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00:00Thanks for tuning in to Talking Point.
00:13I am your host, Neeraj Shah.
00:14It is the day after the Fed rate cut and the case for a chat amongst all things global
00:20that we will talk about to our guests also is local.
00:23What are the sectoral beneficiaries of rate cuts, if any, because rate cuts in India might
00:28have a delayed transmission relative to what's happening in the U.S.
00:32But independent of rate cuts, are banks better placed amongst the valuation concerns that
00:37surround a lot of other sectors?
00:39And while IT is sulking generally, is IT outperformance around the corner?
00:43In fact, in an era of an easing rate cycle, tech tends to come to the forefront.
00:50Let's talk about all of this and more with Neeraj Shah of Envision Capital.
00:53Neeraj, great having you.
00:54Thanks for taking the time out.
00:56Really good talking to you today on such an important day.
00:59How are you viewing the commentary from the Fed?
01:03The fact that they did 50 instead of 25, of course, so that's woven into my question.
01:08And the outlook for risk assets, given the fact that we are in an easing cycle, even
01:13if it's not predictable, 25, 25 basis points each.
01:16So, Neeraj, at the outset, I clearly believe that this rate cut honestly augurs well for
01:27risk assets or riskier assets or where the volatility could be high.
01:30So clearly, I think this is very positive for emerging markets.
01:35And within emerging markets, this obviously is even more positive for India, which essentially
01:40has been outperforming relatively and outperforming by a very big mile.
01:46So to that extent, I think it's very positive.
01:49It's positive for riskier assets, it's positive for emerging markets, it's positive for India.
01:54Specifically for India, why it's even more positive, because I think clearly over the
01:59last three years or in the post-COVID era, FIIs or FBIs have been relatively underweight
02:06and have not been able to catch up with the rising weights of India in emerging market
02:12indices.
02:13So to that extent, it's quite possible that with interest rates coming off, I think they
02:18could basically come back and increase their allocations to India.
02:22So I think on an aggregate basis, on the whole, this is directionally positive.
02:29Okay, Nilesh, I ask this question to now everybody, right?
02:35And it's pertinent because you can think of India as an expensive market in an idiosyncratic
02:41fashion because valuations could be maybe a bit stretched in a lot of cases, a lot of
02:46cases maybe not so as well.
02:47So if you were not necessarily an India dedicated portfolio management service, Nilesh, would
02:55you choose other markets over India, considering that India is growing well, but a lot of others
03:01are not, and maybe Japan is, maybe Spain is, but not a lot of other markets are.
03:05So would you choose India over other markets or other markets over India?
03:08Part one of my question is that.
03:10And part two, that if you were choosing India, would it be a low overweight with very specific
03:16buckets?
03:17Or would you continue to stay overweight India because growth will take care of valuations?
03:24Firstly, Nilesh, I would be overweight India.
03:27I think the narrative for India, I clearly believe is strongly more compelling compared
03:36to the other opportunities that one has in global equities or emerging market equities.
03:43Look at the large pockets.
03:44What are the large pockets?
03:46It's India, Brazil, China, Russia.
03:48Okay, I mean, just these four are the very big pockets.
03:51You could add Southeast Asia as the fifth pocket, which is a combination of Malaysia,
03:56Indonesia, Philippines, and that basket, and Vietnam maybe.
04:01Clearly, India right now offers growth.
04:05It offers stability, political stability.
04:10And it offers essentially multiple kinds of opportunities.
04:15You really don't see some of the other economies having this breadth of opportunities and a
04:21very large extent of policy certainty.
04:25These are some of the strong factors which go in favour of India.
04:30India is still at a very early stage.
04:31I mean, I think some of these other economies, they are already at $10,000 per capita or
04:37north of $10,000 per capita.
04:40In fact, the biggest risk out there is that will they face or are they already facing
04:46a middle income kind of a crisis where you get to $10,000 and then you basically struggle
04:52your way up.
04:53India is yet to get there.
04:55We are still at about whatever $2,500 or $3,000 per capita.
04:58So that gap between $3,000 and $10,000 is still massive.
05:03And it's going to take whatever 10, 12 years or maybe around that time to kind of get there.
05:08In that period, which is probably the next decade or so, India basically is well poised
05:15to deliver higher growth backed by strong policy response.
05:19I think these are some of the things which go in favour of India.
05:23Now, in India, what does one do?
05:25I probably think that the two most powerful themes are around digitization and urbanization.
05:31These are the two most powerful, most strongest or most structural opportunities.
05:35And therefore, one would look out for bottom up opportunities in these two very powerful
05:41themes from an India portfolio or India allocation point of view.
05:44And I think it calls for being seriously overweight on India.
05:48You could basically kind of differ on timings, whether it is now, whether it is three months
05:53later, or maybe six months later.
05:55But clearly, I think the case for India is getting more and more compelling and therefore
05:59calls for essentially higher allocations to India.
06:03Neeraj, could you exemplify why do you believe these are the two most powerful themes?
06:09So Neeraj, clearly, if we look at urbanization, I mean, we're still at about 30-35%, 65% still
06:17is in rural areas.
06:19There is a shift happening from farms to factories.
06:22And you're going to see more and more people come and live in some of the towns or the
06:27smaller cities or even some of the bigger cities of the country.
06:30And a lot of basically villages also improving.
06:33So clearly, there's a shift towards urbanization.
06:36You're seeing nuclearization of families.
06:39And you're basically seeing the dependency ratio essentially kind of get better, which
06:44means that you now instead of just having one person in the family, you're going to
06:48have increasingly two people in the family.
06:50So what all does this mean?
06:52It will mean more consumption, better homes, better appliances, better education, better
06:58healthcare, and some of the other kind of areas.
07:03So you're going to see all of these opportunities.
07:05So clearly, for the next 5-10 years, the demand for most of these pockets should be in kind
07:12of double digits.
07:13So that I clearly believe.
07:15So this whole journey from maybe 30-35% to 60-65% is probably going to take 10, 20, 30
07:21years.
07:23And you really, therefore, don't find a comparable opportunity globally.
07:26And this is the journey which all other underdeveloped or developing economies have gone through,
07:32especially our Asian peers.
07:34They've all gone through this whole spate of urbanization.
07:38So clearly believe that this is a very, very strong phenomena.
07:42The other strong phenomena is basically digitization.
07:45We are seeing how digitization is making inroads, especially over the last 10 years.
07:50The whole technology adoption, the rise of the millennials, the rise of the Gen Z and
07:55their comfort with using technology to trade, to save, to invest, to bank, to consume, to
08:02transact.
08:04And that's become a part of living now, increasingly becoming a part in a significantly bigger
08:10way.
08:10So clearly, therefore, businesses which are using technology essentially are emerging
08:16to be disruptors, challengers, and eventually champions.
08:21And this kind of a journey, which individual businesses are going to essentially travel
08:26or are going through right now, essentially can be very, very big winners and very big
08:31wealth creators.
08:32So clearly, these two pockets, in my view, are essentially the two most powerful themes
08:37and the two most powerful opportunities from an India standpoint.
08:41And I clearly believe that these are unparalleled opportunities from a global standpoint.
08:47Nilesh, can I urge you to try and tell us when you think about, I'm presuming, I mean,
08:54I'm not asking, I'm not seeing your specifying names, but I'm presuming when you're using,
08:58talking about companies using technology, for example, right?
09:01The Zomato, Swiggy, PB Fintech, etc., of the world come into the picture.
09:06Help us understand how you think about it, because, again, it's very easy to get caught
09:13in the argument that the stocks have rallied 4x, 5x from the recent one, one and a half
09:20year lows, and therefore they are baking in some of the optimism.
09:23So when you are thinking about these themes being multi-year themes, how do you think
09:27about it?
09:28I mean, do you think about Zomato as to what it will be, say, in 2030?
09:32Do you think that far out?
09:33And if so, how do you think about these businesses as to what they could be in 2030 and therefore
09:39the resultant stock price movements maybe?
09:42Sure, Neeraj.
09:42I think that's a very, very pertinent kind of a question.
09:46And honestly, it's worth a slightly even a longer debate.
09:50But basically, just to kind of summarize that any of these individual businesses, Neeraj,
09:57they are essentially addressing very large, underpenetrated kind of markets.
10:02They are essentially solving a problem.
10:06They're trying to kind of make life easier for consumers and deliver to them a solution
10:13in the most efficient and effective way.
10:15So I really think that's essentially the big, big premise.
10:19And because of this large opportunity and the fact that they have been able to develop
10:25a very strong technology stack and have been able to execute very well and have been able
10:31to kind of build scale at speed.
10:34I think building scale is one thing, but to be able to do it at speed and with excellence,
10:38I think is quite phenomenal.
10:40The fact that now most of these businesses have become a bit profitable, or there is
10:45a path to profitability, I think, therefore, to that extent, they've crossed that proof
10:50of concept stage.
10:51And just to kind of in a very kind of a short way, I probably think individual, each one
10:58of these businesses could potentially be 10 times larger, maybe in the next 10 years,
11:04which is that they either grow their revenues, or they grow their operating profits, or they
11:09grow their net income at probably a 25% CAGR over a 10-year horizon.
11:15It may not be individually every year, but over a 10-year cycle.
11:19And so potentially, basically, these businesses will be 10 times larger.
11:25And even if valuations were to correct by 50% in any of them, they could still potentially
11:34be 4 to 5 times bigger as in terms of their market capitalization over a 10-year time
11:40frame, which I think is fantastic.
11:42Because I think even over 10 years, the Nifty, what it delivers is probably about 10% to
11:4712% annualized return.
11:50So in that context, which probably is around 2 to 3 times in about 10 years, versus that
11:56these could potentially be 4 to 5 times, assuming that the businesses just end up being 10 times
12:02and not even more.
12:03So I think that's the way to really look at it, that don't just be focused on short-term
12:08valuations.
12:09But I think in the first place, be more focused on the long-term opportunity and how big these
12:14businesses could be in the next 10 years.
12:16Interesting thoughts there.
12:18By the way, viewers, some news flashes on your screen about IIFL and the credit rating
12:22cut that has come in and what it could do to the business.
12:25So that's a stock you want to keep on your mind as well.
12:295% lower as we speak, IFL Finance faces a downgrade risk on the gold loan ban.
12:34And as from Bloomberg coming in, they say that IFL Finance may cut more than 9,000 employees
12:40if the ban persists.
12:42Pertinent things.
12:45Now, the other end of the equation is if the ban indeed goes away, what happens to that?
12:49So remains to be seen.
12:50But these are pertinent things that the credit rating agency, whichever it is, has put out,
12:56and it's showing in the way the stock is doing.
13:00Let's try and talk about that end of the business and financials, Nilesh.
13:07The two more pertinent things to talk about, one, that if indeed global money is to come
13:13into emerging markets and India, and some part of it would be passive in nature, it
13:18might find its way into the highest weightages and therefore banks and BFSI comes into the
13:23picture.
13:23And from maybe a global investor's perspective, when they look top down and look at valuations
13:28which are not looking expensive, banks might feature in that list as well.
13:32Do banks feature in your list as a result of these arguments, plus maybe impending credit
13:38growth and what it could come in?
13:40Or are you at the other end of the street?
13:43Because I hear a lot of people saying that we don't want to do anything with banks because
13:46there are other pockets which are better to invest in because I'm not a global fund and
13:50I don't have a compulsion to necessarily marry myself to the index weightage.
13:56Yes, clearly, Nilesh, the street is divided on that.
14:00I've never seen this kind of, for want of a better word, polarization in terms of the
14:04thought process as far as banks and lenders go.
14:10So I think, yes, this is honestly very, very topical.
14:14And my views, I mean, in the first place, we own banks.
14:18We own all the four top private banks in the country.
14:23We own two of the mid-sized banks as well.
14:26So we actually own about six banks, plus a whole bunch of other financials.
14:31I mean, we own a home financer and then we own three or four online fintechs, if you
14:37may call them.
14:39So probably at least a couple of them.
14:41So I think all in all, I probably think we own about, almost about, we have eight to
14:4610 positions in the entire financial space, of which six are banks.
14:49So we clearly believe that, you know, I think, yes, the banks, the large banks have underperformed.
14:56The smaller banks, of course, have done relatively well, but the larger banks have underperformed
15:01because there has been significant over-ownership of them.
15:04I mean, if in the pre-COVID period, that was really the biggest allocation.
15:08And that obviously has changed quite meaningfully and dramatically in the post-COVID era, as
15:14essentially the ownership challenge has come.
15:17But clearly believe that, honestly, at least from a near-term perspective, expect banks
15:21to essentially catch up with some of the underperformance that they have demonstrated.
15:27And purely because I clearly believe that a slightly benign liquidity environment helps
15:33banks.
15:34It essentially helps them to raise liabilities better.
15:36It helps them to essentially, therefore, earn better spreads.
15:40So I clearly believe that this is not the time to ignore banks.
15:44This is the time to be constructive.
15:46This is the time to be constructive on banks, especially some of the private banks.
15:52And so clearly see more increasing allocation towards that.
15:55Number one.
15:56Number two, Neeraj, I think global investors have been essentially under-allocating to
16:02India in the last three to four years, especially in the post-COVID period.
16:05And if they have to put to work large capital, clearly I wouldn't be surprised if the large
16:10banks become amongst the first port of calls.
16:14So these are some of the reasons, apart from, of course, the fact that they will continue
16:17to demonstrate steady performance, are some of the reasons why we believe that banks are
16:22well-poised to perform here on.
16:26Okay.
16:29The argument, Nilesh, that some people make about how banks are not the only source of
16:37of borrowing right now for corporates because they have other sources and therefore the
16:44credit growth of banks need not necessarily be commensurate to the growth of CapEx in
16:51the country and therefore they may underperform.
16:54Is that a valid argument or are there chinks in that argument?
16:59No, I probably think there are chinks in that argument, Neeraj, because clearly CapEx is
17:04not going to be the only driver of credit in India.
17:09There are two other pockets, which essentially is the working capital requirements of businesses.
17:15No matter how big you are or how small you are, you need working capital.
17:19You are not just into the business of building capacity.
17:22I mean, after building the capacity, you've got to run a business.
17:25You've got to manage working capital and higher growth, higher economic growth, higher business
17:29growth calls for more working capital.
17:33And clearly the banks are in an advantage position to provide working capital requirements
17:38and take care of the working capital requirements.
17:40So, clearly, I think that's one area.
17:42And two is even on the retail side, even now, a very large part of the demand is being met
17:48by the banks, even on the retail side.
17:50I mean, look at the retail portfolio, the size of the retail portfolios of banks versus
17:54the size of the retail portfolios of the other players, the non-bank players or maybe even
18:01of the fintech.
18:02So, I clearly don't think, Neeraj, it's an either or.
18:06I think you buy banks to essentially kind of provide stability to your portfolio.
18:12And you probably buy specialized non-bank lenders or some of the other fintechs to essentially
18:19for either higher growth or to basically focus on opportunities which banks are not
18:25well-placed to do, which could be online savings, online investments, online insurance, the
18:32world of payments.
18:33I think these are very, very interesting hyper growth opportunities, which I think banks
18:38are not relatively well-placed.
18:40So, I think you own banks for the credit requirements of the economy and for the stability to your
18:44portfolio and you own some of these bottom-up online fintech players or specialized lenders
18:50to take care of, you know, not just the credit opportunity, but many other opportunities
18:55like protection, payments and investments.
18:59Got it.
18:59Okay, okay.
19:01Nilesh, the other aspect is IT and that is befuddling me and befuddling a lot of people,
19:08right?
19:08And yesterday's comments from TCS at an analyst conference or Accenture,
19:14supposedly saying in an internal memo to people that we will do these promotions after
19:20six months and people saying, oh, that points towards stress.
19:23I'm just trying to understand, is it just a very difficult environment to predict even
19:28for companies because the commentary looks slightly chalk and cheese in a matter of six
19:34months or and how do you think about it, therefore?
19:41Okay, let's start with that question first.
19:44So, Nilesh, I think clearly, you know, when we look at IT and, you know, I think we need
19:50to really look at, say, the top four or five players and then we look at the next bunch of
19:55whatever 20, 30, 40, 50 companies which are there.
19:58The top five companies, Nilesh, even over the last decade have struggled to grow north of 10%.
20:06Okay.
20:06I think if you were to kind of look at, if you were to basically take away, you know,
20:11the depreciation of the currency or the strength of the dollar, I think in dollar terms, the
20:16growth would probably have been at best mid single digit.
20:19Okay.
20:21And then if you were to further take out acquisitions, the organic growth would still
20:26be probably just about that 5% odd level or maybe even lower.
20:31So, I clearly believe that even over the last 10 years, these big companies have probably
20:36at best grown at about 10%.
20:38Obviously, they have been fantastic capital allocators.
20:42They have essentially undertaken year-on-year buybacks, which have shrunk the equity,
20:47improved ROE and contributed a bit to the earnings per share growth.
20:52So, I think if you're looking out for those, you know, those 10%, 12% kind of returns,
20:58maybe that's a good place to be in.
21:01But, and I think going forward, the risk of automation, the risk of AI being increasingly
21:10adopted by the Fortune 500 companies are the kind of huge hundreds of billions of dollars
21:16of investments, which whatever the magic seven are kind of undertaking.
21:23Clearly, what it implies is that the headwinds for the large Indian IT services companies
21:31or the big IT services companies are only going to magnify further.
21:36So, I think one needs to kind of look at them in this backdrop.
21:39I mean, they continue to be capital efficient.
21:41They can score high on governance and they're fantastic capital allocators.
21:44But I think they will fall short of growth.
21:47So, to that extent, I think one has to be very careful about allocating to them.
21:52Having said that, but there are very interesting opportunities in the tier two, tier three,
21:59tier four space, where there are specialized IT services companies, which are doing engineering,
22:05R&D, which are focused maybe just on the BFSI space, have interesting products, platforms
22:10on that side.
22:13That's really the space to kind of really be focused on for higher growth.
22:19And I think probably that's where investors ought to be rather than the very obvious top
22:24four or five names.
22:25The top four or five names would, I think, be nice short-term opportunities when the
22:31valuations are slightly below their long-term averages, you buy into them and play for that
22:35valuation arbitrage or p arbitrage.
22:37But I think beyond that, they clearly don't seem to be the best of growth bastions.
22:43Okay.
22:43So, well, it's a surprise, not a surprise really, but it's an interesting point, viewers,
22:47that here we have a smart money manager talking about focusing on the mid-cap and the small-cap
22:52and all the mid-size IT companies as opposed to large caps, whereas the common narrative
22:58is that large caps are way cheaper than the mid-caps.
23:01But maybe there is a reason for that to happen, I guess, and I think Nilesh kind of briefly
23:06enumerated it.
23:07I just wanted to mark that in today's session, mid-caps and small-caps have come off now
23:11from the highs of the day, so bear that in mind.
23:13But Nilesh, sticking to this point, what businesses, I mean, are these in the ER&D
23:19space?
23:19Are these product companies or are these pure play IT services companies?
23:23I'm not asking for stock recommendations, but just trying to understand which are these
23:27businesses which are doing good work.
23:30They may not be good stocks to buy because they may be overvalued, what have you.
23:33Just trying to understand this.
23:34Which space do they belong in?
23:36Even if you can't take names, what buckets do they fit in?
23:39So, they fit in all the three buckets that you alluded to, Neeraj.
23:44I think the R&D space is very interesting, the engineering R&D space, where we have a
23:50bunch of high-class companies which are delivering solutions around engineering, R&D, product
23:57development, to a bunch of automotive companies, to aerospace companies, mobility, high-tech,
24:06manufacturing, that space.
24:08They're not those conventional IT services companies which are essentially deploying
24:16enterprise-wide solutions for the big companies, but they are providing some very, very specialized
24:24engineering and R&D-oriented solutions to some of these very high-growth sectors.
24:28I think that's one.
24:30The second, essentially, are product companies.
24:33There are a bunch of product companies which have either core banking solutions or some
24:38of the other solutions around the core banking solution targeted towards the BFSI space,
24:44the global BFSI space.
24:46So, I think that's a very interesting kind of a space or an opportunity.
24:52The third in services, Neeraj, I think it's still a bit early days, but look out for companies
24:57which are developing very strong AI practices which they can basically then execute and
25:06implement for their clients.
25:10Mind you that in the next 10 years, the spending around AI is going to be huge.
25:15Obviously, we won't have sufficient AI creators, but we are definitely going to have several
25:24companies which build strong expertise in deploying AI solutions for global companies
25:30and for global businesses.
25:32I think that could be a very, very interesting opportunity.
25:35And fourth, essentially, is maybe some very selective SaaS companies, which there's a
25:40strong overlap with product companies, which beyond BFSI, but probably around travel,
25:45hospitality, and maybe some of the other areas.
25:47So, these are the kind of four buckets that I think investors should increasingly be focused
25:53upon.
25:54Got it.
25:55Neeraj, it's such a pleasure talking to you, but that longer conversation, you gave us
25:59a very nice succinct answer, but the longer conversation on some of the consumer tech
26:04companies awaits us.
26:05We'll do that very, very shortly.
26:06Thanks for taking the time out and joining us today, though.
26:09Looking forward to that opportunity, Neeraj.
26:11Thank you so much.
26:12The pleasure was ours.
26:12And viewers, thanks for tuning in to this edition of The Talking Point.