Mukherjea further says: “We are making several additions to Little Champs. We are quite enjoying the jitteriness in the market. So the one I can talk about is RHI Magnesita. We have added RHI Magnesita to Little Champs portfolio. This is actually very similar to what we did with GMM Pfaudler four years ago.”
There seems to be a bit of a change in the macro narrative, whether it is local or global. Locally, we can blame it on tomato prices and onion prices. Globally, we could blame it on what is happening to the dollar index and how China is moving?
The macro narrative is probably the best we have ever had. I cannot remember a juncture in Indian history where the economy is running at 6.5%. We are close to the top of the interest rate cycle and the Chinese economy is blowing up in front of us. China blowing up, the fact that they are struggling with GDP growth, with exports, with employment has massive implications. It is almost inevitable that the Chinese economic slowdown will exert massive deflationary forces across the world on commodity prices, on oil prices. I am not so sure central banks or the bond markets are reflecting that just yet. China’s economic boom over the last 20 years supported commodity prices. China’s economic unwinding, perhaps its economic collapse over the next 10 years, will have a deflationary impact. As and when that becomes apparent to bond markets and to central banks, the narrative that we are close to the top of the interest rate cycle will solidify. And therefore, the jitteriness that we see around interest rates, will abate over the next 12 months.
Everybody is excited about the way our financials are moving. It is a consensus view. And it is a space where the growth is evident. But somehow if I look at the performance of financials and especially largecap banks, they have been quite numb this year. The contours of growth are favourable. The valuation stack is exciting and not stretched. Yet the price performance in this year for the largecap banks has disappointed.
The reason partially is that the funding conditions are reasonably easy for the lending ecosystem. So whether I look at NBFCs or the banks, raising money primarily CASA money or indeed wholesale market money has been reasonably easy. Whenever you have that advantage, whenever getting access to funds is reasonably easy, it is very difficult to separate the men from the boys, the women from the girls.
What we will need is some sort of shock to the system around either loan losses, some development of bad news around credit quality for the market to differentiate between say HDFC Bank and Kotak Bank on the one hand and say the PSU banks on the other. At the moment, the market is saying, why should I buy private sector banks if the PSUs can deliver stellar profit compounding quarter after quarter?
I am quite intrigued to see that you are actually calling specialty chemicals a preferred sector at a time when just about every player has given a guidance card and talked about a gloomy scenario. Is this a buying the fear strategy?
No. In specialty chemicals, people are not drawing the distinction. China is dumping agrochemicals globally. Agrochemicals are therefore under pressure. For example, we do not have SRF, but I think it is a high-class company. The SRF management has been clear that China is dumping and that is exerting pressure on SRF’s profits. But in pharmaceuticals, medicines for human beings, there is a shortage. America is going through a massive shortage, for example, of oncology drugs. Contrast media is the stuff we have to consume before an MRI scan. And therefore, what we are seeing is that there is no global glut in the API space that supplies into the pharmaceutical space and the intermediates which go into APIs. We are not seeing price pressure on API.
Now, China makes 70%-80% of the world’s API. If India can grab even 10% of that, our API industry doubles. We quadrupled our position in Divi’s Lab in November, December last year. And we are continuing to try to make more investments in this space which goes into APIs, the intermediate companies. Alkyl Amines, for example, remains a large holding for us. We are continuing to look at more companies there. We spent a lot of time talking to pharma ecosystem players in America and India. We are not seeing price pressure in the pharmaceutical space. There is pressure in the agrochemical space that is a very distinct industry.
After the peak summer rally of this year in the recent aberration that we have seen in the markets, have you made any new additions, be it the Little Champs portfolio or any large caps?
We are making several additions to Little Champs. We are quite enjoying the jitteriness in the market. So the one I can talk about is RHI Magnesita. We have added RHI Magnesita to Little Champs portfolio. This is actually very similar to what we did with GMM Pfaudler four years ago. RHI Magnesita makes ceramic lining, brick lining which goes into steel plant furnaces or cement plant furnaces. This is the world leader. They have around 35% share globally. This is the India leader. They have 40% share in India. Good gross margins 40%, gross margins 15%, operating margins around 30% ROC. It is a near debt-free company. It has an Austrian parent listed in Austria. We have invested in the Indian subsidiaries over the last couple of weeks.
What do you think about the record bulk share sales by promoters? This trend we’ve been seeing over the past few months, What is your take on it?
The way I am seeing it is this is one cycle of investing broadly coming to an end. Just to reference our investment in GMM (I have invested, my parents are invested and our 10,000 clients are invested in it), DBAG, the private equity firm, entered GMM 10 years ago. Typical private equity investment cycle is seven to 10 years and DBAG exited in favour of Chrys Capital. DBAG sold their position to Chrys Cap, last week right. I do not think that’s good or bad for GMM. It is good. One level of overhang has gone. But this is a perfectly rational cycle. A generation of investors entered five to 10 years ago. They are gradually getting out. A private equity firm exited Amber. That is a perfectly rational cycle. I entered five years ago. I have made my money and I am looking to exit. In fact, we are doing that with some of our small and midcap investments as we refresh the small and midcap portfolio.