- 2 years ago
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00:00 All right, thanks for tuning in to Talking Point.
00:03 I'm your host, Neeraj Shah, and our guest today
00:05 is Milind Karmarkar.
00:06 Milind, great having you.
00:07 Thanks so much for taking the time out.
00:10 Milind, the most recent spate of chatter
00:19 that I hear on the street is about the overextension
00:22 at the broader end of the spectrum,
00:24 in a time when the world is looking to maybe avoid risk
00:28 as well, where yields are moving up,
00:30 where interest rates might stay higher for longer,
00:32 as per the Fed Meet.
00:34 And therefore, why should these stocks not
00:37 correct a lot more than what they
00:39 have done in the last few days?
00:40 I would love to understand from you,
00:42 how do you look at that problem from your prism?
00:45 OK, so as you know, Neeraj, I predominantly
00:50 look at the longer term.
00:51 But let me just tell you that in the last few months,
00:57 as you rightly said, that the market has moved up
00:59 significantly higher.
01:01 So in last-- say, if you look at the financial year,
01:04 market is, I think, up by 14%, 15%, or even higher than that.
01:09 Our issue is that whether we will see a correction coming
01:13 in, or is a correction--
01:15 let me say, is a correction necessary?
01:19 So yes, to some extent, normally,
01:22 whenever the markets go up the way
01:25 they have in a shorter period of time,
01:27 there is always a correction.
01:29 It's basically a pulling off.
01:30 What will drive it?
01:32 Very difficult to say as of now, because interest rates,
01:35 frankly, yes, though they will remain high for some more time,
01:39 at the same time, we are probably
01:41 at the fag end of interest rate high.
01:44 So that may not be the reason why the markets
01:48 could correct big time.
01:51 Global markets, as it is, are not in a great shape.
01:54 Predominantly, I mean, I'm talking about the economy.
01:58 So there is a possibility that they
02:00 may stagnate for some more time.
02:02 But as far as the Indian markets are concerned,
02:04 I think the key sort of impactor of the markets, in all
02:09 probability, will be political situation in India,
02:15 or what the media talks more about politics.
02:19 And this will impact the sentiments,
02:21 and therefore, the markets.
02:23 But yes, the markets are likely to correct in the short.
02:27 OK, yeah, and I know you look at the long term.
02:29 So therefore, I was not essentially asking you
02:31 for a small prediction of sorts, Milind,
02:33 but good to get how you're thinking about it.
02:35 OK, so Milind, would you believe--
02:38 so if indeed the markets are corrective, or not,
02:41 let's say, in an uptick, if you will,
02:46 is there a chance that the broader end may see a steeper
02:49 move downwards, specific pockets?
02:52 Because in the last four months, or five months,
02:54 we've seen the broader markets make a much sharper up move
02:57 than what the large gaps.
02:58 Absolutely, very true.
03:00 And yes, I completely agree with you
03:02 that there is a possibility of a sharp correction
03:06 in the broader markets, more than the benchmark.
03:11 OK, now, within that narrative, Milind,
03:13 there are pockets of strength wherein
03:16 the companies are talking about pretty decent growth,
03:18 despite the global environment.
03:20 And some of that is also fueled by policies within India,
03:24 demand within India of specific pockets.
03:26 Now, how are you balancing your portfolio?
03:29 I've seen tweets from fund managers talking
03:31 about fairly large cash levels currently to take advantage,
03:35 so on and so forth.
03:36 So one, are you playing this tactically?
03:38 And two, within the pockets that you
03:41 are constructive over the long term, are you fully invested?
03:47 So we are almost fully invested.
03:49 I can say we are at about 5% to 7% cash.
03:52 The rest all is fully invested.
03:53 The rest all is invested.
03:55 We continue to be invested predominantly
04:00 in consumption, which has been my favorite theme.
04:03 And in all probability, we'll continue to be that.
04:06 But when I say consumption, as you know,
04:08 that I not only talk of retail or FMCG or things like that.
04:12 But we also improve the financials, hospitals,
04:15 insurance.
04:16 And companies or the sectors which
04:19 are directly benefited by rising per capita income.
04:22 So that constitutes nearly 70% to 80% of the portfolio.
04:27 And balance, of course, off late in the sense
04:30 that last six to nine months, we have invested in manufacturing.
04:35 And we continue to hold them.
04:37 And you're right.
04:38 These are predominantly those segments
04:41 in manufacturing which are likely to benefit because
04:45 of government policies.
04:46 So yes, there is a risk also of assuming
04:51 that there will be a continuance in government policies
04:54 post-elections.
04:56 So that is the reason why I see some kind of a correction
04:59 could come in in these type of sectors
05:03 where there is--
05:05 which are doing well because of government [INAUDIBLE]
05:10 But you're not tempted to take advantage.
05:13 You're kind of playing the long game.
05:16 Yeah, so if I go back in 2003, as you know,
05:21 that government gave a big push to the power sector.
05:25 And because of that, power, power ancillaries,
05:28 as well as infra companies did very well.
05:30 Like, Capwood's index between 2003 to '08,
05:35 if I'm not mistaken, went up by 28 to 30 times.
05:39 So the market went up six times.
05:41 So this time as well, I think the Capwood sector,
05:46 predominantly the power, as well as the railway sector,
05:49 is likely to do pretty well.
05:51 But at the same time, last time consumption did not participate.
05:56 But this time, as we are at the cusp of 2000--
05:59 rather, beyond $2,000 per capita,
06:02 the next move, which we believe will
06:05 be to take the per capita income from 2000 to, say, $6,000.
06:10 Consumption will be a big participant in this.
06:14 Got it.
06:15 I was going to save that for the end.
06:16 And I will come to that, because I
06:18 would love to understand how you think about that aspect,
06:21 particularly.
06:22 But so I'm just trying to get clarity.
06:24 You are not tempted to take a tactical advantage
06:29 of a potential possible corrective move in manufacturing
06:32 teams?
06:34 Sorry, I can't hear you.
06:35 OK, can you hear me, Milan?
06:37 Yes, I can hear you.
06:38 OK.
06:39 I'm saying you are not tempted to take advantage
06:41 of a potential possible correction in the manufacturing
06:45 end of the spectrum ahead of elections
06:48 currently because you believe in the long term.
06:50 Is that a fair summation?
06:53 So when I say I'm invested, as I said,
06:56 that I have about 20% to 15% invested in manufacturing.
07:03 And I have 5% to 7% cash.
07:05 So if the fall is significant, I will go ahead and invest
07:11 the balance money in manufacturing.
07:13 I don't think we will add anything
07:15 to consumption at this juncture because we are already
07:18 adequately invested in consumption.
07:20 Yeah, no, I meant manufacturing, to be honest,
07:22 because that's where--
07:23 Yes.
07:24 So manufacturing is where we will put in additional cash.
07:28 Got it.
07:29 OK.
07:29 As in when the correction comes.
07:31 As in when the correction comes.
07:32 Yeah, very difficult to time that, I must say.
07:34 Got it.
07:37 Almost any given time, let alone now.
07:39 Milind, there is a bit of--
07:43 I would say most bulls on private banks
07:48 have kind of-- the conviction hasn't quite paid off
07:55 to the T, if you will.
07:57 I was looking at a chart from November 2020.
08:00 In fact, the PSU banks, as a basket,
08:02 have outperformed the private sector banks by a country mile,
08:05 if you will.
08:06 Now my question is--
08:08 and we've seen the latest set of--
08:11 how do I say--
08:12 commentary that came in from the largest bank
08:14 and how that has led to a bit of a decline there too.
08:17 Now my question is, what's happening here,
08:19 according to you?
08:22 Do you believe that this market will, at some point of time,
08:25 take cognizance of the potential growth ahead?
08:28 Or do you believe this is the new normal in terms of valuations
08:31 for private banks as well?
08:32 And therefore, it will only be an earnings growth-led move
08:35 whenever it comes?
08:37 So yes, it will be earnings growth.
08:40 I doubt whether there will be a further PE expansion
08:43 in private sector banks.
08:45 But I also doubt whether there will be a PE expansion
08:48 in public sector banks.
08:50 And within growth, I think private sector banks
08:53 will grow faster than public sector banks.
08:56 Because predominantly, the growth
08:58 will be driven by personal loans or retail loans
09:03 rather than wholesale loans.
09:06 And that is where private sector banks, in all probability,
09:09 will score over public sector banks.
09:12 Though we have a public sector bank in our portfolio,
09:16 but at the same time, our focus predominantly
09:19 continues to be like most of the, let's say,
09:23 old fund managers.
09:25 We continue to be bullish on the private sector banks
09:29 more than the public sector banks as well.
09:31 So Milan, would it be fair to say
09:34 that the PSUs, in some sense, have narrowed down
09:38 the multiple, the price to book or price to adjusted book
09:41 or price to earnings, whatever you look at it,
09:43 to the maximum possible?
09:45 And hereon, both sets will move as per the earnings growth,
09:48 you reckon?
09:49 Yes, that's what I believe.
09:52 OK.
09:53 OK, the other aspect is insurance, right?
09:55 Longstanding argument of underpenetration
09:59 continues the last multiple years now.
10:02 We haven't seen these stocks virtually go anywhere.
10:06 How long could the wait be?
10:08 And what could trigger a performance of the stocks,
10:14 independent of what the businesses do per se?
10:18 I'm sorry, I missed your first--
10:21 Talking about insurance, Milan.
10:23 I mean, now for a long time, the stocks haven't gone anywhere.
10:27 Very true.
10:27 So what gives you?
10:30 OK, so insurance is an underpenetrated market,
10:34 even now in India, significantly underpenetrated.
10:38 Though there are laws, especially when it comes
10:41 to vehicle insurance, people are still,
10:45 especially two-wheelers, not very willing to renew,
10:50 especially at the lower end of the strata.
10:53 But things are changing now.
10:55 And it's all, again, a per capita income game,
10:58 because it's very simple.
10:59 As far as whether it's medically health insurance,
11:02 or whether it's even vehicle insurance,
11:05 as more and more people start earning more and more,
11:12 their need for insurance, higher and higher insurance,
11:15 goes up, both in what they possess,
11:18 as well as their life and health.
11:20 And that will drive insurance.
11:22 In the shorter term, there has been an issue,
11:24 especially because of COVID.
11:25 First of all, India was underpenetrated.
11:27 On top of it, there were a lot of claims
11:30 which came on these companies because of COVID,
11:33 especially in health and life.
11:35 And at the same time, the vehicle sales
11:38 also fell significantly.
11:40 And that is, if you look at all of this,
11:42 the impact on insurance companies for the last two,
11:45 three years can be understandable.
11:47 But beyond this, I do believe that it's
11:49 a great long-term story.
11:51 And if you talk to insurance companies,
11:54 they're quite comfortable saying that the opportunity is there
11:58 for them to grow at about 16%, anywhere between 15% to 20%
12:02 over a very long period of time.
12:04 And these type of businesses do definitely
12:07 well over a longer period.
12:08 And that's what we believe in.
12:10 So if I'm holding insurance companies in the portfolio,
12:14 I will definitely continue to hold.
12:17 Got it.
12:18 OK.
12:19 Now, Milind, please help us understand,
12:22 how are you thinking about this per capita GDP growth
12:27 from where we are to where we will be, say,
12:30 five, seven, eight years down the line?
12:32 Multiple different countries study,
12:35 throws up multiple different kinds of observations.
12:40 How are you think about it in the Indian context?
12:43 So our observation has been that the growth from $2,000
12:48 to $6,000 happens quite rapidly, anywhere
12:54 between five to 10 years.
12:58 So I think in our neighboring countries,
13:00 the longest wait was for Malaysia.
13:02 But there were a lot of political issues there.
13:04 And maybe that was one of the reasons.
13:06 But in India, we do believe that this move from $2,000
13:12 to $6,000 or $6,250 can happen pretty rapidly.
13:17 And the reason why I'm saying $6,250
13:20 is that for a family of four, what it means
13:23 is that the per capita GDP would be $25,000, which is
13:28 the poverty line of the United States.
13:30 And if the entire country goes above the poverty
13:33 line of the United States, the kind of growth
13:35 which you can see in consumption or anything
13:38 to do with spare income can be phenomenal.
13:43 And that is what we do believe in.
13:45 And that is what we think is likely to happen
13:48 or is likely to drive the economic growth as well as
13:54 the stock market growth in the next five to seven months.
13:58 OK.
14:01 There is this lot of talk of the K-shaped curve there
14:04 and how that end is actually growing faster.
14:07 So luxury cars, luxury watches, et cetera,
14:10 will probably be the bigger beneficiaries
14:13 of this uptick in per capita, though that end is already
14:15 trading at the higher per capita anyway.
14:17 So I'm just trying to understand, one,
14:20 how do you think of that argument?
14:21 And two, with the lower strata moving higher,
14:24 what is the best placed discretionary consumption
14:29 theme or themes according to you?
14:32 I think hospital, pharma, and insurance.
14:35 So these will be the themes which
14:36 will benefit significantly at the lower strata,
14:39 apart from the FMCGs and things like that.
14:42 But these are themes probably which people are not
14:45 looking at with a view of rising per capita income.
14:49 But if you don't have enough income to survive,
14:52 there is no question of you using a medicine
14:56 or going to a hospital for health reasons.
14:58 And unfortunately, that is what is happening in India.
15:00 So hospitals, pharmaceuticals, as well as insurance companies
15:07 are likely to be big beneficiaries of that.
15:10 Now, I'll tell you something about Milind Karmarkar.
15:13 When he started looking at a fashion retailer--
15:17 this was way back in maybe 2000, 2001.
15:19 He started for 21 years, probably
15:21 stayed invested in that for maybe 20 years,
15:23 and has double, triple, quadruple is the wrong term--
15:28 multiplied the wealth by a number of times.
15:29 So we know that he can actually think really long term.
15:32 Milind, I would love to know, do you
15:34 think a theme like hospitals can be
15:38 that kind of a multi-year, multiplier story?
15:42 Or is it a slowly grinding higher kind of an investment
15:47 theme?
15:49 So initially, all these companies
15:53 are, as you said, slow compounders.
15:56 But over a longer period of time,
15:59 since the opportunities are large,
16:00 because what I look at is opportunity.
16:04 And that is where the hospitals do fit in
16:07 as a long-term opportunity.
16:09 So yes, I am looking at hospitals
16:11 with a 10, 15-year view at least.
16:13 So yes, if someone has that kind of a patience,
16:16 like even in the retail, there were times
16:21 when for five, six years, the stocks did nothing.
16:26 But they have returned phenomenal returns
16:30 over a longer period of time.
16:31 So that can happen to hospitals also.
16:35 So there is something-- what I suggest is a portfolio,
16:38 or people say a coffee can portfolio,
16:41 which you review once every one year or once every two years.
16:44 And just sort of analyze it, that the thought process
16:50 by which you had invested in the stock
16:52 continues to hold or doesn't continue.
16:54 Because thinking long-term, there is one thing that,
17:01 yes, you do believe that these particular things will play out.
17:06 But at the same time, there could be changes.
17:08 There could be changes in government policy.
17:10 There could be a lot of other changes which can come in.
17:13 So one has to look at them.
17:16 But I think once a year is more than sufficient.
17:18 Otherwise, you don't look at the stocks.
17:20 And as long as the opportunity is there, you continue to hold.
17:23 So if you are that kind of an investor,
17:26 then part of your portfolio can definitely
17:28 be in these stocks, whether it's pharmaceuticals
17:32 or whether it's hospitals, or even, for that matter,
17:34 insurance.
17:36 Got it.
17:37 And then my final question--
17:38 and somebody who thinks like you very long-term
17:41 on the portfolio side spoke about the media with me,
17:46 about how the last 15, 16 years, the space has gone nowhere.
17:49 The industry is consolidated, so on and so forth.
17:52 And rising per capita might also mean
17:54 the ability of these higher advertisement revenues,
17:57 so on and so forth again.
17:59 Any thoughts on media at all?
18:02 So media, frankly, is a fast-changing world
18:05 because of technology.
18:07 So ultimately, what will rule-- very difficult to take a call
18:11 whether the OTTs will do well or whether the existing television
18:18 channels will do well.
18:19 It's very difficult to take a call.
18:21 A small exposure is fine, but beyond the limit
18:26 of big exposure in media, at least as of now,
18:28 I would probably avoid.
18:32 Got it.
18:33 Fair call.
18:34 Bilind Karmarkar, always a pleasure talking to you.
18:36 No different today.
18:37 Thank you so much for taking the time out.
18:39 Thank you, Niranjan.
18:40 We'll definitely catch up.
18:41 Most certainly.
18:42 And viewers, thanks for tuning in to this edition
18:44 of The Talking Point.
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