's clearly
20:01 very difficult, Neeraj.
20:02 We just started nibbling at it, if at all.
20:05 It's not something that we are able to get our hands around
20:09 and probably develop a lot of confidence.
20:10 But like I said at some point in time
20:12 in the earlier part of the conversation,
20:15 we need to be watchful of some of those value
20:17 pockets which might develop, and we probably may not
20:19 have the necessary triggers.
20:22 I mean, we might have some expectations,
20:25 but the triggers may not have fully manifested.
20:27 So we are approaching it from that standpoint.
20:30 We're taking some baby steps.
20:31 So we would like to think that there
20:33 can be a couple of things which can change
20:35 the fortunes of the sector.
20:37 I hear you when you say that raw material prices have probably
20:40 once again started to go up, and that takes away
20:42 some part of the sheen from the sector once again.
20:47 It at least supported the companies
20:49 during the last 12, 18 months when volumes were actually
20:52 a little difficult to come by.
20:55 But the next leg probably of the story, if at all it unfolds,
20:58 is the way we probably think it might
21:00 would be from a recovery in volumes.
21:03 Maybe the margins may not necessarily
21:05 be as strong at that point in time.
21:06 But I think the sector valuations
21:09 do tend to get driven by what we see on the volume side
21:13 or on the revenue side.
21:14 And I think if that starts looking up,
21:17 it would be after a fairly decent gap.
21:19 And the triggers would probably range from, let's say,
21:22 a good monsoon coming through in the next sometime,
21:25 versus let's say what we've had in the last couple of years,
21:28 or probably some policy changes which
21:35 start to address some of the low to mid-end segments
21:38 of the income pyramid.
21:41 I think those are things which can probably
21:43 bring back or resuscitate the sector as such.
21:47 But we'll have to wait and watch.
21:48 So like I said, there are some triggers in mind.
21:50 But we don't have a choice but to wait
21:52 for them to manifest a little more strongly
21:55 before we move in a lot more confidently than we are doing.
21:58 Point well taken.
21:59 Tahir Badshah, always a pleasure talking to you
22:01 and get your insights.
22:02 Thanks so much.
22:02 We may not talk before that.
22:04 So in advance, have a good holy month of Ramadan and Eid
22:07 Mubarak.
22:08 But thanks for joining in today.
22:10 Thank you.
22:10 Same to you.
22:11 And viewers, thanks for tuning in to this edition
22:13 of The Talking Point.
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