Category
🗞
NewsTranscript
00:00Thanks so much for tuning into Talking Point. I'm your host, Neeraj Shah. Our guest today is Naveen Chandramohan, founder of
00:18ITUS Capital. And there are various ways to structure the conversation with Naveen today. We can talk about the Q1 and how
00:24it's been slightly ahead of estimates. We can talk about his thesis of how this decade is inflationary versus the previous
00:30decade being deflationary. Or we can talk also about his positioning which is heavily and I mean heavily tilted towards large
00:38caps versus mid caps and small caps. While Naveen continues to be a bottom up stock picker. I mean good having you. Thanks
00:44for joining in. We can choose any of these. Let me just quickly ask you though the big events are out of the way. Now the
00:53markets move back to valuations to earnings earnings growth and the resultant moves over the course of the next six to nine to
01:0212 months or maybe longer. Longer is a difficult call to make in such markets in such world times currently. How how do you
01:10view the landscape from an earnings versus valuation perspective currently.
01:15Sure. Thanks Neeraj. Good morning to you and to all the viewers who have tuned in. Appreciate you having me on the call. So as you
01:23nicely summarized I still believe that we are in an inflationary time today. And as a result of which positioning of portfolios have to be
01:33skewed accordingly. In terms of earnings if you break it down roughly around 45 percent of the Nifty Finite companies have reported.
01:42Earnings in pockets have been very strong. For example pharma has been strong. Consumer beautiful has been strong. Consumption is still
01:51lacking across the board. Though there are green shorts from a lower base and banking again has been strong but that strong growth has
02:00come with the effect of ROA contraction. So I think from here like you rightly said it is going to be a bottom up stock because market. But the
02:09overarching theme being cyclicals I still continue to believe we should do well. There are certain sectors for example oil and gas, power, telecom.
02:20These are beneficiaries of what I call an inflationary time. So I think it would be interesting and prudent to look into those spaces because
02:29from a top 500 company perspective in the index they would be underrepresented. So that's broadly how I would think about earnings.
02:37Valuations like everyone is aware is not cheap. But for the growth that you are getting I would say it's in the median end of the range.
02:44So one has to balance it out. You're not going to get cheap companies today for sure. OK.
02:52Just before I come to the some number crunching Naveen what does typically and I mean would you tilt your portfolio towards the larger bias of it being
03:03an inflationary decade and therefore maybe stay out of technology even if those companies are giving out good numbers. For example the E.R. and the
03:12stocks. And would you be tilted towards companies which benefit from an inflationary boom. Typically economy link spaces right. Despite the fact
03:20that in some cases those valuations are stretched very very much. Sure. So I think coming to technology I think there you can be
03:31tactical. At least that's how we think about it. I don't personally look at technology as structural in many of the companies that are reporting as
03:41we speak. So you have two ends of technology. One is the services end where I think one can play an introversion team and that I believe should work out
03:50reasonably OK. But you're not going to get very strong growth. You're not going to get double digit growth. What you are playing for is what used to be
03:582 to 3 percent year on year dollar growth can go towards 5 to 6 percent year on year dollar growth. And that is coming after a period of three and a
04:06half years where many of these companies have managed their margins well in a downturn. So from a mean reversion perspective with certain growth
04:15you can generate some alpha over the next one year from a tactical perspective. Where I am seeing growth is on the product specific businesses
04:24especially those businesses with an India focus with a banking focus. The BFSI focus. I think that is an interesting play from a bottom up
04:33perspective. Now these are the two pockets one has to pick and choose. But to be structurally overweight technology both from a services
04:43or product perspective I'm not comfortable as you speak. OK. Sorry did you mention about the economy hugging sectors. Would you be comfortable
04:51buying them even if they're expensive. Yes I think. Like we discussed I think six months back we had a call together and we had discussed
05:02some of these names. We still continue to own many of these names. We have not trimmed our exposure. Some of these have actually done
05:09well. And we would continue to bias our exposure towards large gas. When I say economy facing I would include sectors like power oil
05:19gas cap goods into them. And I would not want to be buying these valuations my full exposure. So I would want to be building my exposure
05:30with room for volatility or the next course of the next six to 12 months. If I get that I would increase my exposure. That's how I would think
05:37about it. But I'm not out of any of those spaces. Not out of any of those pockets. OK. Now the the here and now and viewers I want to draw
05:47your attention to this chart. This is I believe from the city node if I'm not wrong. But it effectively speaks about the nifty 50 upgrades
05:55and downgrades as things stand as the earnings have come out. And if you just look at this here what's happened now the nifty 50
06:04downgrades the pace of these downgrades have come off a little bit. Some stocks have seen a bit of an upgrade as well. But broadly
06:12speaking relative to the kind of misses on the earnings estimates that were happening maybe they are tapering off a little bit and
06:18which is why we're seeing a lower proportion of upgrades and downgrades. But more importantly it also means that this quarter the
06:25reportage of the earnings has largely been in line with what was estimated. And I mean one thing that stands out is that a lot of
06:36expectations for example from energy as a space but energy is seriously missed estimates and maybe it's accounting and maybe some of that
06:45gets changed as well. But because a lot of people are constructive on oil both upstream as well as downstream and they are all large cap
06:53names where you are tilted towards would love to know if energy forms a part of your core portfolio energy stocks. So needless to
07:02say I define energy is more so towards gas today. I think if I look at energy imports that's picking up significantly. So none of my exposure
07:14is in the oil refiners that you're talking about. I know for a fact that some of this misses that you're talking about is predominantly in oil
07:22refining which considering oil could be range bound. And if you assume that for all practical purposes Trump is going to come back it's going
07:31to be a drill baby drill as far as U.S. is concerned which is how he goes about things. So it looks like oil prices would be range bound.
07:38And if that's the case some of these oil marketing companies can have their expanded margins. But that's not something we are playing
07:45out. Most of our exposures is energy is coming through mad gas both on the transmission side as well as both from an international
07:54perspective as well as from a domestic perspective. That's where we all have this in large caps. OK. OK. I want to I mean because it's
08:02such a busy time for automotive currently. Naveen we have two large numbers today one tomorrow. And it's a sector that's probably has
08:12had four consecutive very strong years behind it already. What's what's the thesis there. I presume you are invested but it's a very wide
08:24and a very differentiated bucket. So where within this bucket are you invested. Four wheelers two wheelers EV focus players auto
08:32ancillaries. And why is that the tilt. Sure. So just to recap our conversation six months back we had a detailed discussion about this
08:42where we as a firm were significantly overweight auto. And over the last six to seven months we've been slowly trimming our exposure.
08:50Most more of our trends have come from four wheeler and auto. Predominantly from a risk management perspective. Basically when you study cycles
09:00of auto. What is very interesting is auto generally goes through an upturn of roughly three to four years and followed which difficult period of two
09:10years. And as a result of which earlier in the year when we were having the conversation there were noise fights around the fact that CV cycle is done.
09:18If this FYI 24 25 is going to be a difficult video for CV. But when you look at the numbers for some of the largest names like say and I should be there.
09:26It's not turning yet. Right. But prudence requires you to risk manage this considering that this has played out reasonably well for us. So predominantly from there.
09:36How we think about it. We still continue to be biased towards two wheelers. Most of our risk exposures that have been trimming and that we have been trimming is coming from four
09:46wheelers and ancillaries as we speak. So that's how we think about it. And like I said last time as well I still think India is a hybrid market. It's not a
09:54standard on any market especially in the four wheelers yet. And that's how we've expressed our risk exposures also in the portfolio. OK. OK. Fair call.
10:06Just just one thing. I mean I want to dwell on this a little bit more if you have if you can. And I don't know if you have thoughts here or if you have investments
10:16here. There's there's a lot of talk around battery storage battery manufacturing so on so forth. Expectations of BLI schemes which were dashed etc.
10:28But from a power company to a battery company we've seen a clutch of these names trying to do something within that battery ecosystem. Have you thought this
10:37through. Have you looked into it. Have you had a chance. And if so what are your thoughts on this ecosystem and which players might benefit out of it
10:45whether or not you have an investment. Sure. So in the interest of full disclosure Neeraj we own both the battery manufacturers which are listed
10:55and we are out of one of them. Now in terms of how we think about. So if you look at the battery ecosystem the lead acid battery the two players
11:06there was one which had a dominant market share in execution between 10 and 17. And slowly as the EV team began the terminal value derating of both
11:17the players began to happen for a period of roughly five to five and a half years. Today one realizes that even for an EV and if you assume that EV is only
11:26going to be on an uptake you're not going to get away with lead acid. So there is a need for lead acid batteries to stay. Growth is robust in that. But incremental
11:38investments are going into EV. Now to me I still think that's going to be a 20 year rollout process. Now when you study the scale up of a company which is the
11:48largest in the world see it here. You will look at their ROEs at best at low double digits. So when you are operating at the largest scale if you are not seeing
11:59ROEs it's still there still is doubt in my mind to basically say even if you can achieve scale and let's assume that the PLI will go away at some point of time
12:09because your ROEs with PLI will look very different from ROEs without PLI. So as an analyst I can't assume PLI will continue for eternity. It might be there for two
12:19three years in order to subsidize. So my steady state ROE I don't see it going above mid-teens yet. So if a company is executing very heavily and investing in KFX
12:31very heavily in EVs to me I'm not very bullish about it. So broadly I would want a legacy lead acid portfolio in there with sensible investments in EV in order to get my mix right.
12:43But away from that in the listed market space you only have two. You have a lot of investments happening in the private market space. We don't want anything from there.
12:53There could be some interesting place in the private market space. OK. I mean very quickly we have a next guest waiting but I just wanted to check with you
13:01because it's related to that because there's so much of proliferation of EV. A lot of conversation happened in the last 12 months to 18 months about how long
13:10will multiples for businesses which are in the conventional space. You know a lubricant company maybe a pistons company etc. might have. So you know
13:21any thoughts here very quickly. We need to I mean about a minute. Do you think they will continue to stay relevant in the Indian context because it won't be only
13:29EV in India. So I think lubricant companies should do well especially the large ones. I think you had six years of derating where they went nowhere.
13:38And I think there is a team that's building up which is a solidification of a team around data centers. How that plays out. I think people are going to take
13:47advantage of stories in this place especially when you see the stock price move. But these are companies that will give you 5 to 6 percent of my growth at best.
13:55So you will have to basically enter in at the right valuation and I say right valuation being multiples of less than 15 are going to be extremely crucial for the
14:03growth that they can deliver. So as long as you get that right I think there is a play there. You cannot pay up to own these businesses. That's my only
14:11ending comment. Got it. OK. I mean great talking to you. Thank you so much for for this time today. And maybe the next time we don't wait for six
14:20months to get you back on. Lovely to hear your thoughts. So thanks for that. Thanks a lot. I appreciate your time. All right. That's I just capital on
14:29some of the pockets. Now what we do is we carry forward that last piece of the conversation on the other side of this break with the management of
14:36Castro Stadium.
14:41We'll be right back.