Talking Point: Predicting Pockets Of Value In Uncertain Markets
Talking Point | How will fresh global geopolitical tension impact Indian markets?
#PrimeSecurities' N Jayakumar shares outlook on chemical sector, upcoming earnings season and discusses top under-owned industrial picks. #BQLive
#PrimeSecurities' N Jayakumar shares outlook on chemical sector, upcoming earnings season and discusses top under-owned industrial picks. #BQLive
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00:00 Thanks so much for tuning into Talking Point.
00:02 It's good to be back after a brief hiatus.
00:04 And it's great to have N. Jayakumar as my guest
00:08 on Talking Point today.
00:09 Jake, thanks for taking the time out.
00:12 Thank you for having me over.
00:14 Pleasure is ours.
00:14 Jake, lots of moving parts, as they always are, you would say.
00:19 But just as we are getting closer to the election season,
00:23 the noise around geopolitics, the noise around yields
00:26 and what could happen to rates, and all of that
00:29 is growing louder and is kind of getting--
00:33 confluencing into a kind of single event of sorts.
00:36 How are you seeing risk assets from your prison?
00:38 We have to see this in the context of flows
00:44 in most markets have been negative.
00:47 People have been moving out of--
00:48 I mean, this is a period when you've seen that for most
00:51 markets, equities haven't made money.
00:55 Debt has actually lost money handsomely,
00:57 because yields have just kept going up.
00:59 And gold has not performed.
01:02 So there have been multiple asset categories
01:04 that people have dabbled in and with.
01:07 And they have not made money in most markets.
01:10 To that extent, I think, without necessarily jinxing this,
01:13 but India stood out like a beacon on a dark night
01:17 kind of thing.
01:18 It stood out much like the proverbial oasis
01:21 in a desert, which is so many good things have been
01:25 happening, which I think sometimes we tend to kind
01:29 of take for granted or ignore.
01:31 The most important thing is that we've always
01:33 had this thing about a demographic dividend,
01:36 large percentage of the population that's consuming.
01:39 That percentage of the population, 50%
01:41 in the working 20 to 40 age group, et cetera,
01:45 is actually now investing.
01:47 So other than just consumption, we
01:51 are now seeing the positive sides of there
01:54 being in the market as investors,
01:57 regular investors, either through AIFs, mutual funds,
02:01 SIPs, et cetera.
02:03 And if there has been one bulwark of this market,
02:06 it's been the Indian retail investor.
02:10 In the past, we've panned the unknown Indian investor
02:14 as well as the guy who comes in at the end
02:16 and gets killed for sort of making tops, et cetera.
02:21 But far from that, this is the investor
02:24 who's been there buying on most BIPs, doing SIPs,
02:29 and actually standing in the face of very strong FII
02:33 outflows as a result of international interest rate
02:36 scenario.
02:37 And if you look at it and just see the way
02:39 the markets have moved, if there is one set of investors who
02:43 made money at the expense-- and you can't necessarily
02:46 name a few HNIs, but they're, in a sense,
02:49 epitomizing the larger investor base.
02:52 And there are ever so many HNIs that you
02:55 can talk about family offices that have made money.
02:58 And interestingly, mutual fund managers
03:00 who are sort of staff fund managers who've left
03:03 and started their own funds have also made it really big.
03:07 In fact, they are bigger market movers represented
03:09 by retail HNI family flows than ever before.
03:12 And I think very few interviews actually give pride of place
03:15 to the leaders.
03:16 And the leaders in this bull market
03:18 have actually been individual investors.
03:20 I think it's a big thing.
03:21 We shouldn't run away from it.
03:23 And as the Indian savings, which were moving to the equity
03:28 markets, which, let's say, five, seven years ago were at 2.5%,
03:31 may have moved up 4.5%, 5% now.
03:33 And as that technology shift takes place,
03:36 given the kind of GDP growth, given
03:37 the kind of quantum of savings, and therefore the money that
03:40 has moved to the markets, I believe the retail investors,
03:44 HNIs, family offices, they are the real leaders
03:46 of this bull market.
03:48 And I think what they do, what they seem to be doing
03:51 is probably far more critical than following necessarily
03:55 FIIs who are mirroring what's happening
03:58 in the rest of the world.
03:59 And to that extent, if the rest of the world,
04:01 most asset categories have been returning negatively,
04:05 I think you'll find India is what
04:08 it is because of the categories I talked about.
04:11 And I think any mention in the footnotes of history,
04:14 this will be actually dedicated to be the--
04:17 what's different this time is this particular movement
04:19 of money from large, unnamed hordes of Indian investors,
04:24 first-time employees, first-time people who've been--
04:30 even people who've started companies, sold them out,
04:33 they come into cash, they become investors in the market.
04:36 I think it's a very interesting big shift and something
04:39 we can't run away from.
04:40 Yeah, and maybe it's very small, but the sips
04:43 done by the person who drives my car
04:46 or the person who does makeup to me in my studios,
04:48 I mean, all of that, Jake, so well put.
04:50 Thank you for putting that into perspective.
04:52 Just one question, is that also what
04:54 is determining how, despite the fact
04:56 that the Nifty as a headline may have been sluggish,
04:59 you are seeing tremendous activity at the broader
05:02 end of the spectrum?
05:05 Well, the fact that small and mid-caps
05:08 have been as popular as they are is also
05:11 sort of symbolic or represented by the kind of money
05:14 that I'm talking about.
05:15 Big institutions goes into large caps.
05:17 So if you see really over a two, three, four-year period,
05:21 especially over the last two years,
05:23 when let's say the Nifty has moved almost 25%, 30%,
05:26 maybe even more, you're talking about HPFC, Kotec Bank,
05:33 and stuff like that being actually
05:34 the biggest underperformers in the market, represented
05:37 by over-ownership by foreign--
05:40 for FBIs, et cetera.
05:42 So over-ownership plus the kind of owners
05:46 who are actually the next sellers in the market
05:48 represents underperformance.
05:50 Small and mid-caps have been massively outperforming.
05:54 And the unloved, under-owned, unfancied sectors
05:58 in the market have performed, representing, again,
06:00 the fact that where there's over-ownership, where
06:02 FI ownership is there, they have not performed.
06:04 And sectors that are performing are those where--
06:08 where the new investors are those that
06:10 have been unfancied and unloved.
06:11 So I think there's a clear, clear movement.
06:14 And if there's ever a correlation you wanted
06:16 between money movement and performance of stocks,
06:19 the last two, two and a half years
06:21 pretty much represents that in form and shape.
06:24 Got it.
06:25 Jex, just one technical question before I
06:27 move to what could happen per se as well.
06:30 Is this-- a bunch of notes in the last three, four months
06:35 talks about the exits of promoters,
06:39 of private equity investors, and how
06:41 that should be a warning sign.
06:43 Now, my question to you is, is that a warning sign to you?
06:46 Or is this a new-age phenomenon wherein
06:48 the depth of the market has increased so much
06:50 that exits are happening?
06:52 And yet it is happening without too much of damage.
06:54 And that did not necessarily be a precursor to downsides.
06:58 Well, I agree with the fact that the first few exits
07:00 that happened a few years ago in large measure
07:02 were a 10% and 15% discounts to market.
07:05 These days, the discounts, as you know,
07:06 in these WhatsApps, come for next day offers, et cetera,
07:09 are 2% and 1%.
07:11 So that answers your depth question.
07:14 So traditionally, for the last 25, 30 years, 35 years,
07:19 any time you said promoters are selling or insiders are selling
07:21 or big private equity guys are selling,
07:24 would have represented traditional logic,
07:26 traditional wisdom told you that that's negative.
07:29 Right.
07:30 Whereas the world today is, if it's
07:33 a stock that's good enough, that a book can be created,
07:36 how does it matter who sells?
07:38 The fact that there is a new buyer
07:40 represents a greater upside as opposed to, say, some insider.
07:44 Please understand, insiders are now
07:45 restricted in terms of sales to certain parts of the year.
07:50 So for instance, at the end of the quarter,
07:52 from the first day of the new quarter
07:53 to the time the results are declared, they can't sell.
07:56 So typically, companies take a month to declare results.
07:59 Then you go out one into four, four months of the year
08:01 where insiders can't sell.
08:02 So insiders can only sell, and many of these
08:05 represented by first-generation entrepreneurs
08:10 are folks who've actually created capital
08:14 and therefore need to sell to generate capital.
08:17 Otherwise, it's all book profits.
08:19 People have needs for a house.
08:20 People have needs for a car.
08:21 People have needs for a whole bunch of things.
08:23 And therefore, promoter sale is not
08:25 being seen necessarily as something
08:27 so damning or dramatic.
08:29 And that also represents the modified or the evolved
08:32 thinking of investors, where those who enter,
08:36 private equity investors, also need to exit and get an exit.
08:40 If the markets are illiquid, maybe the discounts are bigger.
08:42 If the markets are not that illiquid
08:45 and therefore are representing good activity,
08:48 you can, in fact, get away even at par or at a premium
08:50 sometimes.
08:51 The whole concept here is that none
08:54 of this, which is traditionally true, is necessarily true
08:58 and is definitely not being seen as something so damning
09:00 that we should react the way we would have done so
09:03 in the past.
09:04 OK.
09:05 Thanks for that view.
09:06 One final macro view, and that is this overarching belief
09:10 of higher for longer.
09:11 Even if the rates don't inch up dramatically
09:14 from where we are right now-- the recent commentary
09:17 of last night seems to suggest that.
09:19 If it turns out to be true, who knows.
09:20 But even if rates don't go up from here,
09:22 if they stay higher for longer, Jake, is that a net negative?
09:27 And should we reset multiples for lower
09:30 and therefore expect lower returns from equity markets
09:33 or not necessarily so?
09:34 How do you think about this?
09:37 So I personally believe that this higher for longer
09:40 is kind of broadly discounted.
09:42 In fact, the bond markets have discounted this long
09:46 before it was articulated and orchestrated
09:48 in words which the Federal Reserve is attributed to.
09:54 People have seen this happening.
09:57 Bond yields have gone up significantly.
09:59 They have done the work of the Fed long before the Fed
10:03 could do it.
10:04 And therefore, I feel to an extent it's discounted.
10:07 Yes, if this continues actually for, let's say,
10:10 the next three years like this, you
10:12 will have a decided marking down.
10:16 So for instance, cash-rich companies
10:18 may continue to trade at the current level.
10:20 So if you take the three or four big FANG stocks, for instance,
10:23 or whatever the new acronym now is,
10:26 they will probably trade at these levels
10:29 without too much appreciation.
10:30 But because the cash in the books
10:32 are so strong that there's a natural downside protection
10:36 to how much they can fall, which means
10:38 that if they don't perform in the next three, four years
10:40 but don't fall too much, these have already got derated.
10:43 So the derating is happening purely
10:46 in terms of price step--
10:47 not price-wise necessarily, but time-wise direction.
10:51 If, on the other hand, interest rates actually
10:53 start declining, you will find a greater discounting
10:56 and therefore the multiples will go up.
10:58 This is a natural kind of thing.
10:59 I think the markets have factored this in,
11:01 which is why you go back to an interest
11:03 ratio of 2% in the US, but now almost at 5%.
11:07 The Dow has been well-protected in the 32,000, 33,000 range.
11:11 It hasn't really fallen too much,
11:12 despite the markets are--
11:14 whereas if you started the picture by saying,
11:16 we're at half to 1%, interest rates will go to 5%,
11:19 where will the Dow go to?
11:21 I'm fairly sure most people would
11:22 put in numbers of 80,000 to 20,000
11:24 in terms of traditional logic.
11:25 But with the passage of time, with two, three years
11:28 having gone, the market has discounted.
11:30 Multiples have come down.
11:31 But the price-wise erosion has not
11:33 been as strong as time-wise correction does take place.
11:37 Got it.
11:38 So, Jake, thanks for that macro view, a bit
11:41 of the technical view as well.
11:42 I'm trying to pencil in that with the presumption
11:44 that you are looking at the glass half full and not
11:49 the glass half empty.
11:50 The interesting thing that I thought
11:52 was the choice of themes or pockets that
11:58 come about in a discussion.
11:59 Normally, it's banks, IT, the 55%, 60% of the weightage.
12:04 And here I see you, based on our last conversation
12:08 and a few other conversations that you had elsewhere,
12:10 that you're looking at pockets which are not necessarily
12:13 in that bucket.
12:13 You're looking at pharmaceuticals.
12:14 You're looking at metals, which you spoke about extensively
12:17 the last time that we had a conversation.
12:19 You're looking at media.
12:20 Tell us, how are you thinking about choosing the horses
12:23 that you are wanting to bet on?
12:26 So one thing I can tell you is that with the passage of time,
12:29 in general, there's enough and more information in the markets.
12:32 So people may talk.
12:33 The question is, how are they positioned?
12:36 So people may say markets are expensive,
12:38 but in most markets, there'll always be bargains.
12:41 So the way I'm seeing right now is,
12:43 try and see wherever there's consensus
12:45 and move away from that.
12:47 So if there is valuation comfort,
12:49 if there is cash flow comfort, and if leverage
12:51 is reasonably low, especially in these interest rate regimes,
12:58 the way I see this is that if you take metals,
13:00 I'm talking about integrated players with low leverage,
13:03 which means that the fact that there's a higher incidence
13:07 of leverage on many balance sheets
13:09 indicates that they are far more keen on output pricing.
13:15 Whereas well-integrated players with low leverage,
13:17 they don't mind if the output prices are low,
13:19 but as long as the cycle, which means
13:21 that everything from raw material to end product
13:23 is well boxed in.
13:26 And I think the important thing, for instance, is, as converters,
13:29 if you've taken care of, let's say, coal and iron ore,
13:32 and you've got a reasonably well-oiled machinery in terms
13:35 of the output, reasonably low on cost, you can still make money.
13:40 And the strange thing is that when steel prices are
13:43 at 85,000 to 90,000, the sustainable margins then
13:48 may have been lower in retrospect than what people make today,
13:52 with steel prices at 60,000 or 58,000.
13:55 Because the input prices have collapsed that much more.
13:58 Most-- there are no takers in most parts of the world,
14:00 and therefore, the margins here are actually a lot better.
14:03 So we need to focus on margins, which
14:05 is one step more of a thinking than just the end product
14:08 prices that people could have monitored.
14:10 So people bought steel in inflated times
14:13 when end product prices were 85,000, 90,000.
14:17 But because the government came down heavily,
14:19 all kinds of these things, and the delta collapsed,
14:22 people didn't make money.
14:23 And you're likely to make money right now.
14:25 When some balance sheets have actually
14:27 improved by using the bull market to actually deleverage,
14:31 rather than add capacity.
14:32 A few players have added capacities,
14:34 but I think one or two players have indicated
14:36 that they'd rather grow capacities organically
14:38 over a period of time than put in huge capex
14:41 by borrowing against the profits that you make.
14:44 So how you use a bull market is important.
14:46 In commodity kind of cycles, you need
14:48 to deleverage in bull markets and organically grow
14:51 so that in every new cycle, you have a higher capacity,
14:56 more well-integrated, and you've got a lower cost of production.
14:58 That's the broad framework for making money
15:01 in the commodity space.
15:03 As far as pharmaceuticals are concerned,
15:05 this is a sector that's virtually dropped out of bed
15:08 over several years, only for the last two years.
15:10 There's a bit of here and there.
15:12 The Indian pharma business has been good.
15:14 The peers of Indian pharma companies
15:16 have been reasonably attractive.
15:17 In fact, good 20-plus multiples, sometimes even 30-plus
15:22 on price earning basis, EV beta multiples of 20-plus,
15:26 et cetera.
15:27 Where the industry took a hit was a lot of generics players
15:30 saw price erosions, which since the last two quarters
15:34 have actually abated.
15:36 But the interesting thing is that with interest rates
15:39 moving the way they have, a number of generics companies
15:42 in the US have collapsed and gone into bankruptcy.
15:44 So that's number one.
15:46 Number two, with prices of everything going up,
15:51 both insurance companies and individuals
15:53 have been looking at the cheaper substitutes or generics
15:56 as opposed to the patented products.
15:58 So the insurance companies have been pushing people to more
16:01 and more look at generics.
16:03 And a couple of interviews given by the US FDA commissioner
16:07 recently indicated that the generics could become value-wise
16:11 a staggering percentage of the overall US markets.
16:15 And therefore, the entire orientation
16:17 towards more audits, more frequent audits,
16:21 and faster turnarounds indicates that the supply source
16:25 from India--
16:26 and they were very conscious of the fact
16:28 that the supply source from China has been overstated,
16:31 dependence has been overstated, and they'd
16:33 like to move to India with a far greater turnaround
16:36 time in terms of audits--
16:37 indicates to me the generics for the next,
16:40 I would say, 12 to 16 quarters would have a fantastic run.
16:43 May not be price increases, but more importantly,
16:46 stable price.
16:46 That's number one.
16:48 And number two, for the first time in the commentary
16:50 in the last few quarters, we've seen drug shortages
16:54 in various parts of the US.
16:56 And multiple drugs-- there's a recent report
16:59 by one of the bulge bracket brokerages which
17:01 talks about 302 or 306 drugs in short supply.
17:06 And I am, for instance, aware of the fact
17:08 that the US FDA has actually called up different companies
17:12 and talked about shortages which if some of the Indian companies
17:15 can supply on an urgent basis.
17:18 This has never happened before, by the way.
17:20 So from that point of view, I think pharma could come back.
17:24 Pharma is under-owned by them.
17:25 The promoter holding most pharma companies is reasonably high.
17:29 So the price impact of incremental buying
17:31 could be a lot higher.
17:32 Number two, it's a very, very small percentage
17:36 of most portfolios.
17:37 Most people have viewed it as a trading call
17:39 rather than as an investment call.
17:41 Cash flows are decent.
17:43 Leverage is very limited in most cases.
17:45 And some of the pharma companies, one or two of them
17:47 are getting into the PLI space, which means actually start
17:51 manufacturing critical inputs and intermediates,
17:54 depending on China, with concessions
17:56 coming from the government, which essentially not only
17:59 strengthens and secures their input pipeline
18:03 and their end-to-end, if you will,
18:05 but also makes us as a country more dependent on ourselves
18:08 rather than outside world.
18:10 So the PLI-based generics, these are the spaces to watch it.
18:14 - Wow.
18:15 And therefore, just a quick follow-up.
18:16 So therefore in pharma,
18:17 because healthcare is such a wide bucket,
18:19 I've heard a lot of people talk about how
18:21 they are avoiding the US generic,
18:23 well, the Sun Pharma, Ciplas, et cetera, of the world,
18:25 but focusing on the domestic healthcare
18:27 or hospitals, et cetera.
18:28 You are saying you actually like the exporters
18:32 and the generic makers.
18:34 - Absolutely I do.
18:35 And also with everything happening,
18:37 the rupee is quietly moved into the 83s.
18:39 There is a natural one to 2%, if not more,
18:42 that they keep picking up every year.
18:44 My thing is that for the next couple of years,
18:47 US generics could be the space to be in.
18:49 As I said, US generics plus PLI.
18:53 And of course, the domestic market is growing,
18:54 but the last two months have been actually pretty slow.
18:58 - Yeah, yeah, which is true.
18:59 Yesterday's notes as well,
19:01 suggest that the domestic ones have been quiet,
19:03 but this is very interesting data.
19:04 Thanks, Jake, thanks for bringing it out.
19:06 Really appreciate.
19:07 I understand you're getting late,
19:08 but before I let you go,
19:10 I cannot avoid talking about media,
19:12 not, I mean, least because I'm a media house myself,
19:15 but you like that pocket
19:17 and that pocket has largely been a sluggish,
19:20 if not a wealth destroyer,
19:23 then certainly not a wealth creator
19:24 for the last so many years.
19:26 What has changed at the margin?
19:27 - What I think has changed is that habits have not changed.
19:32 People still have their viewing habits.
19:35 People have their media habits.
19:36 At the margin, people have moved to apps and phones
19:39 rather than television, perhaps.
19:41 - Yes.
19:42 - The important thing also is that they may move to OTT
19:44 as much as they move to regular channels.
19:46 But one thing that hasn't changed is consolidation
19:50 on most of this, you know,
19:51 lot of marginal players have fallen by the wayside.
19:55 Consolidation is near complete.
19:56 There are just two or three players,
19:58 China and India right now.
20:00 And one or two of them are listed
20:03 and they're making serious amounts of money.
20:05 The one or two which are going through mergers, et cetera,
20:09 have had their challenges.
20:09 I mean, I'm talking about Sony,
20:11 have had their challenges.
20:12 But if you see the others,
20:14 they're sitting on large amounts of cash.
20:16 They're sitting on massively consolidated market shares
20:21 in different geographies.
20:23 And some of them have moved into a non-cash fund model
20:26 for the OTT and doing pretty well,
20:28 especially at the regional level, South especially.
20:31 I mean, I'm not wanting to talk stocks,
20:32 but you can sort of guess.
20:34 So I think if you go back and see them
20:36 and you strip away the other assets
20:38 that they own, like the cricket team, for instance,
20:40 every media company now has a cricket team.
20:42 So if you strip away the value of the cricket team,
20:44 strip away the cash,
20:45 the core business is already getting discounted
20:47 three, four times.
20:49 This is a seriously under-invested and ignored space.
20:54 And media could make a lot of money
20:56 like it does the rest of the world.
20:58 So I think the next five years could be very interesting
21:01 because this space, which has been largely ignored
21:04 and which has been adopting and adapting to technology,
21:08 adopting technology and adapting to technology
21:13 is actually to my mind,
21:15 should be compared with the kind of valuation
21:19 that some of the big boys like,
21:21 you know, the international majors get,
21:23 you know, the Disney's and the,
21:25 you know, the Netflix's kind of thing.
21:28 So these valuations are at a serious discount,
21:33 but with eyeballs and market shares,
21:34 the way they are today, I'm making money.
21:37 My own assessment is that their multiples
21:39 will get related, no question about it.
21:43 - Such a pleasure talking to you, Jake.
21:45 So much more for these nuggets as well,
21:48 as well as the macro view that you laid out
21:50 so beautifully for our viewers.
21:51 Thank you for taking the time out
21:53 and looking forward to talking to you soon again.
21:55 - Thank you very much and all the best for your,
21:58 for the TV launch.
21:59 - Thank you so much.
22:00 Happening in about a month's time.
22:01 Really appreciate, need all your support.
22:04 - This was the answer.
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