Ashwini Agarwal's Take On Market Correction, IT Recovery & Chemical Sector Outlook I Talking Point
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00:00Thanks for tuning in to Talking Point. I'm your host, Neeraj Shah. And on a good day
00:17for the markets, let's pull up the case for a chat to just establish what amongst others
00:21will be talking to our guests today. We will ask about whether high-end real estate is
00:25going to face a price correction, and could that be negative for real estate companies?
00:29A Knight Frank report certainly seems to believe that there will be a correction. We'll talk
00:33about the impact of the same. Are chemicals starting to steal the spotlight? For the longest
00:38time, the last three years or maybe more, the chemical sector has been in a bit of a
00:43slumber. Can that change in the times to come? Our IT company is hinting at a recovery. We've
00:48heard from TCS and Tata Elixir. We'll probably hear from HCL Tech today. It'll be interesting
00:53to see what our guests today thinks of the same. And of course, no conversation in the
00:57current times can be complete without talking about the China impact. To talk about all
01:01of that, Ashwini Agarwal, founder of Demeter's Advisors, LLP, joins us right now on the show.
01:07Ashwini, always good talking to you. Today is no different. Thanks for taking the time
01:10out.
01:11How are you doing?
01:12Very, very well, Ashwini. Thank you so much. I hope you're doing well too. But for the
01:16longest time, you've been talking about how there needs to be a return of some sanity
01:22in the markets. You could argue maybe that it's not completely that way. But certainly
01:28the last few weeks have shown that the markets need not be always a buy on dips. At times,
01:35it can actually follow the sell the rice template too. We've set the cat amongst the pigeons
01:40if the pigeons were bulls.
01:43So you're absolutely right. And I think we are just starting to see sanity creep back
01:50in, as you say. I don't think there's a deep correction in the offing, but I would venture
01:55to think that we should brace for something similar to what we saw between September 21
02:01and March 23, which was an 18-month consolidation back then and about 15% in terms of Nifty
02:09Index, if my memory serves me right.
02:12Now this time around, it might be shorter and the number of 15% might be a little bit
02:17different. It could be 10 or 18, who knows. But I think we are set for a little bit of
02:23a consolidation. And I think there are multiple reasons. One is, which I have been talking
02:29about for the last three or four months, is the intense supply of paper. I was reading
02:35this report done about how much money has been raised in the first half of this year,
02:44and it's about 1.5 lakh crores. And this doesn't include offers for sale from existing
02:52investors or promoters. This is purely QIPs plus IPO money. And this is a pretty significant
02:57number. So even if you assume a very, very big $70 to $75 billion incremental allocation
03:06to equities from domestic households, which is direct plus indirect via insurance companies
03:13and superannuation and so on. If you put all of it together of $75 billion, this in the
03:18first six months of about roughly $18 billion is a pretty substantial number. In addition
03:24to that, you started to see foreign selling, people allocating away from India into presumably
03:30China. I don't know for certain, but that would appear to be the case. And then you
03:36also have valuations, which are not very expensive, but bumping around the plus one
03:43standard deviation, and you have slowing earnings growth. So you put all of this together,
03:49and I think it's time to see some correction, time correction for sure, price correction,
03:55I'm less certain about. Ashwini, for the longest time, the reasons were always there. The factors
04:00were not adding up. And one of the reasons why the markets got bought on dips at all times
04:06was that while FII inflows were missing, but the DI flows were strong, we still have the DI
04:12flows looking okay. But there are FII outflows now and which might have led to the corrective
04:17move in the recent past. My question is, therefore, that what could be the factor
04:21that would lead to this correction while the reasons are there? Would it be continued FII
04:25outflows? Or would it be the domestic money taking a bit of a pause?
04:30It will be both, Neeraj. See, at the end of the day, the markets are decided by the marginal buyer
04:36or the marginal seller, right? So as the supply keeps increasing, and the supply is from new
04:44papers, the supply is from existing investors, whether it's promoters or FIIs, and it's
04:49counterbalanced by the domestic money, which has been the sort of holding the fort on buying.
04:55So as the supply keeps increasing, at some point in time, the supply takes over. And then we
05:00find answers as to what is the reason why the market is falling. Then we'll point to earnings
05:06growth, we'll point to the uncertainty in the Middle East, we'll point to oil prices, we'll
05:09point to all sorts of things. The reality is it's all demand and supply, okay? And as supply
05:15keeps increasing, it makes it difficult for the markets to continue to go up. And at some point,
05:24the domestic investor, especially the retail participant driven more by momentum than by
05:30anything else, he starts to wonder if he's in the right place. And that's when you see a big
05:37step down. So we haven't seen that happen yet. But we may, who knows? Okay, noted.
05:45So we might actually have some words from the Reserve Bank coming soon as well. So we'll try
05:52and get you that. But what about policy decisions, Ashwini? Are you kind of constructive there? Are
05:58you negative there? What's your sense? I mean, the RBI showed its hand, not in a rush. But is that
06:04a positive thing? Or from a rate sensitive perspective, you would have hope for some more
06:13clarity, and maybe some more action?
06:16No. So, Neeraj, yes. While the market was hoping for a 25 basis point cut, I don't think it was a
06:23consensus view at all. And I think there were a lot of people who expected no change. I mean,
06:29inflation is one aspect. Geopolitics is the other factor. And inflation report, even in the US,
06:36which is driving this whole narrative about lower rates, are quite mixed. I think in the
06:42domestic environment, growth continues to be reasonably okay. I think policy decisions have
06:47been fairly supportive from the government, at least, you know, whether you talk about,
06:53you know, what they're trying to do, trying to bolster the economy in whichever way they can.
06:57But the reality is that, you know, a lot of things have run their course. I mean,
07:01the government can't keep spending more and more money on infrastructure on a year on year basis. I
07:07mean, fiscal consolidation is the right path to go. I think on the policy front, the only thing
07:13that I would hope for is a little bit easier money supply. I think the base money growth has
07:20been a little disappointing, and that's kept liquidity very tight. And there I would have
07:24expected some relief. So now with the rupee breaching the 84 mark on the US dollar, if the
07:31RBI starts buying the currency and releasing some liquidity into the market, we might see some
07:38relief there. But that too depends upon how RBI thinks about liquidity at this point in time.
07:44They've changed their stance in the policy. So that's something that I'm looking forward to,
07:49but let's see how it unfolds. Got it. Okay. Ashwin,
07:54so let's assume that you were sitting on some bit of cash because you were admittedly
08:01talking about caution some time back. I'm presuming that from what you've told me today,
08:05you're not in a hurry to deploy. But if there are some decent numbers that come out in quarter two,
08:14because while the headline may look soft, but that is because of cement and oil and gas or energy.
08:19Otherwise, the other sectors may actually post in decent growth. Where is it that you are looking
08:23out for earnings performance, which might prompt you to put in some dry powder to work, even as
08:29you are maybe not as constructive on markets? So Neeraj, I don't think there are any standout
08:35sectors where you see an incredible amount of value barring financials. And financials have
08:40been quite undervalued relative to their own history. And even the microfinance companies
08:46have sold off quite a bit in the last three months. So that's one sector that kind of stands
08:51out in terms of value relative to the rest of the market or relative to its own history. But barring
08:56that, there are really no sectoral standouts which one can point to. But I will tell you this,
09:03that on a bottom-up basis, there continue to be some ideas that get generated. Not a lot,
09:12but some for sure. And I think given how I look at things, I typically try and look at stocks that
09:19are still haven't participated in the rally that we have seen in the last two years or what we've
09:25seen since COVID. I mean, since COVID, everything participated. That would be wrong. But I think
09:30there are stocks that haven't participated in the rally of the last two years. And I'm looking at
09:34them and figuring out if there's an opportunity there. So it's harder and harder to find bottom-up
09:39ideas, but I do find some. And that's what I'm doing. The other place where I'm personally
09:45quite excited about is the private space, especially mature companies that might mature
09:51from an IPO perspective that might go to public over the next two to three years. I think there are
09:56there are opportunities available in that space. Ticket sizes are higher. So for many of your
10:02viewers, the access to those transactions may be difficult. But that's another place where I see
10:07a reasonable amount of value to put some money to work.
10:12Okay. Okay. Okay. So, you know, that's interesting to hear from Ashwini Agarwal that
10:17there is not too much. There are not too many pockets wherein there is value. Do you find value
10:24in growth, Ashwini, though, anywhere? Because, I mean, the estimates seem to suggest that EMS,
10:29for example, the growth numbers will be solid. But somebody was cautioning me on Friday,
10:34that if you just look at the cash flow converted EBITDA to CFO, those statistics are abysmal for
10:39a bunch of these EMS companies. I'm just trying to understand how do you think of that bucket,
10:43considering that the reported growth will look okay. So, you know, I'm a big slave of cash flows.
10:49So, you know, growth without cash flows is not something that appeals to me unless you're in
10:53very early stage of a very long growth cycle. So EMS obviously makes a cut in the sense that,
10:59you know, it might be a 10, 15 year growth story or 20 year growth story. But the valuation
11:04still don't appeal to me. So, unfortunately, I'm not invested there. You know, in hindsight,
11:09obviously, one wishes that one had. But, you know, I'm a value investor. I'm an old fashioned guy.
11:16So it's okay. I'll partake of something else in the 1000 dish buffet that we are at.
11:27Okay. You know, and viewers, it's interesting because sometimes
11:31when you buy into overvalued stocks, and I'm not saying that this stock was overvalued,
11:37but it certainly is rich in valuations. And there has been a bit of a disappointment today
11:41as a result of which Avenue Supermarkets is bearing the brunt of some serious selling pressure.
11:46Now, before I ask Ashwini Akarwal about his view on maybe retail, there's a clutch of names out
11:52there which are doing really well. Let me get in my colleague Mahima, who joins in with telling us
11:57as to what Avenue Supermarkets did. And what is it that the sell side view is on the stock
12:02considering that it's been bludgeoned out of shape in trade today. Mahima, good morning.
12:06Good morning, Neeraj. So basically, revenue Q2 numbers were a complete miss in terms of estimates.
12:12And in terms of margins, margins have taken a hit from 8% to 7.6%. And what was the highlight was
12:20that the management has said that now they're seeing, you know, their business being impacted
12:25on account of online grocery new format. So it's the quick commerce that is kind of affecting their
12:29like-for-like growth. Now, multiple brokerages have come out with their view on Avenue Supermarkets.
12:34And the views are mixed, of course, to start with Citi and MS who have remained underweight as well
12:39have given sell ratings where they're the most bearish ones. Citi has maintained sell with the
12:43target price of 3,500. And what they've said is that EBITDA and profit before tax growth has
12:49lagged revenue growth in seven out of past eight quarters. And they've also trimmed their EPS
12:54estimates by 4% to 6% for FY 25 to 27 estimates. And valuation as risk to reward seems unfavorable
13:00at 82 times. Now, MS has downgraded it to underweight with a target price of 3,702.
13:07And what they're saying is that online and offline can coexist, but defenders cannot stay defensive.
13:12Now, this was the highlight of the report. And they've lowered the top line growth estimates by
13:167% to 18%. Now, Motilal Oswal has reiterated buy rating and given a target price of 5,300.
13:23And they're estimating a CAGR of 17% and 20% respectively on revenue and PAT over FY 24 to 27.
13:29And they've cut estimates of EPS by 8% to 14%. Now, Nuama retains hold with a revised target
13:35price of 4,040. What they're saying is that Demart Reddy's growth slowed at 22%
13:39YY versus that of 32% in FY 24. Bernstein has the highest target price at 5,800 with outperformed
13:47rating. What they're saying is that one quarter results does not indicate a shift in Demart's
13:51long-term story. And they believe value-seeking customers will remain primary purchase driver for
13:56the large part of India. CLS Avenue Supermarts, well, again, they've rated it outperformed with
14:01the target price of 5,650. What they're saying is that they believe Demart is making appropriate
14:06pivot to private labels and this will meet future growth for the company. And lastly,
14:10Macquarie has rated it outperforming the target price of 5,600. And they're saying this Q2 is
14:15a miss and commerce concerns are cited by the management. So this is the overall view of how
14:21Q2 numbers are fanned out for Avenue Supermarts as well as what sell-side brokerages are saying
14:26about Avenue Supermarts. Very comprehensive indeed. And Ashwini, I'd like to come to you
14:31on this. Now, one swallow does not a summer make, but certainly lays out the perils of investing in
14:38a high-growth business within a quarter of growth gone. And maybe Avenue Supermarts will bounce
14:43back. It's a fabulous business run by a fabulous guy. But for somebody who's tactically gotten
14:48is really licking his wounds or her wounds because of the high valuations and now the
14:57inability to show growth for a couple of quarters now. So Neeraj, this is my whole reason why I
15:05hate or why I dislike investing in stock that have very high multiples, whether it's
15:11price to sales, price to book, price to earnings, EBITDA, whatever you look at. Principally being
15:16that the room for disappointment is very low. And I tend to kind of go where value is. So your
15:23downside is protected, hopefully. And you make a lot of money if you're proven right and the
15:28business is doing better than what the street thinks. So it's always about betting on what
15:35your view is versus the street's view when you're doing bottom-up stock picking. And this is
15:40clearly a situation where expectations were not met, valuations were rich, and that's why
15:45you're seeing the pain today. So we don't know what happens in the long run. But the other point I'd
15:50like to make on consumption is that I'm continuing to see very mixed trends in consumption. I mean,
15:57the K-shaped, you know, much talked about the K-shaped recovery that we saw post-COVID continues
16:04to have legs with stronger demand for more expensive luxury products and kind of weaker
16:10aggregate demand for bottom-of-the-pyramid products. I think two-wheelers is an exception,
16:15but outside of that, I'm not seeing a lot of traction for demand. And that's quite puzzling,
16:20actually, because I had thought that election spending will provide some boost to rural
16:27demand. Monsoons have been very good. Inflation is reasonably well behaved. So I don't understand
16:34it. And this has been bothering me a little bit, and I don't have an answer.
16:40One of the things that was noted, though, Ashwini, is that quick commerce growth is
16:46continuing unabated, even if organized retail might be facing, you know, in select pockets
16:53a problem or two. Trent is not showing any such problems. Some of the others might be.
16:57And that's another stock with such massive multiples. But of course, the growth is there.
17:03Here's my question, therefore. While there are some puzzling things there,
17:08is quick commerce still a pocket to look at seriously, simply because the growth numbers
17:17are looking very, very strong for both the listed and the unlisted ones?
17:22Absolutely. So you're right. Partly the problem in the consumer retailing has been the disruption
17:31caused by quick commerce and quick commerce is here to stay. I mean, all of us are getting used
17:34to ordering on the blankets of the world. I mean, who doesn't like a 15 minute delivery?
17:41And I think it's here to stay and it'll probably gather momentum. Let's see how this unfolds. And
17:48there is a path to profitability that some of the people in the private space need to find.
17:53But so far now, the growth is so good that funding the losses is not going to be a problem. And for
17:59the moment, this market share shift from modern retail to quick commerce or from traditional
18:06kirana to quick commerce will continue. I don't think there's any way out. I mean, I think this
18:12is a reality. Wow. OK. So select names bankable in the quick commerce space, Ashwini, I'm just
18:20trying to derive the final answer here. Could be. Solutions are expensive, but you could get to eat
18:28the growth. I don't think you will get to see multiple expansion, but you could get to eat the
18:31growth and growth is going to be pretty good. Got it. Now, you talking about different pockets,
18:39let's say or sticking partly to consumption in the midst of presumably a long cycle,
18:46which is Indian real estate. I read a report from Night Frank over the weekend that high end real
18:52estate prices might be set to correct. It doesn't show in the demand numbers that are happening
18:57across various companies which are launching projects, NCR, Mumbai, where have you
19:02trying to think about how you are thinking about this pocket? Because you were an early investor,
19:06I know, into some of the NCR companies, maybe MMR to I don't know, but certainly NCR. What is your
19:12view on the attractiveness or the lack of it of real estate companies now that there has been a
19:18bit of a rally into some of them? So interesting question, and I've kind of been puzzled by it as
19:24well, that how many people are there in India who can afford to buy homes that cost, you know,
19:30five million dollars or more? And it's incredible some of the prices for new offerings that are
19:38being charged. There could be some consolidation available, possible, but also there is a very high
19:46correlation between stock markets doing well and real estate doing well. And if you go back to
19:52the argument that, look, you're not in for a very deep correction, you're probably in for some time
19:57correction and probably a single digit, high single or low double digit correction in terms of prices,
20:04then I think the tailwind that many people who have been invested in the markets for a while
20:11have in their personal fortunes will continue and therefore their ability to
20:17to pony up for homes. If you recall our initial conversation, I'd said that, you know, a good home
20:24is a basic human need and something that is the first port of call for saving. So, you know,
20:36when you look at people who make a substantial amount of money through a private company being
20:40listed or through options of having worked in a startup, I mean, it's natural to expect that
20:45they will go and buy themselves a good home. So I think the underlying demand trends will
20:51continue. Maybe you won't see the price appreciation that you have seen in the last
20:56two or three years. I mean, that's how I think about it intuitively. I don't see a massive
21:03sell-off happening in real estate, something akin to what we saw in 96 to 2003 or something that we
21:11saw from 2011 to 2020. And the reason is we are not seeing higher rates, we are not seeing
21:20higher interest rates, we are not seeing a massive amount of bubble in some other part of the
21:26economy which needs to be deflated. I mean, historically real estate falls have been
21:31accompanied by a downturn in the economy and I don't see that happening. Okay, you don't see
21:38that? Okay, so therefore, suffice to say that Ashwini, you're not negative on real estate thus
21:44far and there are enough reasons. I think our producer showed the chart of how real estate
21:48inventory as well is essentially not very high in the system per se and therefore that could also be
21:56a big thing to monitor. Ashwini, the other point is chemicals and for the last 12 months I've been
22:03listening to the possibility of good times because the sector was consolidating for such a long time
22:10but the China pressure is here and real. Dumping is still on in select pockets as promoters tell
22:17us as well. I'd love to know how you are thinking about this bucket because sporadically we see
22:22these like the Sudarshan chemical announcement or the acquisition etc. An announcement here and an
22:26announcement there. Capacities are coming on. The stocks aren't quite moving, they're not showing
22:30results as well. I think you have to be a little more longer term in your view
22:39and look at the positioning of a company in its space, where is it adding value, what is it doing
22:45and what do you expect three to five years from now. So what I would say is that the way I think
22:50about China is that from a top-down perspective what China wants to do is more in terms of
23:01of new technology, innovation, value addition. They're really not interested in supplying bulk
23:07chemicals to the rest of the world. I think some of the pressure will continue in the short run
23:13because they have capacities and the capacities will keep churning out so that might happen but
23:17in the longer run that will not hold true. And what the Indian companies have done is occupied
23:23niches where they can add value through domestic chemistry skills, ability to manufacture quality,
23:31product at a lower price than the West can and this whole China plus one narrative has allowed
23:38people to come and look at India a little more closely. So I think there is an opportunity there.
23:42You have to be very bottom-up, we have to be very stock selective but I'm quite constructive on this
23:47space actually. I think there's a lot of value that will be generated in the years to come.
23:52It may not happen across the board, it might be very selective but I think it will happen. Also
23:59what you will see is margin normalization happen because you went through two or three very
24:06tumultuous years post-COVID where initially end product prices ran up and abnormal profits were
24:13made by domestic chemical manufacturers because they had low cost raw material inventory and then
24:19raw material prices went up and product prices crashed and you had a shipping crisis. So you
24:24had this massive yo-yo in margins where you had abnormally high margins and then abnormally
24:30depressed margins and I think now the margins are coming around to what they are sustainable.
24:35So now you will start to see growth from projects become visible in earnings. I'm actually quite
24:40positive. Ashwini Agarwal, on that note we'll call it a day today but thank you so much for
24:47taking the time out and being with us and from all of us wishing you a great festive season.
24:51Hopefully talk to you around the Diwali times. Thank you. Thank you Neeraj. Wishing all your
24:56viewers and all of you at the channel the same. Thank you so much. Well
25:01but with that it's a wrap on this leg of Talking Point. Thanks so much for tuning in.
25:21you