“I believe that we have to be cautious in certain sectors and not go overboard while investing. We are a bit cautious in our consumer facing theme. We believe it is going to be a very choppy run going forward,” says Dinshaw Irani, CIO, Helios India.
This market is not giving anyone a reason to complain. It is making money for those who are participating. Do you think the party will continue?
Normally, markets are disconnected from reality because we look at the future. Present is not the right indicator for the market. the future trends are. The pandemic has led to a slight disconnect in the longer term story. We normally play in three themes here — compete with the government, consumer facing themes and exporters. We believe our consumer theme has seen a slight dislocation because this time around it has hit closer to home.
Last time around, the infections and mortalities were just a statistic. This time around, so many people lost their dear ones and so many friends got infected. This time it is the actual consuming class which has got impacted and even the rural markets are having the same problem. Last time, only 30% odd rural districts were infected, this time 175% of the rural districts have been infected and it is going to take a while to understand what is happening and that is making us a bit cautious on the consumer facing theme.
So, big ticket items like autos will definitely have a problem. Last time around there was a surge and pent up demand and individual mobility and so on. I do not think this is going to work this time around because as I said it is closer home which has been hit as such.
We remain quite sanguine about the market per se because fundamentally, we will see the impact of the lockdowns for a quarter or two. In fact, we track the mobility index and it shows we are already at 66%. So we are talking about a huge drop in mobility. People are not going out to buy or party or to go to malls and stuff like that. That is going to have an impact for a quarter or two but beyond that, demand should come back on track.
Helios has always liked to buy companies which are pockets which are dominated by the government and where the private sector is picking up, sectors like banks, aviation or for that matter telecom. Where else is this play available?
Though the banking sector was privatised 30 years back, even today the private sector banks control only a third of the overall balance sheet of the country. Two-thirds is still controlled by public sector banks and there is a long runway of growth for private sector banks and they play it right.
We have been very clear that even in public sector banks there are good players like . Our thesis is very simple — we will play in this particular theme which we call “compete with the government. ” Private sector banks remain a major force for us. There are certain plays within education which is hardly anything; healthcare which is again a smaller version. Telecom and aviation are done and dusted. I do not think the public sector competition is there in these two sectors. They are more fringe players than anything else. But we are not in these two sectors in a big way. The telecom sector is being turned into a duopoly rather than a three-four player market. That is why we are in telecom to a smaller extent.
There seems to be no concept of pricing power coming back to telecom companies. Bharti numbers for the quarter show ARPUs have actually gone down quarter on quarter.
I agree with that. Let us look at the ARPU, adjusted for the IUC charges. If you had included them, there was an overall growth for the year at 13%-14%. So in one quarter, there may be a blip and as the management explains, there were lesser days in that particular quarter as compared to the previous quarter. So do not read too much into that. But they were very clear that the growth in ARPUs will continue per se and there has been a slight disconnect in data consumption.
Look at it this way. Bharti today is on an active subscriber base. It is the number one player today and even a Re 1 increase in ARPU leads to a massive flow in its EBITDA on an annualised basis. We are not talking about a Rs 10-Rs 20 kind of a rise in ARPUs. We are happy with the fraction of the ARPUs going up every month and it is not just every month but every quarter or so.
When we talk about a two-player market, there are a lot of advantages that the two players will have as when it comes about. Already,
is losing market share on a quarterly basis and every time the data comes out, they have been losing share. I do not know how long they will survive without throwing in the towel.
With the onset of monsoon predicted as normal by the Met department, are there any themes that you would be playing within the agriculture space to bet on the rural themes?
We are mainly into three themes and I do not think any of these themes would play out on commodities or agriculture or fertiliser as such. But yes, the monsoon is supposed to be good but do not forget this time around, the pandemic has impacted the rural sector and that is definitely going to have a longer term impact.
I was talking to a few NGOs and they were telling us that this time, it is really bad and there are horror stories happening in the rural part of the country as such. I would rather not be jumping the gun on monsoons being good and demand coming back as such because I do not think it is going to work out so easily this time.
How are you advising investors to play the opportunity within the broader market?
We always invest in companies with strong balance sheets. There is no difference in our advisory but what we are trying to do today is that while earlier, our spread in the three themes would have been equal –30 odd percent in each — today we are more cautious in the consumer facing theme. Weightages there have gone down to around 24 odd percent and commensurately, the other two themes are seeing increase in their weightages and we are sticking to our NBFC call where we believe that the consumer facing NBFCs should be doing well because that is the play on millennials and not on mass consumers. That is how we are playing this.
VC investors for a long time have been talking about urban under penetrated potential over the next few years. A) Is the scope limited in terms of the listed universe? B) We seem to have already been waiting several years to really see this takeoff. What gives you the confidence that some of these companies will be able to deliver results?
The point is that we are trying to play on millennial demand. In my time, it was a taboo to mortgage your house to buy a car or even buy a car on a loan. Today, the millennials are very aggressive in these things. This is the decade when the millennials’ earnings enter the economy as actual expenditure and that is going to be a phenomenal run.
Secondly, India will become a $5-trillion economy in this decade. It is a given. It may happen in 2027 or it may happen in 2028. We will say the call is open. But once it happens, historically we have seen in case of the US and China, the growth is phenomenal across sectors and mainly into the financial sectors. NBFCs have a big part to play here because they are driving the consumption, not the banks per se.
Even in banks, the private sector banks are more bullish mainly because we are talking about mid-teens kind of a growth in the advance levels and if this plays out in the next six-seven years, we would be more comfortable here per se.
On the third theme of exporters — IT, pharma and speciality chemicals are now starting to once again become slightly more defensive plays. Would you say this is more of a must have in the basket vis-à-vis picks from a return expectation view going forward?
When Covid hit the world, it changed the way people started looking at technology. They were desperate to adopt it. If you talk to the IT companies, they will tell you that even the legacy banks in the US who were very reluctant to shift to newer systems, started approaching IT companies looking for a customer-facing, mobile-friendly setup.
So there was a definite run for IT and not only that, cloud was supposed to be a big taboo with financial circles per se because they were shifting data to servers which was not in your command. Now they are even adapting to that. A huge adoption of technology is happening which I do not think is going to get over in a couple of years.
TCS explained that it is going to be a multi-year run in IT and even the legacy systems will be shifting over. Even in the cloud, we have just touched the tip of the iceberg. There are so many other options available within the cloud to change the systems from legacy to and when digitisation comes into play. So there are a lot of things to play around in IT.
When we work on a portfolio, in our minds we have two buckets in which to put our stocks. One bucket is called high confidence and reasonable returns. The whole of the IT sector today falls in that bucket. High confidence and reasonable because they have got re-rated and from here on what we are expecting these stocks to do is to show earnings growth which are higher than the index growth and as a result there is alpha generation.
The second bucket is called reasonable confidence and high growth. Now that is where you have a smaller portion of your portfolio which is basically a cherry on top of a cake. This is not the IT bucket.
That is how you develop a portfolio because you cannot have aggressive names all along. You have to have some stability which is your bread and butter on the portfolio which should be roughly around two-third and the rest should be in these other names which are not aggressive because they tick all the right boxes but they do not have a history and maybe they are looking at re-rating in a future and that is why we are looking at higher growth in those with reasonable confidence as such.
In terms of allocation, how much of your portfolio currently is in high confidence, reasonable growth and high growth okay confidence?
Two-thirds is in high confidence and reasonable growth and one-third is in the other one. But if you look at the market cap, around 64-65% of the portfolio is in large caps, 20%-21% odd would be in midcaps and small caps is around 9% odd. The rest would be some cash lying around for new names which we feel like buying.
As I said, the high confidence in reasonable name is the one which provides stability to the portfolio even on the way down. When the markets are correcting, these correct slightly lesser than the market and as a result they outperform even on that downside. Ultimately if you are able to conserve on the way down, after that it is pure math which kicks in because on the way up, you will be beating the markets handsomely if your portfolio performs even along with the market. There is no way the catch up happens.
How do you think markets are positioning in the medical crisis? Is the market pricing in a third wave?
My feeling is that the markets are not pricing in any third wave today which is an area of concern and that is why I believe that we have to be cautious in certain sectors and not go overboard in investing. Whenever a new client comes to us, we tell him to get into our STP option which is your systematic transfer plan. Here, only 20% every month goes into equities because we believe it is going to be a very choppy run going forward. It is not going to be one-way.