Talking Point | #DimensionsConsulting's Ajay Srivastava shares his insights on the opportunities worth looking out for in small and midcap spaces, in conversation with BQ Prime's Niraj Shah. #BQLive
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00:00 So much for tuning into today's Talking Point. I'm your host, Neeraj Shah. It's always a
00:04 pleasure to get in the Frank, Ajay Srivastava, talking about how he sees the markets and
00:08 risk assets through his prism. Today, I assure you will not be any different. Ajay, great
00:13 having you. Thanks for taking the time out.
00:15 Good morning. Good morning.
00:17 Ajay, you were admittedly not the most constructive on markets except for select pockets. And
00:22 I reckon in some part, that is what has worked out though. Yes, the Nifties also rallied
00:27 from circa 19,300 to about 20,200 as the case may be. What do you feel about Indian equities
00:34 at the current point of time?
00:37 First of all, if you see the Indian market, you have seen now very clearly that there
00:42 are waves of movement which takes place in sectors. And therefore, if you have to keep
00:47 pace with your returns versus debt returns, then I keep saying to myself, it's not about
00:51 how much you make in equities. Are you making a superior return than a risk-free debt return
00:57 or a reasonable debt return? Because if you're not making 18% or compounded year on year
01:01 or 16%, you're not doing justice to your portfolio. Your stock may have gone up by 10%, but that's
01:05 not the worth of risk. So keep in context that are you able to generate superior return
01:10 than you can do in a debt scenario?
01:11 Having said that, now you saw in the last two years what happened. We had banks which
01:15 had an uplift. Then the banks have stabilized out, given no returns. Then it was the era
01:19 of pharma which came into place. And that has now peaked up a little bit. And now it's
01:24 on a flat trajectory. We had capital goods which came for the last three years, which
01:29 gave phenomenal returns, still very strong thesis going on. And the last big block has
01:34 been the defense sector, which has done wonderfully well, continues to do well, purely because
01:39 there's a scarce supply. There are no companies in the sector. There may be six, seven companies.
01:43 So I think Indian equity market also is driven by-- if you were in commodities or steel or
01:47 this thing, you wouldn't have made any returns of any kind in the last 12 months. So I think
01:52 more than the construct of the Indian equity market, I think you need to construct and
01:55 say where your portfolio is focused, unless you can sit with an index fund and live with
02:00 it for the rest of your life, which is fine as a strategy.
02:03 But I think the key thing we keep saying is that compared to the earlier time when you
02:07 could keep a share for 10 years, today when you keep a share for 10 years, you possibly
02:11 don't generate a return. HDFC Bank is an ideal example. Phenomenal returns to mediocre to
02:16 low return. If you look at 10-year trajectory, it won't even meet every rate of return. So
02:21 I think the theme of the market is you need to be with the momentum a little bit. You
02:25 need to go with the flow. If you had invested in a chemical industry at the top end of the
02:30 equity cycle, today you'd be sitting and you'd lost it. So while equity market has gone up,
02:34 people who have chemical stocks are wondering what happened to their portfolio. So I think
02:39 the name of the game is, to my mind, is churn. The name of the game is momentum. Don't focus
02:44 on the market. The market doesn't take you anywhere unless you have the right stocks
02:47 for the market at the end of the day.
02:48 Yeah, well, that's a pertinent point. You don't have nifty futures in your portfolio,
02:53 I'm presuming. So the idea should be to be in the right quadrant. Let's ask Sajay
02:57 Sivastava, what are the quadrants that look compelling right now? With a presumption that
03:03 you still find value, or by value I mean the thought of investing into them because they
03:11 will create wealth for you. I believe you still find value in select pockets. Would
03:16 that be a fair assessment that there are still investable options there?
03:19 Oh, certainly. Certainly. I know there can be a generic view that the market is expensive,
03:24 which is fair market. But at the end of the day, market is what it is. It can become irrational
03:30 for years for that matter. But the key point is, the Indian economy has opened up so many
03:34 new sectors and companies, which were not used to be in a portfolio. Whether it's a
03:38 new age company, whether it's a defense portfolio, whether it's a services company, that today
03:43 the options of taking your money into new companies has increased manifold. And that's
03:49 the important part. Earlier it used to be reliance, low, enforces, low, yellow, low.
03:54 But now today, you've got beautiful new age companies. Whether you like it, don't like
03:58 it, you do orders, no matter. You do take paytm. As generic as a quadrant voice can
04:02 be, for disclosure, we hold shares, so we're not advocating it. But the fact remains that
04:07 these choices, the investor 10-year bank did not have. Five-year bank did not have. So
04:11 my view is always that there are new companies coming up, new sectors coming up, and you
04:16 need to get into them. Yes, they may be expensive, which means keep your powder dry. So when
04:21 there is a correction, and there's always a correction, you are able to add onto the
04:25 portfolio. If you're exhausted yourself, you're out of the market at that point of time.
04:30 So the key is, pick out your sectors. And all new sectors. You don't need to go for
04:34 funny, duddy cement, steel. They're going to give you fantastic returns. You need to
04:38 go for the newer companies, newer sectors. You saw what happened to the airline lounge
04:42 company. You saw what happened to Indigo. You saw what happened to hotel companies.
04:46 I think newer sectors, you want Zomato, Paytm, you name it. It's phenomenal. Indian equity
04:52 market gives you so many new choices, Neeraj, that today, one is spoiled for choice. You
04:56 some wonder where do we get the next money to invest. And some teams, some teams are
05:02 for long-term real, it's like defense. I don't think you need to cash out defense for the
05:07 next five years. It's a very long-term thing. So good spaces, good thing. Yes, expensive.
05:12 Keep my product right. Buy when there's a correction. But staying out, I don't think
05:17 is a good option.
05:18 Interesting. On defense, Ajay, people cite how the book-to-bill ratios for defense companies
05:24 have always been good, but cash flows always come back to be the bugbear. Why is it that
05:29 this time is different? How would you respond to that?
05:33 For the simple reason, like all Indian markets, the flows make all the difference. There is
05:39 phenomenal flows coming to defense sector because that is one sector totally under-invested
05:43 by most investors. If you look at HNI, portfolios, mutual funds, none of them are equity. Unfortunately,
05:48 there are a lot of PSU stocks there, which puts high risk on what you do. But the fact
05:52 remains that if India is going to buy 40,000, 50,000 crores of defense equipment from Indian
05:58 companies, it is going to come to Indian companies at the end of the day, whether it's a Mazagon
06:01 dog or the Garland Reach or any other private companies.
06:07 And this theme will remain because given where our rupee-dollar is, at 83 almost today, and
06:11 it continues to fall, it's an historic low, India has no option but to develop indigenous.
06:16 You can't keep buying foreign planes. You can't keep buying foreign goods because you
06:19 can't afford to buy them anymore at this point of time.
06:22 So I think the theme is there for long because India's defense requirement remains. Beautiful
06:27 thing about defense is that unlike other things, airport will last for 25 years, defense equipment
06:32 needs refurbishing, maintenance, spares, and replacement. Now, that's a virtuous cycle
06:38 for most companies because as you know, auto companies make more money on replacement parts
06:43 than they do on the cars basically at the end of the day. So imagine so much of defense
06:46 equipment being brought today will be maintained by these companies, spares, repairs, replacement.
06:53 Beautiful demand cycle for these companies. And best part, market is still under-invested
06:57 because there are not many options. So money chases stocks, stocks go higher.
07:02 Okay, fair point. One realizes that the money is also chasing luxury items in a meaningful
07:09 way, Ajay. There are now niche plays but plays available to ride this luxury buying binge
07:18 that select pockets of India seem to be in. What are your thoughts here? There's a watchmaker
07:23 there is a car dealer, there is something else, there is a winemaker, niche plays but
07:30 are these exciting? See, you're right. Luxury is the biggest consuming and purchasing segment
07:38 of this country by and large. There's no doubt in my mind that that consumption pattern is
07:42 not faltering at all. The problem is how do you participate in the luxury market? Indian,
07:47 most foreign brands are not quoted here at the end of the day. Your only option is retail
07:51 to some extent, but retailing also is privately owned like Tata, Click, et cetera, is privately
07:56 owned. You can't go there. Yes, there are a few good companies like say, watch, distribution
08:01 company, not production company. Like, just to name, I don't have an equity, it's done
08:05 remarkably well. Ethos Watch, they are a phenomenal distributor at the end of the day of the luxury
08:11 watches. But at the end of the day, distribution companies, they only give you so much mileage.
08:16 But the real trick is to see whether you participate in the real luxury boom. And I think people
08:21 are doing that, but different ways. People are doing that by expensive real estate. People
08:25 are doing that by painting. Unfortunately, capital market is not able to capture a lot
08:30 of the stuff. People are doing that cars, but car company, distribution company can
08:34 make only so much money at the end of the day. You know, it's not an equity investment.
08:38 It's a transition investment. You don't buy a car dealer company at the end of the day.
08:42 That's I don't know. That doesn't sound to me okay to me. But the fact remains that wherever
08:46 you see pockets of luxury, which is hotels, where you can directly participate, I think
08:51 that's a great place to be because the cycle of consumption is going off in a different
08:56 tangent altogether. Expensive consumer durable companies, I think they are fine, absolutely.
09:01 But hotels possibly represent the best single luxury segment that equity investors can participate
09:07 in. Got it. Okay. Okay. That's a point well taken. The other other pieces, and I'm drawing
09:14 your thought to the first answer that you gave, that if people bought into chemicals
09:19 at the top of the cycle, then they would be lamenting and rightfully so. The question
09:24 is, after this one and a half, two, two and a half years of hiatus that the chemical stocks
09:29 seem to have taken and the valuation correction that has come into some of them, say for fluorination
09:33 companies, is the tide turning? Do you sense fundamentally that things could be turning
09:39 around for the speciality chemical space? Not till last month, in our calls with the
09:44 customers market visits, I've seen not in the last month, I think the global demand
09:49 itself is kind of edged down at this point of time. And with the certainly with the oil
09:53 prices peaking up again, the margins are going to get under further pressure at this point
09:58 of time, because that's an input into most of the material. But we have not seen any
10:01 significant demand uptake, neither domestic, neither international, in any of the major
10:06 chemical segments. Having said that, you know, also what is happening is that these companies
10:10 are now coming up with huge capacity expansions. So if you see the height of the boom, they
10:15 did huge expansion, which is now coming to the market. So I think there'll be reasonable
10:19 pressure on their margin, reasonable pressure on the ability to perform, and still they're
10:23 not cheap. We are not talking of companies that are all in the P's in the range of 30
10:31 to 50 P's at this point of time. So it's difficult. And therefore, I would still say that in India,
10:36 your better bet is you focus on consumer segment more than front facing domestic, then the
10:43 industrial segment, I think you'll make better returns on companies focused on consumer than
10:48 companies focused on industrial.
10:49 Okay, just one final question, Ajay. With the presumption that you are saying, my presumption
10:55 is that you're saying that don't look at the markets per se, the markets may even show
10:58 a correction, but specific pockets could continue to do well, if there is promise there. Is
11:03 that a good premise?
11:04 Oh, it's a good premise and corrections, deep correction are your best friend. You've
11:08 seen nothing happened to IT industry, but the market price corrected so beautifully
11:13 that you could get an entry chance and made a very good return in the last couple of months.
11:17 I think sectorally, keep watching good companies, strong corrections should be your guiding
11:23 star, not 52 week high and overbought companies. I think that's where the danger lies. So I
11:29 think this is where your mantra should be, be patient, market gives you a chance again
11:34 and again, there's no problem with the chances. Don't worry, don't FOMO, no runaway, patience,
11:40 invest where you like, invest at your time and choosing, not when the market drives you
11:44 to pick up the stocks.
11:45 Okay, so with that the premise, my final question, Ajay, is this, I want you to tell us how do
11:50 you look at this industry that you briefly spoke about, like food ordering. And the reason
11:56 I bring it up is in the last 15 days, I've spoken to four investors, three on air, one
12:02 off air, who told me about their thoughts around why Zomato or Swiggy, which is coming
12:08 in an IPO, could be a model, which all of them looked at it very differently. And therefore,
12:15 their thoughts on what's the kind of returns that could come in, were very, very different.
12:20 But the common central theme was that very early in the industry lifecycle, we seem to
12:25 have a duopoly in a large market like India, which is a very big moat for both of these
12:33 names for now only Zomato. How do you look at food ordering business?
12:37 Okay, we have a holding so that to the extent of disclosure, I think it's a multi multi
12:43 bagger kind of scenario, because it's not even touched really 5 to 10% of the market,
12:48 huge market, huge segment, it's not easy to duplicate it. And you know, moat to duopoly
12:53 doesn't mean you make money always. You look at telecom is an ideal example to say, duopoly
12:58 never made money at the end of the day, okay, that Reliance stock, you know, what's been
13:02 done to Reliance stock and Airtel has given very mediocre. So it's not necessarily duopoly.
13:06 I think what's more important is the focus of the companies to get to profitability stage,
13:12 while keeping that cost of distribution cost of operation low. I think that's where the
13:16 mantra is. That's where this thing is. So I believe food ordering, food ordering can
13:22 extend to many other things. Tomorrow, it can just take on a pharmacy and say, I can,
13:26 you have a logistical base, you can go to pharmacy, you can go to any other product
13:29 from the agriculture input. At the end of the day, your base is a strong IT driven distribution.
13:36 The product could be food, medicine could be any product at the point of time. And you
13:40 see what happened to Blinkit at the end of the day, that nothing to do with food, but
13:43 Blinkit, you know, everybody is like, nomenclature is, you know, you run out of sugar and they
13:48 say, just Blinkit, you know, it's like that kind of nomenclature that developing. So these
13:52 phenomenal events happen once in 20, 30 years, where companies with generic names, like we
13:58 discussed ATM come through, and they become a regular word of usage. And these companies
14:02 offer, you know, not only the more what you said, but also the customer appreciation,
14:07 because they don't need large capital once they grow into a profitable stage. And which
14:11 is the beauty which I like about companies is, if you're not diluting capital and making
14:15 money, I think you're good for the shareholders. Got it. Ajay, lovely talking to you as always.
14:22 Thanks for your time. Thank you very much. And have a great weekend. All the best. You
14:25 too. Thank you very much. And viewers, thanks for tuning into this edition of The Talking
14:28 Point.
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