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Saigal also says: “We believe that, small banks, PSU banks, that is one space where value unlocking is yet ahead of us. Pharma, which has seen multi-year consolidation is coming out of that consolidation phase. We are quite positive on pharma. Then metals and minerals has seen a significant consolidation and adverse price action. This may look interesting going forward.”
Market is at highs. People are looking for undervalued ideas. A section of the market on the consumption side, especially rural tier 2, tier 3 towns, QSR, FMCG as well as some other consumer categories – have underperformed because of inflation. Now that the inflation trajectory has peaked out, can this under-owned part of the market make a comeback? Also what categories would you bet on?
Anshul Saigal: Yes, you are absolutely right that this is a market where it is no longer as easy as it was last year to identify opportunities. Clearly, a lot of the market has rallied quite meaningfully. And what we are witnessing in this market is quite severe sector rotation. While 2021 was the year of IT, for the next two years, IT underperformed and only of late has the IT sector started rebounding.
Prior to that, it was chemicals. Chemicals did very well and then that underperformed because valuations caught up with reality. And now, of late, we are seeing some action there. Similarly, we saw underperformance in the consumption space because we have seen valuations really catching up with the earnings in that space over the last many years. That space, as a result and as you rightly mentioned also because of inflation, consolidated for a two to three-year period. And this may be an interesting time to actually consider looking at this space.
There are obviously different types of investors and different objectives. An investor who is looking for defensives should go for FMCGs. An investor who is looking for long-term wealth creation should look at QSRs. And there are now multiple opportunities in that space to make money over the next few years.
Clearly, the per capita consumption in India is set to rise. And that should play out in QSR companies seeing greater spends and as a result, operating leverage and margin expansion. So that is how one should look at that space, consumption.
While HDFC, Kotak, SBI, all these larger banks be it private or public, seem to be in every fund you look at, the delta on earnings and low valuations and the change in narrative is actually happening in smaller banks, be it regional PSUs or smaller private sector. Some of the names like RBL, CSB, J&K, Karnataka, seem to be doing very well but still have not made it to a lot of big portfolios. Could the small bank category relatively outperform the banking space?
Anshul Saigal: If you look at the 7-8 year perspective of the banking sector, after 2013-2014, we were in a phase where the banking sector was riddled with huge NPAs and those banks which were more retail-focused and were not sort of held back by the NPA problem. These were the private sector banks like HDFC, Kotak etc. Those attracted maximum capital and we witnessed upsides in their stock prices and valuations as a result.
On the other hand, the PSUs and smaller banks which were riddled with these problems, were the banks which faced complete investor apathy and we saw valuations go down meaningfully. And then we hit 2020-2021 that, according to me, was the trade of the century where you saw most of these banks have cleaned up their balance sheets. NPAs were really on the way down, they were at their peak and they were coming down. Valuations were bottom and there was no room for valuations to go down unless these banks failed. But they had gone through the toughest phase in their existence and they had come out, scathed, but not really completely impaired.
As a result, in our judgment, as NPAs came down, valuations would expand. That played out 2021 onwards. Our judgment is that that trade is not yet over. We are in the mid-phase of that trade where NPAs being down, capital being abundant and these banks having enough growth opportunities given that the sector as a whole is growing 15%, there is further room for either re-rating or earnings upgrade or both in these companies. So the smaller banks, in our judgment, will be outperformers going forward as also PSU banks for quarters and years ahead.Where else are you looking at a good opportunity the market is overlooking right now? Earnings are improving at a faster clip and valuation still have not ripened?
Anshul Saigal: We believe that, small banks, PSU banks, that is one space where value unlocking is yet ahead of us. Pharma, which has seen multi-year consolidation is coming out of that consolidation phase. What we are seeing there are price declines in the US because Indian farmers are exporters to the US. Price declines over there have abated. As a result, ROE pressure that these companies were facing has also abated that should be good for valuations.
We are quite positive on pharma. We think that the metals and minerals, that space where there has been a significant consolidation and adverse price action, is a space which may look interesting going forward. There is tremendous opportunity given the valuations are at quite attractive levels at this time. In the next year to two years, there may be value created in that space. Then there are ample opportunities in sector after sector, from EMS to media to defence. I see tremendous opportunity.
Of course, I am not one who will say that markets will not correct. Markets may correct at any point in time, but if you bear that volatility, then the money made over a three, five-year period in these opportunities will be tremendous. I heard an adage yesterday which seemed very apt and it resonated with me. It was that if you are not willing to be poor, then you will not be rich. What this means is that in the short term, volatility can make you poor, but in the long term, if you are willing to bear that poverty in the short term, then in the long term, you will be rich. That holds very well with the Indian markets.
What investor sentiment are you picking up when you meet friends across?
Anshul Saigal: There are mixed feelings. Some people are holding cash but I would say the majority are not holding cash. What that means is that the majority are not expecting a meaningful correction while some are expecting a meaningful correction. Now, we are in a pond which is India and we see what is happening in this pond is that valuations have become expensive across the board and we should, as a result, be cautious given that we have seen trends in the past that when valuations go beyond a certain level, markets correct.
Look at Hang Seng, it is at levels that it was trading at in 2001, no less. In the last five years, it is down 37%. If you look at the China market, it is at levels that it was trading at in 2007. If you look at Europe, nothing material has happened in those markets. Korea, in the last 10 years, has done 1% compounded returns. So the froth that we expect in India and as a result the correction that we expect in India, has to be India-specific. It is unlikely that this froth exists across the world. And then to expect that we will have a correction on the lines of what we saw in 2007 or even say, in 2017, where most markets corrected in conjunction, is not something that either I or many investors foresee.
It could be a 10, 15% correction is par for the course in any bull market, that could very well happen. But given the growth that we are seeing in India and given that there is very limited froth globally in various markets, to expect a significant cut, say, 50%, 60%, is really an over-expectation in our judgment, at least given the odds just now. And one should really focus on bottom-up opportunities, not worry about the market levels, market direction. As long as we have got good companies at reasonable valuations in our portfolios, over the long term, we will be very well-placed. And there is a lot of money to be made in India.
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