In Conversation With Ambit Invst's Dhiraj Agarwal
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00:00Thanks for tuning into Talking Point. I'm your host, Neeraj Shah. Our guest today is
00:16Dheeraj Agarwal, MD of Ambit Investment Managers. Dheeraj, great having you as always. Thanks
00:21for taking the time out.
00:22Good morning, Neeraj. Thank you for having me over.
00:25Now the pleasure is ours. So, well, we are closer, Dheeraj, to the big Fed event than we were.
00:35It's an interesting conundrum in that the markets may have been disappointed if growth was very
00:43strong because then the markets would have thought that, oh, the Fed will not move on rates. Now the
00:48growth has started to shake a little bit and therefore the markets believe the Fed will cut
00:52rates. But because growth is wobbly, should one be worried? So the market is finding its own
00:57reasons. I'm trying to understand how do you think about risk assets if we are looking at a period of
01:02the next three, four, five, six months of some significant rate easing by global central bankers?
01:10So two things, you know, in this whole discussion, we often make valuations as a
01:14third key important variable, the third key pillar of this whole situation. We're just looking at
01:19macro and the news and the possible impact. Now, the valuations of the strong rally
01:26on which the market stands at this point of time, whether it is
01:31US, Neeraj, did I lose you? No, no, I can hear you loud and clear, Dheeraj.
01:37I can hear you loud and clear. So the current valuations on which US and India particularly,
01:43the two markets stand and a very strong rally in the last one year. Markets will find its own
01:49reason to worry a little bit and force a little bit of correction, right? So that is one point.
01:54Second is, it is indeed a tightrope walk. All of us like fairy tales, all of us want
02:01goldilocks, not too hot, not too cold, but reality is often not that goldilocks, right? So
02:08the markets have been wanting a rate cut and a sharp rate cut, but they don't want economic
02:13slowdown accompanying it. You have to be careful what you wish for. So it looks like markets may
02:19get their wish this time, which is a very sharp rate cut cycle, but it might come with some
02:25negative economic data, which might not be very good for the markets overall.
02:29Okay, so what wins? I mean, you reckon, I mean, because valuations have been a concern now
02:35for the last 12, 18, maybe months, or everybody who's been sitting on cash are licking their
02:40wounds as well. What do you think triumphs? Do you think valuation concerns and slower growth
02:46triumphs? Or do you think fund flows and a rate cut triumphs in terms of sentiment and therefore
02:52markets staying steady or even moving higher? So interestingly, Neeraj, you know, sharp rate
02:59cuts are usually not good for equities in the near term. Gradual rate cuts have a mixed track
03:05record of whether they are good for equities or bad for equities. Actually, if you analyze the
03:09data over 40, 50 years, it's almost 50-50. The probability is no better than a coin toss.
03:21A sharper rate cuts, which create expectations of many more sharp rate cuts in the near future
03:27logically, I mean, if you think about it, we step back, logically would make bonds a lot more
03:33attractive than equities. Because let's say, theoretically speaking, market starts to believe
03:39that USA might cut rates by 200 or 250 basis points within a span of one year. Your 30-year
03:46treasury is almost like a sitting duck in terms of where you should park your money, right? I mean,
03:54why bother with equities risk? So this is one of the reasons why money tends to flow out of
04:00equities and chases bonds in the near term. Second is obviously, as you mentioned, that sharp rate
04:05cuts also try, also sort of communicates to the market that is the economy weaker than what we
04:12are reading in the data trends. Does Fed know, which we don't know. Is Fed panicking a little
04:18bit? Those concerns also surface. But the first one itself is powerful enough. I mean, it's fairly
04:24logical. Fair call. Just one small question on that before we move to India, and which is that
04:30the belief almost is that, and you're right, I mean, I was reading, I believe, a city note that
04:34said that their data analysis also like yours seems to suggest the first one or three months,
04:39it's negative and then it turns positive. But usually also a rate cut cycle or a rate easing
04:45cycle gets accompanied by changes in fund flows towards emerging markets as well. You reckon that
04:54that could happen because India's weight in MSCI-EM is now significantly higher. We might
05:00even eclipse China at some point of time. So what happens to that part of the equation?
05:08I honestly, I don't know is the right answer on this one.
05:14We have been waiting for incremental FPI flows in the country as our weight in India,
05:20MSCI has been going up, Indian economy has been doing better relative to certainly the entire
05:25EM world. And there's all the logic that FI should be increasing their weight in the country. But
05:33contrary to that, FII weight has actually come down in the last seven years from 21,
05:3722% to about 18, 18 and a half percent. So that's a little bit of a mystery, I think, to some extent.
05:48So it's very difficult to predict that actually if their FII flows will actually turn because of
05:52the rate cut cycle. Let's see. Fair call. The template the last couple of days seems or last
06:00maybe a week seems to have been that don't bet on defense, but bet on defensives. You're starting to
06:08see the emergence of staples, maybe some of the underperforming private sector banks sporadically
06:15showing a bit of an uptick as well. And the defense railways team has taken a bit of a backseat.
06:20You reckon the template continues for the latter half of the year?
06:24Yeah, so I think you hit the nail on the head when you said underperforming banks. So
06:29in general, in the last two or three months, we have seen re-emergence of the underperforming
06:38sectors. So it started with IT, which was the first sector to show a very, very strong bounce.
06:43It started perhaps in May and June itself. And then we saw a follow through in FMCG,
06:49completely ignored sector for a while. And now we are beginning to see in private banks
06:55a little bit. I mean, that's still sort of struggling. It's still just a two-day,
06:59three-day phenomenon. Let's see if it stretches. But yes, that's what has been happening. Money
07:04has been moving out a little bit from the strong performing sectors into weaker performing sectors.
07:10I call it winds of change. So there is certainly a cycle rotation underway in favor of sectors,
07:17which have underperformed in the last two or three years. And with some amount of logical reason and
07:22catalysts. So there is a slightly higher government support to consumption in this budget. Many state
07:29governments are providing various kinds of subsidies or incentives to boost consumption
07:34at the bottom of the pyramid economy. We have seen a little bit of an uptick in consumer data
07:39and consumption data, even in the last GDP print, also in the commentaries of most FMCG companies.
07:45So that's doing well on that end. On the IT services, very interesting observation I made
07:53recently was that the sector's x max seven earnings growth in the last quarter actually
08:01beat the analyst estimates by almost 70, 80%. And that's usually good news for IT services.
08:08That results in water flows beginning to pick up for Indian IT services with one or two quarters lag.
08:14So there are some green shoots in IT services as well. Private banks is purely a relative
08:18valuation game at this point of time. There's nothing wrong. Earnings have been coming in.
08:23There are no issues in NBLs. Valuations have gotten de-rated. Many participants in the market
08:30now find attractive value out there. So to answer your question, yes, the winds of change, I think,
08:36should last for some more time. A few quarters, for sure. A few years, I don't know, at this point.
08:43Okay, fair call. I'll probe about the ones favored in a moment, but I have a
08:50bit of a cross question on a couple of themes Dheeraj has been performing. And viewers,
08:55here, look at this chart. I mean, this is a chart of maybe given about eight days or nine days ago.
09:00But here's a chart which shows, let's say, real estate, a sector which has done really well.
09:05And fundamentally, pre-sales numbers have looked okay. Inventory is seen at the lowest level since
09:112008 in India. And I presume this must be tier one cities and not necessarily India-wide. But
09:19be that as it may, this looks very solid from an inventory data perspective. But Dheeraj,
09:25it's a sector which has now started to plateau out a little bit. So I'm trying to focus on
09:30themes which have done really well. A lot of people might already have investments there,
09:34and therefore, I would love to know how do you think about some of these. So let's start with
09:37real estate because it's a wide economic impact sector too. What do you do with the pure play
09:43real estate players now that there has been a rally for the last 24 to 36 months?
09:50So, Dheeraj, the answer is purely time horizon, right? So as you rightly pointed out, real estate
09:56sector is doing well. One of the biggest variables which gives me confidence that this cycle for
10:02real estate will last longer than, let's say, either 94 to 97 cycle, or sorry, 92 to 94 cycle,
10:11or 2003 to 7 cycle, because the price rises have been more moderate and gradual as compared to,
10:19let's say, 2003 to 7 cycle. So in 3 to 7 home prices, let's say, cities like Bombay went up
10:28in a span of 4 years, which obviously killed demand at the end of 4 or 5 years. I mean,
10:33it went into speculative demand and finally killed demand. This cycle, the price increases
10:37are more like 10, 12, 14% per annum, which is more digestible. So it can last. However,
10:46in the near term, from a stock price performance point of view, the platforming effect might be
10:52visible for some more time, because market has just started focusing back on valuations a lot
11:00more than what the market was focusing on, let's say, 4 months or 5 months ago, and trying to
11:06seek pockets of safety. So it's not reflected in the index, because one sector struggles or
11:15corrects, but another sector comes back into momentum. So like IT and FMCG is holding up the
11:20index at this point of time. But there is a slight amount of risk of effect in the market.
11:27Investors are focusing more on numbers than on narratives. The focus on valuations have come
11:32back. The focus on relative safety has come back. The animal spirit has gone out a little bit.
11:39So it could consolidate for a while more. Got it. Some recent developments, and we'll talk about
11:44GST in a moment, but one big development that happened, Dheeraj, is the passage of the Biosecure
11:51Act. It just got done this morning, as per Bloomberg. Now, there's a lot of talk about
11:57impact that something like this could have for pharmaceutical companies, non-China pharmaceutical
12:02companies across the world, because the Biosecure Act seems to target some specific Chinese
12:07companies. Now, I would love to know if you've given this some thought. Sorry, this came out
12:13in the morning, so I'm throwing this out of the dark at you. But any thoughts on what some moves
12:17like these could do? Are these really big moves? And is Indian pharma well-poised to benefit from
12:23this or other trends? I think it is. So pharma has been in a very strong uptrend for a few years.
12:33And this is one sector where despite the strong uptrend, I'm buying a couple of pockets here,
12:39and their valuations are not completely out of whack. So valuations are still supportive.
12:46So the whole pharma trend started with generics becoming a little bit more in tight supply in
12:52the US. And the price erosion for generics, which was 20%, 25% per annum, came down to
12:58mid-single digits. Globally, many of the generic players, because of almost a decade of very deep
13:06price erosion, actually shut down. So there was a meaningful consolidation in the sector.
13:11Indian generic players became much better positioned from a competitive advantage point
13:17of view. And now the Buy Secure Act, which is... I mean, the whole genesis of the act is that the US
13:25is feeling pinch of high drug prices and a little bit of shortage in some of the markets as well.
13:32So this gives further fillip or boost to CDMO contract manufacturing, Indian pharma players.
13:41And by itself, does this change the industry fundamentals around? I don't think so. But
13:47industry, which was already doing well, there was already a very, very strong reason to say that US
13:53generic market is not stabilized, price erosions are not there, and Indian companies will benefit.
13:59This is an added, I would say, lever for the Indian companies to do well. So this is one sector,
14:05which I think is in a secular trend for many more years to come as well.
14:09By the way, viewers, watch out for the stocks today. I mean,
14:13Syngene is up about a percent, Loris Labs, I think up about 4%. Newland Labs
14:17could also be in the green today. Diviz is up about 3%. So some of these stocks are seeing
14:22that impact in the session today. Now, stay on Dheeraj, because I want to get in my colleague,
14:28Mahima, to talk about the other aspect, because some of the cancer importing companies
14:33or cancer drug importing companies are also doing well, because of the GST move that has happened.
14:39It's the current news and Mahima Johnson to put that into perspective. Mahima, good morning.
14:45Good morning, Neeraj. So basically, the rate on cancer drugs has been considered to be reduced
14:51from 12% to 5%. Now, this could potentially benefit and you're also seeing stock movement
14:57in these companies today. This includes Abbott India, Zydus Life Sciences, Ankam Laboratories,
15:02Cipla, Biocon and AstraZeneca Pharma. Now, it's not just the pharma companies,
15:07there are also snacking companies which have benefited from the recent GST changes,
15:11where rate for excluded and expanded savoury snacks has been reduced from 18% to that 12%
15:17mark. So all snacking company stocks are up and above in trade today. This includes Pratap
15:21Snacks, Vikaji Foods, Gopal Snacks. There is also GST on car seats that has been increased from 18%
15:29to 28%. Now, one player that has been impacted because of this is Bharat Seats. There's also
15:35an introduction of reverse charge mechanism on metal scrap. Now, this basically means that
15:40if an unregistered dealer is selling metal scrap to a registered dealer, the registered dealer will
15:45be liable for paying the GST taxes. Now, this is impacting stocks like metal scrap recyclers
15:52who buy these metal scraps. This includes Gravita India and Pondy Oxides and Chemicals
15:56and also steel companies which are not really moving in trade today on the back of this news,
16:00but there is Tata Steel and JSW Steels which could possibly have some impact. So these are
16:06some of the stocks which have seen impact on the back of the GST changes that took place yesterday.
16:11Thanks, Mahima. Dinesh, any thoughts here? I mean, again, too early, just happened overnight,
16:16and if not just on the current moves, but broadly on the fact that there is some recognition around
16:24what could be happening at the rural end. So some snacks, savories, etc., also seeing some GST cuts
16:30there. Do you think the alignment of decision making is happening with trying to boost
16:38sentiment and fortunes at the rural end currently? I think Mahima did a fantastic analysis of
16:48all the impacts on the GST cuts, so not much for me to add. But yeah, I think in general,
16:56there is a slight shift in the government policies towards focus on consumption as well. So overall,
17:03in general, there is a slight more awareness of the fact that the bottom of the pyramid has not
17:08been doing as well as the middle and the upper end of the pyramid. We saw that little bit of
17:14shift in the budget also where more allocation was done to all the rural schemes and consumption
17:21boards, government consumption expenditure itself as compared to the interim budget
17:25was hiked by almost 200-250 basis points. So yeah, I mean, overall, there is a shift,
17:33but nothing, no more micro-addition. I think Mahima did a fantastic job of
17:37capturing everything much beyond perhaps even what I need.
17:41What I was trying to understand is, so we've gotten the GST impact, but I'm just trying to
17:45think whether the GST changes plus all the other things make you believe that rural consumption-led
17:50players could now be a forefront because they also, I mean, they are never cheap, but relative
17:57to what they've done in the past, in the last 18 months, not going anywhere, do they present
18:02that relative value currently? Let's say staples, for example.
18:07I think so, yes. And as you rightly said, they're never cheap. But if there is ample
18:14liquidity in the market, the liquidity will always try to seek areas where the marginal
18:22rate of change is moving up and move out a little bit where marginal rate of change is going down.
18:29So in many of the capital expenditure areas, the marginal rate of change is either stagnating or
18:35moving down slightly. The absolute rate of change is still healthy. And in the consumption area,
18:41the marginal rate of change is moving up. So yes, we will see that shift continue for some time.
18:46Got it. Dheeraj, what about non-lending financials? Sorry, I'm moving subjects now,
18:51because we spoke about banks. I want to bring in the non-lending financials into the picture
18:55simply because after a really long time, life insurance is making its presence felt
19:00on the daily screen. And we already seen that despite regulatory moves, the buying interest
19:10in, let's say, for example, the wealth or the asset managers is not dwindling. Those stocks are
19:16making new highs every second, third week as well. So what about non-lending financials?
19:21Do you like that bucket? And if so, what do you like and why? Yeah, I like that bucket. So
19:28I mean, most of them are long term structural plays on India, right? On financialization of
19:35savings or increased allocation to equities, increased requirement and desire for protection,
19:42which is insurance. So whether they're capital market plays, insurance,
19:48those are clearly, clearly in a... I mean, the business cycle itself is in a 10-20 year uptrend.
19:53So even now, on an annual basis, just 4.5% of household savings go into mutual funds.
20:01This number can easily rise to 12%, 14%, 15% before it starts to struggle. So it's a long
20:07journey. I mean, we all know Indians are underinsured on the protection side. Historically,
20:13Indians consider or we consider insurance as yet another savings instrument. It's only in the last
20:19few years that we have begun to realize that better to consider fixed deposits or mutual funds
20:27as savings instruments and insurance as protection. So these are, yeah, these are long-term
20:32trends and pretty much here to stay. All right. Speaking of long-term trends, there is another
20:37chart, of course, which we will bring, but Dheeraj, I mean, just wanted your view
20:42on the new-age tech companies. Now, you're constructive on IT services, which I heard
20:48you say, or maybe if not constructive, you at least see green shoots there. I would love to
20:52know what do you think about the tech-enabled consumer companies, or maybe they are tech
20:58companies with a consumption angle to them, but they've done really well and the newer features
21:05are getting added, which are making their presence felt, Blinkit in Zomato's case, or some other in
21:09some other cases. Do you like this whole bucket? Even Paytm is starting to move up. So I'm not
21:14asking you to speak about specific stocks. I'm just trying to understand how do you think about
21:17the tech-enabled businesses? So tech-enabled businesses, by definition, if you get the
21:23business model right, and the time is large enough, your incremental revenues come at
21:33extremely high margins, right? Because the infrastructure is the same as it was
21:36infrastructure is built. Incremental revenues keep on boosting your margins. So if you're in
21:41that space, when the time is large and you can keep on capturing large market share,
21:45I mean, you mentioned Zomato and Blinkit, for example, so without commenting on the stock
21:50value evaluation at this point of time, I mean, this is a market which will continue to grow for
21:54the next 20 years. It's a globally at this point of time. And as more people order, as AOVs keep
22:02going up, the margins will keep expanding. Whereas there could be many other, let's say,
22:09consumer companies or the word of a better word, which use digital primarily for distribution.
22:18There, the whole matrix on time may not be very clear. So this whole digitally enabled services
22:23or digitally enabled businesses, I mean, each company is so different and each company is,
22:30the target market is so different that it's very difficult to brush them all with the same brush.
22:35And also the competitive intensity, right? I mean, food delivery and groceries are globally
22:41or at best a three-player market. So the competitive intensity, which was very high,
22:45let's say six, seven years ago, five, seven years ago, has come down. So that also
22:51will determine how profitable you can become. If the competitive intensity or barriers to entry
22:55is very high, then it's tougher. Got it. Where are you most worried, Dheeraj,
23:02aside of the fact that you are worried on valuations, because you brought up as the
23:06primary point when I asked you the first question, where is it that you are most worried about?
23:15Apart from valuations, I think the one little shock that we saw in August
23:23and that almost immediately vanished at that point of time, but we should not write it off
23:30completely, is the dual impact on the entire global financial system of U.S. cutting rates
23:39and Japan increasing rates. So for the last five, six, seven years, it was very easy for the
23:48Japanese money to flow off door as the end world on a structural depreciation mode. So as per one
23:54data I read on Bloomberg, I think the Japanese offshore investments for 19 to 24 expanded by
24:03almost three trillion yen or thereabouts, which is about 1.4, 1.5 trillion U.S. dollars. That's
24:09a huge sum of money. So as the U.S. rates come down and Japanese rates go up, could there be a
24:18large scale unwinding? I don't know, but the risk is high. How does it impact the global financial
24:24market stability, whether it is fixed income or equities? Again, very difficult to predict at this
24:29point of time. It's one of those things which you can't analyze and put a number to it, but I think
24:36it's a larger risk, which since, I mean, it's all trailer of that in August five, which was the day
24:42of the worst crash since the Black Monday of 1987 for global markets. Nikkei was down 12% in one
24:48single day, but immediately it's stabilized. Doesn't mean it can't revisit at some point of
24:54time. So I worry a little bit about that. Point well noted. Okay. Dheeraj, we covered a wide gamut
25:00of topics, didn't quite flow one after the other, but it was just good to get your brains on a lot
25:07of these. So thank you so much for sharing the thoughts and thanks for your time today.
25:13Thank you very much for the interaction. I enjoyed it too. Thank you. Yep. Thank you. Well,
25:18that's the ambit view on a bunch of things. Keep in mind that the markets are flat completely
25:24with Nifty IT being the only one which is really shining now about 0.75% higher with the likes of
25:31CoForge, which has got a big thumbs up from brokerages leading the charge, I presume,
25:37but a clutch of other names also doing rather well for themselves.
25:40With that, it's a wrap on this leg of Talking Point. Thanks so much for tuning in.