In Conversation With ASK Investment's Sumit Jain
Transcript
00:00Thanks for tuning into Talking Point. I'm your host, Neeraj Shah. The case for a chat
00:15with our guest today, a guest who oversees nearly 35,000 crores worth of equity AUM and
00:23therefore has a worldview which very few people might have on the equity side. Let's bring
00:27up the case for a chat. We try and of course asking about how the mood on equities as we
00:33inch closer to the rate cycle, rate cut cycle if you will, and whether earnings can sustain
00:38the valuation premium. Will autos remain, autofocus remain in FY25 or will we see that
00:45high decibel sector come off the wheels a little bit? And will global facing sectors
00:51like metals, like IT, see further pain or could the scenes improve post the Fed rate
00:55cut? Sumit Jain, Deputy CIO, ASK Investment Managers with us in the show. Sumit, great
01:00having you. Thanks for taking the time out. I hope all is well.
01:03Very much. Thank you, Neeraj, for having me here.
01:05Yeah, the pleasure is entirely ours. So Sumit, as we inch closer to a potential Fed rate
01:12cut cycle, and presumably other central banks follow suit, I was looking at the market since
01:19the Covid lows. The biggest driver, unequivocally, independent of valuations or markets has been
01:26the central bank. Would this time be different or do you reckon that despite the higher valuations,
01:32an rate easing cycle can spur equities further? See, at the end of the day, equities are function
01:38of growth. They are also function of what is the volatility of that growth and then
01:46how long can we see this growth kind of continuing. Each markets will behave differently. We may
01:51see some markets undergoing some pain because at the current point in time, what we are
01:55saying is not necessarily about markets, but geopolitics also is playing a significantly
02:01bigger role. So I really believe what we would see is some markets doing in a particular
02:06manner, other markets actually may behave very differently. India actually stands at
02:10a point where I really believe growth rates can continue for a significantly longer period
02:15of time. And if you look at volatility of India versus other parts of the world, that
02:20is dramatically different. In the past, in case of any volatility, we would have seen
02:25our currency actually going till spin. This time actually has been different. So what
02:30India presents today is combination of growth and lower volatility. This lower volatility
02:35actually feeds into lower or rather relatively lesser volatility in currency and also relatively
02:42lesser volatility or I would say focus on cost of capital. So if your volatility is
02:48low, cost of capital actually may remain subdued and add to that, if you were to think about
02:53cost of capital also going down globally, markets actually may continue to remain buoyant.
02:59So what we need actually to focus on is, are our earnings growth on track? Quarter after
03:03quarter while quarter may be a shorter time frame, we need to look at relatively longer
03:07time frame. In the short term, things may be volatile for reasons. But if those are
03:11on track, if we can see sustainability, then I would actually not be worried in markets.
03:16Okay, and I'll come to the earnings in just a moment. But just tactically, just to make
03:22viewers understand why I was asking that question that I did. Around budget and maybe post that,
03:27a lot of fund managers, mutual funds and maybe even certain PMSs were sitting on large dollops
03:32of cash. Our analysis suggested that the mutual fund industry alone was sitting on about one
03:37or 1.2 lakh crores of cash. Now, my question, why I'm bringing this tactical perspective
03:42here is that assuming that some of that cash has gotten deployed, but not all, would a
03:46rate easing cycle force some of the capital sitting on the sidelines to get deployed globally
03:52into global risk assets, locally into Indian equities as well? And can that spur the market
03:58higher? I'm asking you for a tactical view. I know you don't necessarily take that, but
04:01just think about it.
04:03So, see, this time rate easing actually could be a function of lower growth rates globally.
04:12And if you look at US markets from a very short term perspective as well, it remains
04:17very confused. So, if you look at markets yesterday itself, when retail sales were pretty
04:22decent and rate cut expectations were pushed forward, yet we saw markets actually going
04:28up and going up decently. So, markets actually from a rate perspective will matter, but not
04:36as much. It is about, are we seeing growth coming by? And that is where I would say India
04:41is different. And over a period, I would think this cash deployment will happen in India.
04:49Many of the managers may be looking at more shorter term because they are we saying markets
04:54are cheap in India, not necessarily. Markets may be valuing dollar for a dollar possibly.
04:59So, to that extent, only when we deliver on to those expectations, we would kind of make
05:06decent returns.
05:07Okay, fair call. In which case, let me ask you, since you mentioned that markets would
05:12be quote unquote slave to earnings as the case may be, what did you make of the Q1 season?
05:17It was expected to be not so buoyant a quarter. I thought it kind of turned out to be that
05:24with the sell side notes are saying that too. What did you make of the quarter and
05:27the commentary thereof? Do you believe that earnings are in fine fettle or not quite?
05:31So, it was a very interesting quarter actually. Because if you look at the quarter gone by,
05:37there were multiple factors which were one off. Heat waves were pretty intense in the
05:41country. We had elections, which actually impacted businesses from a short term perspective.
05:48But even after that, if you were to dissect the quarter gone by and look at how sector
05:53after sector they have performed, possibly one can make a guess that commodity related
05:59businesses actually were impacted significantly more than other part of the market.
06:04So, when I say commodity, I mean global commodities. You can look at cement as well. You can look
06:10at oil and gas businesses as well. X of that, earnings growth actually have not been that
06:16low. It has still grown upwards of 15%. So, to that extent, businesses which are relatively
06:22more structural, relatively where India is focused on, actually are in fine fettle. We
06:29may possibly say order inflow for capital goods, infra businesses may not have been
06:32that great, but that was expected as well. Because this was election season, some amount
06:38of tendering actually gets delayed. So, irrespective of this shorter term phenomena, do I expect
06:44year as a whole we kind of deliver 14-15% earnings growth? I would think that is the
06:49kind of run rate that is possible. In fact, not only for a year, possibly for two or three
06:53years is something that is a very high possibility.
06:56So, therefore, this 20-21 times forward earnings multiple that we are assigning to markets
07:03or the NIFTY, let us not say markets, it is a very bottom of market currently, but if
07:07I use NIFTY as a benchmark, is 20-21 times earnings one year forward a reasonable valuation
07:13to pay them?
07:15At an aggregate level, possibly yes, but when we look at indices, they hide many things.
07:22So to that extent, it will have host of businesses, businesses which fundamentally have lower
07:29P, businesses which fundamentally have significantly higher P, but difference versus past in case
07:34of India is this valuation improvement is backed by superior margins and superior capital
07:41efficiency as well. Our ROEs of the past and ROEs of today are different. Balance sheet
07:47of many of the stakeholders, whether you talk about banks, whether you talk about government,
07:52whether you talk about even consumers for that matter, corporates, actually is way better
07:57as compared to what it was in the past. So, to that extent, looking at valuation from
08:02the past lens actually may not be appropriate thing.
08:06Fair call, but yeah, because you ought to admit that the ROE profile of Indian companies
08:12and you know a lot of people talk about 21 times being so expensive viewers, but look
08:16at that, these numbers are not an anomaly. I mean Indian markets now have gradually elevated
08:22themselves to those multiples. So, it is not that we are trading at a 21 multiple whereas
08:25in the past we used to trade at 15 times. So, in some sense, I think it is a point to
08:30reckon with. So, I would love to talk about some of the pockets because you mentioned
08:37that an index hides more quite a bit as well and therefore, it is very idiosyncratic about
08:42specific pockets. The largest weightage in our portfolio is right and for the market
08:49portfolio which is BFSI and banks, what is the sense there? I mean I hear equal and opposite
08:57views on private banks for example, from fairly smart people. I am trying to understand what
09:04is the bull and the bear case argument and where is it that your bias stays?
09:09So see, the way we look at it is, A, from a growth perspective, I am not worried. Will
09:17our credit growth be closer to about 13 to 15% over a long period of time? That is a
09:21very high possibility. But it is not only about credit growth. It is also a function
09:27of how do we fund that kind of credit growth. Deposit is a challenge. Regulatory interventions
09:33are relatively higher. That has impact on cost of doing business as well. It has implication
09:39on the inherent growth that bank can deliver with the kind of ROE that they have. I believe
09:45many of those steps may be right steps from the regulator perspective, but it does have
09:49implication on what kind of ROE can bank deliver. So we in general have a relatively
09:54lower weight in banks as compared to, in fact significantly lower weight in banks as compared
09:59to what it is for the markets.
10:02So within financials, are you constructive anywhere? Lending, non-lending financials?
10:07I believe NBFCs are relatively better placed. Even many of these non-lending businesses
10:13whether it is market infrastructure linked businesses or other non-lending opportunities.
10:20Even for example, savings opportunity is a large opportunity in the country.
10:23By savings you mean wealth or AMCs?
10:26That is right. So these are businesses which are significantly smaller as compared to the
10:31opportunity that presents to all of us over next 5 years, 10 years. If I ignore the shorter
10:37term, possibly many of these businesses will be significantly larger. So we actually are
10:43relatively more focused there.
10:44I would just love to probe this a little bit more on capital markets. I am choosing that
10:53one and then I will probably even try insurance a little bit. But first capital markets. AMCs,
11:00some regulatory actions done in the past brought down the ability to earn the margins that
11:07they used to if you will, now has stabilised. AUM is growing. Opportunity size is large.
11:15Is that a good pocket? Part 2 of my question is wealth. Non-AMCs necessarily, not just
11:21asset managers but doing other kinds of market functions as well. There are various opportunities
11:28out there. And then I heard you use the term market infrastructure. There are 3 or 4 players
11:32now there too. What within this bucket?
11:35If you look at depository parties, DPs or if you look at registrars, we have quite a
11:41large opportunity in that area. In fact, it's not only players like CAMs, KFINs of the world
11:48but we have exchanges as well. If you look at commodity exchange, today volumes are significantly
11:55lesser. Over period, they will be significantly larger. So it's not only about AMCs or wealth
12:03but the basket is significantly larger in non-lending spaces.
12:07Just a word on insurance. The sector has always shown this argument of India being an under
12:17penetrated market but I was doing the math since listing for some of the private insurers
12:23or even for LIC, the stock price return and maybe even the earnings growth has not been
12:30commensurate to the promise at least that it held. It's been a fairly sluggish return
12:38that these guys have given relative to some of the others, financial or even the non-financial
12:42buckets. Now as an investor, I am not compelled to buy into an insurance name. I don't need
12:46to have it in the portfolio. What is your view here? Are you constructive insurance?
12:50If so, why? If you are not constructive insurance, why not?
12:54So I think opportunity clearly is large, whether we talk about life insurance or non-life.
13:01If you look at non-life insurance, general insurance businesses as well, over last 15
13:05years, industry itself has compounded at between 13 to 15%. If one were to take into account
13:12all the general insurances that are there, some were not there in the past. Crop insurance
13:17has come in later. So that has actually accelerated the overall growth for the industry. Having
13:24said that, those businesses which actually can deliver a decent ROEV or for that matter
13:30ROE, actually they will be value creators. So that is something we will have to keep
13:35monitoring.
13:36Now Sumit, lot of varying views. We were at the MK conference for the last three days
13:44when the conference was on. A clear cut winner was the revival of the rural consumption.
13:49The commentary, maybe even in terms of evidence from the companies and their numbers. How
13:54do you think about this piece? I am going to break up consumption into a few. Start
13:58off with the rural focus themes and is there a change in sentiment and performance that
14:03you believe that you may have seen in results or in your conversations?
14:09So see, let us go to the past first. For last few years, that space has actually been impacted.
14:17Many factors have led to the impact on the space. Rainfall has been erratic. If you look
14:23at inflation, that has also had a very large bearing on their income levels. What I believe
14:29from now on is, if you look at government stance as well, focus on job creation, focus
14:36on skill development actually has increased pretty dramatically. We may possibly start
14:41to see revenue expenditure of the government also kind of starting to inch up a bit versus
14:46what it was in the past last few years. Revenue expenditure actually has been very subdued.
14:50So I really believe we may possibly at a point where rural actually starts to bottom out.
14:59If you look at numbers as well of many of the corporates, the volume growth of even
15:04FMCG businesses actually has stabilized at lows. Over period, we will start to gain in
15:10terms of volumes. Will they be better than what they were in the past last two, three
15:15years? They should be better. Will they be significantly higher because many of the staple
15:19businesses from the penetration perspective are pretty decently penetrated. Can we expect
15:24them to grow at a significantly faster pace? Not really. But will they normalize? I really
15:28believe we will actually see normalization in many of these staple businesses. In fact,
15:33not only it's about staples, but I really believe many of the rural businesses with
15:38respect to agriculture, they actually will start to see improvement.
15:42So on staples, just stabilization of the business, does it revert them back to the
15:48erstwhile higher multiples? They anyways traded high multiples.
15:51They traded similar multiple as compared to, close to similar multiple. But the difference
15:56versus the past is in the past, their margins were on an improving trend. Today, their margins
16:03are closer to what they kind of, I mean, they are not very different from the peak. And
16:08they will have to invest into advertisements as well. So to that extent, will we see profit
16:14growth way higher than revenue growth? Not necessarily.
16:17So then therefore, you will not, I'm presuming you will not have a large bet on them, if
16:22you will.
16:23On the consumption side, what I would think is the place to be in would be discretionary.
16:28If one were to ignore, I mean, let's move on from pure rural to the entire consumption
16:34basket, right? So, you know, if you think about IT spend as well, or rather IT hiring
16:41as well, we have seen actually IT hiring going down for last five, six quarters. Now it has
16:47been, this quarter has been a mixed trend. Some companies have hired, some companies
16:51still continue to remain at a number which is slightly lower, but that rate of decline
16:56actually has come down pretty meaningfully.
16:58So I really believe it's not only going to be about rural, but also about urban. Both
17:03parts actually should start to do well. What does this mean? Some of the discretionary
17:08kind of businesses, small ticket discretionary, could be consumer durables as well. Their
17:13improvement is going to be pretty sharp. That is the area I think is what one should focus
17:17on.
17:18Okay, so would you, could you elaborate because it's a very wide bucket, you've given us
17:23a very succinctly, but still, how do you think about this? And therefore, what pockets come
17:27to mind?
17:28I think discretionary is a very, very interesting area. Consumer durable is just one. Then building
17:33products would be another. You would see many of those retail-oriented businesses, right?
17:39Smaller ticket, right? Which actually are used in household consumption. Those actually
17:44also will start to do much better. And many of these businesses have actually created
17:49niche for themselves.
17:50Okay.
17:51They have created distribution network. Over the last few years, they have focused on the
17:55distribution network. And when we start to see normalization, their rate of growth actually
18:00accelerates.
18:01Okay. So, and within this very wide bucket, are you, is there a first amongst equals?
18:07Are you more constructive on some specific buckets within this wide consumption? It could
18:10be building materials, it could be something else, it could be air cooling solutions, what
18:15have you?
18:16You already started to see improvement on the consumer durable side. Everybody knows
18:20that air conditioner sales have been pretty solid, obviously. Climatic conditions have
18:26helped. But it's not only about air conditioners. If we look at refrigerator sales as well,
18:30if we look at washing machine sales as well, they used to be pretty low. Last quarter has
18:34actually been some improvement, right? So, we are already seeing some improvement on
18:40that part of the market.
18:41Okay. Fair call. So, you do expect that that improvement might continue and therefore that's
18:47a discretionary consumption bucket that you might want to bet on.
18:50That is right.
18:51It's a very small other, the other part is very small, which is the upper end of the
18:55K curve, Sumit, which is the premium luxury spend market. Maybe three or four players
19:00present. They've had a really good run until now. Can it kind of moderate or do you believe
19:05that that continues?
19:07I see no reason for that not to continue. In fact, what I see is significant change
19:14in consumption trends as well. So, earlier it was largely about, one can say, product
19:22consumptions. Today, services are also turning out to be a decent part of their consumption
19:26expenditure, right? So, if one thinks about tourism as well, it can be part of the K shift
19:32recovery as well, right? The way you see numbers of many of these hotel industries, while Q1
19:39may not have been that great, but clearly the commentary is different as compared to
19:42what their numbers were. So, when we look at tourism, it's the entire ecosystem. Your
19:48hospitality businesses does well, your travel tourism does well, your travel agencies does
19:53well, right? So, it is the entire ecosystem which actually starts to see improvement.
19:58So, it's, I would say, multiple pieces, as you rightly said. Some on the product side,
20:03some on the experience side.
20:06Okay. And therefore, that brings me to my next question. I'm really keen to know, how
20:10do you think about aviation as a bucket? It's a small bucket. Let's say four or five
20:16listed players out there from airlines and airport operators, right? It's a sector that
20:23traditionally has never made money, but we've seen in the last four, five years, one airline
20:28come out and show that it can make money year after year after year. Airport operators seem
20:32to be doing okay as well, and the space is still evolving. Is that a long-term play or
20:37is it difficult to take a call?
20:40See, airports clearly will make money over a long period, right? But do we have enough
20:45listed players on the airport side? Pretty few. Even on the airline side, we just have
20:50a very few listed players, right? Having said that, we will see more number of airports
20:56getting listed over a period. Not sure of, will we see more number of airlines getting
21:00listed or not, right? Having said, see, on the airlines, clearly world is short of aircrafts.
21:10The ability of both the large aircraft manufacturer to kind of deliver aircrafts on time is challenged.
21:19So those players which have solid balance sheet will stand a better chance to actually
21:26increase their fleet sizes. They stand a better chance to supply. Demand should continue.
21:33Till the time prices don't go out of whack. So will there be some level of elasticity?
21:39There will be. And we'll have to see where this equilibrium lies. But will we see airline
21:48traffic increasing at a rapid pace? We'll certainly see that. And will that be catered
21:52by few players? It will be catered by few players. So will profit pool keep going up?
21:58If one were to ignore the volatility of external varieties that one can see, for example, crude
22:05plays an important role for these companies, right? So if crude is under check, currency
22:10is under check, we should see a decent profit compounding from these businesses.
22:16Large profit pool, very few people can take advantage of. So key point to note, just rounding
22:21off that conversation, and I'm presuming that you're constructive on hotels and some
22:26of the others as well selectively. I have one final question, Sumit, which is now moving
22:32tracks and sectors. Because you mentioned about IT services, hiring, etc., and stuff
22:36like that. Because we are looking at a cut cycle, so on and so forth. What about external
22:40facing sectors? Be it IT services, be it metals, etc. Is there a tactical play? Because some
22:47of them have been stagnant or been beaten down in the recent past.
22:52Can there be tactical play? Possibly, yes. But we don't want to get into tactical plays
22:56per se. Simply because many of these businesses possibly may see relatively lower growth while
23:04their growth rates may accelerate from the past of very low single digit kind of number
23:10to possibly high single digit. That is what one may possibly look at. Over long period
23:15can we anticipate many of these businesses to grow at a relatively faster pace? I have
23:20my own doubts. Does India offer better opportunity as compared to many of these external global
23:26plays? Certainly, yes. There are many Indian, I would say, domestic oriented businesses
23:32which actually over next five years, seven years, ten years will grow at a rate much
23:35faster than what we are talking about. On the technology side, you're saying?
23:39Not necessarily on technology side, but possibly on domestic consumption or on the industrial
23:46side. So, to that extent, I would think there are lot better opportunities as compared to
23:50pure software services that are there. Within software services, what we would actually
23:55be more focused on is into those businesses which actually are very focused. Focused on
24:01few areas, have strength. Technology investment there are increasing at a very rapid pace.
24:08It could be R&D investments there or ER&D investments there, which are increasing at
24:12a rapid pace. And consequently, they may be beneficiary of the large trend that the world
24:17is witnessing. Okay, so maybe ER&D or maybe product companies which could be doing this.
24:22Great. Okay. Sumit, so good talking to you. Thank you so much for taking the time out
24:25and being with us. Really appreciate. Thank you, Neeraj. Thanks for having me. The pleasure
24:29was ours. And viewers, thanks for tuning into this edition of The Talking Point.