A lot of tactical ideas seem to be popping up. There is suddenly a lot of buying interest in the chemical sector. Do you want to bet on any of these new names for a one-year view or something at all? I know it is a mutual fund with a longer term view. but there is always that one portion that you keep for these momentum plays as well?
Dinshaw Irani: The problem with the chemical sector is that everybody is betting on the fact that it is a China plus one play. But mind you, China came out of that sector because of ESG and we also are not too comfortable with these kinds of companies. But even on the valuation front, they are fairly stretched and they are yet to prove themselves. Frankly, we have not seen much upside here. Forget about the pricing but I am talking about in terms of financials. So we would rather stay away and then be carried away with this, but there are quite a few ideas.
People have FOMO, the fear of missing out, but the point is that there are so many stocks in the market, and we have seen that consistently around a third of the market does fairly well, and that is like a huge amount of stocks. So we have enough ideas to pick from rather than go in and try to grab something which has just got momentum on its side.
Out of the QSR space, some of the names like Barbecue Nation, Sapphire or even Devyani have just started moving. Have you looked at some of these names which have not done well? In fact, Jubilant also for several quarters have been complaining about anaemic growth in same store sales. Is it heightened competition, is it inflation? What led to such weakness?
Dinshaw Irani: The QSR space is very interesting. I think it is more of the names that you mentioned, which are having a problem right now, and are mainly seeing a lot of local competition. You have a lot of options when you open up a Zomato or a Swiggy. Many pizza guys are there as such and you would want to try out new names, right? I think that is where the problem is. Wherever the QSR is high street based or mall based QSR, that is the one that you are looking at because we have 65 crore youths in the country today and I am sure they are always looking at these options of picking up stuff when they are moving around and doing impulse purchase on the spot.
We have only one player in that space and we are quite happy with that. Plus, we have a supplier who supplies to that player, which is a listed player as such, a part of his sales is through that, plus he has got a brand ownership also, fairly well known in the market. These are the only two,, QSR and its derivative that we have in our mix.
Real estate, again, is in the spotlight. But what about the entire supply chain? I am talking about cement, consumer durables, cables and wires, and the rest of the building material. Is that something that could be an interesting sector to watch out for as well?
Dinshaw Irani: That could be because these are, again, derivatives, but in the commodity players that you mentioned, we do not like the cement space. We think there is enough capacity and beyond, just because of the price discipline that they have, they are managing to go ahead and we have seen that. There have been pullbacks in prices and all that.
It is not a comfortable space to be in or anyway the players are fairly stretched on the valuations. You cannot give out 40, 50 times forward earnings to commodity players. So that is why we are away from that. In terms of the other, like the tile guys and the cable guys, again, our comfort is not there purely because of valuations. They have done a fantastic job in terms of earnings growth , but despite that, the valuations are fairly stretched and not too comfortable.Have you looked at anything amongst the recent listings or the recent IPOs?
Dinshaw Irani: No. Actually that scares us. In the frenzy in the IPOs, mainly the retail guys are getting sucked in there because of the IPO and they expect a pop going forward. But the fact is that if that does not happen, it leaves a very bad taste in the mouth of new entrants in the market. So that may just put off a few, but frankly, the valuations there are fairly stretched whenever the IPO comes. Normally, you need something like 20, 30% on the table when the IPO comes. And when they come at par valuations to the listed entity or even a premium to the listed entity, there is no way you can look at a pop when that happens. So that is why we have been very careful. We have not participated in any of the IPOs that have come through.
I would like to go back to some of the supply chain companies in the QSR space. One company which comes to mind is a cookie company, but also supplies buns to this entire space. But I do not want to talk about their domestic play. Increasingly, in their commentary, one is getting a sense that export could become a big angle for them or perhaps supplying to some of the really big retail operators in the West, be it Europe or even US. Could this actually be a new chapter for some of these companies and give much more longer term visibility?
Dinshaw Irani: Actually, that is what excites us about this space. In fact, you are referring to the same stock that we have in our holding as such. So the fact is that, if India has been the toughest market for QSR space, these guys are supplying to MNC players out here. And they have been very cost-conscious. In fact, I remember meeting one QSR player, who is an MNC and he was telling me that he even counts the number of seeds on the bun to make sure that the quality does not go awry, even though they are cutting the price on the buns as such.
So that is the kind of control these guys have on the cost. And despite that, the players who are suppliers to these QSRs have managed a fantastic margin as such. So it is obvious that the global MNCs will always look at them as a potential to outsource from here as such. That is one thing that we have played with and frankly, I mean, commodity prices are the only ones which create a bit of upheaval.
That is what happened in the case of this particular supplier because wheat went up because of the tussle between Ukraine and Russia. We waited for the price to correct even before we bought it as such because we realized that was the only overhang for the stock. And whenever wheat prices come into norm, they will go back to their norm. So that is what we waited for and I think we are very bullish on that stock.