Saurabh Mukherjea explains how to play Bharat instead of India now
Do you think it’s finally time to go against discretionary games, consumer games like PVR, IndiGo?
PVR is the best multiplex game in our country and InterGlobe by some remote games is the best on airlines, but the reason we have never been convinced enough to invest our money in it is because we are not seeing any free cash flow and that means profit growth can become a challenge. These are the two best games in their industries and yet their ability to generate a return on capital above the cost of capital remains a challenge. PVR and InterGloble are both market leaders, but the lack of free cash flow generation means the Marcellus team is staying away from these super franchises.
Do you think we are entering a period of longer consolidation or do you really see the momentum continuing to accelerate if you are confident in the recovery?
Data from both the macro side and company-specific data is coming in – whether it’s Berger Paints results, Voltas results, Asian Paints results, or Titan’s sales commentary from July-August, the company-specific comment. Our checks with dealers and distributors across the country all point to a fairly widespread recovery.
So whether we call resellers and distributors in cities or in the countryside of Bihar or Tamil Nadu, the picture that emerges is a fairly consistent recovery across the economy. FMCG, consumer durables, automobiles, even good lenders are reporting big drops in their moratorium books as well as improvements in collection efficiency. My guess is that this should hold up as long as there isn’t another nasty twist in Covid’s tail. It feels like the first year of a two- to three-year-old pickup and there is an underlying dynamic driving it. On macro data, it is very difficult to get an impression of the CPI close to 7% without a strong increase in demand and the 7% CPI data driven by food inflation is almost a sure indicator that the demand exceeds supply. It is very difficult to get this kind of hard-hitting CPI without some degree of economic improvement, which is why we are increasingly convinced that we are in the first year of a two to three year economic recovery. .
As I said before, the United States goes into recession in year T, India’s economic recovery begins in T + 1. So it’s an age-old model that has worked for 40 years and it seems that the combination of cheap oil and cheap money is helping our country out of the doldrums.
Would you continue to buy down to these levels? Would you continue to add to these stocks?
There are two ways of looking at it; There is no point in timing consistent mixers like Asian Paints, Pidilite, Nestlé, and HDFC Bank. They have given 30 to 40 years of consistent profit growth. Even in the quarter ending in June, the consistent earnings growth of our compound portfolio was a staggering 15%. If you can grow 15% in the quarter ending in June, imagine the strength of those deductibles.
Our point of view is that as long as investors give us money, we will continue to buy regularly. That being said, we closed our small cap product –Little Champs – to entryways because a month ago we realized we were getting too much money and it was getting very hard to find. shares in the market.
This is another way for me to say that we don’t want to raise the stock price and buy at crazy levels and that’s why we closed the small cap product to the entries. So yes, on the big established liquid giants we are happy to continue buying for one or two years.
Likewise, the Kings of Capital have companies like HDFC Life, ICICI Lombard – high quality insurers – alongside Kotak Bank and HDFC Bank. We are happy to buy them over the next couple of years, but in small caps, due to illiquidity, some of them have exploded and we are a little wary of them. But overall the reason I keep reiterating the market leader point is that if we go through a phase of high inflation and this high CPI inflation could last if demand continues to accelerate .
If we go through a phase of high inflation, a market leader is much more likely to pass it on to their customers. It has the strength of its brand, of its distribution to pass on input cost inflation to its customers and thus protect the shareholder. Players number three, number four do not have this pricing power and as a result you as an investor suffer from margin dilution which is another reason to look very carefully at your portfolio and say I’m with the strongest actor in the business? If I’m not, what do I do by being invested in the action?
To what extent is the will and capacity of consumers fueled by liquidity, government support and low interest rates? Ultimately, what drives consumer demand?
I will say that is the $ 2,000 billion question today. We are working quite a bit on this. More than the government support which is still in the works, it is the big lenders who have strong balance sheets, the lenders who have already raised that 5 to 7 billion dollars of capital and who are now turning their firepower to the small towns. and cities. . We are talking, for example, of an HDFC bank, Kotak Bank, Bajaj Finance, which is turning its firepower towards lending to small towns and lending to rural areas of India.
They are activated in this regard with two different things; the amount of smartphone data that has now been collected over the past six, seven, eight years in rural India and the second thing is the fact that for five years now the financial system has been collecting data on the accounts of Jan Dhan Aadhaar. Jan Dhan accounts were opened in 2015 and have benefited from five years of direct benefit transfer. So there’s a good chunk of data on 200 to 300 million Indians who are historically outside the credit mainstream. With good monsoons and a good Kharif harvest, I think the credit disbursements have been heavily skewed towards people less wealthy than us, because without it this sort of sharp rise in automobiles and consumer durables would not have been there. could have happened.
The meteoric recovery we are seeing in the automotive and consumer durables sector suggests a fundamental shift in credit disbursements to small towns and villages and this could last for two to three years and this will give the recovery a shape. and a specific model that could make it a lot more sustainable than maybe many of us fear at this point.
Like I said, it’s a work in progress. We are also baffled by the pace of the recovery in consumer durables and automobiles and we are working more on this, but we believe that smart lenders have geared their credit mechanism to small towns and villages and, if this is the case, it could well be maintained for two, three years.
How to participate in this boom in rural return? How to bet on Bharat instead of India now?
When I was in school there were hard questions and easy exam questions. I have always preferred to answer easy questions first.
The additions we’ve made to some of our portfolios are an easy way to capitalize on the rural boom. We have added Maruti until June in some of our portfolios. We have had
for the last eight, nine months. Bullet and Royal Enfield should be a good beneficiary of the rural pickup and in early July we added Escorts.
These are our first pieces on this subject in the Kings of Capital portfolio. We’ve put rural lenders in, we’ve spent quite a bit of time over the last couple of months figuring out who’s the best lender in the rural setting. Obviously, the household names HDFC Bank, Kotak Bank are the kind of Pan Indian lenders with a rural book. But that’s part of the story.
We are working more on who the best rural lenders are and will focus on a few lenders who have very strong rural franchises. I just want to work a little more on this before I open my mouth to the public domain, but rural and auto lenders seem to us to be the easiest ways to play it.
Historically, during the rural boom of 2009-10-11, building materials also increased. So at a later stage we’ll try to do a little bit of work there by saying that the building materials business will make a comeback if the small towns and villages make a comeback then the story that went so well. built until 2014-15-16-17 which Tiles, sanitary facilities, etc. could come back. But we are not there yet because we have not been able to do the necessary work on the building materials sector. So lenders focused on rural areas and the auto segment are our current way of playing this rural recovery.
A short-term trigger that you keep an eye out for over the next few months?
Let me give a positive trigger and a negative trigger; our calculations suggest that the government withheld part of the fiscal stimulus. Thus, the price of oil falling from $ 80 to $ 40 gives India about 3% additional tax room which we estimate the FM and PM disbursed 2% during press conferences held a month ago. So there is 1% odd and we are trying to find out when this final explosion will happen.
Something tells me that the winter leading up to Bihar’s election we might see another fiscal stimulus and at the same time there will be some RBI action coming on the monetary side.
The negative is just watching the distress in the financial system. As restructuring continues, many banks, especially PSU banks and NBFCs, will suffer. Watch out for the distress of the financial system. We will try to take advantage of it, but at the market level there might be some nervousness as some of the leading lenders are facing large write-offs of their equity.