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00:00Thanks for tuning into Talking Point. I'm your host, Neeraj Shah. The case for a chat for Abhay
00:17Agarwal of Piper Serica today. The China recovery is on the cards, or at least seemingly on the
00:24cards. Will it weigh in on the Indian markets? What are the standout themes amidst muted Q2
00:32expectations, especially for cement and energy? And will a soft US landing aid Indian IT?
00:38Considering that thus far from the comment, we haven't quite seen the evidence of that,
00:42would be lovely to see if Abhay Agarwal believes in this. He joins us right now on the show. Abhay,
00:47it's been a while. Thanks so much for joining in. I unfortunately missed the such amazing
00:53celebrations of Mata Ki Chowki at your house. So I rue that fact, but I hope you're doing well.
00:58Yeah, thank you so much, Neeraj. Yes, we did miss you. And hopefully, you know,
01:02next time you'll be able to join. And again, you know, very happy to be back on the show
01:07and talking to you. Likewise, it's great having you, Abhay. Abhay, you've been amongst the few
01:13very vocal voices of the possibility of people making money in the Chinese markets,
01:20even if people make money in the Indian markets. But I think for you, it is not a case of either
01:24or, but just that you are more constructive on the momentum in China. Now that a lot of
01:30a fair degree of uptick has happened already. And we've seen some of the utterances from the
01:38Chinese officials about the extent of stimulus that they are wanting or willing to give. What
01:45is your sense of what happens next in the Chinese markets? And does it have any collateral impact
01:53on Indian markets? So first of all, my, you know, views on the Chinese market reflating are not
02:04based on any special love for China or from the fact that look, Indian flows will drop
02:10significantly if China reflates. I think as investors, we are always looking globally and
02:17thereby in India of mispriced opportunities that can consume a large amount of capital,
02:24because that's where the large institutional investors focus on. Now, China has been a start
02:30and stop market for many years now. In fact, if you go back from 93, I just, I was seeing the data
02:37sometime back and it's difficult to believe that there's a negative return if you look at from 93
02:41to where China is right now, where Indian markets have gone up 13 times over the same time. But you
02:47know, that's a long period to consider. If you look at from a short term basis, you know, Chinese
02:53economy has seen a very sharp cyclical slowdown, especially post COVID. I think if any economy got
03:02hit by COVID, it was the Chinese economy and their internal consumption fell off the cliff. And we saw
03:09that in real estate, in autos, general slowdown. And as a result, what happened was that the large
03:15Chinese manufacturers who are, you know, the biggest suppliers of commodities like non-ferrous
03:21metals, chemicals, agrochemicals, electronic items, semiconductors, rare earth minerals for EV
03:27batteries, they all were forced to dump in the market, in the global markets. And that had impact
03:34on pricing. You know, there was a severe pricing damage across the board. Now, as the Chinese
03:39government now has decided, clearly they have made that intent very clear and more announcements are
03:44expected. What will happen is that the Chinese economy with that support will start reflating,
03:49which means that, you know, consumption will come back because the government is now hell-bent on
03:54putting money in the hands of consumers, making credit easily available for house buyers, auto
03:58buyers, anybody that wants to take credit to consume anything. So I think that is where China
04:05is headed. It's a very large economy. And I think when it starts consuming, there will be impacts of,
04:12you know, multitude on global markets, especially commodity consumers like India.
04:18One is that there could potentially be a rise in commodity prices, especially non-ferrous metals
04:26and chemicals and agrochemicals, which will be good for Indian producers. But Indian consumers
04:31like auto capital goods and infrastructure companies may suffer because frankly, post-COVID,
04:39we have had a very stable input price regime. You know, we haven't seen any price hikes in
04:44commodities, especially oil. So that is one risk I see for the Indian manufacturers who are
04:51consumers of these economies. But at the same time, exporters and players in this space that
04:57had no pricing power will benefit. So I expect benefit for companies like Indalco, Tata Steel,
05:02GSW Steel, Vedanta. These are not my recommendations, but since we are discussing,
05:07you know, the impact of Chinese depletion. So I think that is the outcome. So again,
05:13another data point four years ago, we saw India's weightage in MSCI Emerging Market Index was 8%,
05:19China was 46%. We thought it was a massive discrepancy and that got filled in as Indian
05:25market went up. And now there was a point recently when Indian market's weightage in MSCI Emerging
05:33Market was higher by a point than Chinese market. And clearly that was an overshooting, you know,
05:39of that weightage. But now I think it will go back to the mean. India will probably go back to
05:43around 20%. China will go back to about 35%. So you will see flows coming back into China. So
05:49yeah, that's the view on China. But I don't believe that Indian market will suffer because
05:55Chinese markets will go up. I think there is plenty of capital that is ready to go into both
06:00emerging markets. Okay, so what's the view therefore on Indian markets? And it's a telling
06:06point that you made because yesterday we were talking to one more fund manager who said that
06:10if China's Chinese markets couldn't give returns in the peak period of their global growth or GDP
06:16growth, why is it that people believe that over the long term Chinese markets could give growth?
06:20I mean, it's a debate. You can argue either ways. But I'll leave that aside. I don't want to,
06:25I want to use your time for telling our viewers how you think about India currently.
06:30What's your sense? The expectation is that Q2 will not be a great season.
06:34Valuations are not out of whack, but in certain pockets may be egregious. Yes. How do you view
06:40markets currently? Yeah, I think Indian market at its current market cap level of around $4 trillion
06:47is a decadal opportunity. We all believe in that, you know, firmly believe in that, that look,
06:52this 4 will become 6, 6 will become 8, 8 will become 12, you know, over the next 5, 8, 10 years.
06:57So there will be pockets of opportunities, new leadership will emerge. At the same time,
07:03valuations have always been high and have been holding back serious flows into the Indian market.
07:08What we are going to struggle with need is clearly in the short term. Again, you know, it's a six
07:12month to one year perspective that there will be a cyclical slowdown, which is already evident
07:18in consumer led consumption. And the reasons for that are that there has been a price inflation
07:26in consumable items that I think the inflation data is not really catching. So
07:32what we are seeing is a higher spike in food prices in other consumable items. Secondly,
07:38the credit availability is not as easy and cheap as it was one year ago. And RBI has been
07:44tightening the norms, making credit flow more difficult to the unsecured retail buyers because
07:51they do not want to create a credit bubble and rightly so. The impact of that is that there is
07:57a cyclical downturn. We are seeing that, you know, we're seeing that in the recent festive sales,
08:03auto inventories are at an all time high, you're seeing real estate prices being, you know,
08:08cut a little bit to get demand going. Implied paint, consumable items, you know, we're seeing a
08:16demand slowdown. Now, this is not a structural shift. I think it's very good that we have a bit
08:22of a soft landing like this so that we form a solid base to take off from there. So my
08:28expectations from the broad index, Neeraj, for the next six to 12 months are muted. But at the
08:36same time, I think askew stock picking is where money will be made. It has always been made in
08:41India by backing sectors, backing teams, backing companies slightly ahead of time, even if they are
08:47on a high growth curve and look expensive. But if you go back, you know, we played, for instance,
08:53the whole PLI team where Dixon has come out. Again, these are not my recommendations, but
08:59as an example, you know, Dixon has come out and created almost a one lakh crore market cap from,
09:05you know, 10,000 crore four or five years ago. So I think it has always been an expensive stock.
09:10So similar to that, there will always be teams that will be available to investors who are
09:16willing to bet on a bit of a contrary basis and make money off that. But from an index level,
09:23I think where the valuations are and where the cyclical slowdown is, it may be difficult to
09:28make money over the next 12 months. Okay, difficult to make money over the next 12 months. And still,
09:35we are in the business of at least telling people through people like you how to make money. So I'm
09:40going to probe that point a little bit more. But before I do that, where is it that you believe
09:45the probability of losing money is higher? Because I think a lot of people get caught in
09:51buying trending moves higher, and some of them may not be accompanied by earnings growth,
09:58but maybe peaking out as well. So where do you foresee challenges of earnings growth? Because
10:04at some after all, eventually, stock price moves will accompany earnings growth, right?
10:11I think one space that is a very heavy weightage in the index, and therefore gets a lot of flows,
10:20but we believe is going to be challenged for growth and margins both, you know, is the entire
10:27lending space. So large banks, small banks, PSU banks, NBFCs, both for corporate and retail.
10:36I think we've seen three things happen there, Neeraj. One is that RBI is increasing risk
10:42weightages for unsecured lending. And even for secured lending, they have increased risk
10:47weightages. So RBI is very cautious that they don't want an asset bubble to build up. Secondly,
10:52the cost of money hasn't come down, it has actually gone up. We saw EMIs for cars at about
10:58seven and a half percent, same time last year, it's about 8.7% now. And Sibyl score, if it is
11:04worse than 600, the cost is higher than 10 and a half percent. So there is a demand slowdown,
11:09you know, and credit card expenses, credit card also expenses where banks are reining in. The
11:16corporate credit also has not picked up as banks would like it to because the private capex is
11:22pretty slow right now. So I think if you look at these and there is a deterioration clearly in the
11:29entire microfinance book, we have seen collection efficiency fall from 98% to 96% and then 94% and
11:37then 92%. And it will probably be below 90% in this earnings as we get into. So I think there are
11:44issues with the whole lending space right now. People should tone down their expectations of
11:50double digit growth from banks and also they will see margin compression because cost to income
11:56ratios are consistently going up. Deposits are not as easily available as they were. So the entire
12:02banking and financial services space is where we are quite underweight and we expect that, you know,
12:08it will probably flatline. Again, a great long term theory space, but something that investors
12:14should be cautious of. The second is IT services. I think that is something that you have kept for
12:19later so we can discuss that at that time. I will. But no, maybe Abhay, just one cross
12:26question here. The common narrative is that, and by the way, I think PM Modi is about to start
12:32speaking. So when he does, we'll have to cut to it. But with that caveat, let me still ask you,
12:41the bull argument for banking lenders is that valuations haven't been as good in a really long
12:47time. And at some point of time, CapEx growth might help even if companies are not resorting
12:57only to banks as the only port of call for capital requirements. How would you argue against that?
13:05No, I would actually not argue against that because I think these are both good points and
13:10they're absolutely right. Valuation has been, if you look at it from a historical perspective,
13:14lower than that. And there is expectation of demand pickup. But I think both these,
13:22the valuations can still go down further from here. You still see banks trade at two and a
13:28half times book value. You're still seeing credit demand going down. And the opportunities for
13:35global investors are plenty. You can buy a JP Morgan, a Citibank at close to one time book
13:41value, one and a half times book value. These are global leaders. Again, Chinese bank, nobody
13:45wants to test them trading at 0.25 times book value, still growing. So for global investors,
13:51there are other opportunities. Indian valuations have adjusted, but still not in that absolutely
13:58attractive zone that you close your eyes and say, yes, this is what we want to buy. There is quality,
14:03but the growth is tapering. So I don't think the valuations even now at the current level of growth
14:07justify themselves. I think there is room for valuations to adjust down. And at the same time,
14:13when the credit demand book picks up, when the banks go back to a 20% kind of book growth level,
14:21there will be plenty of time for investors in between to add these stocks to their portfolio.
14:27Okay. And I think that's a very important point. I mean, you don't have to rush. There might be
14:33better opportunities, better times to use your capital. So let's try and figure out from Abhay,
14:38in these difficult times, when such an important sector is probably going to be under a bit of
14:42cloud, according to him, what is it that might actually make money? And then we'll talk about
14:47IT at the end. So Abhay, if banks are challenged, if you have maybe a mid constructive or not so
14:53constructive view on IT, where is it that you are constructive? There are emerging sectors here. So
15:00I'll break it up into two parts. Within the emerging sectors, where are we seeing opportunities?
15:05I think there are spaces like semiconductor. I think semiconductors will be a giant size team
15:12in India. Unfortunately, very few companies to play them right now. But if you just Google,
15:18you'll find companies like KNCG Power trying to set up their OSAT manufacturing facilities. There
15:25are companies we are seeing that are getting into chip design space with government support for the
15:29first time. So I think the semiconductor space will be a big space. The second space we are
15:34looking at with a lot of interest right now, and there are already three listed
15:38opportunities, is the whole CDMO or contract manufacturing for Indian domestic market.
15:43Right now, what has happened is that there has been a lot of focus on companies like Diviz,
15:47rightly so, leaders in international global CDMO for global customers. But there is a big,
15:54big opportunity in the domestic CDMO business, companies like, you know, APOMS or Windlass,
16:01and there are a couple of more that are manufacturing for the first time for the
16:06Indian domestic market, the formulations and generics. And there is a big push in the
16:11government. There have been announcements and discussion papers put out from the government
16:14that clearly say that the government, for the first time, wants to support large scale manufacturing
16:19and with good manufacturing practices. They don't really want these small plants and, you know,
16:26to be present as the Indian domestic pharma market grows. So I think there are opportunities in that
16:33space. The third space we are kind of, so these are on the new emerging spaces and the, in the
16:39traditional spaces, I think the pharma rally has been quite, you know, astounding. People have
16:45missed it largely because nobody believed that the pharma companies will read it. But now we
16:51believe that there is still five years of clear runway ahead for the large cap Indian pharma
16:56companies like Diviz and Dr. Reddy's because of the work that they have done over the last five
17:01years in cleaning up their operating practices and building a very strong pipeline of launches
17:06in the U.S. market. So I think the pharma space is looking very attractive despite the recent run-up.
17:12Insurance is a space that we are very, very bullish on. Healthcare, health insurance,
17:17life insurance, non-life insurance. I think these are the three spaces, I think, which will continue
17:22to do well for the next five to 10 years. And the third space that we are kind of contra-bullish on,
17:29and it's not a popular theme, will probably not be a theme for some time, is a non-ferrous metal
17:35space because I think these companies like Indalco and Vedanta and Nalco, the entire basket,
17:44if you look at it, they have really become very efficient miners over the last five years when the
17:49commodity prices were depressed. And I think as the prices go up, there will be a phenomenal
17:55operating and financial leverage that these companies will benefit from because they are
17:59very, very low debt balance sheet right now, at least most of them. So I think as the commodity
18:05prices go up, you will see a radiating both in multiple valuation and also in terms of earnings
18:11growth. So I think these are the three or four spaces, Neeraj, that we are seeing opportunities.
18:17Okay, interesting. Abhay, how do you play semiconductors though?
18:22Well, semiconductors, I think, as I said, Neeraj, very few companies right now,
18:26but that opportunity space will increase. So as I said, CG Power has already announced its
18:34plans to set up a facility. Then there is Keynes that has started talking about it. And I think
18:43some of the other companies, we are seeing a lot of action in the startup space by the way,
18:49because when we invest through our startup fund, we are seeing companies that are benefiting from
18:53government support and the whole Shakti architecture designed by the IIT Madras
18:59team that is available for Indian companies for free to design their own semiconductor, the ASICs
19:05for single design and also now getting into FPGA and other spaces. So I think in the listed space,
19:12I would say there are few opportunities, but these opportunities space will grow because
19:17companies will identify that. So investors should keep an eye out for this opportunity.
19:24Hmm. Okay. Sorry, Abhay, I missed that point when you mentioned it somehow, but good to get
19:30that clarity nevertheless, in case our viewers had missed it too. So some emerging themes or
19:35in some cases, some reinvited themes as well, all of which is something that Abhay Garwal
19:40is looking at very closely. Abhay, can't not ask you about the madness surrounding capital
19:46marketplace, though some of it that died down in the recent past, but Bombay Stock Exchange
19:51is on a roll. Some of the brokerages have delivered very strong results as well.
19:55Any thoughts on this whole bucket of stocks? I mean, it could be an exchange, it could be a
20:02utility player, it could well be a brokerage or a wealth management firm.
20:08I think where we are, I don't see a risk of earning growth reduction in these spaces. And
20:17the reason for that is that India will be a very vibrant capital market for next decade.
20:23And the leadership positions across the board have already been created in this capital market
20:28infrastructure companies, as we can call them. So exchanges, there are only two, BSE and SE.
20:33In commodity exchanges, it's only MCX. If you look at depositories, it's only CDSL and NSDL. If you
20:38look at registrars, it's only CAMS and KFINTECH. And in brokerages, if you see discount brokerages,
20:46it's largely Angel One, which is listed. There is no other listed company of the same size and
20:52scale there. So once the industries are in the high growth space, high growth zone, and leadership
21:00positions are already consolidated to a level that it is very difficult for new entrants to come in
21:05in some of these businesses. I think the outcome is that valuation multiples will also stay high
21:11in line with the earnings growth. So Neeraj, I think for next couple of years, as the capital
21:17markets improve, there will be new listings. The market cap goes from $4 trillion to $6 trillion.
21:23These companies will continue to make money. At some quarters, you may see results not as good.
21:30But I think the only risk for investors here is overpaying for some of these companies. But the
21:37risk that earnings growth will slow down is not there. So the only thing you have to worry about
21:42is, look, am I getting too late into this play? If I come in with this valuation, how much return
21:48will I make over a five-year perspective? That's the only risk I see. Other than that, I don't see
21:53a risk of earning downturn in any of these companies. Got it. Viewers, I want to draw
21:58your attention to this. Indian IT services revenue growth. And there's a chart here which shows how
22:05there is a very strong correlation with the US IIP. And this is the top five USD revenue growth
22:10companies. So all the top five have been accounted for. And you can see that there's a bit of a lag
22:15in the recent past. And the question, therefore, that comes to mind is, will a US soft landing
22:25really result in some positivity for Indian IT? Or is it more a case of hope? Or will it actually be
22:33very diversified and different for different companies? Now, we have a couple of minutes
22:38before we wrap up the show. Would love your thoughts here on this. Neeraj, we have been
22:43tracking this and talking about this for almost a year now. And I don't think anything has changed.
22:47I think the Indian companies are still too dependent on the US markets. Even if the US
22:53market comes back, I don't think the pricing model that worked earlier, which was a fixed
22:58cross-pricing that worked in the favor of a services model that Indian companies have created,
23:03which is largely time and material based. I think that whole model is now passe. It's
23:10not something that the customers are used to anymore because they want to pay a fixed price
23:14for projects. So the problem for Indian IT companies is not just a slowdown in the US market.
23:20It's also how do they reorient their business model to go from time and material pricing to
23:26fixed cost pricing and then compete with startups in the US companies like Snowflake and all,
23:32which have scaled up doing product based pricing. So I think the challenges for Indian
23:39companies are far and many that they have to deal with both in the short term and in the medium
23:45term. So I wouldn't believe that just if the US market demand also comes back, the Indian
23:50companies will suddenly see a double digit growth. You look at even the current guidance is like
23:571%, 2%, 3%, 3.5% growth in top line. I mean, I don't find that attractive at all as an equity
24:05investor. Why would I invest in a company that is generating cash flow, but growing at 3% or 4%
24:13in the best case? I think for investors, there are much better opportunities than that. In the
24:18large cap IT, at the same time in the small IT services companies, I'm seeing some very good
24:22innovative products and innovative approach coming up. I think those companies will probably
24:26do better than the large cap IT services companies. So helpful this conversation. Abhay Agarwal,
24:33take a moment to thank you for joining in today and giving us your thoughts. Really appreciate
24:36your time. Thank you so much, Nives. I'm glad to be on the show. The feeling is
24:41mutual and more so on our side. But with that, it's a wrap on this leg of Talking Point.
24:46Thanks so much for tuning in.