'Bullish On Power Sector For At Least 3 Years' : Naveen Chandramohan On The Talking Point
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00:00Hello and welcome. You are watching Talking Point. It is a volatile Friday on the street.
00:14The markets are osculating between gains and losses, but it seems like a little bit of
00:19a base could be made for the day. Well, you are now watching Talking Point and I am Samina
00:24Nalwala and of course, we are now going to be talking to our guest for the day, Naveen
00:28Chandramohan, founder of ITIS Capital, joins in. Hi Naveen, very good morning. Thank you
00:33very much for joining us. We are talking to you on a day when the markets have been tumultuous.
00:38The last few days have been rough to say the least. We are off about a thousand points
00:42from our record highs last week. But when you quantify that into percentage, we are
00:46only 4% lower than our recent highs made on the Nifty. What I want to understand from
00:52you is with the rising geopolitical stress, how much of that is already in the price or
00:58do you anticipate another 5 to 10% correction from these levels? So, very good morning to
01:05you and all your viewers. Thank you so much for having me. So, as you said, I think we
01:09are off the highs, but within that there is a lot of sector rotation that is currently
01:14happening as we speak. So, I think what we are seeing for the first time is while pretty
01:23much most fund managers, including myself, are positioned more so from the risk reward,
01:30not sacrificing liquidity, the small caps continue to do well. And one of the reasons
01:35for that is from a structural perspective, India is in a position not seen after 15 years
01:42where ROE as an industry is expanding. So, I think while we can talk about corrections
01:50being part of the course from here over the next 6 to 12 months, I think risk management
01:55and positioning becomes extremely important. So, what do I mean by risk management is how
02:00do you ensure downside is protected during every such fall? Because even today when your
02:07markets are off the highs, you still have power doing well, oil and gas doing well,
02:13you still have consumer durables doing well, auto two-wheeler doing well. So, end of the
02:17day, it's not like every sector is going through volatility, you still have markets
02:23doing well, as a result of which, which is what I am talking about, sector rotation going
02:28to be increasingly important from here.
02:30I mean, you are right. I mean, at the end of the day, returns are a function of the
02:34markets and the only thing we can really do is manage the risk and that's pretty much
02:40critical. You know, you talked about sector rotation, but I want to talk about market
02:44cap rotation. From mid last year towards the end of last year, most people were propagating
02:51that the value remains in the large cap space and that's where portfolio biases should be.
02:56But at the first sign of stress, which we have seen in the last 4 to 5 days, large caps
03:00that had began a rally have already gotten sold into. Do you feel like a sustainable
03:06recovery in large cap names is a far cry, even though they do have a better risk reward
03:12at this stage?
03:13Absolutely. So, I think that's a great question that you ask and it's very important to classify
03:19large caps, right, because India, large caps is one of the most diversified sectors in
03:25the world with a bias towards banks. Now, if you look at our portfolio, we've been underweight
03:31banks for a good part of 4 to 5 quarters and I continue to maintain that stance. So, for
03:38us, large caps does not mean bank heavy. Though valuation-wise it looks cheap and
03:44reasonable, I still worry about a bit more on the ROA expansion side and the quality
03:50of growth may have a bit more of 2 to 3 quarters to see, especially from an unsecure lending
03:56perspective. Where I'm talking about from a large cap perspective is a mix across pharma,
04:02non-lending financials predominantly dominated by insurance, power, oil and gas. These are
04:08the places where I see sustainability of growth and that's where we would position ourselves
04:13towards. So, a broad basing of just moving from small cap to large cap without giving
04:18context of how you want to position yourself, I'm not sure is a blanket statement that I
04:24would like to make here.
04:27You know, Naveen, correct me if I'm wrong, but you mentioned oil and gas. Let's start
04:31with Reliance Industries. The last four days, it's been a key contributor to the Nifty's
04:37downside. There is a report out by Ambit that says the growth triggers, its new energy have
04:43been delayed. There is delays on monetization, there is delays across the board through its
04:49different verticals as well. How do you feel about that? Do you feel like a lot of the
04:54good news for RIL is in the price and the stock hasn't done much even though it has
04:59superior earnings in that sense? That was an RIL question and also beyond RIL, the oil
05:05and gas pack seems to be so, so sensitive to what's happening to crude prices. Do you
05:10feel that stocks like ONGC and Oil India could continue to gain, but OMCs may once again
05:16go back on the sell side?
05:18Sure. So, first, coming to Reliance, unfortunately, Reliance, underneath the balance sheet are
05:25multiple businesses that is just not oil and gas and energy dependent, right? So, you
05:31still have the coal energy business, which I think should do well, and you still have
05:36the telecom business where you will have to take a view on when the demerger is going
05:41to happen. Maybe it's going to be five to seven quarters away, but that continues to
05:46be a very good cash cow because telecom as a sector is in an up cycle. The issue from
05:52Reliance's perspective, what you're talking about where the share price has not done much
05:57comes from the retail business. So, end of the day, for you to generate shareholder IRR,
06:03you need ROEs to accrete and retail business has caused a drag on the ROEs for a good part
06:10of two and a half, three years. So, unless and until you see the retail business picking
06:15up, you are going to have a drag from a Reliance perspective. So, you have two businesses which
06:21are actually doing well from a cash flow accretive business. Both of these underlying businesses
06:25are growing their cash flows at almost 16 and a half percent, but Reliance retail is
06:31causing a drag on the ROE. So, cumulatively, while you see a console level growth of 12%,
06:37which for Reliance is higher than me, there is a drag on one of the core businesses. So,
06:43that drag has to actually get overcome for you to have an IRR uptake from here.
06:51So, it's not going to be purely energy dependent is what I'm saying.
06:55Right. Let's talk about the pharma pack and I know you're overweight on that because you
07:00indicated that to me yesterday, but the overall pharma and healthcare pack seems to be or more
07:05or less fully priced in for growth opportunities that these sectors offer. I mean, Nifty Pharma
07:10Index trades as a P of 38. How do you feel? Do you feel there's value in the pharma and
07:15healthcare pack and if yes, any specific pockets where you're adding incremental capital to?
07:21So, for us, when you look at pharma and you take a slightly zoomed out perspective, right,
07:27from 2015 to 2022, you've been in a pharma down cycle specifically driven by US generics.
07:35You had not price inflation, but the rate of change of price deflation come down predominantly
07:43because a lot of the US manufacturers have filed for bankruptcy as US cost of capital has gone up.
07:48So, the macro is in favor for volume growth to happen for US facing businesses and many of these
07:55businesses have also diversified their product portfolio with an Indian facing ROE or creative
08:00businesses. So, for us, our portfolio is across generics, it's across businesses with an India
08:08facing branded portfolio and CDM and we still see a lot of value in these three pockets. So,
08:16predominantly from a large cap perspective, we have businesses which have diversified US and
08:23India portfolio and in the mid and small cap space, our portfolio positioning is more so towards CDMO
08:29pockets. As you rightly point out that there is been some level of re-rating in pharma from,
08:36let's call it a year back. Many of these businesses used to trade at roughly 40%
08:41of the PE that we just spoke about, but as long as growth comes in, but more importantly,
08:47margin expansion happens because some of these businesses that I'm talking about that net cash
08:52to market cap is roughly at 6.5% and the last time I saw this was around 2014-15. So, what you're
09:00going to see in the next two years is an increased M&A pickup because the balance sheets are clean,
09:06cash appreciation is real and you're going to see M&A pickup. So, from here,
09:10the quality of M&A in terms of capital allocation is going to decide future returns. So,
09:15that's where bottom-up is going to be important purely from a capital allocation perspective,
09:21but we continue to be bullish, yes. Across global and local players,
09:24your top two or three bets in the sector, Navin at the current juncture and the current valuations
09:30and of course, also ahead of earnings season in the pharma banks. So, I mean,
09:39we have roughly seven names in terms of pharma amounting to almost 20% of our portfolio.
09:47So, like I said, we are bullish across Indian branded generics, there we have a portfolio
09:54exposure in a company called Eris Life Sciences and in terms of a recovery story
10:00within the CDMO bank, we like Biramal Pharm. Right. Navin, you know, when you indicated to
10:07me that you're one of the few PMS advisors or fund managers who actually hasn't been too bullish on
10:15banks, I had to stand up and take notice. Credit growth for the banking space has been in the range
10:21of 13.7 to 13.6% over the last two months and that makes me believe that the earnings downgrade
10:27from here is rather limited. But there is a potential for an upside only because there are
10:32large capacities to lend to as well. Do you agree? Do you feel like it's a matter of time and you
10:37may turn constructive of banks or would you avoid banks for now at least? No, I agree with the entire
10:45hypothesis that you laid out. I think the credit growth is likely to be strong from here.
10:52What I am not confident of is this credit. So, in the previous cycle between, let's call it pre-21,
10:59our financial exposure coming predominantly from banks was on average 40% of our portfolio. So,
11:05it's not like we have not been overweight banks in the past. Where, why we've dropped our banking
11:11exposure to as low as 3.5% today is this credit growth is not according to me translating into
11:18ROA expansion. See, one of the reasons if you take a step back and we look at Indian banking at a
11:25price to book of 2 to 2.1 being cheap versus global benchmarks is because our ROAs are roughly
11:332.2 times that of global benchmarks. Now, in an environment where I don't see ROA expansion
11:42in an accretive way, what that means is my ROE which I was used to at 18 to 20% drops to 16%.
11:50And this ROE, unless and until I see it go back to an 18% number, I don't know the price to book
11:57at 2.1 is cheap or not. From a 10-year perspective, it does look cheap and hence there is value like
12:02you rightly pointed out, but my incremental IRR has to come from an ROA expansion which is not
12:09where I'm confident of. So, I'm not saying I'm a bearish family, but from an opportunity cost
12:14perspective, I still see there are better pockets of growth. It doesn't mean we will not look at
12:18banks, but unless and until I see an environment where I know ROA can agree, I'm not going to go
12:24overweight banks. You know, what are you doing with power stocks? There's so much changing for
12:29the power sector. I mean, in some ways, it's going through a tactical or tectonic shift, right,
12:35with renewable energy generation, transmission being prioritized over traditional thermal energy,
12:40shorter gestation period in some ways, better earnings, reduced exposure to CROI's
12:45coal price. With the likes of a Pravag, they're expecting nearly 2 trillion rupees in capital
12:50expenditures. So, very ambitious plans as well and while momentum could have taken a hit,
12:55fundamentals are still strong. Your top bets in the power pack and would you play power
13:03significantly between now and the next six months and keep adding to any sort of,
13:08adding your allocations if there's any weakness? Sure. So, if I take a trio view, right, one sector
13:15that I would like to stick my neck out and say that we are bullish on is power. No matter how
13:22we look at it, if India has to transition from a slightly more services economy to a manufacturing
13:28economy, the backbone of that has to be power. At the same time, if we have to increase our GDP,
13:35that has to transition with a power capex expansion. And more importantly, if we believe
13:41the data center story is real and globally, we are going to be talking from a mobile first economy
13:47into an AI led economy, there again, you need power. So, no matter whether I look at compute,
13:52whether I look at manufacturing or a data center led economy, the backbone of all of this is power,
13:58which we have been underinvested for a good part of 10 years,
14:03globally, right? And India, one of the reasons we are in a bedrock position is we never said
14:08no to thermal, right? So, I think what you're going to see is growth in thermal annualizing
14:13at around 12 to 14 percent, growth in renewables, including nuclear, going much higher at 18 to 24
14:20percent. But the problem is today, renewable growth does not mean our way expansion. So,
14:26what I would like to play within power is a portfolio mix of a company which has the capability
14:32of doing thermal and renewable alongside. So, our largest exposure there is in a PSU with NDPC. So,
14:39that is where I would continue to look at. I would not preferably look at a renewables only
14:46player because you might get incredible top line growth, but I'm not sure that translates into an
14:51ROE expansion. So, I think I would want to balance out the two. And as you rightly nailed it in terms
14:59of power capex does not incrementally translate into demand accretion unless and until you have
15:05the transmission layers sorted out. So, the transmission layer legs also has room to expand.
15:11Now, I wish we could chat longer, but one last question before I have to wrap up this
15:16conversation. Three to four stocks across sectors, across market cap that is on your watch list,
15:23and you would use the next, say, five to 10 percent correction to increase allocation to
15:29these stocks. So, more than names, I think I'll lay out the sectors, right? And the way we think
15:36about this, mostly we go after market leaders in any of these sectors. So, I spoke about non-lending
15:42financials. There we continue to be overweight insurance. Insurance continues to be one of
15:48that. In our top five, you would see the stock actually figure in. We continue to like pharma.
15:55There again, we are incremental buyers if there is a dip. Then third is auto two-wheeler.
16:05There again, we own the market leader. They continue to execute. And fourth here,
16:13I spoke to you about power. So, these are the four sectors we continue to be bullish on,
16:18and that's where we would continue to add risk at every given opportunity.
16:22Right. Exciting. Thank you, Naveen. So good talking to you and getting a perspective from
16:26you. Your fund, of course, has beaten the index in the last one year and over a longer period of
16:30time as well. And that, of course, means that everything you say our viewers will
16:34be taking very seriously. Thank you, Naveen. Have a great day and we'll see you soon.
16:41Well, the big, big story over the last few days has been about how FIs have been rebalancing
16:47their portfolios and moving allocations or incremental flows into the Chinese and Hong
16:53Kong stock markets. Those markets, for good reason, have actually done phenomenally well
16:57over the last few days. China, for example, is up 30 percent in the last 13 trading days,
17:02while China as well has had a phenomenal run over the last few days. Well, while you're an
17:07investor who's swindling your thumbs and getting disappointed and worried about the fact that
17:12Indian markets are selling off on back of this money moving to China, do not be too disappointed
17:16because as an Indian sitting in India, you can actually diversify your portfolio to make
17:22allocations to Chinese stocks. Now, let's take you through how you can do it. There are a few ways
17:26in which an Indian investor can actually invest in stocks outside a country. First up, you can
17:32either do it through mutual funds or you can do it through ETFs. I'm going to start by taking you
17:37through which are the ETFs and which are the China-focused funds that you could invest in.
17:43Let's start with Edelweiss Greater China Fund. Now, this is a fund that focuses largely and has
17:49a major chunk of its investments made in China, Hong Kong and Taiwan, which is more popularly
17:55known as Greater China. This is a fund of funds. So what this fund does is it doesn't invest
17:59directly into these markets, but it invests in the J.P. Morgan Greater China Fund. So it's a
18:04fund of fund vehicle, but the Edelweiss Greater China Fund is investing in the J.P. Morgan Fund.
18:10The returns of this one have been good. In the last one month, it's done about 3%.
18:14Three-month return is about 13.5%. And one-year return is largely what the Nifty has done with
18:19a return of over 20% for China and Hong Kong at a time when those markets have been underperforming.
18:25The other way to invest in China and Hong Kong is to do it through ETFs. This is a very popular
18:31mechanism. It's a low-cost instrument. And the way you do it is that you buy into the Nippon
18:36India ETF Hansing Bees. ETF tracks the Hong Kong index pretty much with the usual tracking error,
18:44so not too much in terms of what Hong Kong does. This is a passive fund, which means that
18:49if the Hong Kong index goes up, the Nippon ETF, which invests in this Hong Kong
18:54bees also goes up. The returns of this one have been pretty solid and in line with what the
18:58Hansing itself has done. In one year, it's done returns of 22%. In three months, it's done about
19:023 odd percent. So, if you only want to play Hong Kong, which is an ancillary of China,
19:06this and through a low-cost liquid instrument, this one becomes a good way to do it.
19:11The other one to do is the Mirai Asset NYSE FANG plus ETF. Now, what this is, it invests in the
19:21FANG stocks, which is Facebook and amongst others, the stocks that are listed on the Nasdaq. But what
19:27it also does is it has some exposure to Chinese tech companies. So, companies like Alibaba and
19:33Tencent are present in the NYSE FANG mutual fund. So, again, this may not just be China-focused,
19:40but a small allocation of this fund does make investments in the Chinese and Hong Kong stocks.
19:45The returns have been great, but that's not driven by the performance of Chinese stocks.
19:48It's been driven by how well the Nasdaq has performed this year. The stock, the index,
19:53of course, is up about 54%. What you also want to keep in mind is while these are some of the
19:58funds that are available and ETFs that are available to invest in the Chinese and Hong
20:03Kong stocks, a few other ways to do so is to do this through foreign brokerages. So,
20:07if you have a zeroed account and you have a good understanding of Chinese and Hong Kong stocks,
20:11you can simply register on these platforms and go out and buy specific companies that are listed
20:17in China and Hong Kong. The other way to do this is you can also buy into the New York
20:22Stock Exchange. A couple of the Chinese larger tech companies are listed on the New York Stock
20:27Exchange on the Nasdaq and the NYSE. So, that's largely how you could make hay while the Chinese
20:34markets are witnessing or experiencing or set to experience an outperformance from here on.
20:40But a couple of things you want to keep in mind. These funds are high risk. Remember,
20:43there is no home bias here. So, obviously, what happens over there, you are slightly
20:49disconnected with. So, it might be tough to get a pulse of the market since you are not
20:53living in China and Hong Kong. You should consider this as a diversification instrument. So,
20:58don't go out there and bet the house on these funds, but off your portfolio, talk to your
21:02advisor, maybe a 5% to 8% allocation to Chinese and Hong Kong stocks could be a good idea for now.
21:09So, those are a few ways of how you can take advantage of the rally that's expected across
21:13Chinese and Hong Kong stocks. With that, completely out of time. Thank you for watching.