Valuations of Indian market are pricey not expensive: Vikas Pershad

“Our allocation to new private companies in 2022 was zero and this year however we are making progress, we are doing diligence,” says Vikas Pershad, M&G Investments.

I am going to now jump from IT to the fancied IT names all these new age tech companies. I recall your comment that you were not as smart as an Alia Bhatt or Katrina Kaif when you actually skipped Nykaa but in retrospect I am sure you feel happy about giving those names a skip. Having said that now that they seem to be on the path of profitability talking it, delivering it, as did a Paytm, are you now exposed to them or is it still zero exposure?
Our aggregate exposure to the class of 21-class of 22 tech IPOs is still effectively zero. You can have an issue with a company’s valuation or the business model itself. For us for many of these companies the issue was not the valuation although it was that also, the primary concern was the business model itself and in a world of rising competition pricier capital what do these companies do, how do they evolve, and what we have seen in the earnings delivery or there is not much earnings even in the revenue delivery is that our concerns have been justified and despite the correction of the share price there is not much value there yet. So there is a small subset of these companies that we keep our eye on but our aggregate exposure is still effectively zero. None of it. No Policy bazaar, no Paytm, no Nykaa or maybe the unlisted space as well.
Well, I will talk about the unlisted space because I think there are certain areas in B2B e-commerce, in infrastructure build out, in manufacturing and in two-wheelers where we are actually quite excited. Our allocation to new private companies in 2022 was zero and this year however we are making progress, we are doing diligence, it is another reason why I am here to meet some of these companies and I think that story in particular is very exciting. But there is a broader story around that of manufacturing in India that we can talk about that is very exciting. And so yes if I look at what could be the class of maybe 2024 or class of 2025 IPOs, the companies that we are looking at today are very exciting and there is a high probability that we allocate capital there.

I also want to talk about autos because two years back when we chatted you were completely bearish in two wheelers right. The stock prices definitely have underperformed whereas you have got the class of four wheelers doing what they have everything from an M&M to TVS Motors actually has been an exception in that pack. But are you bullish now overall on autos or again is there diversification four wheelers separate, commercial vehicles separate and now you bearish or bullish on any of the names?
I am glad you remember everything because it makes me look good but yes so the two-wheelers did underperform, so I will address that but again there is a broader question why we like India, the breadth and the depth of it is because for almost every sector you have so many choices and for active managers it is a wonderful market because there is such a dispersion. We will talk about autos in a second but IT services, banks, healthcare, manufacturing, staples if you look at the share price divergence which is a direct function of the earnings divergence over the last couple years it is quite material. And today when we look at two wheelers to come back to your question we expect that divergence to continue.

So when we last spoke in November 21, 15 months ago our effective exposure to the two wheelers was close to zero it is not zero any longer, there are some underweights or shorts that we have closed and the work continues. The work that we are doing on the private side is informing the work on the public side and vice versa, it is making us smarter on both sides.

So in the two-wheeler story I think it is partly because of the pent-up demand and also because of the shift from these ICE vehicles to EVs. The opportunities that we see actually with the private companies have surprised me to the positive and the listed companies I think I would have expected more from them by now.

But they can be fast followers. We have seen this in other industries where the incumbents allow people to burn a lot of money, develop products and then with their scale and their size and their acumen then they come and they eventually take the lead and that could still happen. This race is not won and we are still closer to the beginning.

But other ones who are going to catch up on the EV race going to be the fastest ones to win?
You mean on the private side?

No, across the board four-wheelers, passenger vehicles in particular.
It is very interesting, I think if you look globally, the adoption of EVs has exceeded general expectations, certainly mine. I think I read a stat recently that EV sales have crossed a trillion dollars for the first time globally and if you look at the penetration rates, two-wheelers, four-wheelers, CVs, scooters, personal mobility, all of that is decelerating. Related to that, the component industries, the battery industries, energy storage, energy charging, and a lot of those roads lead back to India, China, and Korea, which is why I think those areas are worth looking at as well. And these stories will take a long time to play out until we will be able to invest in the space for a long time.

Sure you know the other space that you have talked about is the derivatives of housing, everything from home finance to tiles to paints etc. Having said that, well the boom in the real estate sector was a big move, it was almost an alpha generation if you bet on the housing sector at the COVID lows, but it has not been a very symmetric rise in the entire space be derivatives or pure play reality, how are you exposed to the real estate sector at large right now?
In our portfolio the implicit bet on Indian housing as a story is perhaps the largest aggregate bet that we have. Now within that what is curious is we do not own any of the developers, our exposure to the developers.

Why is that?
I think there is more operating leverage and more gearing to that story in the derivatives. However, I am actively re-evaluating because after the sustained period of underperformance which I think we had hoped for and expected but not entirely predicted but it is worth looking at them again. Now if you look at pipes, fittings, ceramics, paints, adhesives, all these other things and then you lay on top of that housing finance, we can only invest in so much but there is so much going on here. You listen to their commentary, you look at their revenue growth and it is not the revenues, as you know, is a function of both price and volume.

Volumes are high and we know they are going to be high for a long time. The pricing has been more resilient than we would have expected and on top of that these companies have been very intelligent about the operating leverage. But again this is another one of those sectors where you cannot buy everything. You have to do your homework but the dispersion is there, it is available, the alpha is there.

When you say you are betting on India manufacturing, a lot of sectors are now opening up there is defence, there is railways etc. as well. Are you skewed towards largely auto manufacturing or have you also broadened your portfolio?
That theme is more broadly reflected in the portfolio than it has been ever. So it is infrastructure, it is defence, it is anything you sort to see with rails is exciting to us, and we are spending time on that. It is two-wheelers, it is four-wheelers, it is commercial vehicles, there is agriculture equipment all of that is reflected in the portfolio.

And I think this is just, we are closer to the beginning of the beginning than the end of anything. When it comes to the shift because there is the domestic demand, there is China plus one and that China plus one is not confined to any one sector. You are going to see that in healthcare, you are going to see that in clothing. Over the longer periods you might even see that in semiconductors although I think that is going to take a lot of time and a lot of capital so we do not need to talk about that today but it is going to happen again and again. It is actually quite exciting to see. I confess, I was sceptical two to three years ago about this because if you look at the power infrastructure, the logistics infrastructure, and I think any rational person would think that this story is going to play out over a longer period of time than expected. But you look at smartphone manufacturing and all the other sectors we just mentioned, it is all happening, it is quite real, it is very exciting to see.

So this is all the good. What is it that you dislike about the India market?
As a market as a whole, I think, okay we will start with valuation. India is probably the one market where we are least dogmatic about valuation. We have learned our lesson decades ago that if you just buy the lower PE stocks in absolute returns you would not make much money and you will horribly underperform. So we are not dogmatic about valuations. I would say as a broader market and for many of the companies we have talked about and the sectors we have talked about, the valuations are pricey not expensive. There is a difference as when valuations are expensive there is risk to your capital. Pricey, it is because that is where the earnings growth is. So broadly, valuations I am not so concerned. Now within that you look at some retail companies, consumer discretionary companies, some of the healthcare companies, those valuations are genuinely expensive and we are staying away.