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00:00Thanks for tuning in to Talking Point.
00:13I'm your host, Neeraj Shah.
00:14The case for a chat for our guest on Talking Point, Ravi Dharamshi, today.
00:20We asked him whether the concept of value has changed.
00:23He's tweeted extensively about this.
00:25Would love to know his thoughts there.
00:28Also try and talk about whether some of the high-priced themes are now baking in all the
00:33positives, particularly power or defense, but power in particular.
00:36Has the potential been priced in?
00:39And he was also amongst the earlier identifiers of the EMS theme.
00:44That theme seems to be having a nonstop run.
00:48Look at almost every business, and they are bagging in more clients and doing well.
00:52In fact, companies talking about how India can become an EMS hub, we asked Ravi how does
00:56he think of it.
00:58He and his partner have also written a book, and we'll try and talk to Ravi about the book
01:03as well.
01:04Ravi, there's so much to talk to in the next 20 minutes.
01:06I don't know if we'll be able to do all of that, but thank you so much for taking the
01:10time out.
01:11Thanks, Neeraj.
01:12Thanks for inviting me.
01:13The pleasure is entirely ours, Ravi.
01:15Let me start off by asking you about this set of tweets that you have put out on the
01:22platform X, wherein you're talking about whether the concept of value has indeed changed.
01:28And I think you ascribe to that theory.
01:31In fact, you espouse that theory.
01:33Tell us a bit about it.
01:34So, see, I don't think the concept of value has changed.
01:39But what happens is as the markets have evolved, everybody tries to bucket themselves and I'm
01:45a value investor, I'm a growth investor.
01:47And I think that is what creates confusion.
01:51I mean, every type of investing is value investing.
01:54And that is what Warren and Charlie have said over a period of time.
01:58And I had tweeted a particular video of Warren speaking about it also.
02:03And I think value and growth both are not a mutually exclusive concept.
02:10Growth is very much a part of the value equation.
02:13If you want to estimate the value of a company, you have to know what the future growth is
02:19going to be.
02:21There are certain people who are completely shunned away from doing any kind of a forecast
02:26and say, I will buy when the intrinsic value of the company is much higher than what the
02:36current quote of the company is.
02:37Now, I'm not saying that it is absolutely a wonderful thing, but those kind of cigar
02:44but investing opportunities come very, very rarely, like once in two decades, maybe where
02:52there is a crisis of sorts where asset prices fall so much that they become very, very attractive
02:59in relation to their own intrinsic value.
03:03In a regular course of business, and especially in a market like India, which is a growth
03:08market, you will be hard pressed to find opportunities which fit into this particular
03:14traditional definition of value.
03:17So the value of an asset in simple terms, if you take the formula, is the discounting
03:25of all future cash flows.
03:26By definition, it is all future cash flows.
03:29So you have to know what the future cash flows are going to be.
03:31Now, if you figure out that the future cash flows are going to be much higher than what
03:36they are at present, because there are certain aspects about business, which are panning
03:41out now, then you will suddenly realize that there is very apparent value, even though
03:45in the traditional PE format, it might not fit.
03:50And that is what I have been trying to dispel that myth that just because on a TTM PE basis
03:57or the last year PE basis, a stock looks expensive does not mean it is actually expensive.
04:03So there is a fine logic why there is a lot of value in it.
04:09Ravi, the help our viewers understand the constant pushback to something like this is
04:18that, oh, we've seen this step play a number of times in the past, it looks good till it
04:23is looking good, then it tends to correct and stocks which price that x valuation at
04:28some point of time will come back.
04:30And then the last four years have shown that expensive stocks continue to do well.
04:34I'm not asking you to comment on a Dickson, but I'm using that as an example, right?
04:38For a brief period, notwithstanding, it's always stayed an expensive stock, continues
04:42to do well.
04:43There is a Keynes Tech, which has continued to do well, a clutch of others, power companies
04:46or wind equipment companies continuing to do that for the last couple of years.
04:51So how does one wrap her or his head around what can be construed as expensive?
04:59And what is not too expensive because there is growth and therefore the value is in the
05:05growth of the company.
05:06How does one distinguish between the two?
05:08I think there's a very simple way, of course, it entails that you do some scenario analysis
05:16on what's going to pan out in the 10-20 year time frame.
05:19Often enough, even in the bottom of, right after 9-11, when the stock prices were dirt
05:26cheap at that point of time in September 2001, you would have found that in Asian paints
05:33was still expensive vis-a-vis the market, a Titan was still expensive vis-a-vis the
05:37market.
05:38Now, at that point of time, you could have said that, these are expensive, let me buy
05:42a 5PE multiple company.
05:43Yeah, sure, you would have bought 5PE multiple company and made some money on it, not denying
05:50that.
05:51But you would have completely missed the point if you just focused on valuation or historical
05:56valuation.
05:58What about understanding the business?
05:59What about understanding the management?
06:01What about understanding the prospects of the business 5-10-20 years out?
06:05And if you would have understood that, then you would have realized that those seemingly
06:09expensive stocks were actually the cheaper ones.
06:14And the seemingly cheap stocks were actually the expensive one because you lost out on
06:18an opportunity, you did not understand the prospect of that business.
06:22So if you can say that, and I'll take that example of Titan again, now, it's not like
06:30everybody has a clear picture of what's going to happen.
06:33But if you could foresee that there's a large jewellery market out there, Tata has a trusted
06:40brand name, and there is a management in place that is focused on creating that value, then
06:46it would have become very, very clear that it's okay if the traditional metric of PE
06:52and price to book might say that this is an expensive stock.
06:55But this is a long runway, there is a lot of predictability to it.
07:00And you can say that the probability of a Titan becoming a much bigger company was much
07:05higher than let's say some XYZ company becoming that large.
07:10So focus on identifying that predictable growth over a long period of time, and where markets
07:17are actually probably underestimating the kind of growth that can happen.
07:23That is where the value lies.
07:24I mean, I hope I've been able to explain, but honestly, I'm not very good at articulating
07:30as maybe some of the other valuation experts are.
07:34But you're undermining yourself, Ravi, I think this was a very good explanation and much
07:38needed as well.
07:39So let me try and correlate this, Ravi, to the current pockets, one or two that I have
07:43picked out for a conversation today before we talk about your book as well, because that's
07:46the third one.
07:47But the first one, EMS, because you were amongst the earliest identifiers.
07:52Now, the stocks have had a long run.
07:56I mean, I was looking at the Dixon market cap today, 85,000 crores.
08:00That's something that's gotten created in the last four years.
08:02But we have some charts here, which shows, one, that the government targets for electronics,
08:07finished goods production, and components production with policy support.
08:11Base case, some people say, and NITIA research and Nomura research suggests that a 530 base
08:15case, look at their growth from 86 to 253, and with policy support from 86 to 350, that's
08:22nearly a 5x jump in finished goods production and a 10x jump in components production.
08:29And viewers, the other piece that one of the research notes suggests as well is the electronics
08:35production as a percentage of GDP will shoot up from circa 3.8 currently to maybe 5.3 by
08:43the end of FY27.
08:45Ravi, are these stocks, which are optically expensive, and may look cheap as earnings
08:52growth comes in, or are they actually expensive?
08:55So, see, today, no doubt about it, they're factoring in a lot of the future.
09:03So there is a risk to the extent that what if the future is different than what the stock
09:08prices are suggesting.
09:09However, I'll just give you a framework on how we think about it, and how we attach probabilities
09:16to the outcome.
09:17And that might give you some sense on how to evaluate this.
09:21So two, three years back, when this sector was actually getting born, on, you know, where
09:26new companies were getting listed, at that point of time, this valuation concern was
09:31actually totally not required.
09:34Why?
09:35Because, see, we tend to track a lot of these trends on our 10-20 year horizon.
09:42But only when they cross a particular inflection point that we bring it on our radar or make
09:46it into part of our investable universe, is that the growth is going to pan out in the
09:51next five, seven years and not in some 10-20 year horizon, which might not be my investment
09:58horizon to begin with.
10:00So when, you know, government in 2014-15 started talking about make in India, and then
10:08they focused, they came out with a policy for electronic manufacturing, we knew that
10:14this is the beginning of a particular mega trend.
10:17However, we waited until, you know, Samsung came here, Apple came here.
10:23Once the OEM started coming here, putting, and of course, we all start with low end assembly
10:28world.
10:29And then the ecosystem around it started developing.
10:33That's when you keep your eyes out for companies, where there is some differentiation where
10:39they are showing some signs, who are these large OEM beginning to work with?
10:44Those are the companies that you should be focused on.
10:46And then you have a reference point, how this particular thing has panned out, whether in
10:50China, whether in Taiwan, and someday we will have our own Pegatron, Winstron, Foxconn out
10:58of India.
10:59Yes, there is all possibility and likelihood that we will have, because government has
11:03created that required ecosystem and the required ingredients for from where the entrepreneurs
11:10can actually start charting their own path.
11:13So that that is what tells you that, give or take a couple of years, this story is going
11:19to pan out.
11:21And in that kind of a scenario, you don't try to value those company on what the current
11:26earnings multiple is, but you try and build scenarios, what kind of size this company
11:31can become, what kind of profits this company can make in a 3-5 year horizon, and then see
11:37vis-a-vis that scenario, is the stock still very attractively valued or very cheaply valued?
11:45And in that also, you don't have to make extravagant predictions or forecasts to justify your position.
11:52Even in a base case scenario, if it is attractive enough, then you can let the upside, you know,
11:59surprise yourself.
12:00That's how we think about these things.
12:03Wow.
12:04Maybe, maybe that's how money is being made these days as well, Ravi.
12:07So thank you so much for that example.
12:09Wonder if the same analogy applies to power again.
12:12I could mirror those charts, Ravi, remove EMS, put in power, change the words and the
12:17bar charts would look the same in terms of targets, etc, right?
12:20The stocks have also run up, but it's a different sector, I mean, per se.
12:24How do you think about this space?
12:28So when you say power, I'm assuming you're talking about power equipment companies.
12:32Yeah.
12:33Equipment generation.
12:34Okay.
12:35Let's stick with equipment.
12:36Let's start with that.
12:37So again, the same thing.
12:39What is the size of the opportunity?
12:41How soon will this opportunity pan out?
12:44See, people talk, we don't like to talk in terms of 10-20 years, we like to talk in terms
12:49of 5-7 years.
12:50And is that opportunity going to pan out in that 5-7 years?
12:54Basically, will the government be forced to spend money on building power transmission
12:59infrastructure or power as even private sector will have to spend that money.
13:04If you see today, for example, for all the renewable generation that is coming up, the
13:08single biggest factor that is impeding that growth is the connectivity to the grid.
13:15So basically, you need to put those transmission lines in place today, if you want the entire
13:20energy transition to succeed, otherwise, we would have failed.
13:24It's like buying, paving the roads before selling cars.
13:28You cannot sell cars if there are no roads available to drive.
13:32So first, you have to pave the road.
13:33So power equipment companies are essentially catering to that opportunity of paving the
13:39roads for energy transition.
13:42And that spend needs to happen in the next 5-7-10 years.
13:46And because of that, delta is huge in terms of spend.
13:50If x was being spent 2 years back, the annual number for that x will become 3-5x in the
13:58next 5-year horizon.
13:59That's a huge delta.
14:00And then there are very few companies who are catering to that kind of an opportunity.
14:04So there is a huge delta in terms of opportunity.
14:07And now there is a right to win of certain companies, which is why the stock prices are
14:11running probably slightly ahead of even ordering.
14:13We saw the same thing in defense as well.
14:16Way before the orders started coming, the stock prices started moving.
14:21And with every order, the stock prices have been going up.
14:23So this is how usually a cycle plays out.
14:26Now of course, probably I can say defense has reached a point where ordering has kind
14:32of reached a kind of a peak level.
14:34And now you are carrying the entire execution risk ahead of yourself.
14:37So it's hard to say.
14:38The opportunity won't pan out.
14:40But now the risk reward might not be that favorable from the next 5 years perspective.
14:46Got it.
14:47Okay.
14:48Okay.
14:49Point well noted.
14:50We have time for one more question.
14:51So I'm going to now extend the power thing to a green revolution giga trend.
14:58And I believe that's the book, Ravi, that you and your partner Varun have written.
15:06I was lucky to get a copy of that book, Ravi.
15:08I would love to understand in brief, we'll probably do a separate show on this.
15:12But today for a brief in the next three minutes or can you tell us a bit about what is the
15:17message that you're trying to convey from an investor's perspective?
15:21Anybody who's an investor and listening to you right now, trying to think about this
15:24theme and trying to get an excerpt of what you're trying to say?
15:27What would you mention?
15:28Yeah, no, thanks for that question, Neeraj.
15:31So first of all, the way we look at this is that energy transition is not new.
15:37Okay.
15:38We've been moving from various forms of energy.
15:40There was a point in time where coal was a big percentage, then oil took over and now
15:47oil is being replaced by renewable.
15:49But what is different about this particular energy transition is it is being driven not
15:54by natural resources, which are to be dug up from the ground, but it is being driven
15:59by technology, which is made in factories.
16:02So there is a learning curve involved over here.
16:05These technologies tend to keep improving as you produce more and more of it at a scale,
16:09they become cheaper, they become more efficient, and they're able to extract more.
16:15So that is the main difference between this particular energy transition as against the
16:19previous one.
16:21Another thing that's different about this particular energy transition is that there
16:25is a time bound nature to it.
16:28It's not like it will have to take its own due course.
16:31We have to achieve a certain level of carbon emissions.
16:35And to achieve that, we basically to reduce that carbon emission, we need to achieve some
16:39level of renewable penetration for those carbon emission norms to be achieved.
16:45So there is a timeline to it as well.
16:48And we always prefer opportunities that come with a timeline that this has to be done in
16:52the next 30 years.
16:53If this has to happen in the next 10 years, that is when opportunities become real.
16:59So that is the point.
17:00Now, the backbone of this entire energy transition, in my opinion, is going to be solar.
17:06Why solar?
17:07Why not nuclear is because there are three things that are needed for a particular technology
17:13to be adopted at a mass level, cost, afford, basically, which means affordability, accessibility
17:22and acceptability.
17:23So with nuclear, cost is an issue, with nuclear, accessibility is an issue, because, you know,
17:32people, there is something called a NIMBY effect, not in my backyard.
17:36If you were to put up a nuclear plant, let's say 10 kilometers away from Bombay, I don't
17:41think the entire city is going to agree to that plant today as of now.
17:45So basically, you will have to go to remote location, which might probably increase the
17:50cost even further of evacuation and everything.
17:53So a technology can become mass only when it is free, accessible, affordable, and it
18:00has reached that mass adoption level.
18:03So yeah, so those are the points that we want to make.
18:06Now, this energy transition as a theme transcends many, many sectors on the generation side,
18:13on the transmission side, on the consumption side, on the new technology side, on the financing
18:18side.
18:19So from time to time over the 30 year period, some subsectors from the energy transition
18:25will end up being a beneficiary.
18:26I'll give you an analogy of, you know, internet, the entire pipelines for internet were laid
18:33in the late 90s, early 2000s.
18:36However, the eventual winners of that pipeline lane probably are being discovered today,
18:41you know, Google, Apple, Microsoft, AI, those are the beneficiary of the pipelines that
18:48were laid 20 years back.
18:50So think of this energy transition also as a pipeline exercise that is going on for the
18:54renewables.
18:55And at some point of time in 20 years down the line, we will see that new business models
18:59are suddenly cropped up, which leverage on this particular thing.
19:04I'll just give you one example that I can think of right now, is heavy manufacturing
19:09industries where the power cost is very, very high, we are already witnessing that the power
19:14costs are falling to zero or it is actually power is becoming a revenue source of revenue
19:19rather than a source of cost.
19:21For example, let's say spinning in textile is a very power intensive business.
19:26But if you have your own solar plant, you are actually making money, you are supplying
19:30power to the grid and your competitor now has no choice but to actually install a solar
19:36plant of its own.
19:38Because otherwise, they will not be able to compete with you at all.
19:42Yeah.
19:43Ravi, this calls for a longer conversation.
19:46We should do a long, very long format conversation on this because this is a very interesting
19:51thing.
19:52Unfortunately, I don't have time today.
19:53But I urge you that in the next 15-20 days, we should try and bring you to get you to
19:58the studios and try and do a very long format conversation on this.
20:02But thank you so much for giving us a snapshot of this today.
20:06Thank you so much for inviting me.
20:08The pleasure is ours and viewers, that's all that we have time for on this very informative
20:12edition of The Talking Point.
20:14Thanks so much for tuning in.