Dinshaw Irani, CIO, Helios India
Where do you find the spicy treats in this market?
Let’s look at what’s happening in the global market first, then probably look at India, because we think this time around is a bit different than what’s happened in the past. Watch how emerging markets handled the inflation crisis. They did a fantastic job and if you go back in history and look at the 80s where that led to the Latin American crisis. Decades later, it’s a tequila crisis again because Mexico is an emerging market.
A while ago there was a tantrum when three markets – Brazil, India and Indonesia – literally exploded, but this time look what happened. Despite quantitative tightening and rising interest rates, developed market currencies took a hit. The euro is down 13-14%, the pound 17-18% and the yen around 20%. Undoubtedly, the Indian Rupee is also down 10%, but it’s still better than what the DMs are doing. So we have to keep in mind that EMs did a better job than DMs this time around.
The second setback we continue to get on India in particular is that our premium in the emerging markets index – the MSCI EM index – has more than doubled. But let’s also understand the composition of this index. Four rather large countries control nearly two-thirds of the index: China, Taiwan, Korea and India. China is down about 25% and I’m talking in dollar terms; Taiwan and Korea are down about 38-40%, still in dollars; India is down about 10% and again it’s because of the dollar and nothing else.
We therefore fell less than the other three markets which have their own intrinsic problems. Korea depends essentially on the United States; for Taiwan it’s mainly the semiconductor issues and China obviously has its own local issues around the zero Covid policy and stuff like that. In addition, they heavily swoop down on tech companies. India cannot therefore be penalized for not having fallen.
“ Back to recommendation stories
That’s why premiums have gone up, but that said, India can’t swim against the tide. It will be a while before everyone starts saying it’s too expensive, but the fundamentals aren’t that good at the moment either. The results for the September and December quarters will be released and they wouldn’t be so exciting. We already see that a few names have come out. Obviously the base case we are working with today is that the market is going to flatten over the next two quarters. In the worst case, we could see a correction of 5% to 10% and not too much and the upside will also be limited to that extent.
What are expensive treats? What should investors buy right now? You didn’t answer that.
We have essentially left most of the outer sectors; It was a big call that we undertook as we said we didn’t want it anymore and in fact our weight is now down to zero in the IT and services industry. It was a big call that we took.
We’ve deployed that money primarily into private sector finance companies, basically private sector banks and to some extent some NBFCs and obviously our own very popular theme of affordable luxury or mass luxury. Here, too, we have deployed our money. So those are the two areas where we think the real cream is really and that’s why we’re there in those areas.
You made a lot of money
, Campus shoes. At what level would you be tempted to sell it not because of growth but because of valuations? Are you going to sell them just because of the buyback or would you sell or give up your gains because of the underlying price action?
Basically, we identify the themes that are going to provide long-term growth and those themes are like multi-year tailwinds that we look at properly in sectors and stocks and that not only help the stock grow with earnings, but also help the stock grow with earnings. reassess over time. when consistency of earnings comes into play. That’s why we’ve identified this particular theme.
It has a long lead to play, so we wouldn’t be in a rush to sell them any more. Maybe if there’s a buyout we could look to other areas but obviously the waiting issue is there as well and that’s what we’re trying to control here because it’s not are not liquid stocks. We don’t want to have an overweight position in these illiquid stocks. This is another constraint that we are looking at. Otherwise, on the valuations front, if they continue to grow at 25-30%, we have no problem holding them because those valuations will be justified going forward.
How do we view the automotive sector? There’s a lot of disruption on the EV front and many companies seem to be participating here. How can India play its role in electric vehicles? Is this to be avoided at present?
We’ve been very vocal about the automotive space itself. We avoided this space for a while. Like I said, if you look at the long term, there’s no way a local company can compete in the electric vehicle space. We’ve seen this disruption before in the two-wheeler space. A good chunk of new two-wheeler bookings are in the EV space as such, which has created some commotion.
Hero Honda didn’t go anywhere as such. So that’s something to keep in mind and it’s only a matter of time before the PV space feels that pinch as well. Look at the kind of capex. Foreign automakers are investing $70 billion, $100 billion and here we’re talking about a billion here and $3-4 billion there. There’s no way they can compete with this type of R&D in the EV space.
Our appeal is that in this space there would be no winners for some time. It will only be after a while that a leader will come out and start winning in space. Even in the auxiliary space, I think there is any player who can benefit from it as such, other than providing a few bits here and there. I don’t think it will work longer term.
You are bad at computers, numbers so far from the first four – , and – are not bad. All indicate that although there are speed bumps, it is not the end of the road. Does it make sense to stay zero on IT after the correction and after the comment?
I don’t drive my car looking in the rear view mirror. Everyone knew this year would be difficult. If you talk to the managements they also tell you that this year they are looking at decent numbers and I am talking about the calendar year. Going forward, the planned budgets seem a bit risky; people are considering postponing their projects and stuff like that.
It is obvious that this will not be the case this year. The December term also depends on holidays. But as we approach the March quarter of next year, things are really going to start to slow down for them and they can see it. If you look at the hiring numbers or if you look at the fact that the bench is being cleaned as such. It is therefore evident that the margin expansion that occurred was due to the use of the bench rather than anything else. You know they are trying to use more, recruit less and so obviously they can see the writing too, but it will take some time.
They’re calling what they’re seeing right now and they’re also trying to caution you when most of the executives have said yes, we’re seeing some kind of instability in the retail industry and so on. It is obvious that they are also looking at certain sectors that are not working. So it’s only a matter of time before the slowdown starts to hit IT.
Frankly, I mean even if valuations were in sync with pre-Covid levels because we’re talking about 7-8% growth rates in dollars going forward, which was 4-5% before the levels of Covid. So where’s the excitement here? Now if you tell me there’s still an odd 25-30% premium in valuations, obviously you’re better off waiting, letting it play a bit and then probably taking a call at the coming.