How do you feel? Well, the year, of course, has been great but I think this Diwali week or month could have been a little more I guess.
Ravi Dharamshi: Yes, and I see we can’t complain. We’ve had a really good three years, so if there’s a slight correction I think it’s par for the course. What I would say broadly what is happening is that the government continues on the path of fiscal discipline and the RBI keeps its liquidity tight and its monetary policy as well. So, both of these have led to some slowdown and we can see that in the high frequency indicators the numbers are decreasing especially on the consumption side. So, some change in attitude is needed from the RBI or from the government to start giving a little push, but I think there is some uncertainty about the US election and what the Fed will do, maybe some action will happen after that. that, post that, but I believe that all these near-term concerns are related to special consumption, other than the economy is not doing that badly especially the sector oriented capital goods.
So, would you say that this correction is quite shallow and what do you expect for Samvat 2081 in terms of returns because the last three years, as you know, have been ahead of the average, we have seen 19-20% kind. from the return of the good itself versus an average of 12% to 14%.
Ravi Dharamshi: So, one, because it’s just the magnitude of the returns, we have to follow the expectations of what kind of returns we should expect and we’re not talking about 12 months, we’re talking about three to five years.
Can we still get double returns from the market? I would say it definitely works. If you are smart enough and can generate alpha, you can do better than that too, but don’t expect more than that.
Some volatility is to be expected and we should try to take advantage of that volatility instead of fearing it. Shallow about the correction, I have corrected some 8-10% of the peak. Can you justify another 5-7-10%? I can’t resist just because of the kind of return we have and the price is a bit expensive. So, with the slowdown and the kind of valuations we’re seeing, it’s par for the course. So, from the peak to correct about 15%, I would say, but beyond that I would say, so they look attractive again from a three to five year perspective because there are no issues that are really balance sheet oriented issues, all of them. other P & L related issues and other valuation issues.
But talking about this, don’t you feel that the selling of the earnings disappointment has been a bit harsh and if it is corrected and if the earnings are down in some sectors of consumption, banks, etc., do you know? More EPS cuts coming?
Ravi Dharamshi: No, of course this festive season is supposed to be what many revivalists want, people are thinking about revival and not seeing it.
The first 15 days of October did not show a very strong festive season. So, from that perspective, I don’t rule out further EPS cuts and as we continue to talk, it’s more focused on the consumption side and as I said the macro reason is that the government is more disciplined on the fiscal side and the RBI is. stricter on the liquidity side, this is the main reason and the decline that must be seen from the corporation well until it reaches the economy, which takes more time and the impetus is not yet in the economy. for the general public to do well.
My understanding is that this attitude will and must change in the next 12 months. In fact, I have seen that the central government may maintain fiscal discipline, but the state governments have started to walk the path of providing welfare and everything to increase consumption but it may be some time before that happens.
You will also have state elections.
Ravi Dharamshi: yes already.
So, given the fact that you are expecting consumption, now is not the right time to buy those dips and buy corrections if there is a correction in earnings?
Ravi Dharamshi: I agree with you, but if you say the right time, not necessarily the next 15 days, but in the next two, three, four quarters would be the right time to look at it because all the disappointments will be taken into account and if you take it. view three five years, one must see that the stars are actually starting to align. All this hockey stick consumption growth that we’ve been waiting for can finally come through. If you look at the NDA 2 government for the first five years the focus was only on creating a safety net and establishing the system.
The second five years they focus on trying to revive the cycle with the company’s profitability and this one I believe should ideally lead to some amount of focus and in the budget also we have seen that they try to revive the cycle of real estate and job growth. So, job growth, wage growth if it comes through and the real estate cycle revives, which should lead to a boom in consumption also eventually, but consumption is a lagging indicator. First, the real estate cycle at the bottom of the pyramid should start well.
But the other thesis is that if you are a long-term investor that we all hope to do, why even look at these tactical and cyclical themes, you are always a big spreader of the energy transition theme, why not play 10- 20 year types of stories, real estate yes become one of them and then financials whichever way you want to cash in the growth story of India.
Ravi Dharamshi: Look, all businesses have cycles. Unlike any business that is cycle proof. But the difference between some cycles is one-two year cycle and some five ten year cycle.
Well, what I’m trying to say is don’t go for the shorter one.
Ravi Dharamshi: Yes, so if you bet only on things that are going to be for one or two years you 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 lasts 10-15 years and then you can try and take a five-seven-year period out of that cycle and usually even if the trend is longer, the market tends to catch on very quickly. For example, the defense theme for all practical purposes starts in 2019-20 and in 24, we have considered a lot of the future.
So, you’re completely out of defense then?
Ravi Dharamshi: Yes, for our moment.
Yes, the price tag is something that we have seen with Waaree Energies as well as the type of listings that we get and it’s all because people are trying to implement the story. But let’s talk about financials a bit more because again it is a very big sector about PSUs and privates and insurance and brokerages and whatnot. What’s the pecking order in all of that?
Ravi Dharamshi: Look, financially, of course, you divide it into two buckets of debt and non-debt finance. On the financial side of credit, essentially there are two spins. What I am saying is that over the next 12 months, this central government-driven capex cycle will overtake the private sector-driven capex cycle because the government has finally left some elbow room to keep rates down, the government is trying to stay fiscally disciplined. and there ability to push the envelope has kind of reached the limit.
So, the private sector has to take up the baton there. But what happens is that a lot of this capex is actually financed through equity rather than debt. So we have to see if the confidence will return for the company to be able to use the leverage for the upcoming projects, if the cycle should start again from this year, it is our bet, so from that perspective, the lenders of large companies should do it with good. .
The second big change we expect is that in the real estate cycle, instead of just the nice top of the pyramid, we’re going to see more of the bottom of the pyramid cycle. I mean the focus on the budget is very clear and if and if that happens, I think about affordable housing finance should also do well and there are some quality plays available there.
So those are the two parts on the lending side that we like and then there’s the great small business focused lenders. So, these are the three parts of a preferred loan.
On the non-lending side, we like wealth management or more than capital market beneficiaries. I think the capital market for the last three years has done well and the numbers are there, the kind of flow of mutual funds, everything that I have cooked up, but we believe that this is not the end of the story. It feels like this is going to have a long runway.
We are still unique in terms of Demat accounts around nine-ten crore, I think the number should be 20-25 crore by the end of this decade and that means it will continue to grow. So, there will be more recipients coming out of this sector, the capital market, we like wealth managers but there are other players like exchanges, brokers, discount brokers, infra market companies, all of these are reporting good numbers that should do well. . We also like insurance.
Insurance has had a bad five years, certainly the last six months have been good especially on the general insurance side as the competitive intensity has finally subsided.
So, during the era of private equity when money was freely available, a few unlisted players basically took part in grabbing market share and led to somewhat irrational competition, thus destroying margins. Now the valuations are also corrected and the margins are also lower, since the last two quarters, the leaders of the listed places have started to perform well because the auto cycle is also turned on and the competitive pressure is also reduced, so it makes us confident about the general insurance from here as well.
And you can say that it also kind of plays in the generation of wealth because it is not general insurance but businesses tend to do well, they take insurance; people tend to do well, they also tend to take insurance so that life insurance is actually sold as an investment product and not as a term product in India, so it is also a sham in the capital market.
But just follow it there, how do you put a price on the regulatory risk in all that and I ask you because for example when the capital market, there are steps that will be taken in derivatives, which is expected to curb a bit. RBI has been on high alert. So, you don’t know which day you will get the news about the last NBFC or bank, so how is it all worth it?
Ravi Dharamshi: So, I’m glad you brought it up. It is absolutely necessary and necessary because we do not want systemic problems. Of course, all these measures tend to have a short-term impact on the amount of volume and usually for brokers and exchanges more on the market side. But in the end what it does is that it creates barriers to entry for smaller people and means that the market share of them tends to consolidate to the bigger people, who can comply with the regulations easily.
So, from a stock market investor’s point of view, you need to make sure you’re aligned with the guys with the best corporate practices and the strongest balance sheets. But this can cause short-term disruption, but is good in the long-term and especially for larger people. In addition, for all regulators, whether it is RBI, IRDAI or SEBI, all these actions lead to small people feeling pinched because they have to comply far more and big people manage to do that and that leads to them becoming more and more. market share.
