What could be the wealth creators of next decade? Here’s a clue

Currently financials, which include banks and NBFCs, account for nearly 40 per cent weightage on the Nifty and historically when a sector reaches to 35 per cent to 40 per cent weightage of the Nifty it always coincides with the market peak. Exactly 10 years ago, financials were the sub 30 per cent weightage on the Nifty. Are you worried about this mega concentration which has happened in 1-2 NBFCs and 3-4 private banks?

The thing is that even within financials, we have noticed that a lot of new sectors are getting listed. You have insurance getting listed and all the three companies are large companies. Now LIC will get listed in the next 12 months. The AMCs have got listed, SFBs have got listed and hence, the list has actually become very wide.

Now if you include all of this in the financials I have my own doubts whether the weightage of this segment will come down. Also if you look at why investors are actually piling on to some of these names, the reality is that the broader economy is slowing down, there is no clarity in terms of how consumption will pan out, how investment cycle is going to pick up and even consumption is actually concentrated in a few areas; so the choice for the investors has become very narrow.

I will talk about three overarching themes that we are seeing in investment and how it plays into the issue of the weightage of financials as well. One is that globally ESG has become a big issue. In fact, in a poll that I did in Hong Kong, some 85 per cent of the 36 investors said they cannot invest in cigarette stocks, coal stocks and select upstream oil stocks. Due to this, the liquidity cannot flow into sectors that are not compliant with the ESG theme. In fact, one of the investors said that for every investment they make, they have to answer 98 questions on ESG, and so there is a reluctance to invest in these sectors.

Second, a lot of investors, particularly foreign investors, do not invest in commodity in India because they are here to find stories to play on domestic growth. And hence a lot of commodity companies that are listed are out. A lot of PSU companies have become un-investable because their terminal growth rates have got impacted or they are part of the ESG.

If you exclude all these companies and look at the weightage of financials in the overall investment theme, you will be able to appreciate why the weightage is so large. So, the short answer to your question is that I do not see this coming down.

Every decade we have seen the emergence of new sectors. If private banks and consumer staples, consumer discretionary stocks have done very well for the decade gone by, which themes do you think will dominate this decade? What could be the high growth earning sectors for next four to five years?

I would categorise chemicals. It has done well but looking at it from a multi-year theme perspective, it can do very well. What we saw in the pharmaceutical sector between 1995 to 2015, we are likely to see that in the chemicals space. Within chemicals, you have companies catering to different categories of chemicals. Insurance-life and general, AMCs, select SFBs and some of the private banks will continue to do well considering the fact that the public sector will continue to lose market share. The tailwind is still there at least for the next three-four years or so and probably the growth rates will start to slow once the private banks gain another 10-12 per cent market share in the overall pie. After that it will become incrementally difficult but as I said there are a lot of new sectors that are getting listed and some of these will actually drive big value creation over the next 10 years. I would include retail as well under this theme. Sectors like telecom have seen a big drop in value. They have witnessed value destruction in the last 10 years. And as we see things today, the companies that survive and stay put for the next five years could emerge as reasonable wealth creators.

Bill Gates once famously said that we overestimate the impact of disruption in the short term and underestimate it in the long term. If I have to apply that to autos, do you think markets are getting extra paranoid? What could EVs could do to Indian companies in the short term?
I think so. I agree with you. I think that seems to be the case maybe three, six, nine months down the road. There is one more issue, people are also worried about BS-VI price increases and how it will impact demand. One of the large auto company’s CEO was telling me that the best thing is you wait it out till June. You will have a completely new price list, a new set of vehicles on the road. People will view this sector with a fresh perspective. He was extremely bullish that July onwards there will be an acceleration in demand. Therefore, I think that there is a pent-up demand given what has happened in the last 18-24 months. In some cases, we have seen very steep year on year decline in volumes and therefore it is definitely going to come back. I do not know how this will pan out over the next 10 years but all I can see is that in the next two to three years, the pessimism will be proven to be unfounded.


You like insurance but some would argue that within the insurance space –A) valuations are rich, B) could there be an overhang because of supply. As per the new norms, the holding by promoters or groups in this case has to be wane down in next couple of years.

I am a fundamental analyst and I do not get worried about this technical overhang because we have seen in a lot of stocks that it just goes the other way around. The most recent example is DMart.

Two months ago people were talking about large supply, look at where the stock is. What matters is what the fundamentals are, what the growth delivery potential is, what the expectations are and how do they meet these expectations.

In India, good quality stocks have been expensive for a long period. If you had looked at HDFC Bank in 2000, 2005, 2010, 2015, all points in time it was one of the most expensive banks in the world. But has it not created value? It has created value. Also, when a sector has multiple listings, sell-side coverage improves, buy-side interest improves, index inclusion happens. Passive funds are becoming bigger and bigger. One of the other overarching themes of investment is actually ETFs.

Last year 37 per cent of the flows into domestic funds came from ETFs and today foreign plus domestic ETFs have about $70 billion invested in various indices – MSCI, FTSE, Nifty and Sensex. So, therefore, people always get worried about supply coming through. I look at the fundamentals and their ability to deliver growth. If these companies have the potential to deliver 20 per cent to 25 per cent earnings growth over the next decade which I think they have the potential, then these stocks will deliver returns fantastic.