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00:00On the sidelines of the J.P. Morgan India Investors Summit, we are in conversation with
00:16the man who needs no introduction now.
00:17A lot of viewers in India now know him for his wisdom around where India stands on the
00:26pecking order of global markets.
00:28Rajeev Batra joins us right here.
00:30Rajeev, great having you.
00:31Thanks for joining in and thanks for having us in your conference.
00:34Thanks for having me.
00:35So, what's the response been like?
00:37I know the response has been fabulous ahead of the conference because 30 odd percent more
00:42participation etc.
00:43But you've spent about, whatever, 36 hours here in the conference.
00:48What are people asking you the most about and what's your response been to that?
00:52I think the foreign investors who have visited and especially the one who are visiting for
00:56the first time are really shocked to see what's happening in India.
01:01They didn't anticipate that even if the stocks are trading at around 50p, 70p, there is still
01:08a mad rush chasing that name over there.
01:11Because if you go outside of India, if you're trading at 15, 16p or so, oh my God, that's
01:15expensive.
01:16I shouldn't touch.
01:17But here, if it is 50, 60, people think, oh, it's a value.
01:21Don't you buy on this one?
01:22And this is largely because the first time investors who are coming from territories
01:26like China, Malaysia, or even I will say some part of the Middle East, all these markets
01:31are trading at a multiple of around 8 to 5p kind of a zone, 15p kind of a zone.
01:36So when you reach to a country where large cap is 24, mid cap is 50, I don't even want
01:42to talk about SME cap, which trade at some berserk valuation.
01:45So taking all these factors into account, there is a surprise.
01:49But interestingly, I remember last time when I was there on your show, we highlighted that
01:54JP Morgan expects $100 billion inflow in Indian equity market.
01:59Money has started coming in.
02:00Last seven months, India has witnessed $11 billion inflow.
02:04And these people, foreign investors who disagree with that thesis are now not questioning valuations
02:09and investing in Indian equity market.
02:11That's great to know.
02:12So two questions from your first answer.
02:15I heard you say that first time investors coming out here, there is a larger participation.
02:20Are these first time investors completely alien to investing in India?
02:24And therefore, I'm guessing because they are JP Morgan clients, they are big, big checks.
02:30Are those big checks waiting to come in even at these valuations?
02:34No, definitely for them, even if you offer a stock or a sector, which gives them only
02:419% earning growth.
02:43My domestic investor may not like that particular sector and stock.
02:46But you ask somebody outside whose country is delivering zero or a negative percent earning
02:51growth from them, 8 to 9% kind of a growth with $50 to $60 billion market cap.
02:56For them, it's a wow moment.
02:58Like let me invest and forget in this market.
03:00Hence, this is the reason why they are willing to revisit.
03:03So where my domestics are chasing alpha generation in mid and small cap.
03:08For foreign investors who are looking alpha in diversified external market, the large
03:13cap in India, which is giving them 9% earning growth, 50 ROE, 60 billion market cap.
03:20Let's invest into that name.
03:21Wow.
03:22And, and there is a very, I mean, there is a reasonably high likelihood that the currency
03:27will also be a lot more well behaved.
03:29I mean, some depreciation would be welcome in Sajid Chennai's words.
03:33But it's not like India is now part of those fragile economies wherein the currency could
03:37depreciate 8, 9, 10% and therefore it could on any given day.
03:40And therefore, there could be a loss to the global investor as well, I reckon.
03:44No, for the foreign investor, they are saying that it's a matter of time when we will start
03:48seeing the appreciation in Indian rupee.
03:51Because the way which Indian rupee has reacted, dollar gone higher, rupee maintain 80 zone,
03:57dollar gone lower, rupee maintain 80 zone.
03:59So they know the strength on the balance sheet side fiscal as well as on the current side,
04:03current account side, which is not showing up in the currency.
04:07So the trade they are playing in India is not just the equity trade.
04:10It's the dollarized equity trade that one in five or 10 years time, the moment come
04:14when currency start appreciating, that will be the windfall gain for my foreign investor.
04:19So that should be taken as a positive point.
04:21Got it.
04:22Wow.
04:23Rajiv, so tell us this then, there is large cap space, one, I mean, my view somehow of
04:32the last 12 to 18 months, that India seems to have become a low beta market relative
04:38to what it was, maybe relative to some of the other markets as well.
04:42You're talking about the possibility of at least currency stabilization at the bare minimum,
04:46maybe appreciation, large caps offering value.
04:50Would you reckon that this gap between 100 billion of expected inflows, which turns India
04:59into an equal weight from an underweight, versus 10 billion or 11 billion that has come
05:03thus far?
05:04You reckon this gap of 90 billion dollars, which is a lot of money, could get filled
05:09over the course of the next 12 to 18 months?
05:11I'll say 12 months will be a stretch, but definitely 18 to 24 months is well enough.
05:17But I would say it's contingent upon capital issuances, that is the fresh money, primary
05:22issuance is coming or additional offer.
05:24So we have seen over the 12 months, 50 billion dollar issuance have happened, primary and
05:29the secondary side, foreign investors have largely come into them.
05:32One, because they don't have to chase liquidity at a higher valuation.
05:36So that's an easy way to get out over there.
05:39That's the point number one.
05:40Point number two, it's most probably give them a bit kind of a favorable opportunity
05:47to enter into that space.
05:48As an example, if you are competing out in the secondary market with the domestic, with
05:53HNI, with PMS, with AIF, it becomes too crowded in this one year, you get simply a position
05:58out.
05:59So that is the key reason why, like if you keep on having new primary issuances and secondary
06:04issuances coming up, that will give easy way route out for foreign investor to come.
06:09And remember, it's not just the active guy, the pressure is also there on the passive
06:12guy too, because India is slowly and steadily inching towards the mark of either meeting
06:19China or beating China in terms of an index weighted.
06:23In MSCI IMI index, which tracks 125 billion dollar passive allocation, India has already
06:29surpassed China.
06:31But the bigger index, which have a 500 billion dollar passive allocation or chasing, that's
06:36where we are still one, one and a half percent lower than China.
06:39But as the weight keeps on increasing, you will not only get money from the active investor,
06:44you will also get the money from the passive investor also.
06:47I have given you the sizes, just multiply the weightage and apply for how much money
06:51it will be.
06:53It's mind boggling numbers, I'm sure.
06:56But it's not a zero and one moment, right?
06:59As the weightage keeps on increasing, the money will keep on flowing.
07:02If India were to eclipse China as the highest weightage in the MSCI EM market, IMI has happened,
07:09but the other one that you mentioned, but it's not a zero and one moment, right?
07:12As the weight keeps on increasing, money will keep on flowing, right?
07:15I presume.
07:16Yes.
07:17OK, great.
07:18So in about 18 to 24 months, significant inflows from foreign investors anticipated.
07:23You mentioned a very important point.
07:24And that's true.
07:25I mean, we've seen a fair degree of foreign participation in the primary markets.
07:33And there has been a series of blocks, PE investor exits as well that have happened.
07:41You see foreign investors trying to now ask you actively for that end of the market to
07:48primary is one thing, and I'm coming to that.
07:50But in the listed space, whether QIPs are happening or PEs are exiting or promoters
07:55are shedding some of their own holdings for whatever reason, are foreign investors wanting
08:01to lap those up as well?
08:03100%.
08:04So the most interesting conversations I'm having with my investors over the last couple
08:08of weeks, they're saying the biggest foolish thing any investor would have done was not
08:12to chase these IPOs or the QIPs or blocks in India market, because it's kind of a no
08:17brainer strategy.
08:18Whenever any kind of an IPO block or a QIP is coming, you subscribe to it.
08:23And if you look at a performance six month, three month and 12 month forward basis, your
08:26performance ranges from 30 odd percent to 150 odd percent.
08:30Hence, it has been one such momentum strategy, like you need to keep on subscribing.
08:35Now seeing that as a successful strategy year to date, if it continues for the next 12 months
08:40or even an 18 month also, I think the other set of foreign investors will keep on joining
08:44the bandwagon.
08:45What about the primary markets?
08:47Because you mentioned that we need high quality paper to come in.
08:50There is a Hyundai IPO, there is a Swiggy IPO at some point in the next 12 months, we'll
08:55probably see NSC and a clutch of others coming out too.
08:58Are you personally excited about the primary paper?
09:01No, as I said, we need it.
09:03If we don't get one, then your journey towards a 40p for large cap will be very soon, which
09:08will be a bubble territory for the market.
09:11So if anyone asks me today at 24p, is India six month?
09:14My answer is absolutely no, because in case of an Asia since 1989, any kind of an Asian
09:20economies who have went to a bubble territory, be it China, Japan, Taiwan, Thailand, Korea,
09:26all were marked at around 35 to 40p.
09:30India is still at 23, 24p kind of a mark.
09:32So if you don't come with the primary issuances and everyone is chasing the same set of a
09:37secondary markets only, your 40p will come very, very soon.
09:41So that's the reason why to keep a balance and we have a SEBI panel yesterday they were
09:46presenting and they said even they are looking that the demand supply mismatch should not
09:50be that huge enough that can create a kind of a high valuations in the secondary market.
09:55So that's the reason why this primary paper is must and a proper hygiene factor for market.
10:00I'm loving what you're saying.
10:01You are not saying if or whether the 40p will come.
10:06You are saying 40p toh aana hi hai, whether it comes sooner or later is the question.
10:11Yeah, it's on the market dynamics.
10:14Because you're, you are not having just one investor foreign, remember, you are dealing
10:18with three set of investor, foreign institutions, domestic institution, and then retail, which
10:24includes PMS and AIF.
10:26So that's the competition it's having.
10:28The only fourth player who is giving up is your promoters, like from a 70% holding they
10:34have come down to 58%.
10:36But that's not outlandish.
10:37Right?
10:38A lot of people raise eyebrows.
10:39US has been through that journey wherein promoters gave up their holding.
10:42Is that something that you question or you believe that's just part and nature of a market
10:46development process?
10:47I think if we talk about the Vikasit Bharat, then in a developed market, the free float
10:54is quite high.
10:55The liquidity is never an issue.
10:57In US, the retail holdings of the market direct and indirect is 48%.
11:03In case of an India, if you look at a retail holding overall, which includes some PMS and
11:08AIF too, it's only 8 to 9% of the market.
11:11And if you look at the household balance sheets on how much allocation they have allocated,
11:156% only because most of the other are in gold, physical assets and the term deposits and
11:20this one.
11:21So right now the limit from year to go higher is multiple times.
11:25So that's the reason why I'm saying like valuation, no problem for me, promoter or a PE selling
11:31should not be a problem for me because you need a very diverse market where everyone
11:36has a share rather than an illiquid market where only one set of an investor is purely
11:41owning the market.
11:42And that's why our beta is lower and we are seeing there is, you can say, resilience in
11:47market.
11:48Yeah.
11:49Sorry, I'm trying to wrap my head around this.
11:50I'm reconfirming things.
11:51Rajeev, you're saying that we, everybody's raising question marks around the valuations
11:56of the Indian market.
11:57Sure.
11:58In the Smith space, there may be.
11:59But you are saying that we are headed higher both on the absolute levels as well as on
12:04the multiples as well.
12:06Yes.
12:07Yes.
12:08Okay.
12:09Yes.
12:10And other way to look around, Neeraj, would be look at market caps to GDP ratio.
12:13The peak market cap to GDP for India was 150% in 2007, the last cycle which we have seen.
12:21Even today, despite all this rally, we are still at around 120-125% where denominator
12:27GDP is still going a rapid pace over there.
12:30And now if you compare with a similar outperforming market like us, Taiwan and US, Taiwan is 300%
12:37and US is 225%.
12:39Got it.
12:40Okay.
12:41What excites you about India the most?
12:43Because there is a lot of stories being out there in the market, a lot of stories getting
12:47developed, which might become really big in times to come.
12:50From your vantage point, what is it within India, bottom up, sectoral, excites you the
12:56most currently?
12:58In terms of a key thing which India excites me about is demographic and urge for people
13:05to innovate.
13:06It is like even if we talk about the literacy, not just on a basic schooling side, but even
13:12a tech, financial literacy, India has quickly become adaptable to changes and innovation
13:17at quite a faster pace.
13:19We suddenly saw here like people are talking significantly about investment into the EMSs
13:25into Semicon, Fab, investment.
13:27So that shows even the entrepreneurs, promoters, first or in a second generations are willing
13:32to deploy and willing to give all of it to innovate and take the cycle forward.
13:37So rather than being stubborn and saying we will grow on this criteria only, India is
13:42being quite flexible enough and that adaptability has become now a key for India.
13:47So that's the reason why if any changes are happening globally, be it on the nuclear side
13:52or even on Semicon side or even space side, which Prime Minister Narendra Modi is doing
13:57really good work on, or even on EV side or green energy side, India is looking into the
14:03forefront.
14:04Even if we are not there in top two or top three, we will make sure India is either in
14:08top five or in a top 10.
14:10So that has become a key.
14:12So we can definitely pick choose a sectors and themes that are coming up.
14:16But according to me, the key is the way people are flexible, adaptable and innovating at
14:21a constant pace.
14:22Within that, you can say themes that are emerging, it's like power, your infrastructure, EMSS,
14:29even now still on the EV side.
14:32So themes are multiple, but the key for me is that innovation and adaptability.
14:37Okay.
14:38I'll come to the innovation piece, but I'm just trying to understand the themes that
14:43you mentioned within that, right?
14:45All of them, the bearish argument out there is that the valuations of some of those are
14:52extremely expensive, be it EMS, be it power, and maybe not power financing, but almost
14:58everything is related to power has become very expensive.
15:03How do you, how are you constructive at these valuations on these?
15:09Maybe I'll counter question you on this one, like you go decade or two decade back, you
15:13pick up the FMCG companies, you pick up the top notch private banks, you pick up any kind
15:19of healthcare companies, either they were trading in the price to earnings ratio of
15:2440 to 50 a decade or two decade back, or the price to book of a financial 4x, 5x price
15:30to book over there.
15:31But still the stocks keeps on rallying and analysts keeps on defending their price target
15:36and keep on raising higher.
15:37Where is the key?
15:39The key is in the DCF model, what kind of a terminal growth rate you are implying.
15:43So if you are implying a terminal growth rate of looking back of 10 years and 20 years,
15:48where things were slow and cycle was not there, that you apply 7%, 8%.
15:53Now suddenly because your nominal GDP growth is rising, government is putting more focus
15:58toward that and that wants a terminal growth to be double digit or even high teens.
16:03If you apply that number on your DCF model for 10 years, 15 or 20 years, valuation will
16:09not be expensive.
16:11So rather than doing that, now to justify every couple of years or three years that
16:16okay, my 70p stocks will still give me a 20% upside next year.
16:21What the analyst will do?
16:22He will keep on increasing terminal growth rate by 1%, 1%.
16:26Rather than doing that exercise, take a structural call, see where the country is heading in
16:3010, 15 and 20 year direction, raise your terminal growth once for all and also reduce your risk
16:36premia because with India entering into the GBI EM index, which calls for decline in the
16:42bond yields over there, decline in the risk premia as we talked about the lower beta,
16:46that is another factor which will support the market.
16:50And most importantly, we kept on questioning on earnings risk premia for India over there.
16:55Look at the two decade performance, US have given us four and a half, 5x return.
17:00India has given 6x return.
17:02The only market who have a tenacity to either perform in line or beat US in US dollar term
17:09is only India and EM.
17:11India bull would love listening to you Rajeev, I must tell you some very compelling arguments.
17:17The other question is and then I'll come to the innovation part and finally end with what
17:23are the risks facing?
17:25The other question is a lot of the themes that you mentioned, EMS may not have as much
17:31of a supporting infrastructure listed, but power, I mean, power generation is one, but
17:36the whole power equipment, T&D, etc. is a mid cap, small cap sector.
17:43It is not large cap.
17:44The growth rates seem promising, but the valuations are expensive there for sure.
17:50So if you're playing power, let's say, and you're talking about the terminal growth being
17:54higher, etc., is it true for the whole ancillary pocket as well or is it only true for the
17:59top tier companies wherein the liquidity is also very high?
18:03No, it will be, this will be the much more an average one, but depending on the chain,
18:08on the value additions which you are and in terms of a competition in the pricing power,
18:12the things will differ.
18:14As an example, right now the transformers guys or the grid guys, they are charging you
18:19a higher valuation in this one because supply is a constraint, not too much competition
18:23is there, pricing power is there, so by default they will enjoy a certain higher phase of
18:27a growth.
18:28But in the case which are crowded enough and where you have intense competition, pricing
18:32power is also lower, there you will not be able to generate a much higher growth premium.
18:37You will be generate on an average kind of, so that's where within the chain we will need
18:41to differ just based on the two components, pricing and competition.
18:45And remember, competition should not be just the competition right now.
18:49As we talked about innovation, remember, as the demand rises, we see more of the startups
18:54join, start joining the bandwagon.
18:56More of the PE and VC start deploying on the particular sector, so that they enjoy
19:00the demand which is coming through.
19:02So similarly in the power ancillary space also, may be a 5 year or 10 year down the
19:06line as the startups or the PE who are investing and the new capacities start coming, they
19:10may start seeing the reduction in risk premium also.
19:14And that's where your growth will also come set a bit lower.
19:17So it's important which part of the chain you are looking and then looking at this two
19:20dynamics.
19:21Got it.
19:22So you were telling me that JP Morgan as a house seems very constructive on real estate
19:26as well.
19:27Are you personally still constructive on real estate?
19:30Definitely.
19:31I think for crops of any equity market, capital market, real estate is a key.
19:36And if real estate sector is dysfunctional, you will see neither growth nor there is a
19:41vibrancy in the capital market.
19:43We have seen what China has been going through, what happened in the property market segment
19:49side.
19:50So that is the key reason why we are seeing with the income power, urbanization, rising
19:55trend.
19:56And now hopefully we are seeing some inflection around the ruler consumption and the ruler
19:59growth also.
20:01So that will be further supportive for the real estate sector overall.
20:05Okay.
20:06Last two questions.
20:07One is just a bit of an elaboration on this whole innovation piece that you spoke.
20:14In some sense, there are hubs which are becoming startup centrals, right?
20:21I mean, you have a cafe you walk into, you have a bunch of people out there trying to
20:26build a startup and it's not just one table, multiple tables out there.
20:30So there is innovation happening at a frantic pace in India.
20:33What has impressed you the most from an investor lens within that whole gamut of newer themes
20:40that are coming out and newer innovative business models that are coming out?
20:44What has impressed you the most?
20:46What impressed me the most is on the way we are functioning on the AI side.
20:51I know there are still a constraint because India is a lot more dependent on the imports
20:56of hardware components and everyone, but that's not stopping them to take a step forward over
21:02there and evolve and try to rub shoulders with the global giants out in the US, Europe,
21:08Japan, Korea and Taiwan.
21:10And I've seen that happening because I'm based in Singapore, what the companies in Malaysia
21:15and Vietnam have done.
21:16So seeing their cycle of last five to six years, how they evolved and then they partnered
21:22with multiple companies in the US as well as China and Japan, I think even India is
21:27also moving towards the same direction, looking at the cycle.
21:30But considering the size, scale, pace and the policies, yesterday we had Union Minister
21:37Ashwini Vaishnav joined us and he highlighted government plan.
21:40It was really exciting to see about how much government is trying to invest into that space
21:47and try to promote overall that sector.
21:50So with the talent being in there in place, clean energy, which is the key overall to
21:56supply over there, top of it policies.
21:58So you have a positive trifecta going for this entire space to pick up.
22:02Now you name it under AI, EVs, or you want to name it under any other sector with the
22:08space at the other one which is coming up, or even in the defence right now.
22:12I think all the spaces it is going through, because in India, there is multiple opportunities
22:17right now are available.
22:18And that's the reason why when any young graduate, as you mentioned out, working out of CAPE,
22:24being an engineer over there, he's not just thinking about a job, the nine to eight hours
22:29of job, he's thinking even about back of the mind, how I can contribute as an entrepreneur,
22:33how I can innovate and provide something new to the country.
22:36So that is the change which I have seen happen over the last 10 to 15 years in India.
22:42Got it.
22:43Risks to this very promising outlook that you've portrayed for us.
22:47In emerging markets, remember, always the first risk is policy and politics.
22:51You need both on the right side, which thankfully, with all stars aligned, it's there with India
22:56for almost close to two decades.
22:58If this mix goes wrong, we have seen emerging market from a structural story of growth becoming
23:05a structural de-rating story also.
23:08So that's where the number one we have to take care of.
23:11Near term, yes, there will be some hiccups around if oil prices start rising because
23:15of a geopolitical tension.
23:17Right now, nobody in the world is taking geopolitical risk premium very high.
23:21So anytime if it's evoked, there will be some set of a kind of a correction.
23:26Oil prices, yeah, that's nobody can guess which direction it will move.
23:30It is also linked to geopolitics as well as demand, which is slowing because China growth
23:35is at the three-handle.
23:36US is also on the soft landing side.
23:39So oil prices is also not a concern for you.
23:42And last but not the least, unemployment.
23:44So remember, the other problem beyond policy and politics is unemployment.
23:49India has been blessed where our unemployment is a single digit kind of a mark rather than
23:54neighbors who have a high unemployment number.
23:57So if unemployment is not there, you don't need to focus on consumption.
24:01You can still keep on growing through investment, CapEx and overall investment in the system.
24:07Great, Rajiv.
24:08Lovely talking to you today.
24:09Thanks so much for taking the time out and look forward to talk to you once more, maybe
24:13before the end of the year, but have a lovely remainder of the conference.
24:19And viewers, thanks for tuning into this broadcast.
24:24I'll see you next time.
24:25Bye-bye.