Saigal also said: small bank, PSU bankit is one of the areas where the unlocking of value is still before us. pharmaceutical, has experienced a multi-year consolidation and is emerging from that consolidation phase. We are very positive about pharmaceuticals. Since then, metals and minerals have seen significant discounts and prices have fallen. This could be interesting in the future. ”
The market is high. People are looking for ideas that are undervalued. Some of the markets on the consumer side, especially rural tier 2, tier 3 urban, QSR, FMCG and several other consumer categories, are underperforming due to inflation. Now that the inflation trajectory has peaked, can this undervalued part of the market recover? Also, which category do you bet on?
Anshul Saigal: Yes, you are absolutely right that this market is no longer as easy to identify opportunities as it was last year. Obviously, much of the market has rallied in a very meaningful way. And what we are witnessing in this market is a very tight sector rotation. 2021 was the year of IT, but the following two years saw poor IT performance and only recently has the IT sector started to recover.
Before that, it was chemicals. Chemicals did very well but underperformed as valuations caught up with reality. And now, we're seeing some action there recently. Similarly, we've seen the consumer space underperform over the past number of years as valuations have kept up with earnings. As a result, and as you rightly mentioned, because of inflation, that space he consolidated over a period of two to three years. And it might be an interesting time to really take a look at this area.
There are clearly different types of investors and different objectives. Investors looking for protection should choose FMCG. Investors looking for long-term wealth creation should look to QSRs. And there are now multiple opportunities to generate revenue in that space over the next few years.
Obviously, India's per capita consumption will increase. And that should trickle down to QSR companies, increasing spending and, as a result, expanding operating leverage and profit margins. That's how you should look at that space, that consumption.
HDFC, Kotak, SBI, all these big banks, whether private or public, seem to be included in every fund, but the delta of returns and low valuations and the change in narrative is actually is happening in smaller banks, whether they are regional PSUs or not. or the small private sector. Some stocks like RBL, CSB, J&K, Karnataka seem to be doing very well but are still not part of many big portfolios. Is it possible that the small bank category is relatively better than the banking sector?
Anshul Saigal: If we look at the 7-8 year outlook for the banking sector, since 2013-14, the banking sector has been at a stage full of huge NPAs and more retail focused but unchecked banks. did. Due to issues with the National Police Agency. These were private banks like HDFC, Kotak etc. We have seen these banks raise maximum capital and their stock prices and valuations rise as a result.
On the other hand, these troubled PSUs and small banks faced complete apathy from investors and saw their valuations fall significantly. And 2020-2021, according to me, was the deal of the century where most of these banks cleaned up their balance sheets. NPA was on the verge of decline, had peaked and was on the decline. Valuations were at rock bottom and there was no room for them to fall unless these banks went bankrupt. However, they went through the toughest phase of their lives and came out hurt, but not actually completely disabled.
As a result, in our judgment, valuations will widen as NPAs decline. This continued into 2021 and beyond. In our judgment, the deal is not yet done. We are currently in the mid-stage of that deal and given that NPAs are low, capital is ample and the overall sector is growing at 15%, there is ample growth opportunity for these banks. , there is further room for rating changes and earnings improvement. Both of these companies. Therefore, in our judgment, smaller banks will outperform similarly to PSU banks over the coming quarters and years.Where else do you see opportunities that the market is currently missing? Are revenues improving rapidly but valuations not yet mature?
Anshul Saigal: We believe that small banks, PSU banks are one area where value unlocking is still ahead of us. Pharmaceutical companies that have been consolidating for several years are emerging from the consolidation phase. What we are seeing is a drop in prices in the US because Indian farmers are exporters to the US. The price decline there has stopped. As a result, the ROE pressure these companies were facing will ease, which should be good for valuations.
We are very positive about pharmaceuticals. We believe that metals and minerals, an area where we are seeing significant consolidation and adverse price movements, is a potentially interesting area going forward. There is a huge opportunity given that valuations are currently very attractive. In the next one or two years, new value may be created in that space. And there are ample opportunities in every field, from EMS to media to defense. I think there is a big opportunity.
Of course, I'm not saying the market won't correct. The market may correct at any time, but if he can withstand that volatility, the profits he will make over 3-5 years on these opportunities will be huge. The saying I heard yesterday was very accurate and resonated with me. That is, you cannot become rich unless you want to be poor. What this means is that in the short term, fluctuations may make you poorer, but in the long term you will be richer in the long term if you are prepared to endure that poverty in the short term. . That applies well to the Indian market as well.
What kind of investor psychology do you feel when you meet your friend?
Anshul Saigal: I have mixed feelings. Some people have cash, but it's fair to say that the majority do not. What this means is that while the majority do not expect meaningful corrections, some do. We are now in a pond called India. What's happening in this pond is that valuations are becoming more expensive across the board. As a result, we need to be cautious, given the historical tendency for valuations to fall. Above a certain level, the market corrects.
If you look at Hang Seng, it's at the same level it was trading at in 2001. It has decreased by 37% over the past five years. If you look at the Chinese market, it's at the level it was trading at in 2007. If you look at Europe, nothing significant is happening in those markets. South Korea has achieved a compound return of 1% over the past 10 years. Therefore, the froth expected in India, and consequently the correction expected in India, must be India-specific. It is unlikely that this bubble exists all over the world. And to expect a correction like the one we saw in 2007, or even in 2017, when most markets corrected in tandem, is something that I and many investors do not expect. I have not.
A 10-15% correction is to be expected in any bull market, and it's entirely possible that it will happen. But given the growth we're seeing in India, and given the very limited froth in various markets around the world, we would expect a significant reduction, say 50%, 60%, at least below. Considering that, in our judgment this is actually an excessive expectation. The current probability. And instead of worrying about market levels and market direction, you should really focus on bottom-up opportunities. As long as you have good companies in your portfolio at the right valuations, you can be very well positioned over the long term. And there is a lot of money to be made in India.
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