How do you think the so-called global trade war will impact Indian businesses and markets?
It is not good. Since we’ve grown post World War II, we’ve talked of a globalised world with the US as the central engine. And I think the US is looking back at its own history of its contribution to the world when it seeks protectionism. Globalisation allowed a lot of Asian and frontier economies like Taiwan, South Korea, and Japan to emerge from the ruins of World War II. Regarding India, we never took globalisation very seriously until the late 90s. But, even then we are still such a huge domestic market and we are more inward-looking. So, protectionism will affect us at the margin and some of our businesses. But, we will be able to weather it better than a lot of other Asian countries.
Are Indian markets underestimating the risks from a global trade war?
They could be because it has helped all of us. Globalisation has raised the standard of living, ensured peace and prosperity and if you believe that there is a final reversal in globalisation and that we are going to move to protectionism environment; we tried that in the last 1920s and it ended up in disaster called the Great Depression, and World War II. Markets hope that there are enough rules in place in the WTO and free-trade agreements, which will put in place checks and balance. We hope that the Trumponomics is a passing phenomenon but clearly it is something that will keep you up at night.
With markets down, do you find valuations comforting and are you buying stocks?
They are getting comfortable. But a lot of these golden tier stocks have not corrected such as FMCG, retail, and trading at 52-week highs. There are a group of 20-25 A-group stocks that have made a post-Budget high. Many stocks have also hit new lows but those are cyclical companies, and exposure to global trade. The market is not necessarily given up on equities because in that case everything would have fallen. What am I buying? I went into this period will very low amounts of cash. Historically, I have kept at least 10-15 per cent cash, but this time was far lower. So, there’s not much room to buy something new, unless I selling something old. Some bit of rebalancing is going on. But I see some sectors emerging with value.
Which are these pockets?
There is a big boom going on in the airline industry, which looks very attractive. My friends tell me the roads construction is seeing a lot of order inflows with infrastructure in focus. Retail is also showing very strong numbers. Heavy commercial vehicles is doing well. So, there are enough choices. I am still hopeful of the market and I still believe buying the dips is better than selling the rallies.
Which are the stocks that can grow at a decent pace, offering compounding returns for next 5-10 years?
There is a quadrant of stocks that we like such as companies involved in cyber security because of the huge threat that various entities face, and it’s a business with immediate return on investment. The cyber security space is under-owned and under penetrated. The business and equity prices should do well. Some cyber companies have delivered 40 per cent net margins, which is a sign of a business with pricing power and exciting growth prospects. However, there aren’t many stocks in this space to choose from.
We also like airline stocks. Airlines have moved from a ‘one ticket one price’ to an ‘A la carte’ pricing. So, any fuel price hike would now be dissipated as they charge flyers separate for fuel surcharge, food, luggage, blanket, etc. Air travel is booming in India. This entire sector probably will get re-rated. The business is also not too much involved with a threat like automobiles which face a threat from electric (EV) and autonomous vehicles (AV), and the capacity that we have at our airports, especially metros like Mumbai and Delhi, are severely restricted, and those will be mitigated by higher prices of tickets. So, the sector looks attractive from a 3-5 year perspective.
We do like the QSR business as it will benefit from shift from unorganised to organised, increasing number of women working outside the house, desire for place with air-conditioning and Wi-Fi, hygienic environment, value for meal, etc. So, we like plays that offer in-room in-restaurant dining as opposed to take-out. The industry is very nascent so we can see many years of compounded growth in these stocks. With GST (goods and services tax), organised players will experience better times.
The last sector we like is affordable housing, and real estate has been beaten down. While there is not much traction on the ground of people buying real estate, commercial is showing an uptick and I think affordable housing segment is starting to pick up. It’s a good time for a long term investor to buy real estate stocks, but the large and most liquid names with strong brand rather than smaller players.
There are new sectors like pathology labs, dairy, defence, etc emerging. Can investors look at some of these?
There are asset management (AMC) and insurance companies that will do well. But these are still young and recently listed businesses. We will have to watch them for a while. But, the four I mentioned are quickly reaching maturity stage. For a sharp analyst, there is still opportunity in life insurance and AMC.
The banking space has seen a lot of negative news flows, especially for PSBs and private corporate banks. Would you be considering some of these given the sharp price fall?
If you read Uday Kotak’s interview in one of the forums, he said that private banks’ market share will rise from 25 per cent levels to 50 per cent levels. I tend to agree with his hypothesis. There needs to be serious rethinking on the ownership and management in public sector banks. Until that happens, only a very eagle-eyed investor could find a bargain. As a broad rule I don’t see great advances in the public sector banks. My sense is that for most investors its best avoided.
How do you see things unfold in the next 12-15 months, in the run-up to state and general elections?
Elections always provide a lot of uncertainty in the markets. Broadly, my experience of last 30 years, I’m not being cynical though, governments come and go, but India grows. Because of our demographics, positioning vis-à-vis the world as a domestic economy and big internal markets, we will do fine unless if we get some form of an extreme left government which I don’t see happening. Irrespective of the governments, India has grown in excess of six per cent. My personal feeling is that I wouldn’t let political fear stop me from investing.
Earnings have disappointed in the past few years. For FY19 too, earnings are estimated to grow 18-20 per cent. Do you see signs of earnings picking up and is private capex picking up?
From the analysts friends I talk to, they are seeing some green-shoots of recovery in terms of capital expenditure, earnings growth and are all confident. It is somewhat ironical that when earnings weren’t there the markets were going up, and when earnings are coming, markets are going down. That’s the way of markets typically. I think, there will be an uptick in corporate and personal tax collections, GST will also recover though the first signs are not buoyant. So, earnings should be good in FY19 and FY20. At some point, the fall in markets will stop and it will have to take into account better earnings. The fear that earnings will not come is misplaced.
There have been some issues with GST collections and tax leakages, indicating that it hasn’t played out as desired. Even for sectors such as home improvement, tiles, etc, the expected gains seem to be eluding?
The anecdotal evidence I have from talking to people who run large business houses, all have welcomed GST with open arms. They feel there is an adjustment period as this is such a huge change, the biggest tax change in over 50 years of Independent India, so it does take time for the benefits to trickle down. But, for organised businesses, it is a big win. I think collections will become buoyant after a period of time and give a huge boost to the exchequer’s revenue. I’m still a believer in the GST story.
Technology is changing businesses faster than ever. When you invest in companies how do you factor in for such threats?
That’s a real threat. Trump imposes tariffs because he believes that will increase employment for the US. But, I think he is rooted in the 1960s, when an investment in a steel plant would have created a certain number of jobs. The Wall Street Journal pointed out that there is a mill in Austria producing half a million tonnes of steel wire a year with just 14 people. So, the idea that these tariffs can create employment is wrong because of automation and artificial intelligence, which is driving businesses. You want to find businesses that are relatively immune to such challenges. For example, auto companies are not immune to EVs and AVs, but steel is already automated to a large extent. There are so many businesses that are threatened by the changes such as oil. The big advantage that emerging markets had of almost a limitless source of cheap labour no longer exists because technology has overtaken that. So, you find sectors that are perhaps immune to that such as QSRs, airlines, real estate, etc.
Can pharma companies bounce back?
I think so. There could be value emerging, as many of them are important businesses. My sense is that they would be doing better.
Over the next 5-10 years, any interesting trends to watch out for?
In the next 10 years, we will see a huge shift to driverless cars and that would has a profound impact on many sectors such as auto, infrastructure, auto ancillary, insurance, etc. Auto and steel have been the bedrock of industrialisation that contributes to GDP and all that is going to change. Cars would be made of composite material and plastics rather than steel, there won’t be any need for oil, drivers, as they would be electrically powered running through a smart APP. So, that industry is going to through a plethora of opportunities, both on the short side and the long side. And you want to be sure that you want to be on the right side of history.
Look at the photography market. The two dominant companies KODAK and Polaroid, both went bust when the biggest boom is taking place in the photography industry. So, technology is a big threat to multiple businesses. As Andy Grove said only the paranoid survive, so you want the company CEOs to be paranoid about the big changes that are coming. I would say, may be for the next decade, we are seeing an end to the globalised world to a more protectionist world. But, we are also seeing the beginning of the end of the oil age, which is hard to grapple with as oil has been central to world economy for 60-70 years.