“I do not think the market is pricing in a long-term structural earnings growth story. When I read a lot of strategy reports and earnings reports and people are still going “oh we are cutting.” Sour grapes absolutely,” Hiren Ved, Director & CIO, Alchemy Capital Management
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Markets are trading way above their long-term averages and if you bought at these long-term averages, you are not going to make money?I disagree. What I have learnt is that you need to first understand the circumstances and decide whether the market should trade below averages or above averages. It does not trade at average and average is just a statistical number. In my view, when I put together how India is placed today versus the world, how we are starting a new earnings growth cycle in this country, how broad based the growth is beginning to happen, how manufacturing is reviving in this country -- it looks like we should trade above average. So, there is no case for trading at average and that is point number one.
Point number two is that most analysts, sell side houses, brokerages get caught up in near term numbers. In Q1, we had a strong top line growth because of inflation and everybody took price hikes but there was a 450 bps knock on EBITDA margins if one takes financials out on a year on year basis.
My view is that even if half of what you have lost in EBITDA margins comes back to you in the second half, people will start upgrading earnings. The 2024 Nifty earnings were about 1,000 plus. They have now been cut to 960. I would not be surprised if six months down the line, this number goes back above 1,000.
And we are talking about FY23 and not about FY24?
I am not even going to FY24. I think some of that will come back in the second half of FY23 and some of that will come back next year because we will have a high base of higher raw material cost this year. Next year, we will have a favourable base in FY24. My point is that people look from quarter to quarter. Based on Q1 EBITDA margins, has any analyst today baked in a higher EBITDA margins in FY24? No, they will not do it, they will wait for the margins to improve and then slowly will take the margins up by which time the markets would have already figured it out.
So it is QSQT or Quarter Se Quarter Tak in markets?
Yes and I do not blame them because that is how they are structured to look at things. As investors, we are told to look at the big picture, we are told to step back a little bit and not get too flustered about what is happening from quarter to quarter and look at the big picture. To me the big picture and the future looks very bright for India.
I am not even going to FY24. I think some of that will come back in the second half of FY23 and some of that will come back next year because we will have a high base of higher raw material cost this year. Next year, we will have a favourable base in FY24. My point is that people look from quarter to quarter. Based on Q1 EBITDA margins, has any analyst today baked in a higher EBITDA margins in FY24? No, they will not do it, they will wait for the margins to improve and then slowly will take the margins up by which time the markets would have already figured it out.
So it is QSQT or Quarter Se Quarter Tak in markets?
Yes and I do not blame them because that is how they are structured to look at things. As investors, we are told to look at the big picture, we are told to step back a little bit and not get too flustered about what is happening from quarter to quarter and look at the big picture. To me the big picture and the future looks very bright for India.
It is said that history may not repeat itself but it certainly rhymes. What has happened in the past will certainly happen in the future; courses remain the same, the horses change. Where are we in terms of this bull market cycle? Is it still alive and kicking? If this bull market is a train journey from Churchgate to Borivali, where has this bull market reached?
We are still at Marine Lines.
Still at Marine Lines? You mean this bull market still has a long long long way to go? Why do you feel that?
There are a couple of structural factors. The economy has taken a lot of pain in the last few years – whether it was the disruption because of demonetisation, whether it was the adjustment because of GST. Then we almost had credit markets freeze in India post IL&FS in the past 18 months.
We are still at Marine Lines.
Still at Marine Lines? You mean this bull market still has a long long long way to go? Why do you feel that?
There are a couple of structural factors. The economy has taken a lot of pain in the last few years – whether it was the disruption because of demonetisation, whether it was the adjustment because of GST. Then we almost had credit markets freeze in India post IL&FS in the past 18 months.
It may not matter to the top 30, 40, 50 companies but it matters to the breadth of the economy – small, medium enterprises and small companies. When you squeeze liquidity out of the system, it matters when credit markets become so tough. Then there was Covid. If you have survived till today as a business, then I think you have built a lot of immunity because you have taken so much pressure and survived and now they are ready to run.
Secondly the credit cycle in India is just starting; bank balance sheets are clean, credit growth can happen and that is still ahead of us. Manufacturing went into a 10-year slumber in this country and that is waking up. One may call it PLI, you may call it China plus one, one may call it Europe plus one – whatever – and we are seeing iPhone being made in India and now Google says they are going to make Pixel in India. We are going to see a manufacturing renaissance in this country for the next 10 years.
Like what we saw in IT it is going to happen in manufacturing?
Exactly! We are now getting very serious about defence manufacturing, we are getting serious about semi-conductor manufacturing. We are getting serious about all kinds of manufacturing in this country, specialty chemicals, APIs, drugs, pharmaceuticals. What is going to change in my view is that 2018, 2019, 2020, 2021 was all about betting on the big and the strong and betting on consolidation.
Secondly the credit cycle in India is just starting; bank balance sheets are clean, credit growth can happen and that is still ahead of us. Manufacturing went into a 10-year slumber in this country and that is waking up. One may call it PLI, you may call it China plus one, one may call it Europe plus one – whatever – and we are seeing iPhone being made in India and now Google says they are going to make Pixel in India. We are going to see a manufacturing renaissance in this country for the next 10 years.
Like what we saw in IT it is going to happen in manufacturing?
Exactly! We are now getting very serious about defence manufacturing, we are getting serious about semi-conductor manufacturing. We are getting serious about all kinds of manufacturing in this country, specialty chemicals, APIs, drugs, pharmaceuticals. What is going to change in my view is that 2018, 2019, 2020, 2021 was all about betting on the big and the strong and betting on consolidation.
If you bought into an HDFC Bank or a Kotak Bank you made money. If you bought into Infosys ahead of midcap IT, you made money. If you bought an HUL ahead of let us say…
Yes generally. Generally speaking, the theme has been that the big are getting bigger, the strong are getting stronger, the organised are taking market share away from the unorganised and that trend definitely has been there and investors have played that trend.
In the next five, seven, ten years, the big will continue to get bigger but there is a second trend which is starting which is the survivors; the smaller companies, the manufacturing companies are likely to now grow and spread. Look at the price action of the market; the breadth of the market has improved and that is telling us why small and midcaps are outperforming the large caps. That story is well and truly discovered, betting on the leaders of yesterday and today, the time has come to bet on the leaders of tomorrow.
But we are in a tough macro environment. We are going to have QT or quantitative tightening. Inflation is back and here to stay. Liquidity will be less whether it is because of RBI or because of global factors. Historically, in a tightening liquidity environment, small and midcap stocks fare poorly.
You are right but what is different this time is that the corporate sector is deleveraged. QT or sucking away liquidity really plays in two ways – one is that availability of credit to the wider sector becomes a problem and secondly, it also dampens demand and sentiment to some extent.
Now I am not sure whether what we think of as QT will run its full course. It never has. It did not even after the 2008-09 crisis. They pulled back liquidity a little bit and then they stopped. Pretty much the same thing is going to happen. We talk about QT. What has the UK done? They have capped energy prices. That to me is QE because that is a 150 billion pound stimulus.
If today somebody was to tell me I am going to cap your electricity bill at Rs 2,000 or Rs 5,000, what does it mean? It means QE to me because I would not have to pay for energy prices and I will save that money and I will spend that money somewhere else. So the structure of the world is such that every time there is a crisis in some form or the other, the government either does a fiscal transfer or a monetary easing.
Now because inflation is at our back, one cannot do monetary easing but once inflation peaks and growth slows, I do not think QT will happen.
My view is that higher rates in India unless they go abnormally high are not going to matter either to demand or to the corporate sector because the corporate sector is already deleveraged. We are not leveraged any more. We were leveraged five, seven, ten years ago when the NPL problem was at its peak. We were coming off a massive leverage cycle from 2006-07 right up to 2010-11 and then we have ten years of deleveraging.
I do not think QT is really going to matter. I think balance sheets are strong, cash flows are strong. Look at the data. The top 500 companies in this country have generated Rs 1,85,000 crore of free cash flow during the two years of Covid.
The Tata Group has projected to have cash flow of nearly Rs 2 lakh crore in FY23 which is an outstanding number.
And the second thing is that today if you have a reasonable business idea there is enough capital to back it, which was not the case earlier. We now have a very well developed startup ecosystem, venture capital, private equity, there is so much money waiting on the sidelines to be poured in. Now even in the new age stocks, valuation corrections have happened and so I think the cycles will play for itself. I just feel that we are going to have a big growth cycle in this country, we are so sweetly poised. Yes the only risk is that we tend to believe this is too early so I hope we do not make some mistakes…
And the market, according to you, is not pricing in this scenario?
No, I do not think so. I do not think the market is pricing in a long-term structural earnings growth story. When I read a lot of strategy reports and earnings reports and people are still going “oh we are cutting.” It is sour grapes absolutely
Yes generally. Generally speaking, the theme has been that the big are getting bigger, the strong are getting stronger, the organised are taking market share away from the unorganised and that trend definitely has been there and investors have played that trend.
In the next five, seven, ten years, the big will continue to get bigger but there is a second trend which is starting which is the survivors; the smaller companies, the manufacturing companies are likely to now grow and spread. Look at the price action of the market; the breadth of the market has improved and that is telling us why small and midcaps are outperforming the large caps. That story is well and truly discovered, betting on the leaders of yesterday and today, the time has come to bet on the leaders of tomorrow.
But we are in a tough macro environment. We are going to have QT or quantitative tightening. Inflation is back and here to stay. Liquidity will be less whether it is because of RBI or because of global factors. Historically, in a tightening liquidity environment, small and midcap stocks fare poorly.
You are right but what is different this time is that the corporate sector is deleveraged. QT or sucking away liquidity really plays in two ways – one is that availability of credit to the wider sector becomes a problem and secondly, it also dampens demand and sentiment to some extent.
Now I am not sure whether what we think of as QT will run its full course. It never has. It did not even after the 2008-09 crisis. They pulled back liquidity a little bit and then they stopped. Pretty much the same thing is going to happen. We talk about QT. What has the UK done? They have capped energy prices. That to me is QE because that is a 150 billion pound stimulus.
If today somebody was to tell me I am going to cap your electricity bill at Rs 2,000 or Rs 5,000, what does it mean? It means QE to me because I would not have to pay for energy prices and I will save that money and I will spend that money somewhere else. So the structure of the world is such that every time there is a crisis in some form or the other, the government either does a fiscal transfer or a monetary easing.
Now because inflation is at our back, one cannot do monetary easing but once inflation peaks and growth slows, I do not think QT will happen.
My view is that higher rates in India unless they go abnormally high are not going to matter either to demand or to the corporate sector because the corporate sector is already deleveraged. We are not leveraged any more. We were leveraged five, seven, ten years ago when the NPL problem was at its peak. We were coming off a massive leverage cycle from 2006-07 right up to 2010-11 and then we have ten years of deleveraging.
I do not think QT is really going to matter. I think balance sheets are strong, cash flows are strong. Look at the data. The top 500 companies in this country have generated Rs 1,85,000 crore of free cash flow during the two years of Covid.
The Tata Group has projected to have cash flow of nearly Rs 2 lakh crore in FY23 which is an outstanding number.
And the second thing is that today if you have a reasonable business idea there is enough capital to back it, which was not the case earlier. We now have a very well developed startup ecosystem, venture capital, private equity, there is so much money waiting on the sidelines to be poured in. Now even in the new age stocks, valuation corrections have happened and so I think the cycles will play for itself. I just feel that we are going to have a big growth cycle in this country, we are so sweetly poised. Yes the only risk is that we tend to believe this is too early so I hope we do not make some mistakes…
And the market, according to you, is not pricing in this scenario?
No, I do not think so. I do not think the market is pricing in a long-term structural earnings growth story. When I read a lot of strategy reports and earnings reports and people are still going “oh we are cutting.” It is sour grapes absolutely
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