The consumer spending frenzy could be halted if interest rates rise and inflation returns. We could go through this dangerous time where growth is challenged and inflation persists, which means a rate hike, then the reversal begins. Isn’t that the biggest risk?
It is more a source of volatility than the genesis of risk. I think interest rates could go up 25 to 50 basis points, but I don’t see a significant rate hike here in India. This is also the case at the global level. Yet policymakers continue to believe that low interest rates are essentially the way to go and that is the way to bring strength.
In India, fortunately, we are not quite a leveraged economy yet and Indian households and families are not yet so in debt. Today, mortgage interest rates are 6.5-6.75%. They could go as high as 7-7.25% but will that deter an individual and a family from taking out a mortgage to buy the next house? I do not think so.
Also, I think revenge buying, revenge travel, pent-up demand still exists, so I don’t see any significant risk to the overall business environment with a moderate rate hike. I still think that if there is a rate hike it will be a bit moderate and we will benefit from an environment of low interest rates and high liquidity.
So you’re basically saying trade unlock can stay safe when it comes to revenge shopping, revenge travel, revenge dinners. The last time we spoke you said you took a leap of faith and started owning platform companies. Since then, a lot has happened and the IRCTC stock has corrected. We saw what happened with the IPO of Paytm. How would you approach this?
I still believe that digitization is the most important or the most powerful theme. It has performed very well in the rest of the world markets, including the United States and China. This is something that will play out even in India. It’s started to play out, but we still think it’s just the start.
That said, it should not be forgotten how tolerant public markets are towards companies reporting losses. I think the next few quarters are going to be very interesting. Good public markets continue to support loss-making platforms. The good thing today is that there are a lot of choices among platform companies or new age companies. There is a set of businesses there that are profitable and there is a set that is loss-making. So far, we only bet on for-profit companies that generate cash flow to fund this growth.
We haven’t invested in companies that continue to make losses yet, but who knows? Space is getting interesting and all of these companies are talking about a huge TAM (Total Addressable Market). As investors, apart from TAM, we also need to look at the MAT (Money After Transactions), that they have margins and generate money. So it’s going to be an interesting fight between TAM and MAT and that’s what we need to be careful about.
Also read: What stocks to buy, sell and hold as the market corrects 10%
You own ICICI Lombard. What do you think of Star Health’s IPO?
We’ve owned ICICI Lombard for quite some time and it’s a very interesting piece. We continue to love what ICICI Lombard is doing, especially in general health insurance, where it continues to be the biggest player with almost 8% market share and is obsessed with its performance targets. equity of around 20% and more.
Star Health Insurance is a very interesting piece. We are very constructive on health insurance and appreciate the fact that Star Health Insurance is a leader in this area. It has grown at a tremendous rate and, of course, health insurance continues to be relatively less penetrated. So we love this space.
It’s just that the valuations seem to be higher and therefore one would probably want to wait a while before investing in Star Health Insurance. Honestly, I don’t know when this opportunity arises, but I’ve generally seen over the years that even some of these new listings provide an opportunity to enter at a later stage, either when the market corrects itself or when specific companies having a bad quarter create an opportunity for one to invest.
I think Star Health Insurance is a great business and it’s a space to watch for someone who is really constructive in the long run.
You have Cipla and DRL. Have you added any health services to this pack? Diagnostic stocks are doing very well. Would you add it to your portfolio?
Not yet. We continue to love frontline pharmaceutical companies. We still think the next couple of years could be very exciting for them, given the kind of launches they have in regulated markets like the United States. We continue to love the big pharmaceutical companies. We do not own any of the diagnostics companies but we are eagerly awaiting the IPO of Pharmeasy. We think this is going to be an interesting space given that Pharmeasy also owns Thyrocare which is a diagnostic company. Plus, it means an online pharmacy today.
The media are reporting that they are also planning to be omnichannel and are starting to open stores. We will wait for Pharmaeasy’s IPO. In general, we like the online pharmacy space. It’s a huge market and it’s basically ready to be disrupted by some of these players online. It is a more interesting space than the autonomous diagnostic companies.
Month to date, have you had somewhere in the past month or reduced positions?
Yes, we have cropped positions. We kind of exited the position in Triveni Turbines which we bought a few months ago and which had seen a ferocious surge. Roughly a fair value went into the price. So we left Triveni Turbines. There are a few other positions where we reduced our holdings and looked at an opportunity like this.
Do you think the shift in perception within the Tata group of companies – Tata Power, Tata Motors, Tata Steel or for that matter TCS – is over?
In a way, the band really did perform and it seems like it’s best to roll on the Tata name. In the past, we have invested in Tata Elxsi which has worked very well. Of course we no longer have it. So it worked very well.
But in general a lot of the revaluation of PEs has happened and when I look at companies like Tata Consumer, TCS and Tata Elxsi, as an investor you can’t bet now on further expansion of PE to from those kinds of levels. The stock that we love the most now in Tata Group is Tata Motors. We think this is just the beginning of the story and over the next few years Tata Motors will play a pretty big role.
They seem to have basically every part that pulls well or should pull well – whether it’s an expected increase in CV cycle or a huge breakthrough in the EV space. They really seem to have the best of both worlds. I don’t think the share price at current levels takes into account future potential and the whole Tata Group pack, this is one of the stocks we love the most today.
The stock of Tata Motor went from Rs 350 to 550 after the agreement which valued the EV activity at 10 billion dollars. What could be the next trigger? Nilesh Shah: For a market as huge as India and for someone who is a trailblazer like the Tatas, if the EV strategy works really well, keep in mind that globally, the EV space has worked really well in the four wheel, passenger auto segment and that is exactly where they are going to be.
Of course, it has been different so far. We hear more noise on the EV two-wheeler space, but it clearly looks like the Tatas have a huge advantage or a leading edge over the EV touring car cycle. We think $ 10 billion is just the start. Keep in mind that they said this space was profitable and cash flow generated after the first two or three years. It is phenomenal for me.
Second, it is in the conventional passenger car sector that they have gained market share at the expense of other leaders and if this continues, then this sector which is honestly an overhang on Tata Motor’s stock, is going to act as a huge tailwind for the stock.
The third element is of course the expected rise in the CV cycle. The CV cycle has been pretty much moribund for the past two or three years and this is something that is expected to pick up over the next two or three years. If you are going to have so many activities related to manufacturing, mining and infrastructure, then you will see the CV request coming back. There, Tata Motors is the market leader.
I believe these three pillars – CVs, Conventional PVs, and Expected EVs – all together are tailwinds strong enough for Tata Motor’s stock not only to revalue, but also to grow based on huge growth in sales. benefits as well.
What about M&M because there have been new launches and a lot of talk about innovations?
M&M is an excellent proxy for remediation. What they’ve achieved in the last year or a year and a half is phenomenal and they’ve basically come out in a certain way or as we say in our lingo, they’ve had a stop loss for various companies. deficit and that was the first big step.
Two, of course, are the tractors and farm equipment, as one space has worked well and should continue to do well. Overall, we think M&M is a great type of investment for the next few years. It has strong outperformance potential and we also own M&M. We think Tata Motors and M&M are two very independent segments and in a way that gives us a very holistic and comprehensive exposure to the whole four-wheel space in automobiles.