A lot of events have happened in the last quarter, which we have not seen before, and some of it may be just one-time changes. Numbers on a relative basis will be a little better, because they were a disaster at this point in time last year. So on a year-on-year basis, you’ll have reasonable amount of growth. The entire consumer sentiment has taken a hit and we’ll have to walk through the next six months to see whether that will come back again.
On a relative scale, IT has been cheap for some time. You’ve got pharma which is still in the twentyish in terms of valuations. In financials, you’ve got PSU banks which are trading significantly below the book. Then there’re, private banks available at significantly above book. You’ve seen NBFCs that went to almost four times price to book. So, on a very broad index perspective, you might not see much downside. But is there something which is coming through that is phenomenally going to drive your market on the upside? I’m not too sure.
What could be the composition of the market six months from now? We look at the BSE-500 data and we look at manufacturing to give us a profit indication of where the economy is heading. This number is somewhere around Rs 3 lakh crore. This has been static and it has been around that number for the past four years. The problem is demand has got affected. Will it surface in the next six months? Will it surface in the next 12 or 18 months? I have no answer. In 2016, the businesses that made enormous amount of money were the guys who actually benefitted from the commodity down cycle. But in 2017, commodities are bouncing back.
You said earlier that we needed to now start looking at companies which will benefit as result of the farmer income going up. Does that theme continue? Rural income is a long-term play on the India consumer cycle because 60% of your population actually is in that part of the world. One of the key assumptions is the current policy framework is going to be dramatically more socialist. That is something that you’ll see play out over the next couple of years. If your economy has to be expansionary, you’ll have to get that last 60% of your population into the earnings cycle, and in that earning cycle, you become a larger consumer play.
So, you are saying people should buy fertiliser companies or seed companies, buy agricultural companies, buy companies giving finance to farmers. That is a wide basket. Please narrow it down: We had this huge capex cycle and we used to run diversified funds in the industry and whether it was cement, road construction or power companies, etc. All benefited from capital expenditure by the government. So, when we talk about farm income, rural incomes, you have to break it down from the longer consumption cycle. You have to allocate money where you feel valuations are comfortable.
You have given us a theme but that theme cannot be a portfolio. If somebody wants to invest with you, how can they really: There are just two parameters: one is businesses have to be cash flow positive and two; businesses have to have the right valuations. Preferably they need to lead their industry or the category that they operate in. So if we have been able to identify companies like this very early into the cycle — and you usually do that when industries are in distress — that is when I have gone an allocate capital out there.
India
NRI
