Milind Karmarkar on consumption theme and the art of long-term investment

What is your front view mirror or the windshield telling you?
Front view mirror is telling me that India will grow at a rate of 6.5% to 8%; add to that a 4-5% inflation; so 13% growth for the next five-six years is probably given and this would lead to India reaching the target of becoming a $5-trillion economy. In all probability, the per capita income may also more than double in the next five years and if that happens, then, of course, there were will be a phenomenal drive to boost consumption.

When I say consumption, I include hospital side, pharmaceutical side, insurance companies and also include banks and NBFCs. So, it is a slightly wider range of consumption because all of them benefit when the per capita income goes up and that is where my focus will be, apart from the industrials.

You owned two insurance companies in the past – one life insurance and one general insurance. Given that has got listed now and there are new entrants in the health insurance sector, have you revisited the insurance stocks? It was and if my memory serves me right?
You are correct and both of them have been underperformers.

Does that bother you?
No it does not because I see a long-term potential of growing at 18% to 20% in most of the insurance companies over a longer period of time. As long as these companies can deliver a growth rate that is 30-40% higher than the GDP growth, the stock price will start delivering, may not be in six months, but in two-three years.

The challenge with ICICI Lombard is that they are still living off the float and are still not a profitable franchise.Other health insurance companies are profitable. Does that change the argument for the business in terms of viability?
No it does not change my thought process because I do see ICICI Lombard as a big opportunity. There is enough space for all the general insurance companies to grow. All these companies in insurance space can grow very fast and very well. So especially after the pandemic, I expect the health insurance business to pick up. In the pandemic, there were issues about passenger vehicles also. Now passenger vehicle sales have also started and so four-wheeler and two-wheeler insurance is also likely to do well. Therefore, the entire general insurance sector is likely to do well.

Also Read: Why Milind Karmarkar has not changed top 3 stocks in his portfolio since Covid

What are your thoughts on defence, railways, manufacturing, the atmanirbhar theme? Long-term investors like you look at the size of the opportunity. In consumption, the size of the opportunity is making you excited but if defence opens up or railway capex starts, aren’t these big profit pools where one should participate as an investor?
Railways can be a big opportunity but as of now, I am not finding any company which can deliver that kind of growth. PSU defence companies also is a big opportunity but they are yet to deliver the numbers. So we are looking at defence companies as well; we will probably buy them at the right time because Make in India makes a lot of difference. We already have positions, but when it comes to defence, we are looking at these companies and will probably buy a couple of them in the near future once we are convinced that the growth is sustainable over a longer time.

You are invested in from 2000. Trent was never a value stock; it was always trading at PE multiples which were higher in terms of the market benchmark. When you invested in Trent, they had sold off Lakme, after that they moved into grocery. Now there is a Zara interplay coming up. Did you anticipate this kind of a foresight from the management?
When I looked at Trent I was looking at all the retailing companies, in fact Trent and

came in because of that. I realised that in the US from early ‘60s to early ‘80s, largest growth was in retailing companies – whether it was Walmart or many others. That is the reason I started looking at retail in India because I believed that over a longer period of time, people will have a habit of going to the mall and hypermarket and shop for a week or for a month .

At that point in time, no one was willing to believe that and everyone thought that Indians will only stick to neighbourhood grocers. Even now, people are worried that online businesses like BigBasket or many others can disrupt the kind of growth which these companies are showing but my view there is slightly different. If you go to US, you still see most of the people going and buying things from Walmart because you can have a look and feel and then buy it.

I think that will continue to happen in India as well and that is what my view was earlier.

Coming back to what I thought or what my interactions with the management at that time were, when I asked them how large can you become, they said that we can become about 90 stores in 10-15 years. That was also a big growth because from two to 90 is 45 times. Not only did they deliver it that but now they are adding more than 100 stores – which includes Zudio – every year. Even now the kind of growth which can come in in these stores is phenomenal. That is the reason why I continued to buy in the portfolio over a longer period of time as and when we got an opportunity and we will continue to do that in all the retailers.

Which are the industrial stocks you have invested in?
I cannot tell you what industrial stocks I have invested in but they are typically stocks where we are looking at decent growth in the coming years and we have already seen growth coming into them in the last two, three quarters. I cannot disclose them but we have been buying into these stocks for some time now and we will continue to do that. They are not the routine names, let me put it that way.

One big merger which is approved and which is due in the banking sector is and HDFC Ltd coming together. A different size of balance sheet is getting created. What would be the implications of this for HDFC Bank shareholders and the home mortgage market?
Ultimately both will benefit because of the sheer size. It is possible that HDFC, the home finance business, will start getting funds at a cheaper rate and that will be a new growth engine for the HDFC Bank.

So I continue to be bullish on this merger though some people say it will create a large entity but that is at $2000 per capita. When you have $5,000 per capita, then the opportunity continues to be extremely large.


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