Editors Discuss The Week Gone By & Road Ahead For The Markets — Editors' Roundtable — Nifty

[00:00:00] Reema Tandulkar: biggest contributor to the market recovery this week over the next 30 minutes we'll decode the week gone by on dalal street we'll put the spotlight on the it sector hello and welcome to editors roundtable i am reema tandulkar with me a prashant animation here with us in the studio is anish tabakli um he is the chief investment officer cio at dsp asset managers thank you very much guys uh for joining in you launched the rocket this week and came i had a different week [00:00:28] Anish Tabakli: you had a different way actually i had a different end to the week i was the same week as you guys for the first three days and the last two days uh uh anish i was at i was at sri harikota which is uh sort of you know uh launch launch center it's been the launch center for israel for the last 40 years and uh tomorrow which is saturday uh you know they'll go they're going to launch the first private rocket into space and they're going to put a satellite into orbit oh fantastic that is sky route at some point i think we'll talk about it as a listed company not now but i guess at some point but that's a new new uh new frontier i think uh reema and i have done a deep dive once right i mean this is about a year ago sky route and agni cool etc but i mean new avenues opening up right i think uh i think i think i think i mean so different week end of the week but it looked like a long week right [00:01:17] Speaker 3: i mean anixin just started and it looked like oh god it's been more than five days so much of running so much of news and i guess for the i was just observing last three weeks it is turning out to be a headline for for for the show right either it's down or up five percent down or five percent now but it turns out to be a but this week it was more up more more up and down and i think earnings were not that bad right [00:01:38] Reema Tandulkar: do you want to begin with your view on the markets and where we're headed no so i'm reasonably comfortable [00:01:44] Speaker 4: with where things are see the way i'm seeing the situation is the economy is in pretty decent shape right why do i say that basically look demand is recovering and there's still spare capacity and that's a good position to be in right when you've got good demand and spare capacity so i expect like good uh you know good revenue and healthy earnings growth going forward what will drive the earnings uh in the second half funny i think uh across the board the cyclical sector should do well okay so like financial sec cements the uh autos even capital goods because you will see [00:02:23] Reema Tandulkar: steady demand in these sectors will the middle east tensions the resurgence of that throw a spanner in the works we were getting comfortable with the idea of crude at 70 71 dollars and in two weeks crude prices have repriced higher by 12 13 dollars right so see the way i see it obviously it's not [00:02:40] Speaker 4: good right it doesn't help the economy but i think the economy will should remain resilient right so why do i say that see uh so when there are when there is a issues in the middle east global oil output drops right and if global oil output drops global gdp has to take a hit because oil is a critical input for for production so if there's less oil you produce less but not every country is equally hit right so india needs 5 million barrels of oil we are sitting on 500 million dollars of foreign exchange reserves that's what these reserves are for right when there is a scarcity of oil we should not sort of have to cut back our production because if we have to cut back our production sorry our consumption because if we have to cut back our production our output will also fall so i think it's a i think we are doing the right thing by not transmitting the entire pain to the economy let let us use the reserves for uh you know meeting our oil needs and if that is done then the economy should remain [00:03:43] Anish Tabakli: resilient anish uh by the way it's also i think our first and actually it's for me i think you're speaking for the first time since then she's taken over at dsp after what a lifetime but i say we had [00:03:52] Reema Tandulkar: on we had one yeah you're right here on editors roundtable not an editor not only we did one we did one [00:03:58] Anish Tabakli: maybe i missed that one but i think i i anyway uh how's it how's how's the oh it's going well yeah look [00:04:04] Speaker 4: uh i mean the reason i think i joined was because i thought it would be a good fit yeah so the team is [00:04:10] Anish Tabakli: good i enjoy working i was wondering what does it what does a new cio do when when he gets to uh [00:04:15] Speaker 4: which gets to a investment house like dsp i mean do you so fortunately i don't have to do do a dramatic transformation right a lot of things are already in place yeah and that's very reassuring yeah a little bit of strengthening of processes yeah i think my previous boss is is a great investor yeah which everybody knows yeah but he's also a great process manager so some of that i've learned from him and [00:04:40] Anish Tabakli: implementing here implementing here absolutely uh you know i remember you were talking about uh i mean i think it's been like this cornerstone for you for a while that if housing does well in india that drives i mean a lot of things right yes is housing doing well yeah we i mean if we look at cement consumption [00:05:00] Speaker 4: that's doing good uh you and home sales etc are all doing well in fact that if you were to ask me what is the single most important thing that i worry about if house prices were to go up too much to the point that it curbs demand then that would be a setback for the economy but at the moment that's [00:05:20] Anish Tabakli: not happened the so sales are doing i mean sales are doing well have come up uh recently i mean i think [00:05:26] Speaker 3: real estate image yeah the index is valid almost 10 percent stocks have valid from the lowest the stocks have like 20 30 percent so another reflection of uh because there was a bit of a soft patch [00:05:37] Speaker 4: isn't it especially yeah i think there were concerns that uh sales would slow down but that hasn't [00:05:43] Anish Tabakli: actually happened okay and mumbai also as a market is uh yeah like mumbai is also seems to be doing well although i don't really have direct as an investor what i mean should one get exposure to what kind [00:05:53] Speaker 3: of names in this it's because it's very no let me let me put it the other way just to take the housing discussion forward you know there was one guest recently who said that uh within the housing space a lot of you know flats will the flats will get delivered in the next one year and maybe because of that you'll see a lot of uptake in the building material space the tiles and those kind of businesses is that is that broadly your thesis as well that uh you know if you saw a lot of under construction work [00:06:20] Anish Tabakli: that is not getting delivered so just to i i remember this wasn't this last year's uh because i remember somebody saying this right but i'm saying this was this is the same argument i heard middle of last year that this was supposed to happen into last year which is ending 2020 maybe i don't know [00:06:38] Speaker 4: but uh yeah see the thing is you know we spend a lot of time trying to forecast demand yeah the reality is you don't make money just because of demand growth if supply growth exceeds demand growth you actually end up in a in trouble right and in a lot of these sectors that we are discussing right like whether it's mdf whether it's steel there is no constraint to supply expansion so in fact i often use the example of mdf it's been one of the sectors if you looked at a 10-year period volume growth has been massive yeah but there's been no constraint to supply growth so actually you don't end up making a lot of money so i actually focus less on as long as demand is growing i think the more important thing to get a grip on is is is there any constraint to supply addition well idea sorry and just one more point prashant i think you see when i say the real estate is important it's important for the overall economy so you don't necessarily directly have to play it no no absolutely when construction activity happens people have jobs people then there is a broader you know uplift in the economy no that's [00:07:39] Anish Tabakli: that's what i meant as well i mean in that sense but as a as a sector i mean what's the if one were so [00:07:44] Speaker 4: inclined to take uh so i actually uh i i have a slightly different view from one of the mistakes that people are making in the sector is looking only at cash flow and it's important to distinguish between cash flow and free cash flow the term free cash flow in cash flow actually has a meaning right free cash flow refers to stuff that can actually be distributed as dividend at the distribution of the company for that to happen it's not just customer advances and customer collections that it needs to go through the pnl earn an adequate profit and then come out as so it's actually important not to focus just on what are pre-sales and what are collections but also on what is reported a lot of companies a lot of companies then start falling short right okay so and and the second question i ask when i'm looking at real estate is is this a time to be buying land or is this a time to be liquidating the land that you have i would say this is a time to be liquidating the land right you should be net seller of land in the real estate now if you're a net seller your balance sheet should be shrinking yeah if your balance sheet should be shrinking then you should be paying a good dividend [00:09:03] Anish Tabakli: so i actually look at dividends when i why do you say this is the time to be a net seller of land [00:09:09] Speaker 4: uh because land prices have gone up and those are cyclical right so while i house prices are still okay i mean land prices have moved up and i don't know whether uh i would prefer somebody who's a [00:09:24] Anish Tabakli: net seller at this point rather than so what is the implication i mean distill it down for a viewer [00:09:29] Speaker 4: so you should look at whether the company is actually reporting profits as well not just cash flows and what it is doing with the profits right are you getting some of it back as dividend or not [00:09:38] Reema Tandulkar: why do we get the sense that you're not i mean you think real estate is in a good place yeah but on the companies per se you said that they're not meeting the free cash flow criteria that you have yeah so not everybody is not so you know is it the regional players one should look at from an investment [00:09:55] Speaker 4: point of view is it the smaller i mean i i look at what is the criteria and then whoever meets the criteria if you can find like i don't know every single real estate company in debt i would say look at these parameters also not just at cash collection just to complete the point of [00:10:10] Anish Tabakli: this is the better way to look at financiers of uh i mean housing finance etc i mean is that a [00:10:17] Speaker 4: i mean i just buy banks right right what's wrong with banks yeah yeah uh you know we'll slip into a [00:10:25] Reema Tandulkar: very short break anish hold that thought we will come back don't go anywhere we'll continue to decode the week gone by we'll also talk about the it sector [00:11:00] Speaker ?: Thank you. [00:11:30] Reema Tandulkar: Welcome back. You're watching Editor's Roundtable. This was the week where markets conquered the 24,300 mark. IT stocks made a comeback and some of the reasons are that the earnings were not as bad as what the street was fearing. Expectations were very subdued compared to that TCS, HCL Tech. Tech Mahindra was a standout performer in that. Wipro, yes, missed the mark on revenues and margins, but that is seen more as a company-specific factor. So it didn't alter the overall view on perhaps the worst fundamentally for now, for the next two or three quarters, perhaps being in the price for the IT sector. Secondly, we've also started seeing a correction in many of these global semiconductor names. So Micron has slipped about 13% from the recent record high that it hit on the 22nd of June. A company like Microsoft is down 15% year-to-date and India is seen as an anti-AI trade. So the fact that these companies are seeing, the global tech companies are seeing volatility on the sidelines is a sentiment positive. And of course, the Nifty IT index has done nothing for the last five years, absolutely no return and valuations are comfortable. The only thing that I want to keep watching out for is what the Tech Mahindra CEO said in the conference call. And he said that we are seeing cases of irrational competition or competitive pricing and in some cases 70% to 80% productivity benefits being offered by the companies despite no change in the process. So if the demand environment continues to remain tight, if enterprise tech budgets are getting crowded out and large deals, whether the vendor consolidation or cost optimization, they are going to be competitively fought. You know, are we going to see maybe some instances of irrational competition which can spoil the party for whatever little pie is there for the IT stocks? Aneesh, I know you've been bearish in IT, right? Does that change? [00:13:25] Speaker 4: I'm still cautious. See, firstly, let's talk about this term irrational competition. [00:13:30] Reema Tandulkar: 70% to 80% productivity benefits, was that, that's the... [00:13:33] Speaker 4: Yeah, irrational competition is when you lose money or you don't earn return on capital. Other than that, competition, as long as you are still profitable, is not irrational. It just means that margins were too high to start with and are coming down to more reasonable levels, right? So I wouldn't necessarily use the term irrational competition as long as the sector is still profitable. So see, I think what's happening is the following, right? 20 years back, a bank in the US, Wells Fargo or a JP Morgan sort of had not discovered India. So somebody went to them and said, look, it costs you $100 to do this activity here, we'll do it in 30. Now they were not comfortable opening an office here and then they didn't care whether if you are delivering at 30, whether your cost was 22 or 25 or 20, right? So they were very happy to give it to Indian vendors who were earning a 25, 26%, 22% margin. But now they all have their own GCCs here. The number of vendors they're dealing with is comfortable, so the competitive landscape has changed, right? And therefore, margins need to moderate from where they were earlier. And yes, if I was in the industry, I would also feel it's irrational competition, but as an economist, I would not call it irrational competition, right? People are just willing to operate at more reasonable margins. The second point, right, like as an outsider, it's very difficult to judge what's happening to demand, what's happening to this. So I have a simple framework, right? The leading indicator is, are the companies adding headcount? Because if they're not adding headcount, I feel they won't get revenue growth. In fact, I would say they themselves are not confident of revenue growth. [00:15:14] Reema Tandulkar: But isn't headcount disconnected from revenue in an AI era? [00:15:19] Speaker 4: So the point is, while they're not explicitly billing based on time and material, competition ensures. So how do you bid for a project, right? Somebody says, look, this is a new project. It'll cost me, it'll take me 20 people, 50 people, whatever, for six months. So this will be my cost. Let's me put a markup, a rational markup on that. And that's the bid. So competition ensures that ultimately your pricing is based on your costs. See, this is different from products. When Microsoft sells you a Microsoft Word, they don't say, oh, the cost of production for the incremental Microsoft is zero, right? It doesn't cost them anything more to produce the next one. They price it value to the consumer downwards, right? So say, this is the value the consumer derives by having this software. Let's price it at a discount to that. Here, the pricing is still cost plus. So I am willing to stick my neck out and say, look, if headcounts don't increase, they might do more work with the same headcount. But the benefit of that increased productivity will go to the consumer. [00:16:21] Anish Tabakli: So you would still look at headcount growth as a good indicator of, yeah. Or that growth is coming back or whatever, right? In that sense. And you're not comfortable. I'm not seeing that in the numbers. So in terms of product companies, since you mentioned it, we have a few here. I mean, very few in that sense. [00:16:36] Speaker 4: I'm not an expert on those ones. I mean, maybe there is a case there. I haven't studied them in depth. [00:16:42] Reema Tandulkar: Anish, you also think that the capital goods space margins have peaked out. Why do you say that? [00:16:47] Speaker 4: I mean, I'm just looking at history and I'm saying, look, I'm not negative in the sense that I still expect this is a cyclical sector and demand to remain healthy. But if I look at history across companies, whether it's engine manufacturers, whether it's their margins are closer to the peaks than at the trough. So earnings growth will be driven just merely by revenue growth and you won't get a kicker from margin expansion. [00:17:13] Reema Tandulkar: And here we're talking about ABB, Siemens. [00:17:15] Speaker 3: I mean, that whole set of space here. Most of them are very close to. At DSP, interestingly, I mean, correct me if I'm wrong, but you manage the large cap and the small cap fund. [00:17:24] Speaker 4: No, I was doing that in my old role. [00:17:26] Speaker 3: Here I'm doing large cap and business cycle. Large cap and business cycle. So within large caps, you're finding a lot of value and a lot of opportunities to invest at this point in time and if yes, which are the sectors you'll be most bullish on? [00:17:38] Speaker 4: So see, I'm not saying multiples are cheap. Don't get me wrong, right? If I look at the trailing PE multiple, it's about 21 times. But my point is I'm expecting healthy like earnings growth because the economic outlook, as I said, is healthy. And you see, I always ask this question and I can't give you numbers, but if you stay invested for three years and you get good earnings growth for three years, right? You should stay invested for three years. Even if the multiple compresses from 21 to 19, right? You lose 10%. Yeah. But the earnings growth is more than offset for that. So you won't be unhappy. I mean, you won't feel great if there's a 10% multiple compression, but you won't feel like, why did I invest and all of that kind of stuff. [00:18:19] Anish Tabakli: Any other strongly held beliefs across sectors, any sectors, anything or I mean, wherever we are, any... [00:18:25] Speaker 4: I mean, I have to have beliefs. [00:18:26] Anish Tabakli: Anything gets a reaction, you look at it and say, oh boy, you know, good, bad, ugly, whatever. [00:18:32] Speaker 4: Well, since you were talking about housing, I mean, I wonder about affordable housing finance, which seems to be, it feels to me overheated. In fact, I don't even understand what the term affordable housing means. For somebody, a 20 crore house is affordable. For somebody, a 5 crore house is... Yeah, come on. [00:18:48] Anish Tabakli: Affordable housing is affordable. I mean... [00:18:50] Speaker 4: No, it's affordable. It depends on your income. [00:18:52] Anish Tabakli: I mean... [00:18:53] Reema Tandulkar: For a large population, what is affordable? [00:18:56] Speaker 4: Yeah, but a large population, housing is unaffordable. So the point is, you need to... See, I mean, I'm concerned that we are calling subprime loans affordable housing, right? So... [00:19:10] Reema Tandulkar: But the asset quality is okay. You look at the companies like Aadhaar Housing Finance, et cetera. [00:19:14] Speaker 4: I mean, my point is, too much capital flows into a certain sector, one should be careful. But has too much capital flows into the affordable housing? [00:19:23] Anish Tabakli: I thought that there was no... You know, I remember two years back, who was... There was... I think there was a real estate company out of Delhi who came on the program. Two years, maybe even longer. He said, they moved from being an affordable real estate company to being a premium company. They said, there's no demand. [00:19:41] Speaker 4: That's my point. Then you have more lenders than demand. I mean, ultimately, you need... What is demand? [00:19:46] Anish Tabakli: No, no. I'm saying he stopped constructing lower value flats and started constructing premium flats. [00:19:50] Speaker 4: Yeah, because the point is that at the lower segments, there aren't the incomes to afford... Correct. ...even what is called affordable housing. [00:19:58] Anish Tabakli: Correct. Right? No, but my point is that, is there too much money going into that segment? No, right? So... There is a lot of lending going into that segment now. [00:20:05] Speaker 4: The amount of capital that has been raised for lending in that sector is quite large. [00:20:10] Anish Tabakli: And into affordable housing. [00:20:12] Speaker 4: Look at the number of companies that have raised capital for affordable housing. [00:20:15] Anish Tabakli: I see. And you think that that perhaps is a risky... Probably a risky... [00:20:19] Speaker 4: Okay, let me put it this way, right? I don't like to call... I don't even like to use the term affordable housing. Okay. For me, there is prime lending and subprime lending. Okay. And then you need to decide which segment this belongs to. If your argument is, look, this is prime, that's okay. But that's a debatable proposition. [00:20:35] Anish Tabakli: In another lifetime, I think, you were a banks and financials analyst. Yeah, yeah, yeah. So, and you've done this prime sub... [00:20:41] Speaker 4: Yeah, because ultimately, that's the point, right? [00:20:43] Anish Tabakli: It's... Yeah. And does this also include other segments in the... Since we're talking about lending, I mean, lower down. [00:20:50] Speaker 4: No, I mean, look, the unsecured consumer lending space is another space that's attracting a lot of lending, right? And see, the point people make is that they'll say, look, retail lending is underpenetrated in India. And the number they'll quote is the retail lending market is in the US, 100 and whatever, 40% and India is 30%. I mean, roughly speaking. That statistic is true, but misleading. Because when you look at the US, when you look at that UK, that 140% of GDP number, 100 or 105% of that will be housing, home loans, mortgages. [00:21:30] Anish Tabakli: Okay. [00:21:31] Speaker 4: Unsecured is actually much, much smaller. And when you do a like-for-like comparison for India versus the US or UK, you don't feel that, you don't see that underpenetration, particularly when you include microfinance in unsecured lending, which you should, right? So, I think the two overheated segments in lending are, in my view, unsecured lending and... [00:21:52] Anish Tabakli: Affordable housing. Affordable. Affordable, which you don't want to go right on the road. [00:21:56] Speaker 3: Okay, you spoke about, you know, sectors where you're cautious and careful. One sector which is unloved by the market, not been, you know, very favorably looked at, but you feel a lot of value. Anything that stands out for you? Well, I think insurance, I'm like, I don't fully understand why insurance is so... Because this quarter also earnings were quite good, like it was not bad, but the reaction was quite negative to the earnings. [00:22:17] Speaker 4: Yeah, so I don't understand why insurance has become so unloved. I kind of sense that there's concerns around regulatory, you know, there's some regulatory overhang. But when I look at that, I feel, if you look at the value chain, right, there are the insurance providers and then there are the distributors. So, the supernormal profitability is actually in the distribution end of the chain. It's not like the insurers are supernormally profitable. So, I feel like insurance profitability is reasonable, it's not outrageous. So, even if there is regulatory tightening, I think the burden should fall on the distributors. [00:22:54] Anish Tabakli: Right, and here you would be comfortable to make that comparison. I mean, we all, we mark to market with what's happening in other countries and we talk about insurance penetration being so low. Is that a metric you track here? [00:23:04] Speaker 4: No, I don't, I mean, I think insurance penetration is fine for where we are in terms of the development. Okay, okay. See, there again, I would say like, you know, if a person doesn't have money to live the life before death, then what will he worry about life after death, you know, he has to pay school fees, etc. So, there's no point saying the market per person is underinsured when he doesn't have money to put food on the table. So, relative to income levels, the argument is not that it's underpenetrated, but the argument is that it will grow with income levels. [00:23:32] Anish Tabakli: So, that's the space you are constructive on and fair enough. [00:23:35] Reema Tandulkar: Okay, thank you. Anish, great conversation. [00:23:38] Anish Tabakli: Thanks a lot, thank you. [00:23:39] Reema Tandulkar: Thank you. With that, it's curtains down on Editors Roundtable. Hope you enjoyed. [00:23:49] Speaker ?: Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.