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00:00Thanks for tuning in to Talking Point. I'm your host, Neeraj Shah. The case for a chat
00:15today on a day, the day following a really strong move in the market. Would the DII flows,
00:22which have effectively absorbed all of the FI selling for April, albeit for the last
00:26so many months, will they continue to drive the markets higher? We've seen some strength
00:32in the recent releases of some of the real estate ancillaries, particularly cement. Is
00:39that a bucket that you want to look at more actively? And is there some dichotomy between
00:45what select band of IT companies are saying versus what IT service companies are saying
00:50in terms of minutiae? We'll try and get into that as well. But a lot of macro and micro
00:55conversations with Unmesh Sharma, Executive Vice President and Head of Institutional Equities at
00:59HDFC, joins us right now on the show. Unmesh, so good having you. Thanks for taking the time out.
01:02Thank you, Neeraj. Thanks for having me. Constructive or skittish about prospects
01:09of risk assets, both global and local in nature? Yeah, so that's I think the trillion dollar
01:15question right now. The cross current, there is too much crosswind going on right now. Okay,
01:22so let's start from the top. If you look at the way in which the fight against inflation
01:28has happened globally, and I'll try to put it into an Indian context, because not all
01:32of it is what happens in the US is really 100% relevant for us. The biggest issue that
01:38we are facing right now is the fact that the fight against inflation quite expectedly has
01:44been longer than you think. If you go back to the 1970s, this is exactly what happened
01:51at that time as well. You keep thinking that you are winning the victory. So if you remember,
01:55even this, in this round, there was this whole phase about it being transitory. And then there
02:00was a pivot backwards. And I think this word pivot has been used since if I remember correctly,
02:04since August 22. I remember there was an article I had written where we had talked about the fact,
02:10is there a pivot and they said, so that didn't happen. And then there was one earlier this year,
02:16maybe December last year. So what happened was that at that point in time, the market thought
02:20that there are going to be seven rate cuts, while the Fed said it was three. And the data
02:25this morning is that the bond market believes that there will be zero or one rate cut this year. And
02:30I don't know if you know this, but in the data, if you really go deep, you will find that there
02:35is a set of investors who is actually hedging for even a rate hike. Now, that is a huge move. But
02:43the market's not fallen. Okay, because I think the liquidity has been sloshing around and we
02:47can go into specifically in India, what is happening. But at the same point in time,
02:50the risk reward on risk assets globally. And within that, I would say emerging markets and
02:56then India being a part of that. Definitely, the risk reward is not in favor of a very big
03:01up move from here. So yeah, that answers the first part. Yeah. The second part, therefore,
03:07is the market behavior over the last nine months, being able to climb almost every wall of worry,
03:17and in some part, as you said, maybe due to domestic flows, because FIs have been rank net
03:24sellers, seems to suggest that if this were to continue, there is a bit of a safety net for
03:30markets. Earnings plus liquidity is a potent combination for climbing over some walls of
03:34worries. While the risk reward is not in favor, can India do slightly different? I would love for
03:39you to bring about the intellect that you have around what this global peace and liquidity means
03:45for Indian markets. Yeah. So, you know, you're actually, there are a lot of layers in the
03:50question itself. So I'll try to address all of those. Okay. The first is that globally while
03:57liquidity is sloshing around, you can see from the net selling in India itself, that there is some
04:05risk off. In fact, if you look at the last week's data, there is a lot of flow, which is actually
04:10happening into China. Now this makes two points. One is that, does that mean that people are going
04:16away from risk? The answer is probably not. Why would you move from India to China? China,
04:19probably the risk is higher at this moment in time, given all that's going on over there. But
04:23what's happened is that there is some value bias, which is coming in, because I don't know if you've
04:29seen, but across sectors, the valuations of a lot of very good quality Chinese companies is actually
04:34in single digits now, versus India where the whole market itself is over 20. So what's happening is
04:38that there is some reallocation of portfolio happening. Now, so that's at the FPI level and
04:43which is why that connects with your second point as to why FPIs are selling. So there is a reason
04:48for that to happen. So it's not necessarily complete risk off, but at the same point, because
04:52there is enough liquidity, but this. Now then you come to the second point, which is something that
04:56to a large extent is unprecedented. Now this is where you actually compare it to what happened
05:01in Hong Kong, China in 2004, 5, 6, 7, 8. Now what's happened is that this huge wave of
05:07financialization of savings and in people participating in the market has started and
05:14which is what I think you can see from the SIP flows. Now there are a lot of layers in that,
05:18but what's actually effectively happened is that all the bouts of selling, which have come from
05:23the FPIs, has just been completely absorbed by the domestic market. Now here, what happens is that
05:29this is a little scary in a sense. And if you look at the aggregate data over, I think the
05:34FPI stake in the India Inc was peaked at around 23% and it's down 5, 6%. Now, you know, maybe I'm
05:43too old school, but earlier if someone had told me that 5% of India Inc is going to be sold by
05:47foreigners and nothing will happen, answer, the market's actually gone up. Okay. So, you know,
05:53it is also somewhere where we, people like us also have to take a little bit of humble pie,
05:56because I actually thought the market will fall this year and that's been the call. And wherever
06:00I go, people keep asking me this. You thought that it's going to fall, but what's happening now? But
06:06now what I think is happening is that if you compare it with the example of what happened
06:11in Hong Kong China, this can go on for a bit. The only reason why this would stop, and that is the
06:17second part of, you know, I'm preempting what you will then say, okay, how does this stop is,
06:22one is that as of right now, there seems to be not much interest in looking at aggregate
06:27valuations. So, if company is delivering earnings, then keep buying. The counter corollary which
06:35supports this thesis is the fact that if you see in, even in this earning season, and this is
06:40happening globally, not just in India, but globally, you see a small miss and the stocks
06:44fall dramatically, which kind of supports my thesis that a lot of this participation can go
06:49away if there is disappointment. And the second is that there has to be something else to buy.
06:52Because this liquidity is real. And people have now kind of made money in the market,
06:58or at least not lost money in the market now for a long period of time. So,
07:01unless something as a real estate or working capital or people start deploying money elsewhere,
07:05I think this will continue for a bit longer. Now, in this scenario, it's a little tough.
07:11And honestly, that's exactly what's happened to a lot of market participants, including us,
07:15thinking that, you know, at some stage, it will stop, it has not stopped. And I think
07:19this will continue for a bit. Yeah, and difficult to kind of call an end to it. Because as you said,
07:24it's not something that too many of us have seen in the past, this kind of liquidity participation
07:30from the domestics in a meaningful way, direct PMS, AIF, mutual funds, and the passive flow,
07:37right, pension funds, etc. Just one point before we take that break. It's very curious that the
07:44market while it's punishing some of the companies which are missing, is not shy of disproportionately
07:50rewarding expensive stocks, if they are delivering. Trent a case in point yesterday, KPIT a case in
07:56point yesterday. And there are countless other examples. I mean, it's just a dichotomous market,
08:01punishment meted out to even weaker hands, even if the valuations are attractive, but
08:05complete blowout buying into some of the businesses which are delivering growth.
08:10So, look, that's the nature of the market. I think given the fact that it's becoming
08:15incrementally more, if I may call it domestic and retail, this tends to happen for short periods of
08:24time. Now, short could mean a year, could mean two years. What that means is that what is happening
08:29really is that not having any reason to sell becomes reason to buy the position. And you know,
08:38there is this mindset that if it's not disappointing, why should I, you know, why fix if it ain't broke,
08:43you know, that type of mentality. So, I think that's what's happening. But at some point in
08:48time, this catches up. And you know, for people like us who are constructing model portfolios,
08:53our research team, we quite struggle with this kind of scenario. But yeah, that's the nature of
09:00the beast at this point in time. Till there is disappointment, we can't see selling happening in
09:04the market. You made this very valid point about concerns on the anvil and therefore build a
09:08portfolio which can kind of suit the mindset that you bring into the table when you're building that
09:12portfolio, right? You and your team. What is the model portfolio like currently? So, okay, so you
09:19start from the top. I think the biggest change that we made to our model portfolio, I think is
09:27slightly different approaches. We never go over 5% cash. But we used to be three. So it's going to
09:33five. Okay. Okay. So we have 5% cash now, which and then what we've done is that we've added weight
09:41to the utilities. So there is the invert has come in the PG invert has come in, for example. Now,
09:49more than just the fundamentals of that, more importantly, is that it's a little bit of
09:54protection for your portfolio. So power grid, power grid, invert, NTPC, these are the types
10:00of names that we've added. All of these are overweights now. So without going into specific
10:06details, broadly, what we are doing is that almost 8 to 10% is like a rock solid kind of bulletproof
10:12kind of portfolio. In the rest, what's happened is that we had a very, very good run in our model
10:19portfolio for three years, taking outsize bets, playing, if I may call it domestic economy and
10:25value. But what's happened is that, you know, value has one issue is that if your call is right,
10:33then value is no longer value. And that's what's happened to our portfolio now. So what has
10:39happened is a lot of convergence has happened. And if you see, when we started to adjust everything
10:44together, we came to the point where everything was just getting closer to the index. And so I
10:51give you an example, we had a huge underweight position on levers, which was quite unpopular,
10:55a lot of pushback from clients, but it really worked. And we had a huge overweight on, on ITC,
11:01that stock is on phenomenal. And I think we were one of the few fans of that when it was in the
11:05hundreds, in you know, somewhere between 100 200. And we kept adding weight to that. Now,
11:10when it came together, what's happened now is that you don't know what to do, because it's worked.
11:15And that is where the difficulty starts. Now, what has happened is that we've, I think that
11:20the model portfolio now is in a position where for the larger companies, we have,
11:27and it's not like we have a large cap bias in the portfolio, but we've naturally gravitated
11:31towards the larger caps, because of the fact that that's where the value is relatively better. Now,
11:36this is also linked to my earlier point, which is that the participation has happened more from the
11:41domestics, which if you look at the way in which ownership of stocks used to be back in 2000,
11:48let's say, six till even 20 was dominated by the FBI. So there was natural bias towards consumers
11:56and large cap banks. But that kind of reversed over the last four, but we are kind of now
12:01gravitating back towards that. So we have a very huge bias for that. A lot of things like consumer
12:08discretionary, which are just overpriced, we've just taken them off. Even premiumization beneficiaries
12:13you've taken? Yeah. So premiumization, technically, you know, Maruti also is a
12:17premiumization beneficiary in a sense, right? So, and so is Hindustan Lever as well. So they have
12:22come closer to the benchmark. But what we've done is a lot, some of the discretionary have gone off.
12:26So we are playing discretionary now indirectly. So we have real estate in there, which is not in
12:30the, so why in real estate has come in, even though it's not, there is no real estate in the,
12:35in the NFT. And then there is, you know, things like media and all this. So we've added a few
12:41of these names in there to play that kind of theme. So what's end up happening is that the
12:46large caps are close to the benchmark and the expensive small caps have gone and got replaced
12:52by a non-benchmark names. Okay. That's broadly how it's got constructed now. Okay. Real estate is
12:58interesting. And the reason I find it interesting is because the pre-sales continue to be higher,
13:02despite the fact that the valuations may be a bit of a question. But the question that I have is
13:07for the ancillaries. So a lot of people have said that plywood or cement or whatever it is,
13:14they have not quite gained because inventory was there and that was getting sold. And now
13:18inventory is at whatever month lows, different statistics. And now that the newer construction
13:23is getting done, there will be a demand for ancillaries coming through, for cement coming
13:28through in a big way, et cetera, infrastructure plus real estate. Is that a valid argument? Yeah.
13:32So look, we've been through this cycle, very positive on the domestic capex cycle,
13:39and I would say equally excited about both the infra and the real estate. I would think at this
13:45point in time, given that there is elections coming up, so there has been a little bit of
13:48slowdown on that side. We are a little bit more positive on the real estate cycle, so as to speak.
13:52And the best way to play that is not just to own the real estate names, because these are all
13:56normally very niche urban place. We are talking about the whole cycle. And in that, apart from
14:03having some cement names, I think we have JK Lakshmi in there, but we also have names like
14:08Stylum, for example. So we are playing it through that. And in fact, we have a team which actually
14:12looks at building materials together, not just that. At some stage, once the post-election lull
14:18is kind of gone and we can expect to see some kind of pickup on the infrasight, again, maybe
14:23the weight will shift towards cement a little bit more. But as of right now, on this entire
14:28space, we are quite constructive. Got it. What about newer themes? I mean, you know,
14:34this conversation with the government seems to suggest that rooftop solar, for example,
14:40right up there. Defence pens will probably stay right up there. Suddenly, out of nowhere,
14:45railways came into being for three years on a trot and gave some superb earning surprises as well.
14:50What about some of these new or recently developed themes which might have a slightly
14:54longer runway? Power, for example, you know, this hydropower and the wind power, etc. And
15:00those ancillaries too have given some strong guidances. What do you like here?
15:03Yeah. So look, what's happened is that, okay, so one big challenge with all the four themes
15:10that you mentioned, in fact, one common theme is that it is very difficult to play these themes.
15:14The number of stocks which are genuinely high liquidity, I see also I work for institutional
15:20equities. So one big benchmark that we have internally, it's a rule of thumb, it's not really
15:27a benchmark, is that a meaningful fund house should be able to build a meaningful position
15:32in the stock. So, you know, unlike our retail research team, which has a lot of these under
15:39coverage, we don't actually have that. And a very simple rule of, I don't know, as you know,
15:46this is one fascinating thing earlier, small caps, mid caps used to be 2000 crores, 3000 crores,
15:504000 crores. And now, you know, at 15,000 crores, you really is where you really start operating
15:56because the size of the funds are so much. And in fact, some of the new IPOs as well,
16:00you know, that's the conversation we have with fund managers that how is this going to matter to
16:04me? The amount of work that you have to do to assess a company of 2000 crores versus 20 is the
16:10same. And if it's not going to be, if I'm not able to put it as half or 1% of my portfolio,
16:15where the portfolio has become 25,000 crores now, how do you operate? So honestly, on all of these
16:20themes, we have not gone deep. What I can make an anecdotal comment is a lot of these themes
16:25have run ahead of themselves. Okay. And basis some of the coverage stocks that we have,
16:31because what's happened is that low liquidity stocks also invariably end up doing that the
16:35pendulum swings too far. And in some of these, it may have happened. So I think we'll wait for
16:40some of these to become investable and see what happens. Okay. One final question, and that is on
16:46the dichotomy between IT services and ER&D. If you dwell on both of these spaces, because it's
16:53the same for the last maybe 12 to 18 months or 24 months. But even at the end of the quarter,
16:57when I speak to the ER&D guys, today we are speaking to KPIT before you came, or LTTS last
17:03week, the outlook for growth is a lot more confident and promising as opposed to IT services.
17:09Now, do you believe IT services are reaching a bit of a bottoming out phase or not quite part
17:16one? And part two, despite that discretionary spending being not evident, could ER&D still do
17:24well, despite the higher valuations? Okay. So slightly tough one. So I'll give you a slightly
17:34more nuanced answer. We have about 90 seconds. Okay. So the Indian IT services companies will
17:41figure it out. But we think that they are hitting an air pocket in the short term.
17:45Okay. So they will come out of this. But I think in the short term, there is a bit of a challenge
17:50there. So relative valuation is the only game in town. We used to have ER&D. But we think we're
17:57not comfortable with the value. A lot of these names we had under coverage and in the model
18:00portfolio, they're off it now. Okay, sorry, I'm told we have some more time. If you can take some
18:05time and tell me, why is it that ER&D doesn't? Is it the valuation argument? Yeah, it is. Yeah.
18:11Unmesh, I'm just trying to think. KPIT is talking of maybe delivering 18 to 20% growth for the next
18:19five to seven years, purely by auto, other adjacencies notwithstanding. LTTS is saying
18:24that we'll do 10% organic, and there is an inorganic move going to happen. Eventually,
18:29that will be whatever 12, 13, 14, 15, 16%. So growth is there. So why then take them off?
18:36Yeah. So, okay, so the model portfolio is also very concentrated. We want to play it that way.
18:41That doesn't mean we have no ad ratings in there. But a lot of our, if you see our long term three
18:46to four year kind of long term Tata, LXC type names, which were there, which we rode all the
18:50way. In fact, some of these, we made our name in the market, pushing some of these ER&D players.
18:55I think at this point in time, we are getting to the point where we are a bit less emotional
18:58about them. And I think that on balance, are they great companies? Should you stay invested?
19:03Answer is yes. But hold recommendations don't make it to the model portfolio.
19:07Got it, got it, got it. Don't sell, but don't do anything. That is not going to
19:10get to the model portfolio. So the benchmark is high. I get your point. Last question,
19:14what is the most active sell? It may not, it'll obviously not be a part of the model portfolio,
19:18but where is it that you're the most negative on?
19:28I think on the metals with the exception of Tata Steel, we have a huge underweight position.
19:34And a lot of it has to do with the imponderables of what is going to happen in China.
19:39Until the time we see a little bit more clarity there, I think, because you're asking for one.
19:45That and some of the smaller NBFCs. In fact, even Bajaj Finance, we have a huge underweight,
19:51but that could correct and we could still, we still like it, the business. But on the margin
19:57at the NBFC, looking at the way the asset cycle will play out over the next two years,
20:01and the imponderables in China, I think the metals names with the exception of Tata Steel,
20:06we think is other two big underweights for us. Well, this was lovely having you in the studios
20:12and look forward to have this kind of conversation more often. Just so good to do this in person,
20:16but thank you for your time today. Thank you, Neeraj. Thanks for having me.
20:18The pleasure was ours and viewers, thanks for tuning into this edition of The Talking Point.
20:41Transcribed by https://otter.ai