The last time we spoke, Nifty was at 5800; today at 18,000, a lot has changed. We are still in the midst of a Covid pandemic. While we’ve done well since the pandemic lows over the past two odd-numbered months, flows to India have weakened a bit and some flows have shifted to China. Are there any non-fundamental reasons to believe that there will be a strong bid for Indian stocks for the foreseeable future?
The answer is clearly yes. Before looking to the future, let’s look back again and go back to the period of March 2011 as a benchmark. Since then, the S&P has outperformed the Nifty in local currency terms and in adjusted dollar terms, even more. The Nikkei had probably surprised people by then after going through a big earthquake, 10 years later it has risen by about 3X. So, yes, the market has done really well over the last decade, but most of that performance only came in three years 2014, 2017, then 2021 is one of them. So compared to the expectations of about a decade ago, I would say the Indian market has done very well, but it has probably exceeded the expectations I had at the time.
This is not a cause for consternation. This is a good thing because we are allocating capital to these markets today and when we focus on the next 10 years that means there are more returns in store for the Indian market. Now why am I talking about multi-year horizons? A) Because this is the horizon on which our firm invests, but also B) it is impossible to predict when these years of great performance will come.
We could have another year in 2022 that would be just as good if not better than this year. Or it could be a year down from 2021. But the point is, the Indian market is the best seen over a multi-year horizon. So it is difficult to choose the year or the quarter and to plan the entry and exit of the Indian market, according to the inflows and outflows from China or for some other reason is difficult.
But on a long-term horizon, it’s very exciting because purchasing power, investment power increases, market participation increases and almost 200 companies will be listed in the next two to three years and these will be important registrations and a large capital. bearings. In total, they could add between $ 300 billion and $ 500 billion in market capitalization to the Indian market. Thus, market capitalization will greatly exceed $ 4 trillion in just a few years. These are some of the non-basic reasons to be very excited.
Do you think it might be safe to lower yield expectations for India and maybe say the best in the short term might be behind us with the performance we’ve had over the past 18 months? ?
I would probably say yes. If we look at how the market has behaved not only since the March lows, but let’s say June, July, August of last year, there were several points along the way where this could have been said about the market as a whole and in certain sectors as a whole such as IT services, hospital services, parts of the automotive supply chain or the names of consumers. But they continue to grow. Now we believe that what is most important to your prospect of return is the time horizon and also the price you pay. So yes, it’s worth going back to it but if we are not long something today, what we have to ask is if we already have it, would it be open to sell it today? hui? If the answer is yes, then I shouldn’t buy. But if the answer is no, then it’s the same as buying today and it’s the exercise we do with each of our names every day.
In the Indian context, how to map risk versus volatility? Is there a reason to look for places to hide?
So far I have answered yes to all questions, but the answer to this one is “no”. If you are afraid of the short term horizon, I think so, you might want to hide some of your exposure and dramatically reduce your exposure, but the opportunities in India are vast and deep. There are many opportunities for relative and absolute outperformance, even at these levels, and there are many areas where we can say it is possible.
Since you think you know there are still plenty of opportunities, let’s talk about IT first. Would you say the best is behind us or does it still have legs to go?
We have been positioned in this sector since the start of last year and it has worked well for us. I think the easy gains from reclassifications have probably happened in several companies. We’ve seen an upward slide along the PE curve for every company in this space and what hasn’t really changed is earnings expectations from the same time last year, compared to just before Covid in early 2020. These remain largely unchanged.
If these companies can demonstrate earnings or earnings acceleration over a year or two, then we’ll see stocks continue to rise and there might be some revaluation room in each for those reasons. Cost management is a bit trickier, but it is possible.
The world has now discovered the BNPL model and so has India. Buying now paying later is becoming a fast emerging trend. Will the NBFC and Indian companies be able to profit from it beyond the big boys like Bajaj Finance, Bajaj Finserv?
I think this is part of a larger conversation about commodifying finance and we can talk about other asset classes, related asset classes later. So, again, I would say it’s possible for multiple companies to emerge when it’s here. What will be important, however, is the ability of these companies to generate profitable revenue growth and provide other services to the user base they get. Nowadays, if you are in the right theme, if you have the right capital behind you, you can grab users and short to medium term income. But growing profitably beyond that is going to be a challenge.
As we invest in private companies, we see a lot of promising companies that are not yet public but could become big companies in due time.
What’s the best way to play the electric vehicle disruption in India? Is it via two-wheelers, accessories or passenger vehicles?
Let’s start with the larger vehicles – utility vehicles first. There is a whole national supply chain in India, from trucks to components, and these will be listed. It is worth investing in it as we have seen stagnation in demand for CVs for good reasons be it the slowdown in the economy or the Covid.
The previous peak of three or four years ago will be removed at some point. I don’t know if it will be in two years or in four years, but it is not reflected in the stock prices of the companies that are exposed to this sector. So I would say spending time on utility vehicles and passenger vehicles. It is a single market given the dynamics of a company’s market share relative to others and the history of PV will return as will the CV cycle.
What’s more interesting and where there seems to be more debate is what happens to two-wheelers. I am a motorist myself and I don’t look very cool on a motorbike or scooter. But I think a lot of excitement is going to be seen in this space. It is still to come and compared to utility vehicles and private four-wheeled vehicles, it is in the two-wheel sector that the most upheavals and the fastest transfers of shares are taking shape. Opportunities in listed two-wheeler companies will expand over the next 12-24 months. This is where the debate is and given that we are looking at private companies, this is where I gather a lot of intelligent information to be a little more careful on the two-wheelers that are already listed.