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00:00Thanks so much for tuning in to Talking Point. I'm your host, Neeraj Shah. The case for a
00:16chat with our guest today, has the large cap pivot begun already? Would the festive cheer
00:23aid consumption, which certainly needs a bit of a kicker, and would the pharma focus in
00:30India continue considering a slew of developments that have happened already within that space,
00:35including the Biosecure Act in the US and more? Let's talk about all of this and more
00:41with our guest, Ashish Gupta of Access AMC, joins us right now on the show. Ashish, great
00:45having you. Thanks for taking the time out. Neeraj here, I hope all is well.
00:48Yes. Hi, Neeraj. Thanks for having me.
00:51The pleasure is entirely ours. Ashish, I'm asking you a bit of a here and now question,
00:55and then we move on to the longer term picture. But the sudden spurt of momentum that India got
01:00yesterday, and maybe some of the other markets too, is this preempting some rate easing cycles
01:07ahead of them actually happening? Or are there other technical reasons for the same?
01:13So I think my personal belief is that, yeah, definitely the outlook of the market because of
01:22the expected rate cut is positive. But what we saw yesterday and particularly in the last couple
01:28of hours of trading is more to do with the interlinkages the cash market has with the
01:35derivatives market, right? And we have spoken about this earlier that the frenzy that is there
01:45on index options around expiry date in particular can drive volatility in the market. So I think we
01:53have to be careful about that and not read too much into the volatility that happens in the last
01:59couple of hours, particularly on expiry dates. Got it. Okay. The near term reasons notwithstanding,
02:09Ashish, the fact remains that we are a market which on certain counts of valuation could be
02:16considered expensive. Though the bulls tell me that in ERAJ, look at the 10-year valuations,
02:22look at the growth that we are putting in. Why are we so egregiously expensive? We are not. So I
02:27would love to understand from you, Ashish, how do you think of the valuations in the current context?
02:32Sure. So I think there's no dispute that if we look at valuation from a simplistic lens of just,
02:40let's say, a PE multiple, right? So if you look at the large cap indices, they are trading at about
02:4621-22 times earnings. The historic average has been around 16 times. So on that count,
02:52it is expensive. I think the other important statistic to note there is that if you look at
03:00the broader market, if you look at the mid cap and small cap indices, there the multiples are
03:06even higher at about 27-28 times. The good thing, and where I will agree with the bulls, is that
03:14these high multiples have been well supported by earnings over the past three years in particular.
03:21So both in absolute terms as well as relative to what we are seeing in international markets,
03:28we have had a 23-24% earnings stagger over the past three years. I think what we need to be
03:37careful about is that what is going to be the earnings growth going forward. And if you see
03:43the recently reported June quarter earnings, the earnings growth had moderated to about 8%.
03:50And if I look at consensus forecast earnings for FY25, that is averaging at about 13-14%.
04:00So I think that is why it's careful to kind of take these multiples into cognizance that
04:08the earnings growth is also slowing. And with the slowing earnings growth,
04:14one should not expect multiples to keep expanding. And if that does not happen,
04:20it certainly means that market returns will be more moderate this year compared to what we have
04:25seen in the last couple of years, notwithstanding the fact that global dates are easing.
04:32Got it. Okay. Just wondering, Ashish, the first quarter aberration,
04:41I mean, it may spoil the picture, yes, for FY25. But I mean, most companies have said that
04:48the election-related issues that happen in quarter one will get over. So does that spoil the party
04:55quite significantly from an earnings outlook perspective?
04:59Yeah. So I think you're right. First quarter was a bit of an aberration and therefore it was only
05:07about 8%. But even if I look at FY25 and even the forecast growth for FY26, that is broadly around
05:1815% only. And actually the mid-cap and small-cap are relatively faster growth is expected in those
05:29pockets of the market. Because if you see the large caps, they are dominated by companies in
05:35the IT services sector, a few conglomerates, the banking sector, FMCG. And these companies actually
05:45are not growing that fast. The banking sector, we know, has seen some slowdown in loan growth.
05:54Merchants have also peaked. So the fact is that in the last three years, we were coming off a
05:59very low base of earnings. And from this high base of earnings and profitability,
06:06the growth in bottom line will be more correlated to the top line growth that India is witnessing.
06:14So if the nominal GDP growth is going to be about 10-11%, then I think a 15% corporate
06:22profitability growth is reasonable to expect. Okay. Now, viewers, I want to draw your attention
06:31to this chart. It also assumes some significance simply because on the back of a note that Ashish
06:36had written some time back, where he spoke about the kind of flows that have happened
06:41and the kind of selling that has happened as well from the promoter entities too. But this
06:45is an ISEC research note of a recent note. And it's based on data of top 1,000 stocks by market
06:52cap and clearly shows that the flows from the MF side have been bordering majorly on the large cap
06:59end versus the mid caps and small caps, not quite so much for FPIs wherein there are outflows until
07:05recently on the large cap end. And then this crux here, right, promoter entities, other foreign
07:10investors, all have sold out of large, mid and small. Ashish, I would love to understand from
07:17the time that you first wrote that piece in a much more broader fashion, of course, but until now,
07:22does that give you a sense of things being different going ahead? Could large caps now
07:31be the central focus if indeed global flows were to strengthen and let's say the market
07:39stay stable or marginal correction as well? Could SMIDS correct or relatively underperform
07:44the large caps going ahead? So I think technically where the market is positioned and actually if you
07:53rightly highlighted that mutual fund flows on the large cap side have picked up and
07:58you have had relatively more stable flows on the mid and small cap side. But I think
08:06really one big challenge which I referred to earlier is that the large cap earnings growth
08:13has been relatively lackluster. And so I think unless there's a huge disappointment in mid and
08:21small cap earnings, I think there will be attractive pockets of opportunity in that space.
08:29It, of course, comes with a fairly high risk because earnings expectations are high
08:37and which is reflected in the multiple. So we spoke about the fact that companies are trading
08:43on average in that space at about 27, 28 times. In fact, we had done another analysis that
08:50companies where earnings growth expectation is more than 20%, the average PE multiple is nearly
08:5734 times. So if the company disappoints in earnings today because earnings growth is
09:06forecasted to be more than 20%, it's trading at more than 30 times. And if for whatever reason
09:13there's a miss in earnings or cut in earnings forecast, say 20% comes to 10 or 15%, you will
09:21see a double whammy, not just the EPS being cut, but the multiple will drop from 30 plus time to
09:30around 20 times. So I think that's where we need to be careful in the mid and small cap space. So
09:38one has to be much more focused on companies where you have the belief that
09:45earnings growth is going to be there and it is going to be there for the medium term.
09:52Well noted. So where do you believe the largest pools of profit exist, Ashish, let's say over the
09:58next three years, because in some pockets, like you also probably partly referred to and correct
10:04me if I'm wrong, that maybe in some pockets valuations may be expensive, but profit pools
10:08may be very, very large over the next three to five years, and therefore maybe a better promise
10:12of earnings growth. So where do you think the largest pools of profit exist and where within
10:18the pools of profit relative to the existing valuations, is there the largest degree of
10:23comfort for a large investor like you? So actually, to be frank, the market does not really
10:32have too many undiscovered pockets. We have had like seven, eight years of consistently positive
10:39returns. So there is very few undiscovered pockets. I think the good news is that the market
10:50earnings and profit pools have become very broad based, right? So if we kind of go back
10:58five, seven years ago, the profit pools were primarily sitting in a couple of areas,
11:04the consumer sector, the retail space, or really the financial sector. And this has
11:13gone broad based over the past four years. So today you see various parts of the economy,
11:21whether it is investment related, manufacturing related, even pockets like real estate,
11:32besides consumer and financial. So the profits are very well distributed and literally
11:42every segment of the market is today in terms of profitability. And now I'm not saying earnings
11:48growth, but at least in terms of profitability near to its peak in its earning cycle. So I think
11:58that is the good news. I think what we need to focus on teams that will be long lasting
12:06given the multiples that are there. One thing that we have done incrementally more positive on
12:13is consumption because over the past three years, because of the relatively slow recovery
12:22post COVID in that space, and the fact that other pockets of the market had
12:29come back from very low profitability, this part of the market had got relatively ignored.
12:36So I'm not saying that there was a distress valuation, but had relatively underperformed.
12:42And here we are seeing a couple of opportunities. One, that there has been a cyclical pickup
12:50in mass consumption. So some early signs are visible. So you would have heard the commentary
12:55now that for many companies, the consumption is outpacing urban consumption. You are seeing
13:04some segments now like two wheelers consistently doing well. And in fact,
13:08now two wheeler sales are outpacing the growth in passenger vehicle sales.
13:14And the second big important driver in this space is really the benefit of
13:23increasing penetration and changing consumption patterns. So you look at segments like retailing,
13:30you look at what is being consumed. So the consumption basket, how it is changing for people
13:38and even how these goods and services are being consumed. So that has been a
13:47big driver of growth. And I think that presents attractive opportunities that will be
13:54a long lasting. So I think that is one segment we are incrementally more positive on.
14:00Okay. Sorry. Can I just ask for some detail there? So two subsets of my next question, Ashish.
14:06One of them is this uptick that we've seen in rural growth. And some people say, oh, don't
14:12classify urban rural because most of urban companies also have a rural presence and vice versa. So I
14:18don't know if you bifurcate that. So that's part one of my question. Part two of my question is
14:21what you just mentioned, that there are some interesting consumption trends emerging, which
14:26could be long lasting. Now, is this only present in retail or are they present in other forms of
14:31consumption too? Would love to pick your brains on that. No, frankly, it is present in every form
14:37of consumption, right? So for example, if you look at the four wheeler sector, particularly,
14:44so we had five, six years ago that the four wheeler being dominated by compact car sales,
14:53right? So 60% plus two thirds of the sale used to be compact cars. Today, if you see four wheeler
15:00sales, more than 60% is SUVs. So companies that got that shift right, have seen a multifold
15:12increase in their stock prices compared to relatively companies that are still more focused
15:18on the compact car segment. So I think this is present in virtually every segment of consumption
15:26and not just say a few pockets of it. And sorry Neeraj, I forgot your first question.
15:35My first question was on the basic aspect of rural growth because data seems to suggest that rural
15:42is picking up. So is that data applicable for trying to make a decision on FMCG or staple names
15:50or not really? I think it definitely is. And again, with FMCG,
16:00again, we have to be careful about what are the changing consumption patterns because
16:06for many companies, it's actually not just about the cyclical slowdown that had happened,
16:13but it is also about what are the goods and services and how they are being consumed today.
16:21So today you have seen the growth of D2C brand in many categories coming in and that's actually
16:31taken the shine away from companies that just relied on their distribution network, for example.
16:38So you are actually seeing differential growth rates in segments where D2C brands
16:47are meaningful versus in segment where there are no D2C brand. So FMCG companies in pocket where
16:55there's no D2C brand, you have seen consistently better volume growth. So I think we have to be
17:02careful in classifying every slowdown as just being because of cyclical reasons because there
17:09are enough changing patterns that are driving consumption as well. Got it. Okay. So just one
17:19last question on consumption, Ashish, and that is until about six months ago, the theme most
17:26favoured was the beneficiaries of the K-shaped consumption, and particularly at the premium
17:35urban end, right, because those opportunities were cited to be multi-year, maybe decadal
17:42opportunities as India's per capita income grows. I'm just trying to understand, there may be a
17:48slowdown currently or maybe out of fashion to talk about them currently, but are these indeed
17:53decadal opportunities? And would you be interested in investing in some of these? And if so,
17:59what are these? I mean, are they falling under indirect forms of urban consumption
18:07or are there direct good manufacturers? Any insights here?
18:12I think I still believe that those opportunities are there and I still believe that they are
18:18decadal. And even as you are seeing some slowdown in urban consumption, in these pockets, growth
18:28continues to be fairly strong. One segment, and I know it might not be typically seen as
18:37consumption, but I even see real estate as a big beneficiary of this trend, right. And we believe
18:47that we are on a strong real estate cycle and you will continue to see growth come in. I think one
19:00of the reasons why market has kind of lost some of the focus on this probably is that the valuation
19:09overall had moved up more materially in this segment and there is a catch-up as broader
19:17consumption is picking up. But I think the trend in the top end and the premiumization trend that
19:26we are seeing is certainly here to stay. Okay. Ashish, now I'm moving tracks
19:33and trying to understand if tech and IT services becomes a part. And the reason I ask this amongst
19:42everything else is that the last seven or eight days, a clutch of sell-side brokerage houses
19:50have come out and said that they are now starting to turn constructive on IT services at the margin.
19:55Maybe even BFSI is picking up. November uncertainty on the US is probably a couple of months out.
20:02At least we will know which direction it is and therefore that event is out of the way as well.
20:07Are you constructive IT services? Yes or no? And why or why not?
20:15We are actually still relatively underweight IT services. So we believe that yes,
20:24there is some visibility in terms of bottoming out of earnings and earnings growth,
20:29given the fact that there are rate cuts, there is commentary particularly in BFSI sector,
20:38global BFSI companies, that their IT spending is actually going to go up and there's been some
20:44pent-up demand there. But even kind of putting all that in, we really struggle to see most of
20:54the IT companies being able to deliver double-digit earnings growth. If I look at multiples of IT
21:00services companies, so despite the fact that many of them had underperformed, the multiples for IT
21:11companies were still about one and a half standard deviation higher than their historic trading
21:17multiples. So I think that has kind of kept us deformed towards IT services companies.
21:25Within the sector, we believe again there are some companies that have better earnings potential
21:35that are focused in a few verticals or products that are doing better. So we are overweight those.
21:43But on a sectoral basis, we continue to be underweight IT services.
21:49The same applies to ER&D and other forms of tech businesses as well or is it only IT services?
21:57I think ER&D certainly has much stronger growth outlook. I think companies
22:04have consistently delivered better growth and outlook is certainly
22:09a better there than I think the larger cap IT services.
22:15Okay, so ER&D better, but IT services itself, access AMC is not that constructive on.
22:22Ashish, one more follow-up really to an earlier answer that you gave, last couple of questions.
22:28You mentioned about longer-term trends and how four-wheelers and SUVs in particular are coming
22:33to the fore. I'm trying to talk about the near term now. We're seeing this dichotomy in sales
22:42between four-wheelers and two-wheelers. It's after a really long time, probably post-2019
22:48that I'm seeing festive season discounts on offer in the four-wheeler companies. Now,
22:55are therefore four-wheelers a bit circumspect as an investment candidate and conversely,
23:00could two-wheelers continue to do well? I'm just trying to think how you think about it.
23:06See, I believe the discounting cycle that we are seeing is really reflecting the inventory cycle.
23:15So, there was a big build-up in inventory on the four-wheelers space. Last quarter,
23:23the retail sales on the four-wheeler disappointed and there was a big inventory build-up and that's
23:29kind of led to the discounting that has happened. I think once the inventory clears up,
23:37you will see the discounts also fade away. I think the interesting question,
23:43though, still remains that over the medium term between, I think, the two-wheelers and
23:50the four-wheeler space where one would be, I think we have positions across both the
24:02segments and the way we are playing the auto sector is not really just looking at we want to
24:09be overweight two-wheelers or four-wheelers, but we are more focused on the companies within this
24:15space because there are clearly trends visible on which companies are gaining market share,
24:21which companies have a better product cycle that is coming through and we believe that will really
24:29determine the outperformance. Okay. Ashish, one last thing over the course of the next six months
24:40until Pitcher becomes clear because I think it's becoming difficult to take maybe year-long,
24:44two-year calls, but over the course of the next six months or nine months as far as visibility
24:48allows you, would you prefer within the subset that you're investing in, would you prefer
24:56outward global-facing businesses or would you prefer India inward-looking businesses,
25:04considering that some of the Indian domestic-oriented businesses, maybe the valuations
25:09could be higher, defence slash railway slash others and maybe some other pockets too. So,
25:14where is it that your preference lies and why? No, I think that part of thought process is very
25:21clear that it will be inward-looking businesses. I think the best parameter to look at this is oil
25:30prices. Whatever we are seeing happening in terms of geopolitical events and that has not really
25:42improved over the last few months, you still see the fact that oil prices continue to come down
25:49and that's really reflecting what is happening to global demand. So, I think with the challenges
25:59China is facing and their economic growth outlook is not improving, even as there is expectation
26:09that US state cuts will come in and will help avoid a recession in the US, the outlook for
26:18global growth is really not great. So, I think our preference is that there is much greater
26:25visibility on domestic growth stories that we can have and the risk-to-earnings here
26:34will certainly be lower. Got it. Okay. Lovely talking to you, Ashish Gupta. Thank you so much
26:40for taking the time out and being with us. Thank you. My pleasure. That's the view from Axis AMC
26:45and with that, it's a wrap on this leg of Talking Point. Thanks so much for tuning in.