Vodafone is almost on the brink of packing shop from India?
It is difficult to say what they want to do. We also read the same media reports. But the telecom stress has been fairly well known and well flagged and for the last two-three months, we have also seen the government finally trying to explore ways to resolve the stress in the sector. The big difference now is that we are seeing the policymakers waking up and trying to ensure that telecom sector survives in some form or the other in terms of the players who are at the margin.
You cannot buy telecom. Media is too fragmented. All the action is happening in the start-up space. Typical Indian IT companies are continuing to run models of software services. They are not purely digital. Digital is the big opportunity for every investor. How can one participate in it?
In the listed space, there is a constraint in terms of participating in digital space. We cannot talk about individual companies, but there are other businesses trying to benefit from that both as an enabler for their existing businesses to have an edge over competition as well as businesses trying to leapfrog into being market leaders. These are not necessarily existing digital companies. Compared to US or China market, India still lacks the breadth of digital or new age internet businesses.
Markets are at an all-time high. Fund managers have underperformed their benchmarks. It appears the worst is behind us but markets have run up already in anticipation. Where can your clients make the next 8-10% return in the next one year?
The investors’ mood is clearly hopeful, not necessarily overly optimistic or upbeat. Why I say hopeful is in the context of what is happening globally. Again given the global growth slowdown, India slowdown is not necessarily a big negative for the global investors.
Secondly, as we have seen early signs of bottoming out and policymakers being more responsive, that is also giving hope to investors.
Lastly, the global investor community remains hopeful about the medium-term growth potential given the reforms agenda of the new Modi government and specifically around corporate tax cuts, etc. At the same time, there is a lingering worry around the NBFC and financial sector stress which has got prolonged. Every year, the markets keep hoping that it is a bottom but we see that getting prolonged. So, the worry lingers on and one of the common questions we get these days from investors is how big and how serious this is. But thankfully, there also we are seeing proactive policy interventions which should be reassuring.
Give me one idea each in the three categories – evergreen compounders or the big picture winners, disruptors or beaten down angels and early birds.
I cannot talk about individual stocks, but the evergreen ones are clearly in the financials and consumer space. The private banks are the obvious ones, specifically backed by retail liability franchise and consumer also there are select opportunities in home improvement, etc, where they continue to see great long-term structural stories which have managed to deliver well even in the current slowdown.
In terms of some disruption and beaten down stocks, the obvious space is in the oil and gas or the broader SOE space specifically, because we see a high probability of big privatisation agenda coming through over the next few quarters which will be great for the overall market and will be a significant re-rating driver for a lot of these SOEs which are trading at very attractive multiples.
Coming to early birds, we do have a midcap coverage in terms of long-term compounders but unlike the broader midcap world which has been clearly beaten down and underperformed over the last year and a half to two years, the quality names which to us are compounders and early stage, I have not come across so much.
Markets in India have been quite efficient and they seem fairly priced but there are enough opportunities there in the media, healthcare space and entertainment space where we see long-term compounding opportunities for small companies.
We have been talking a lot about the divestment agenda from the public sector space. Is there anything that is looking interesting to you?
We have been watching it closely. We have been publishing on that theme as a broad market driver because the broader SOE basket in India is still trading at very attractive valuations, versus their own history compared to absolute bottom up fundamentals as well as relative valuations versus markets.
Again, some of them have specific issues which justifies these valuations but the broader set looks attractive to us and within that, the oil and gas SOEs are the ones where we could see something even in the media reports talking about specific companies also. Why we think privatisation is quite likely because this government for the last five-six years has been focussed on macro stability and keeping fiscal discipline intact. After the corporate tax rate cut and the tax revenue slowdown in the recent months, there is no way they can meet the fiscal targets, not just this year but for the next two-three years.
Unless they have a more aggressive privatisation agenda because piecemeal divestment is fundamentally constrained a)by how much stake they can sell; may be they will go below 51% but there is a question mark on how much below 51%. b)The valuation they realise in a piecemeal sale is significantly lower compared to privatisation.
So our estimate is that if they do privatisation, that is sell the entire stake, the value realisation could be two to three x broadly. In case of piecemeal sale, the revenue visibility for the government is going to be seen in 10, 15, 20 years rather than three to four years.
Are you convinced that disinvestment drive is going to happen or it is all smoke and mirrors?
We are saying there is a very high probability of privatisation. Whether it happens in the next one to two quarters or next one year is difficult to time.
You have always said that you do not like PSU stocks. In case of a disinvestment drive, would you ask your clients to buy the likes of State Bank of India, BPCL, Container Corporation, SCI?
Yes the specific companies which get disinvested will definitely have meaningful upside from here and even for the others which do not get disinvested, the investor focus will come back to the underlying value in them.