- How is positive credit growth outlook helping banks?
- How will delayed client spending impact IT and ITeS?
Niraj Shah speaks to Aniruddha Sarkar on 'The Portfolio Manager'. #NDTVProfitLive
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- How will delayed client spending impact IT and ITeS?
Niraj Shah speaks to Aniruddha Sarkar on 'The Portfolio Manager'. #NDTVProfitLive
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TVTranscript
00:00 being a bit defensive because of the valuations and because for the world at large, it's a year
00:05 full of material events. I think after the way the markets have moved in the last one year,
00:12 I think one thing is very clear that you know, you need to definitely protect what you have made
00:17 in the last one year. So what I'm focusing in our portfolio is trying to focus where earnings is
00:23 going to be much higher than the industry or the broader market because at the end of the day,
00:28 earnings is what will justify the price. Any place where the stocks would have moved much
00:33 faster than the basic fundamentals, that is where we are booking profits. In fact, we have been very
00:38 aggressive in booking profits in the last couple of months and that would be our advice also to
00:44 investors that anything which has moved very fast, do book profits. So I'm booking profits into
00:49 companies and sectors which have moved ahead of fundamentals and parking the money into sectors
00:54 and companies where earnings are going to be much, much higher than the broader industry average.
01:00 With regard to the market cap allocation, as of now, we are almost like equally between the large
01:06 cap and mid cap and small cap. Roughly around 40 odd percent would be into the large cap and
01:12 around 40 odd percent into the small caps and rest would be to the mid caps. Cash level would be
01:17 roughly around 4-5 percent. So that is a broad market cap allocation which I'm keeping at this
01:23 point of time. I'm guessing it's not a blanket call because there are a lot of pockets which
01:33 may have moved fast, but the story might be very promising by virtue of earnings growth as well,
01:38 because I was looking at your portfolio construct for now as of Jan 24, and manufacturing has a
01:45 dominant 26 percent as well and out there a clutch of pockets have moved really well.
01:50 Defense is a large 14 percent. Those stocks have rallied quite a bit as well, even though
01:54 they may have been a bit sideways in the last couple of months. So
01:58 try and explain to us with your portfolio construct about how are you thinking about this?
02:04 Because you mentioned that you are booking profits, you are adopting a bit of a cautious
02:11 approach relative to otherwise. Yeah, sure. So the basic philosophy which we follow in our
02:18 portfolio construct is following the concept of sector rotation. And in that you will find
02:24 where we try to allocate bulk of our money is where the highest conviction is there and where
02:28 the highest earnings growth is there. At the same time, what you would have observed in our portfolio
02:33 is there are sectors which we completely avoid. Now talking about industrials and the whole CAPEX
02:39 cycle which we are trying to play, that makes a large portion of our portfolio, as you rightly
02:43 mentioned, around 26 percent of our portfolio would be into the industrials where we are trying
02:49 to play the capital goods, industrials, defense. Cement is again a larger location over there
02:54 compared to the index. The thought process there is that that is one part of the economy which is
03:00 doing very well. And our outlook is over the next four or five years, this is one part of the
03:07 economy which will contribute significantly to the whole the valuation in the economy.
03:11 Now, valuation is a concern because we have a couple of names wherein in the capital goods space
03:16 mostly where the valuations could be a bit on the higher side. But I think the type of,
03:22 I would say, growth opportunity which is unfolding over there across industries. In fact,
03:28 earlier it used to be a concept that most of the capital goods companies used to deal with
03:32 the government. Now what we are seeing is a lot of private engagement of these companies is also
03:38 happening. In fact, many of the, I would say, capital good companies we own, a lot of demand
03:42 is coming from the smaller towns which is very unheard of. So I think there's a broad-based kind
03:48 of a growth happening in the economy and that is where we are trying to play the whole the capex
03:53 cycle via these industrials. We have also energy as a part of our this allocation which is your
03:59 industrials and the capex cycle. It goes without saying if we are bullish on the economy you have
04:04 to be bullish on the whole energy space and we have taken allocation within the energy space also.
04:10 Yeah, so actually let me probe that a little bit. So instead of trying to,
04:16 okay, no, maybe let me just first get the portfolio construction out of the way.
04:20 It's interesting that when you're talking about consumption in which is a large weightage,
04:24 I believe it's disproportionately large to what the weightage is in the
04:30 relevant indices benchmark might be. So one, you are large there. Two, you are focusing almost
04:37 entirely, if I'm not wrong, on urban consumption. Tell us a bit about this.
04:41 Within the portfolio construct, in fact, we just have an overview of a portfolio. It gives you an
04:48 image that we are betting on India. Everything in our portfolio is about India and that is where
04:56 you'll find we are not taking any bets on what is happening outside India because if we are talking
05:00 about a slowdown in US, a slowdown in Europe, we don't want our portfolio to be exposed to any risk
05:07 over there. We are bullish on India. The world is bullish on India. So why should not the portfolio
05:12 also be kind of bullish on India? Within India, I would say the whole India opportunity, I think
05:18 consumption is a very large component wherein the household income is increasing, disposable income
05:24 is increasing. And that is where the debate happens between urban consumption and the rural
05:29 consumption. If you would be seeing, there's still time for the rural consumption to pick up. I think
05:35 there is some kind of pain over there with regard to the demand picking up on the agri side of the
05:39 economy. And hence, we are betting completely on the urban side. Now, if you ask me the allocation
05:47 within the urban consumption basket, I need to just look at any consumer like you and me and see
05:53 where does the money go. And that is where the allocation is. Bulk of our money goes into the
05:58 real estate, autos and apparels, and also the hospitality, which is your holidays, your hotels,
06:05 and also eating out. So this is the whole spectrum of urban consumption allocation,
06:10 which is there in my portfolio, which is auto and auto ancillary, the real estate and the home
06:16 improvement, consumer discretionary and hospitality. In fact, we have a large allocation, almost 6-7%
06:23 into the hospitality, which is your hotel industry. And both the names we have in our
06:27 portfolio have done exceptionally well. Valuations in the whole consumption space is a big debate,
06:32 which you keep having. But I think if the earnings are going to justify
06:36 the growth, I think valuation is something which the market will keep giving it higher and higher.
06:42 Let me again kind of talk about that a bit more. Since you mentioned hospitality specifically,
06:49 they are usually believed to be cyclical. Yes, the supply is coming maybe another three years out
06:56 at the earliest, if you will. You reckon that the earnings momentum will continue because there is
07:04 only as much room that ARRs might have to move up, right? I mean, because they've moved up quite
07:11 significantly. So where does the growth come from for the hotels and hospitality?
07:17 So Neeraj, there's a big change in the way the hotel industry has evolved in the last
07:21 couple of years, especially post-pandemic. I think what used to happen earlier in the earlier cycle,
07:27 so you're absolutely right that the hotel industry is a very cyclical business. And
07:31 anything to do with the cycles, you have to play it right. You have to exit at the right time,
07:36 because otherwise typically bulk of the capex happens at the peak of the cycle. And then you
07:40 are sitting with an over-leveraged book and you go through the pain of the down cycle.
07:44 Unlike that, what has happened now is that the whole hotel industry is expanding in a different
07:49 zone. A lot of new destinations are being made. And this is unlike the past, where most of the
07:55 new room additions used to happen mostly in the metros, your Delhi, Bombay, Bangalore, Calcutta,
07:59 etc. Unlike that, what we are seeing this time around is a lot of new destinations are being
08:06 created in which we see that both the large players, your Oberoi, Indian Hotel, both of them
08:13 are building destinations. They are coming up with hotels in some new properties, in some new areas
08:19 where there have been no hotels in the past. Now, this is something which is a very, very big change.
08:24 And with regard to the ARRs, if you look at the ARRs which are there in India and the ARR which
08:29 is there in comparable kind of countries and anywhere outside India, I think there's a huge
08:35 scope of ARR improvement even as of now. Historically, the ARRs used to go up, occupancies
08:41 used to get impacted. This time around, as an investor, I'm very happy. But obviously, as a
08:46 customer, I won't be very happy because ARRs continue to rise. But yes, I think occupancies
08:51 are not getting impacted even with the rising ARRs. And with the new destinations being built,
08:56 I think that is something which is getting more and more Indian domestic consumers over there.
09:02 Okay. So, that's the argument on hospitality. I saw 15% or 16% weightage to consumer discretionary
09:10 within the urban consumption, 40% getting it. Now, what within consumer discretionary?
09:15 There are newer segments, right? There are tent hotels, there is a car dealer,
09:25 there is a watchmaker, and lots more. So, what is it that has enthused you?
09:29 Yeah. So, within the consumer discretionary, I think you rightly pointed out that the definition
09:34 of consumer discretionary has changed a lot. Earlier, consumer discretionary, the companies
09:38 which used to come under that used to be very different compared to what it comes now. So,
09:43 within our consumer discretionary, we will have the names like something like the retail,
09:47 within retail, something like the trend, where we are very bullish. We have been an early investor
09:51 over there, and it has done exceptionally well for our investors. We are also betting on, I would
09:57 say, eating out or ordering food at home, wherein you will see a large allocation is towards Zomato.
10:03 We have again been an early investor in Zomato. We continue to like the business exceptionally well.
10:08 Also, something like, I would say, Tata Consumer, wherein you go to the Starbucks and things like
10:13 that. So, I think this is the consumer discretionary where we are betting on, which is the
10:17 retail in the form of trend, eating out, and ordering food, and also something like Tata
10:23 Consumer. So, these are the consumer discretionary names which we will be having in our portfolio.
10:27 Viewers, remember, they are early investors, they may get out whenever they believe either
10:31 valuations or the cycle is turned. So, don't think of any names as recommendations, they are merely
10:36 being spoken about for illustrative purposes for you to understand where is the guest. In this case,
10:42 Anirudh Sarkar is coming from and he is giving his answer. Anirudh, just one question on consumer
10:46 discretionary before we take a break again. Because you have been early investors in some of
10:51 these businesses, you pick and choose, but there is an optionality value that people are now giving
10:57 to businesses which were always a part of the main business, but were not being given value earlier.
11:05 So, for example, when now people talk about trend, they talk about Zodio and the kind of
11:08 good that Zodio is bringing. When they now speak about Zomato, they speak about Blinkit,
11:13 and what Blinkit could become in times to come. Just trying to understand, how do you think about
11:19 some of these additional business streams for any of the portfolio companies that you may be invested
11:25 in? I think any of these companies, when we look at these businesses, what we try to identify is
11:32 that if a particular company is suppressed from a price point or a valuation point in the market,
11:38 what are the factors which is leading to the separation in the valuation or the price
11:42 in a particular company? Now, since you mentioned in case of Zomato and Blinkit, I think, you know,
11:48 if you look at the way the stock reacted post the announcement of acquisition of Blinkit
11:53 after its listing, that is something which got our attention. We felt the market was overreacting,
11:58 and that is where we looked beyond the short-term reaction, and we looked at what can Blinkit do to
12:04 it in the next four to five years? And if it's able to kind of leverage its brand, its network,
12:11 its on-the-ground reach, can it complement its existing food business and also add to the top
12:19 line and the bottom line? So, these are things which, as an investor, one needs to look at.
12:24 Any short-term event which is happening in the company, is it an opportunity for the next couple
12:28 of years? And we need to take a point of that. Now, you also mentioned about trend. Now, we were
12:33 bullish on a trend mainly because of the way Zudio was growing. And initially, there were many people
12:40 who were apprehensive about Zudio. They were saying, like, you know, they're having many
12:43 competition like that in the market. You also had your big names who were in a similar price point.
12:50 But what we learned from being an actual visitor to a couple of their outlets is that the whole,
12:55 I would say, the comprehensive experience as a consumer which you get when you enter in one of
13:00 their stores is very different. The price point at which they're offering top-notch quality is
13:05 very different, and that can attract a lot of the mass consumers into their stores. And that is
13:10 exactly what has happened. So, sometimes on-the-ground check, visiting the stores also gives
13:15 you a good feel about the businesses in which you're entering into. Oh, most certainly. Sometimes
13:20 it can actually be a very good showcase of what the business could do as well in the minds of
13:25 certain people. Anirudh, point well taken. Stay on. We need to slip into a quick break. Come back and
13:30 talk about the others as well. We spoke about consumption in detail. The other space where they
13:34 are very bullish on is defense and industrials. And we talk about that and more on the other side
13:39 of this quick break. Stay tuned.
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16:05 Well, thanks so much for staying tuned. We are back in conversation with Anirudh Sarkar, CEO and
16:10 Portfolio Manager at Quest Investment Advisors. A high allocation of the portfolio to consumer
16:16 discretionary and to defense. By that extension, I suspect to PSUs as well. Anirudh, is my
16:24 assumption correct? You've not averse to PSUs? Absolutely. In fact, you know, over the last 18
16:32 months, we have been quite bullish on PSUs. And for most part of the last 18 months, we will be
16:38 having on an average anywhere between 7 to 10% allocation towards PSUs. At this point of time
16:45 where we stand, this allocation would be roughly around 14 to 15%. So we are pretty high on the
16:51 PSU opportunity. A lot of debate happens with regard to the froth which has built up in some of
16:57 the companies which would have moved very fast. But one thing which I keep debating on the PSU
17:02 opportunity is that we don't need to look at PSUs, what they have done in the last 10 years or 18
17:07 years or 20 years. We need to see that how the whole PSU basket is evolving with the government,
17:13 the mindset which has changed in the government with regard to what they want to do with the PSUs.
17:18 If you go back, we always used to hear that government wants to sell the loss-making PSUs.
17:23 So that used to be the main factor that you know, why would one want to buy the PSUs because
17:27 there could be a disinvestment opportunity, some private company could come acquire it. Now that
17:33 used to be the old days. Now what has changed is now the government focus has changed that we need
17:38 to bring up these PSUs at par with the private companies, bring in the strategic investors and
17:45 grow the businesses. Now that is a very big change mindset and that is what is unfolding in most of
17:51 the PSUs across the spectrum could be oil and gas, energy, defense, the railways, even the MDFCs
17:57 which are there in the PSU space. Now this is the whole opportunity which we have been trying to
18:02 capture and we have been participating in different, I would say the sub-sectors within PSUs from
18:07 time to time, including the banks. In fact, we were one of the early investors into some of the
18:12 PSU banks as well in our portfolio.
18:15 Okay, PSU banks, defense, interesting. You know, but this morning viewers, I saw the statistic
18:21 about how PSU banks not just this last one year, but over a three-year and five-year period have
18:26 actually beaten the private sector bank index quite comprehensively. So it's not a one-year wonder
18:33 if you will. And one year is a long time these days anyway. But I'm interested in defense and
18:39 industrials because I presume that there too would be forming a part of some of the PSU holdings
18:43 that you have. What's the argument for defense and industrials now in Jan or Feb 2024?
18:51 Now that we've seen a bit of a rally already, valuations are no longer as cheap as they were
18:57 and all the books are well discovered.
19:00 In fact, in the defense space, we would have booked profit in most of them. And because as you
19:06 rightly mentioned, valuation comfort is something which we are not getting in some of the defense
19:10 names. And as I mentioned early on that, you know, many of the companies which would have run
19:15 up much faster than our expectation, it's better to take profits off. It's always good to leave
19:21 something on the table for others to also earn. But I would say defense is one space where
19:25 in valuation comfort is not there. But yes, if one has a four or five-year horizon, opportunity
19:29 is there. But if we have a kind of a limited number of stocks which we need to own in our
19:34 portfolio, that made us take a call to exit defense from there. With regard to the industrials,
19:39 I think we are betting on companies which are there on the railway side, which are there on the
19:43 energy side with regard to the power transmission or maybe the power generation. So both the
19:49 generation, transmission, the railways, that is where we are betting on the industrial side
19:54 with regard to the PSUs.
19:57 Okay. Okay. So within that portfolio mix, viewers, that Anirudh spoke about, defense,
20:04 industrials, booking out of defense, but be that as it may, that still is a large portion,
20:09 about 14 or percent of the weightage. And that forms a part of this India manufacturing
20:14 and industrials, which is about 26 percent of the portfolio. Financials are 22 percent
20:18 of the portfolio. So clearly they are underweight relative to the index when it comes to
20:23 financials. And as we discussed earlier, urban consumption is about 40 percent. What is
20:28 interesting? Yeah, this is the portfolio mix for Quest Investment Advisors. What's
20:36 interesting is that you're completely absent, Anirudh, from IT and ITES. Why so?
20:43 So IT is one sector we have been, I would say, underweight for almost the last 15 months.
20:49 Some part of it, you can see we went wrong with regard to the price moving. But if I
20:54 look beyond the price action, I think fundamentals have not improved. We were heavily
21:00 overweight IT for most part of the COVID, but almost for the last 15 months, we have
21:05 been heavily underweight. And last one year, we are completely absent out of IT. Now,
21:10 the reason for that is that the valuations, so I would break up IT into two parts. One
21:15 is a large cap IT and one is a mid cap IT. Now, mid cap IT companies have been doing
21:19 well compared to the larger players. And that is where the valuations of the mid cap
21:23 ITs are pretty high. On the other hand, the large cap IT is where the earnings are not
21:28 as they were in the past. And that is the reason your valuations are cheap. Now, it's
21:33 a very difficult choice that, you know, do you buy the mid cap IT at a high price where
21:36 growth is there or do you buy the large cap IT companies where growth is not there and
21:41 valuations are cheap. So, one is that part. The second part is that if you talk to the
21:46 management of any of the IT companies, I think they're still concerned about the margin
21:50 improvements, about the deal pipeline, and that is yet to improve. So, we continue to
21:55 be negative with regard to Outlook over there. But I would say we, as of now, we have some
22:01 of the IT companies on our watch list. We are evaluating them because I think maybe
22:05 in a couple of quarters, they would be out of the woods. Margin would have bottomed
22:09 out and also the deal pipeline will improve because the biggest impact happened when the
22:14 slowdown emerged in Europe and America. That is where a large part of the deal wins, which
22:19 were happening, were not happening. So, I think with improvement in the Outlook on the
22:24 economy in those regions, we could see the IT sector also picking up.
22:28 Okay. So, while you are zero currently, you might not be averse to increasing stake at
22:33 some point of time in the current calendar. First half, you reckon?
22:37 Yeah, I think in the first half, we should be looking at adding.
22:40 The only thing, Anirudh, is that ER&D has come out smelling like roses. I mean, yesterday,
22:46 KPIT was at life highs, Tata Tech post listing, the whole enthusiasm, it's not buckled down,
22:54 it's kind of staying true with fairly strong, steep valuations for both of these names and
22:59 some others too. So, can we sustain or, I mean, because they are very expensive, both
23:06 of those names or some others in the ER&D space?
23:10 That is the whole, I would say, the confusion which, as an investor, we also have that,
23:15 do you buy something like that at a very high price? See, Tata Electric, because you mentioned,
23:20 we were very early investors over there during COVID and we exited completely roughly at
23:26 around 8000 plus levels and the multiples which were there, almost like 60-70p is something
23:32 which we could not justify. As you rightly mentioned, the valuations even at this point
23:36 are something which doesn't give us the comfort to make a fresh entry. So, I think one needs
23:41 to be very careful at what price we are entering because I think valuation is one part and
23:47 second part is the peg ratio. Now, what multiple you are paying for what growth, that is very
23:53 important. If the peg ratio is going to be anything more than two times, I think you
23:57 are slightly taking a bigger risk because if there is a contraction in the earnings,
24:01 you will see the multiples also contracting. And if you look at the market in the last
24:06 couple of years, only those companies have underperformed which were very, very expensive
24:11 with regard to the peg ratio. So, I think that is a big kind of doubt in our mind also
24:17 that should you pay such high multiple for that type of earnings. And since there is
24:22 no shortage of ideas in the market, we are kind of completely avoiding entering into
24:26 those part of the market. Fair call. Okay, Anirudh Sarkar, we will leave it at that.
24:33 Thank you so much. We could have talked a lot more but out of time completely. But great
24:36 talking to you. Thanks for all the insights. Always a pleasure. Have a good day. Thank
24:42 you. You too. And viewers, thanks for tuning into this edition of the Portfolio Manager.
24:45 Thank you.
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