A businessman is reflected on an electronic board displaying a graph of a market induce outside a securities firm. (Photographer: Yuriko Nakao/Bloomberg)

Avendus Capital’s Most Favoured Sectors In 2018

Domestic-driven sectors will be the overriding theme for the Indian market this year, according to Ranu Vohra, managing director of Avendus Capital.

Vohra is “excited about everything around the consumption market”, bullish on sectors which are purely inbound mergers and acquisitions-driven and industry disruptors such as logistics, financial services, etc.

In the case of logistics, there is an underlying assumption that technology solutions will guide the sector. In the consumer technology space, there has been a significant push towards capturing offline spaces after starting out with online offerings, as retailers focused on creation of own brands and adopting a unit economics-based model, he said. “Traditional and digital businesses are moving towards each other at such a fast pace that a collision is bound to happen,” he added in that context.

In the financial technology space, which is largely payments driven, there has been a visible shift towards credit analytics, lending to small and medium enterprises and financial inclusion, said Vohra. The traditional ways of making payments are also getting replaced by the use of artificial intelligence systems. “There has been a huge change in the sector, and I’m unable to see how banks will cope,” he added.

Avendus Capital, Vohra added, is also positive on companies which have made a smooth generational shift in management and continued to outperform in the consumption market. Kajaria Ceramics Ltd. and Eicher Ltd., in particular, have seen the next generation take over and create value over time.

While Vohra’s brainchild firm has ventured into wealth management, alternative asset management and structured debt or credit business so far but stayed away from asset reconstruction companies and stressed assets.

Vohra said it’s a “conscious” decision as the firm has its hands full at the moment with growth-oriented businesses which generate better returns. In a year or so, it might venture into the stressed assets space, depending on how the insolvency resolution process plays out, he added.

Watch the full interview here:

Here are the edited excerpts of the interaction:

How are we are stepping into 2018?

India is looking quite strong. We are already seeing a good level of momentum on the ground. Investments are coming into the system and there is good visibility on earnings. Our view is that for the next three years we can see a near 15 percent growth in earnings. We are also seeing a very interesting move towards good governance. As the mid-size companies grow and some of them go public, there is a strong movement towards good governance. All these are positive trends for this year. We are also seeing a lot of capital now getting ready for India, which we call dry powder. So, there is a lot of dry powder waiting to get into deals.

The only thing I’m worried about is that the market does not factor in risks and the global risks are building up. We don’t know what part of the risk could come up at what time and spoil the party. But fundamentally, with demonetisation and smooth transition into GST, I think there is a good visibility and track for Indian corporates.

What is your sense of the trend in hedge funds?

India has traditionally been very low on equities. Even today, about 1.25 percent of assets are sitting in equities. A lot of other things were happening in this country. People were substituting that risk which they would have got through equities like by way of real estate, for instance. As of now, a lot of those investments are trying to get back to the equities’ universe. When you look at equities, while the traditional retail investor would look at mutual funds, a lot of the mid-size families are considering alternate strategies and different ways of investing in equities, different risk return profiles. So, that will lead to an explosion of alternate products which will cover the entire risk return map. You can virtually look at the curve and point out that something is missing there, resulting in bringing some or the other product in the area. So you will find a lot of products coming up and families getting in. Our hedge fund business today is at about $1.4 billion. I wouldn’t be surprised, if in next three-five years, the market grows by eight-ten times. There is a lot of appetite because there is headroom available in the market.

Where is this coming from?

A lot of it comes from family offices and high net worth individuals. They are the first adopters of these products. They have taken the pains to build family offices, meet distributors and develop knowledge around these products. The real institutional market like insurance companies, banks, which has been very slow. The next phase of growth is likely to come from these institutions but right now it is just domestic wealth which is moving towards risk.

What is the total size of your business right now?

We have four businesses. We started with our traditional investment banking business which continues to be very strong. That’s on the back of the growth in digital technology and consumer. Two verticals have fired it and now healthcare and IT are coming back. The fact that the yields in investment banking are well protected is helping us build that business. We built a wealth management, alternative asset management and credit business on top. Investment banking initially gave us a good bunch of entrepreneurs who we could back. As the economy grows from $2.2 trillion to $4 trillion over the next eight years, our view is that the addition to the gross domestic product will come from newer companies and business models. Digital could be 20 percent of the total GDP,  ten years from now. We are backing these models, these entrepreneurs are becoming richer and they are getting value. So, we built well management business on top.

What’s the difference between the wealth management and asset management business?

Wealth management is when you look at overall asset allocation for a family and those assets could be allocated depending on their liquidity. We are more like a third party architecture. That’s the model we followed where we put best in class products to the HNI families. Asset management is more pieces and products where value can be created, and you can build scale. So, each of our asset management product idea is to get to the $500 million or higher to qualify it in our stable as a product.

What is your business amounting to either from a top line or net worth point of view?

We are getting close to Rs 1,000 crore this year in terms of net worth. The numbers on the top line, this year, should be in excess of Rs 300 crores. Hopefully, the story gets even better next year.

How big is the book in the credit business?

Right now, we have infused Rs 500 crore in the credit business which has been funded by the investment we took on board from KKR and Gaja capital. The idea is to build a book of Rs 3,000 crore in the next three years.

Is this the credit to SMEs, structural credit of sorts?

Yes. This could be flexible capital available to entrepreneurs. As these companies follow new business models, they are not very asset heavy. We are living in a world where assets are not perceived as the best thing to have. But a lot of traditional business do not want asset-heavy businesses which means your sources of finance when you go to a bank are constrained and you have to rely on alternate structures to raise capital. We are very good at understanding the solution which this mid-size growing company would need to meet its objectives.