How is it feeling like? Well, the year, of course, has been great but I think this Diwali week or the month could have been a little better I guess.
Ravi Dharamshi: Yes, and I see we cannot complain. We have been having three fantastic years so on back of that if a little bit correction is there, I think that is par for the course. What I would say broadly what is happening is that government is continuing on the fiscal discipline path and RBI is keeping the liquidity tight and the monetary policy tight as well. So, both these things are leading to some amount of a slowdown and we can see that in the high frequency indicators that the numbers are slowing down especially on the consumption side. So, some amount of change in stance is required either from RBI or from the government to start giving a little bit boost, but I guess there is some uncertainty surrounding US election and what the Fed is going to do, maybe some action will happen after that, post that, but I do believe that all these are near-term concerns related to consumption specifically, rest of the economy is not doing that badly especially the capital goods oriented sectors.
So, would you say this correction is going to be fairly shallow and what is the expectation then for the Samvat 2081 in terms of returns because last three years as you pointed out has been much ahead of average, we have seen 19-20% kind of returns from Nifty itself versus average of 12% to 14%.
Ravi Dharamshi: So, one, because of just the sheer magnitude of the returns we should temper our expectations in terms of what kind of returns we should expect and we do not talk in terms of 12 months, we talk in terms of three to five years.
Can we still get double digit returns from the market? I would say definitely possible. If you are smart enough and can generate alpha, you can do slightly better than that as well, but definitely should not have expectations more than that.
Some volatility is to be expected and we should be trying to take advantage of that volatility rather than getting scared of it. Shallow in terms of correction, I think we have already corrected some 8-10% from the peak. Can it correct another 5-7-10%? I cannot rule it out just because the kind of returns we have had and the valuations are a little on the expensive side. So, with the slowdown and with the kind of valuations we are seeing it is absolutely par for the course. So, from the peak to correct around 15% kinds is I would say, but beyond that I would say then they start looking attractive again from a three to five years perspective because none of the problems are really balance sheet oriented problems, they are all more P&L related problems and more valuation issues.
But talking about that do not you feel that the selling around the earnings disappointment has been kind of a little too brutal and if it is justified then and if earnings were to slow down in some of those sectors consumption, banks, etc, do you sense further EPS cuts coming in?
Ravi Dharamshi: No, definitely this festive season was supposed to be the one where lot of revival was expected, people were banking on the revival and that does not seem to be panning out.
The first 15 days of October are not pointing to a very-very strong festive season. So, from that perspective, I do not rule out further EPS cuts and as we keep talking, it is essentially more focused on the consumption side and as I said the macro reason is government is being more disciplined on the fiscal side and RBI is being more tight on the liquidity side, those are the primary reasons and the trickle-down that we are supposed to see from the corporates doing well all the way to the economy, that takes a little longer and that thrust is not yet there in the economy for the populace at large to start doing well.
My sense is this stance will change and it should change in the next 12 months. In fact I am already seeing that the central government might remain fiscally disciplined but the state governments have already started treading on the path of giving welfare and everything so that should give boost to consumption but probably there is some time lag before that starts to happen.
You will have the state elections as well.
Ravi Dharamshi: Yes.
So, given the fact you are expecting a pickup in consumption, would not now be the right time to buy those dips and buy the correction if at all if they are correcting on earnings?
Ravi Dharamshi: I agree with you, but when you say right time, it is not necessarily next 15 days but over the next two, three, four quarters would be the right time to look at it because all the disappointment is getting factored in and if you take a three-five-year view, one has to see that actually the stars are starting to align that. All this consumption hockey stick growth that we have been waiting for might finally come through. If you see NDA 2 government in its first five years focused on only creating a safety net and getting the systems in place.
Second five years they focused on trying to revive the cycle with corporate profitability and this one I believe should ideally lead to some amount of focus and in the budget also we have seen that they are trying to revive the real estate cycle and jobs growth. So, jobs growth, wages growth if they come through and the real estate cycle revives, that should lead to consumption boom as well eventually, but consumption is a lagging indicator. First the real estate cycle at the bottom of the pyramid needs to start doing well as well.
But the other thesis is that if you are a longer-term investor which all of us hope to do why even look at these tactical and cyclical themes, you have always been a big propagator of the energy transition theme, why not play these 10-20 year kind of stories, real estate yes being one of them and then financials whichever way you want to cash in on the India growth story.
Ravi Dharamshi: See, all businesses have cycle. It is not like any business is cycle proof. But the difference being some cycles are one-two-year cycle and some cycles are five-ten-year.
Yes, what I meant is do not bet on the shorter ones.
Ravi Dharamshi: Yes, so if you are betting only on something that is going to last one-two-year you will have to know exactly when to enter and exactly when to exit which is very difficult to do.
So, for that perspective you need something that last 10-15 years and then you can try and capture a five-seven year period out of that cycle and usually even if the trend lasts longer, markets tend to capture that very-very quickly. For example, defence theme for all practical purpose started in 2019-20 and by 24 we have kind of already factored a lot of the future in.
So, you are completely out of defence then?
Ravi Dharamshi: Yes, for the moment we are.
And yes, getting priced in is something that we have seen with the case with Waaree Energies as well the kind of listing it got and everything because people are trying to bank on those stories. But talk about a financials a bit more because again it is a very large sector with respect to PSUs and privates and insurance and brokerages and whatnot. What is the pecking order within all of that?
Ravi Dharamshi: See, financials, of course, you split it into two buckets lending and non-lending financials. On the lending financial sides, essentially there are two plays. What I said that over the next 12 month these central government driven capex cycle will pass on the baton to private sector driven capex cycle because finally government has left the elbow space for the rates to come down, government is trying to stick to the fiscal discipline and there their ability to push the envelope has kind of reached a limit.
So, private sector needs to pick up the baton over there. But what is happening is lot of this capex is actually getting funded through equity rather than through debt. So, we need to see that confidence coming back for the corporates to start taking leverage for the future projects, that re-leveraging of the cycle should begin from this year onwards is our bet, so from that perspective the large corporate lenders should do well.
Second big change that we are expecting is that in the real estate cycle, instead of only the top of the pyramid doing well, we will see more broadening of the base where even the bottom of the pyramid cycle does well. I mean the focus in the budget was very clear on that and if and when that happens, I think the affordable housing finance segment should also do well and there are some quality plays available over there.
So, these are two segments on the lending side that we like and then there are small businesses focused lenders that are doing well. So, these are the three segments within lending that we like.
On the non-lending side, we like wealth management or rather the capital market beneficiaries. I think capital markets last three years have done well and the numbers are there, the kind of flows mutual funds are getting, all that is getting baked in, but we believe this is not the end of the story. This feels like this is going to have a long-long runway.
We are still at about unique around nine-ten crore kind of Demat accounts, I think that number has to swell to 20-25 crore by the turn of this decade and that will mean the sustained growth. So, there will be a lot more beneficiaries coming out of this sector, capital markets place, we like wealth managers but there are other plays like exchanges, brokers, discount brokers, market infra companies, those are all reporting good numbers that should do well. We do like insurance as well.
Insurance has had a bad five-year, of course last six months have been good especially on the general insurance side because the competitive intensity has finally abated.
So, during the heydays of private equity when money was available freely, some of the unlisted player were basically engaging in market share grab and leading to competition which was a little irrational, so that eroded the margins. Now the valuations also corrected and the margins also bottom, since last two quarters the listed space leaders have started doing well precisely because auto cycle also turned and competitive pressure also decreased, so that makes us bullish on the general insurance from here as well.
And you can say that also is kind of a play on this wealth generation because not general insurance but businesses tend to do well, they take insurance; the individuals tend to do well, they also tend to take insurance so life insurance is actually sold as investment product and not as a term product in India, so that also is essentially a quasi-play on the capital markets boom.
But just a follow up there, how are you pricing in the regulatory risk in all of that and I ask you that because for instance when it comes to the capital markets, there are those measures which are expected to come in on derivatives, which is expected to curb that a bit. RBI has been very vigilant. So, you do not know which day you will get a notice on which NBFC or which bank of late, so how are you pricing all of that in?
Ravi Dharamshi: So, I am glad you brought that up. It is absolutely a must and a required because we do not want a systemic issue. Definitely, all these measures tend to lead to a short-term kind of impact on the volume numbers and usually for brokers and exchanges more on the market side. But eventually what this does is it brings in entry barriers for the smaller guys and that means that the market share from them tends to get consolidated towards the larger guys, those who can comply with the regulations much easily.
So, that is from a stock market investor point of view, you have to ensure that you are aligned with the guys with the best corporate practices and best strongest balance sheet. But this might lead to a short-term disruption, but it is good in the long run and especially for the larger guys. Similarly, for all regulators, whether it is RBI, IRDAI or SEBI, all these actions lead to the smaller guys feeling the pinch because they have to comply far more and the larger guys manage to do that and that leads to them getting more and more market share.