You have always been a fan of technology and I don’t say so. Many digital platforms combine their power and strength with consumers towards industries. Is there something that is interesting there?
Pankaj Muuraarka: We own a lot of them like Paytm. In the long term I can remain constructive or positive on Paytm as a growth tongue. We love food delivery companies and now that industry is an oligopoly. Food delivery as a segment in a few years will have a billion dollar cash flow and an oligopoly in which the top two players will check 120% of the profit, because the other players continue to lose money and it will remain in an oligopoly structure forever. Fast trade comes very quickly in an oligopoly structure where three or four players will eventually dominate and control 120% of industrial profit because all other players will continue to bleed.
The good thing about this internet company is that, apart from rapid growth, they stimulate the consolidation of the industry in the segment in which they work on a very fast scale. When there are a few players, it enters the price determination and offers a long runway for the winpool to keep growing and that is one thing in contrast to traditional industries such as steel or cement that have quite a few companies.
Here there are only a few players in every segment and they will continue to dominate that space for a long period. The point that I make is every segment, or companies that come forward as leaders are the ones we like, because they will dominate the winpool and they will have a long runway in the next 15-20 years.
If someone does not want to buy both and only want to buy one, eternal or swiggy, do you think the valuation comfort is more with Swiggy and would you even pay RS 300 for Eternal?
Pankaj Muuraarka: Both is now the call of each investor in terms of what they like and as they say appreciation after a time is a matter of judgment because there are too many variables. But if you ask me for a period of five years, they will do well.
The other bag that you were very bullish on is the couch. We have also talked about it in the past. But now, given that we are in a tariff reduction environment and even the banking companies are talking about the NIMS compression that continues, what is your opinion about the bank space at the moment? You will continue to hold HDFC, Kotak and Icici Bank. Are there other banks that look good for you or one of your recent additions?
Pankaj Muuraarka: The image of banks remains positive. NIM compression is passing and it is naturally cyclical. If we will of course have rate reductions, the way in which the sector instructions or RBI have regulated the sector will be reproduced much faster than your obligations because your obligations are long duration. So this is a cyclical thing that banks will have a NIM compression in a rate -environment and in a rising speed environment they will get the benefit of expansion in NIM. I don’t think this is something we have to worry about. What we really like are banks with strong liability franchises and unspoilt asset quality and it is now very clear that the larger banks have an advantage over smaller banks. It is clear that we like the larger banks, and in fact we now own four of the top five large banks in our portfolios, including HDFC, ICICIs, Kotak and State Bank, and that mainly reflects our opinion. One thing that the sector has kept again, apart from the cyclical issues of NIM compression is a slower growth in the loan and probably if the economy recovers in the second half of the year, we will probably see recovery in the growth of the loan in banks. What is even more important, in a market that is priced to perfection, there are many sectors in the markets where valuations are far ahead of the base, this is a sector where the ratings are very reasonable.
I still think that for an investor with a three -year time horizon, these large banks can give high teenagers returns or profit growth, because in an environment where credit will grow a low double digit, these banks will take market share from smaller players, and they will lead the industry’s credit growth. In fact, they can make mid -teenagers credit growth and middle teenagers into high teenagers income growth and high teenage returns in these banks for a time horizon in the medium term.
Place this earning season, are there bags that you must avoid or remove your current core list?
Pankaj Muuraarka: To keep things in context, we must understand that India is the most expensive stock market in the world and that we are in the sixth year of a wild bull market. It is clear that on the wide aggregated index level markets are priced to perfection and there are pockets of markets where the ratings are clearly expensive or shares are far in the ground. What we have clearly done in our portfolio is that we have removed the valuation risk from our portfolio.
We have taken money off the table that we think that valuations are far ahead of the basic principles. For example, we have left all our defense expenses. We like to take money off the table, because in the past three five years it was quite worthwhile to possess some of these shares. But now these shares are praising in a high 20S, 30s type of profit growth for these companies in the next 10 years.
Although there will be visibility in the coming two years, I am not sure whether these companies can do that kind of profit growth and of course there are many expectations built into these sectors. I still doubt that profit growth can be maintained in the long term at what the market appreciates.
The top 20% of the market is the most expensive and this includes defense and some of the other companies in electronic production. We have taken that out of our portfolio because we want our portfolios to be reasonably priced and in an adult phase of the economic cycle and the bull market, we do not want to wear a risk of valuation in our portfolios.
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