India Equities Showcase A Healthy Distribution Of Growth Across Various Sectors: TVF Capital's Shiv Puri

Shiv Puri: I think the biggest sway is going to be the direction of interest rates and you've seen that historically, when inflation spikes, it takes a very long time for it to settle. That's proven to be the case this time as well.

As a result, people expected a lot of rate cuts this year. Up to four rate cuts were priced in the US this year and now that's down to perhaps one or none. So the direction of interest rates again is going to have a crucial factor on what happens in the US economy and also the direction that the Reserve Bank can take in terms of its rate-cutting strategy.

So the direction of interest rates is the crucial factor for this year. With regards to geopolitics, those issues have been around for a while and I think the market has taken that into account.

In terms of elections, I think most investors and followers in India are assuming the outcome to have no surprises. So I don't think anything new would happen in that.

Shiv Puri: Well, as long as there is a majority as expected, I think any disappointment would be very short-lived. Structurally, people would realise that the direction would be unchanged and there is stability.

Shiv Puri: I think, the long-term structural story of India remains unchanged and it's been unchanged for the last couple of decades. The direction is clear and with all that we've seen happen in the last decade, I think the next decade is also going to remain unchanged.

I think, one of the things that we realise now in the economy and many people are seeing this as a compounded benefit of all the reforms that have happened and how certain sectors are benefiting hugely from it.

So all of these reforms that happened whether you talk about GST, or you talk about the Bankruptcy bill, whether you talk about the real estate regulatory reforms, etc., or piecemeal reforms that happened that caused some sort of disruption and pain to adjust to.

But now that they're all sort of, well understood, well in the machinery, the compounded benefits of things like that, including digitalisation of the Indian economy, payments, etc., all the benefits that are starting to compound in the years ahead and I think the benefits of that will come on.

So I think macro-wise things are looking very solid. Near-term fluctuations will happen. Areas like banking, areas like healthcare, especially hospitals, certain pockets of FMCG, or I should say consumption not FMCG, continue to look very, very interesting structurally.

Shiv Puri: I think, your first point is absolutely right. The Indian equity markets behave quite differently than the US equity markets, where the returns have largely been driven by the big tech stocks. It is much more broad-based in the Indian equity market and that's healthy. It's not surprising given that the growth has been fairly widespread across sectors.

I think, the interesting investment areas in India have always centred around the domestic economy, whether it's consumption, infrastructure, financials, all catering to the growth that's there in the Indian domestic economy.

So I think that remains unchanged and I just highlighted some of the areas that I thought remain interesting, have been interesting and likely to do so.

Shiv Puri: I think, one has to be very careful with an argument like that, because some of these high-quality names that you mentioned that have rerated have also had a change in their business model.

Some of them have become much more service-oriented than low-end manufacturing and it's reflected in the return on equity and the return on capital ratios that you see for some of those companies. So for that reason, along with the growth tailwinds some of them would command a higher multiple than perhaps in the past.

I think, the important thing in capital goods is that all revenue and all earnings are not equal. There are certain companies that will benefit because of a tailwind but are in a very competitive market spaces. Capacity will come online, margins will get squeezed and the earnings trajectory—which is being straight-lined into the future and a very high multiple that's been put on that—might actually see the opposite happen over there.

So, one has to be very careful in terms of extrapolating, simply looking at the P/E ratios and look underneath and see what's the durability of that growth. What is the barrier to entry? What's the model, in terms of return on capital metrics? Just the usual things that one would look at across the board to make a decision on that.

I think, infrastructure, even in past cycles, capital goods in past cycles has been very cyclical at the low end. So, one has to be careful not to apply a high multiple to high earnings because that result in disappointment.

Shiv Puri: There are certain segments in infrastructure and capital goods where the demand cycle looks to be very structural for a long period of time. Railways is certainly one area where it looks like it is going to happen.

So therefore, supplying components into some of those markets will be very interesting. But again, one has to see that nobody's sort of looking at the commoditised aspect of companies that supply into that region.

I think, the one other point to keep in mind is when we talked about green energy, etc., sometimes these are very good for the overall economy, in terms of promoting growth, lowering the cost of power, working well with the environment, etc. But by themselves, they may or may not make great businesses.

We see that in payments. For example, digital payments is a great lubrication for the financial services industry. I think it's done a lot of good in India and in promoting businesses, but not necessarily maybe the great way to sort of create wealth. It's a very difficult business to do to make margins and to make money.

So again, I would say there are certain areas within capital goods that are very interesting, several areas that are great for the economy and may not necessarily be great as investment themes.

Shiv Puri: For the longest time, there was a player in the market that had very aggressively acquired a lot of customers. ARPU levels were low compared to the services that were being offered. It was a great benefit to the Indian consumers.

I think, as that stabilises, it becomes quite clear that it's effectively a two-and-a-quarter player market. I think, maybe some of the bets that are being made on the quarter play on Vodafone is that maybe it'll become a two-and-a-half player market or a two-and-three-fourth player market.

I think, time will tell because this is a business that is very capital-intensive as well. Barriers to entry are very high, scale matters and the top two players in the country effectively have a vast majority of their subscriber base already locked up. So I think it's up in the air to see whether the quarter player can become a half player or not.

Shiv Puri: No, I think it's very difficult. Again, I don't know what happens from a short-term perspective, because that particular company’s stock had fallen a lot. So again, no idea on what that's going to do. But fundamentally, given the construct, if somebody has a more structural view it's a very difficult bet to make.

Shiv Puri: I think, what we have been seeing in the last couple of years is this sort of two-step consumer economy. You're seeing an aspirational consumer economy on the one hand, and then you're seeing a regular consumption economy on the other hand.

On the aspirational side, you're seeing very strong growth, whether it's premiumisation, whether it's spending on discretionary items, whether it's travel-related. So, discretionary services, all of that, has been very strong.

And the regular consumption side, I think, is still going through a challenging environment, primarily because of the inflationary impact that consumers have felt, post-Covid.

So real incomes, you know, at that level, have not kept up with the pace of price increases that we see many of these companies do regularly, and they have to increase prices, given what's happened to their raw material costs. So volumes, naturally, are not moving in as they used to in the past.

I think, this will still continue for a little while because we are still seeing demand at that level, whether urban or rural, be quite slow. The real incomes have to first move higher before consumption of goods in that level can move higher.

Shiv Puri: I think, the opportunity that you described is multi-decadal. What we are talking about is urbanisation that may not just be the top 8–10 cities, but another 25-30-40 cities that are in the pipeline, which are also getting urbanised very fast, where the penetration levels are much, much lower.

So, whether it's in the jewellery business or retail, it's really important to understand whether the business is structured correctly. It should have the right model, scale, differentiation, proper sourcing, and basically the fundamentals of a sound model. But the opportunity set, I think, is multidecadal in that space.

Shiv Puri: At this point, in terms of themes, financials is an area where there is quite a lot of focus. And I think, even if you look at some of the private sector financials that haven't done well over the last few years relative to the rest of the market are pretty attractively priced currently.

I think, the growth numbers have been reasonable. Liquidity, undoubtedly is tight but I think what's going to happen going forward even with a slight pickup in asset quality, in terms of NPAs, you will see a softening of rates over time, and demand will continue to remain strong, plus they're very attractively valued.

Shiv Puri: Private banks, private financial services and NBFCs.

So, historically you know, not much is done in the PSU sector. So, that's been something. There has been a pretty sharp rating in the PSU banks. I will say this though, you know, I was quite impressed seeing some of the changes that the larger PSU banks have made, both in terms of management quality as well as the development in technology, which they used to be fairly behind. Very impressive what's been happening in the PSU bank at a fundamental level, but I think a lot of the rerating seems to have happened.

Shiv Puri: Well, when I started looking at markets here in 2004, I remember in 2003, when I was in the US, the prevailing consensus was that the Indian markets are too expensive. And, you're actually right.

Twenty years later, it's still the theme. I think, it's important to understand that duration of growth matters and that's what the last 20 years have shown. If there is a company or a country where the duration of growth can be pretty long, multiples will naturally remain higher as they should. So I think, that is something that is going to happen.

Now, in certain pockets, it maybe irrationally high. You are certainly seeing that it happened in some of the mid and small caps where the quality of earnings in some of those companies may not be deserving of the multiples that they are getting. That might be a function of, you know, a lot of retail capital or whatever it may be.

But by and large, if you look at the well-run companies, the large-cap companies, you know, some of them may be at the higher end of the range, but many of them still are in the zone of a valuation that they have historically been, you know, for the last two decades. So the real question is, will growth sustain and we feel it will.