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00:00Thanks so much for tuning in to Talking Point. I'm your host, Neeraj Shah. The case for a
00:16chat with our guest, Vineet Sambre today. Is promoter selling a cause for caution or
00:21not really? I think it's one of the key questions that has been weighing on the minds of the
00:27markets in the last few quarters. Is quality making a comeback? Remember, everything from
00:32an HDFC bank to a page industries have rallied between 15 to 20 percent in the last two months.
00:39And with the BFSI valuation discount at a record high, does BFSI become a pocket that
00:45you might want to focus on for incremental investing? Vineet Sambre, Head of Equities
00:51at DSP Investment Managers, joins us right now on the show. Vineet, thanks so much for
00:55joining in. I really appreciate your time. How are you approaching markets currently,
01:01Vineet? As of end of August, you and your brethren together hold about 1.48 lakh crores
01:10in cash and cash equivalents. Have you been on the higher side? Have you been cautious
01:17or have you been fully invested and are you enjoying the ride?
01:22Thank you, Neeraj and good morning. I think we have been almost fully invested. We haven't
01:28sort of changed course in terms of taking a call on the cash because I think broadly
01:34the assumption with which we work is investors at their end need to sort of take the cash
01:40call and when they are allocating capital to the funds, I think it is our responsibility
01:46to sort of remain invested at all points in time. Cash at some times may be more strategic
01:51in nature to have some ammunition ready at a fortune level to buy but broadly we don't
01:58take large cash calls as such. And other than that, I would say that this huge amount of
02:06cash which is there in the system at the fund level, at the retail level, there is a lot
02:13of optimism. Foreign investors, they want to be part of the India growth story. Maybe
02:19they are also waiting for decent valuations. That makes us feel that the market itself
02:25should not see deep cuts unless there are some events which leads to that. But other than that,
02:33that being the case, this kind of high valuation is something which we will have to live with
02:39at this point in time. Just in terms of our strategies, we just try to look at the relative
02:45valuation across different segments, cycles of the business where we see some improvement in the
02:54cycle taking place and valuations being reasonable, I think it is more an allocation to those
02:59categories. So, I think that is how we are sort of trying to navigate the current situation.
03:05Noted. Vineet, what is your view on this very popular way in which people look at
03:12the recent developments, which is if a promoter is selling or if a PE market,
03:16PE investor is selling, that is a word for caution because the promoter knows the business best,
03:21more than anything else. I mean, this has now continued for 12 months. If it turned,
03:26I mean, you could argue that this is an anomaly if it lasts for one or two or three months. But
03:30over 12 to 18 months, we have seen promoter selling coming in in a big way and the markets
03:36are certainly higher and those individual pockets are way higher than what they were
03:41when the sales happened. Absolutely right, Neeraj. I think if I go back in history,
03:48generally this kind of promoter selling, this magnitude of promoter selling
03:53ideally is generally showcasing the tipping point in the markets that markets are high,
04:00the promoters also feel that the valuations for their businesses which the investors are
04:05ascribing is generally reached a point which doesn't look like sustainable and which is where
04:13the promoter selling sort of takes place. Now, in the past, these are some of the, let's say,
04:19signals which one picks from the market suggesting that markets could be near the tops. But I think,
04:24like you said, this time around, it has sustained for a longer period. All what has been sold by
04:31the promoters in the last one year, the stocks largely have seen significant improvement only
04:36because it has got absorbed from the huge liquidity which is coming into the markets.
04:42And I think this could sustain in the time there is demand, there is money which is floating around
04:48and that keeps chasing good quality businesses. But the point, at some point, maybe we'll reach
04:56point where the supply sort of overtakes the demand and that's where maybe people will start
05:01cutting positions from their existing portfolios and which is where maybe we'll see some more,
05:07let's say, cuts or consolidation. Okay, but so we need my question to you.
05:13Okay, I'm just trying to gauge, sorry if I missed it, but since they are still happening,
05:20is that a concern or is it a case-to-case scenario? Because there are large blocks
05:26happening as we speak today as well. So it is a case-to-case scenario. I would
05:31say that companies which are making sense from the investor's perspective, promoters
05:37needing capital for growth, I think those are good spots because that is providing opportunity
05:45for investors to also participate. It is increasing the free float and thereby maybe
05:52giving slightly more brownie points when it comes to valuations. And if the promoters are putting
05:57that capital to work and are ready to sort of earn reasonable ROCs from those, I think those
06:03are good spots. But where we have seen that there's a lot of narratives which have been built
06:09around businesses, businesses have reached 40 levels of valuations, there is a lot of exuberance
06:14and there P or promoters are trying to earn cash and investors are still lapping up,
06:20I think those are the risks to us and maybe at some point those will emerge out as risk.
06:26So it is a case-to-case and one will have to evaluate on individual basis for each of them.
06:34Got it. Okay. Are we egregiously expensive or do you reckon these valuations can sustain?
06:44So I would say on the first point, we are expensive. I mean, there are a few pockets
06:49which can show reasonable valuations, but for a reason. And the ones which are expensive,
06:54I think they have gone beyond their reasonable limits. If you, any cuts, you look at it 5-year,
06:5910-year average valuations, we have been crossing. And incrementally, Neeraj, what is happening is
07:04that whichever sector actually comes into fancy or suddenly catches the attention,
07:10the re-rating sort of takes place very quickly. And as I said, it crosses all the historical
07:17averages. So I think this is a power of money flow, which is there. And from that perspective,
07:22if you ask me that, is that a reason for being cautious? I think so. The reason for caution
07:29is more around how one is thinking about generating returns or the expectations around
07:33the market. And if one is actually trying to sort of get swayed and is largely getting
07:42stuck in narratives or facts, I think those can eventually hurt in the long term. I think those
07:49pockets are which where investors should sort of remain slightly more vigilant is my guess.
07:55Okay. So the most common saying or mentioned these days is about how large caps are still
08:12maybe okay in terms of valuation, but there is froth in mid-caps and small caps. Now,
08:18we know that it can't have a uniform because it's a very wide bucket.
08:22Two questions. One is a tactical question. One is a bottom-up question that, which are those
08:27pockets out there at the broader end of the spectrum where you believe that valuations
08:32relative to growth that they're present are still attractive? Part two of my question is this,
08:38that if indeed the, we know that when the mid-caps and the small cap is in as a pocket, correct,
08:43even the good ones are taken down with the receding of the tide. So do you force the
08:49tide? So do you foresee that to happen or do you believe some of the strong,
08:54promising stories may withstand the pressure? So Neeraj, I think this time around it has been
09:04slightly very different. I can say the businesses which we consider defensive,
09:10we are seeing that in drawdowns, they may be sort of taking a higher hit as well. And this is to do
09:17with the, that flow of capital, which is chasing the momentum at that point in time. And we have
09:23seen progressively the sectors have been rotating and the money is chasing those and just maybe
09:32taking money out from the other sector. So there's no fundamental pattern or fundamental connect to
09:37what is happening today. But broadly, if you ask me, where are the pockets of opportunities,
09:43I would say that maybe excluding banks today or insurance, maybe to some extent,
09:50the valuation ranges have gone up. Now, let me sort of try to sort it as per the degree of
09:57valuation. So in terms of the, where we have the highest comfort given the growth matrix,
10:01I think healthcare is where when the valuations have moved up, but it seems that the growth is
10:07intact, more is sort of coming to the segment. The US market is improving, the Biosecure Act is
10:14providing more opportunities for some players. So I think that that is where I would say that
10:19while valuations have gone up, it is not exaggerated is what I would say. That is one
10:25pocket. The other pocket may be the building material broadly as a category. I mean, this is,
10:32I'm talking from the broader space, like you asked, is one where we have still not maybe seen
10:38the benefits from the higher registered sales, which has happened. And maybe those should sort
10:44of start coming through. And those are the segments which could match maybe or sustain the
10:53valuations, what they are currently trading at. I think broadly, and likewise, I would imagine that
11:02the automobile industry is one which is seeing a lot of technology-related change. And we are
11:09seeing that as a whole, the industry has been on a launching spree, new models are sort of coming up.
11:15And that is going to create a decent demand pool, even if it is, let's say, mid-single-digit demand
11:22pool. What it will do is it will create more opportunities for the auto and companies,
11:28and which is where we see that maybe the growth visibility should be okay. And hence,
11:35maybe the higher valuation sustains. But there are spaces where, which have picked up quite a bit
11:43in the last couple of months. Let's say the energy transition theme, the
11:49renewable theme, a lot of this, the EMS theme, it has got fancy on the hopes of very high growth,
11:57maybe it does see high growth, but the kind of valuation stretch we are seeing seems slightly
12:03unreasonable to us. If it outperforms the kind of growth, what the expectations are,
12:11maybe then it sustains, otherwise, we see those as a risk, basically.
12:16Well, Vineet spoke of the biosecure act and pharmaceuticals certainly in the thick of
12:21things. In fact, it's a bucket that you want to watch out for idiosyncratic movers as well,
12:27as well as bottom-up. Vineet, we were talking to Syngene, and I'm just trying to delve into three
12:33or four sectors. We were talking to Syngene earlier, and they mentioned that, like everybody,
12:39that this is a longer-term theme, but it sits on top of the existing process of manufacturing and
12:48research moving eastward, and China Plus One giving that opportunity to India and other
12:54country pharma companies to stand up and get noticed and get business.
13:02You guys run a very successful healthcare fund as well. I would love to know how you think about
13:08healthcare, but predominantly the CDMO, CRO pocket.
13:13We are pretty much convinced and healthcare has been a long-standing positive category. If we
13:19look at not just the healthcare fund, but across different funds, we have been slightly overexposed.
13:26Now, in some funds, we've started taking some profit out given the valuations, but I would say
13:32that this is one sector which has a good combination of, let's say, sustainable growth
13:38between 11 to 15 percent, good cash flow generation, decent ROCs, and a while back,
13:45the valuations were also very supportive of looking at the category. Now, coupled with that,
13:52I think the sector itself has gone through a bit of a low cycle post-COVID, where the US
13:59business in general was constrained. I think that is now picking up through the last three,
14:07four years as the Indian companies went through a very tough cycle of their plans getting examined
14:16by the US authorities. I think the quality of the plans is improving and will give a boost to the
14:24business momentum eventually. I would like to say that while the Biosecure Act or the CDMO
14:32opportunity, it is definitely a good long-term opportunity, but more importantly, I think the
14:38capability of the companies here is something which is a strong point for us. Companies are
14:46capable, we are good in terms of our understanding of chemistry skills, now even the biosim skills.
14:54So, I would say that that is an important element. The other element is the cost, and like you said,
15:00the macro is also turning positive, where companies globally want to look at businesses
15:06beyond, let's say, China. So, I think all this sums up into a good position for the sector,
15:13and maybe one can take a slightly longer-term view here for five years at this juncture. And
15:19hence, I think that sector remains a positive spot as far as we are concerned.
15:26Got it. Okay. Just before we dwell on others, I think Pharma is in news for more reasons than
15:31one today as well. There are specific companies which are already showing signs of this.
15:37Neural Labs is a company in focus. Let's get in my colleague Varsha to really talk about what's
15:42happened here, because there is a CDMO aspect to Newland's move in today's session. Varsha,
15:49tell us about this. Well, thanks Niraj for that. So, yes, Newland is buzzing now because US FDA
15:55has approved Bristol-Myers, that is BMS drug, which will be used to treat mental disorders,
16:01and the name of the drug is CAR-XT. Now, this is a drug developed by Corona Therapeutics,
16:06which is a BMS company. Why Newland is in focus? Because Newland has been partnered with
16:13Corona Therapeutics since CAR-XT's phase 3 trials in 2019. And Bristol had bought Corona in Q3 FY24
16:21for $14 billion, and Bristol has marketing exclusivity rights for CAR-XT for five years,
16:29and a patent period that's much more longer, according to analysts.
16:32Now, analysts also pegged, if you see the revenue potential for this product,
16:37so CAR-XT's peak sales during the patent period could be around $7 to $10 billion.
16:43Now, also this FDA's approval was based on data from two studies in which patients on the drug
16:49experienced a meaningful reduction in symptoms. Now, Q3 FY25 onwards could see a huge ramp-up
16:56for Newland CDMO's revenue for CAR-XT as Bristol starts launching the product.
17:01Let's see what Goldman Sachs has to say about this. So, they've raised the target price. The
17:06target price has been set to 9,100 with 47% upside potential. And they expect Newland's
17:13revenue to grow at 13% CAGR for the next five years, mainly driven by increase in outsourcing,
17:19penetration, and market share. And they expect Newland top-line growth of around 24% in FY26.
17:25Now, this is on the back of expansion of the Unit 3 and also commercialization of CAR-XT,
17:31which we were speaking about, and also because of launch and approvals of the
17:36newer niche molecules in the speciality API segment as well.
17:40Okay. Thanks a lot for that. So, that's as far as Newland specifically goes. But
17:44just interesting to see that some of these things are happening. Varsha,
17:47thanks for bringing that to us. The other aspect, Vineet, is how does somebody who manages such
17:53large pools of money think about such a heavyweight sector, which is IT? It's blowing hot,
17:57blowing cold. Accenture's supposed commentary led to the stocks coming off their peak in the last
18:05three weeks. Suddenly, Accenture's performance and guidance is leading to some bit of green shoots
18:12here. How do you think about all the volatility, one, in IT, and how do you think about the
18:17slightly medium temperature? Is it a sector that is providing an investable opportunity?
18:26So, I think, first of all, as compared to all the sectors, maybe the kind of information
18:31which gets available to the analyst community in the IT sector is the highest. I mean,
18:36to the accuracy of maybe two decimals is what people are sort of feeded with the information.
18:41Hence, the volatility around the quarterly numbers, the misses, and maybe outperformance
18:48actually leads to a lot of volatility. But like you said, I think slightly stretching
18:52beyond these quarterly noises, if one is thinking about the long-term opportunity,
18:57I think we are at a juncture where maybe we were 5 years back when from pure coding and the other
19:04stuff, we were sort of moving to digital and the cloud-based opportunity. And it was sort of
19:10felt that whether Indian companies will be able to make up into the new segment as such.
19:16I think today also we are at that same interesting point where the AI piece is something which is
19:24again sort of has come up. And the question mark here is whether Indian companies
19:29will see benefiting or where a lot of these efficiency gains would mean that there will be
19:35attrition and less people requirement and the business will come down.
19:40So I think this is a call to be made and I think it's very difficult to predict. But the way I
19:47think is that Indian companies, they have again, it's about the skill set. The Indian companies
19:53does have the skill set. We are low cost source for the global players. And I would say that
20:03even in case of AI, while the lot of efficiencies will be there, but the quantum of work is also
20:10going to expand significantly and which is where we believe that this is also going to eventually
20:14lead to decent growth for the IT sector. Time and again, I think the sector has proven
20:19their skill set in the newer technology and they have taken up that as a challenge and grown.
20:24So we would like to go by the historical trends and say that this is going to be the new avenue
20:30for growth for the sector. The sector has all good metrics when it comes to ROCs, cash flows,
20:38dividend payout, governance. And hence, the quarterly noise could be also taken as an
20:46opportunity to sort of maybe look at sizing your bets at that point in time to maybe benefit from
20:55the long-term growth opportunity which we see coming to the sector.
21:02Okay. Vineet, are you bifurcating between IT services large cap, IT services mid cap or ER&D
21:09or product companies? Are you bifurcating in IT that way? And is there a first amongst equals?
21:14Yeah, it used to be bifurcated previously where the mid cap used to be trading at a discount
21:19with the large gaps. Now, it is the other way around, I think, and for right reasons,
21:24because they have shown maybe more sustainable and higher growth trends.
21:28And also, in fact, Neeraj, if you go back and see, I think whenever the companies reach a billion
21:33dollar sales, that is a sweet spot. It allows them to get into the bidding process much more.
21:40And the journey from 1 to 2 billion is a higher growth journey and slightly more linear growth
21:45journey. And which is where large part of the mid cap IT companies which are there today are
21:53seeing the benefits of that. So, I would say that we have to bucket them into large and mid
21:59given this fundamental difference and also the valuation difference is there. And hence,
22:06from that lens is what we are also sort of taking a call and not ignoring a mid cap IT just because
22:11the valuations could have been on the high side. Okay. Noted. Vineet, the other key question is
22:20what to do with banks. No longer can we say that banks have been underperforming because the last
22:28one odd month, I mean, HDFC Bank, some of the others too have gained anywhere between 10 to 20%.
22:33But there is a rally that has happened already. We're not quite still seeing signs of private
22:39capex. And a lot of economists recently that we spoke to mentioned this possibility that if indeed
22:44there are severe Chinese tariffs, then those goods, final goods could be dumped into Asian
22:51emerging markets as well. And therefore, private entrepreneurs or entrepreneurs might think twice
22:57before setting up very large capex in the near term because of this China risk. So,
23:02if private capex is getting delayed, for whatever reason it may be,
23:07do banks still provide a good opportunity to invest or would you bide your time because
23:14there are other opportunities? No. So, I think first and foremost,
23:21growth is one aspect as far as the banks are concerned, which is going to get driven by
23:25the government capex, the household capex and the private capex. And I think today there is
23:32a good support coming from the government capex, maybe the household capex is also,
23:37the retail, I mean, is something which is anyways doing okay. Private capex,
23:45hypothetically, if we assume that you don't see a high growth, I think still if the economy keeps
23:52growing at six, six and a half kind of rate of growth, we still have around 12, 13% kind of
24:00the great growth in the system, which is sustaining even now after, you know,
24:05rising to 15, 17%, we have seen some bit of moderation, which looks like sustaining. Now,
24:10the good part is that we are at the low cycle of the private capex, we are at the low cycle of
24:15broad consumption in the economy. And hence, that could be taken as a low point. And as these
24:20improve, these are large, you know, proportions of the economy. And as these improve, I think
24:27we can see marginal upsides, that is number one. Number two, I think more importantly,
24:32in terms of the banking stocks performances, they have been, you know, while the banking
24:38businesses have gone through a massive growth cycle over the last two years, post COVID,
24:45but the stocks have not reacted to similar extent, because these were sort of over owned,
24:50and a lot of the money which moved to other sectors, maybe I would imagine that has
24:54come out from here. And hence, it has not been able to participate. Now, at this juncture,
25:00where the banking balance sheets are in the best position, we are sort of now staring at,
25:06like I mentioned, some bit of moderation in growth, NIMS picking out, the asset quality,
25:12some stress sort of emerging from few pockets, unsecured micro and all of those. So I think
25:18till the time these headwinds are there, maybe the stocks could sort of consolidate. But
25:25I would say from the valuations viewpoint, these are trading at reasonable valuations, and
25:31maybe the cycles, few segments of the cycles, as I mentioned, are at the low point. And hence,
25:36this could become a good, you know, category to be in with a longer term. But again, be mindful
25:44that, you know, we would want to focus on banks which have very strong underwriting process,
25:51because this is something which can lead to good success or failures eventually as investors.
25:59Noted. Okay, Vineet, great talking to you as always. Thanks for taking the time out and
26:03being with us. We really appreciate your time. Thank you so much.
26:06That's all the time that we have on this edition of Talking Point,
26:09viewers. Thanks so much for tuning in.