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00:00 of the JPMorgan India Investor Summit.
00:02 And we're having a lot of conversations here.
00:05 And well, the one I'm having right now
00:07 is to do with the technology space in India specifically.
00:10 And for that, I'm in conversation with Ankur Rudra.
00:14 He is the executive director here at JPMorgan
00:16 and he heads APAC telecommunications research
00:19 as well as India DMT.
00:21 Ankur, thank you so much for joining us.
00:22 - Thank you for having us, Saigum.
00:24 - So Ankur, I'm gonna get off the mark
00:27 with the question on Indian IT.
00:29 A lot of business uncertainty in terms of the environment.
00:34 We've seen a little bit of delay
00:36 in a lot of deals coming through.
00:38 My question really is here,
00:40 that what does it mean for visibility?
00:42 In fact, I was going through one of your reports.
00:44 You said that a lot of clients
00:46 are now resorting to monthly budgets.
00:48 What does that mean for the outlook for the sector right now?
00:52 - Yeah, I think the outlook for the Indian IT services sector
00:55 has been a bit cloudy for the last six to nine months.
00:59 And I think what's happening is,
01:01 one, on the technology budget side for CY24
01:03 has been very tight, like you mentioned.
01:06 In many cases, clients decide by just on a monthly basis.
01:09 So if there was a budget decided
01:10 at the beginning of the year,
01:11 and it's not spent like in month one, month two,
01:14 or the first quarter or so,
01:16 it doesn't come back the following month.
01:17 You don't get it back.
01:19 You sort of start from the bottom.
01:20 And hence, sort of, it's tough for companies
01:22 to see an upside later in the year.
01:24 And essentially what's happening
01:25 is there are two tracks of spending.
01:27 There is the discretionary spending track.
01:29 There is the keep the lights on a cost spending track.
01:32 The discretionary spending track has been rather weak,
01:35 and we continue to see cancellations.
01:36 So we've seen a lot of companies commenting
01:39 how things have not bottomed out in the last quarter.
01:42 So those remain challenges for visibility
01:45 for fiscal 24 for sure.
01:46 And there are no clear signs,
01:48 how the next financial year will play out also.
01:51 - Right.
01:52 Ankur, a few weeks ago, you had mentioned
01:54 that a lot of these companies are reverting
01:55 to their long-term growth averages
01:57 of slightly higher single-digit growth.
02:01 The question in here is that,
02:05 what does that mean for valuations?
02:06 Because earlier in this calendar year,
02:08 we saw a lot of companies give,
02:10 or cut their guidance coming through,
02:12 and then we saw a sharp correction.
02:14 But at the moment, we've seen a rise in share prices
02:18 for a lot of these companies.
02:19 So on a scale, where do you gauge valuations?
02:22 - Well, I think it's an interesting question.
02:23 Back in June, we had highlighted
02:25 that this year is likely to turn out very different
02:28 versus earlier expectations.
02:29 And we had said that,
02:30 a lot of our channel checks suggest
02:31 that growth is unlikely to be more than zero to 5%.
02:34 And in the event, that's what's begun to play out.
02:37 Last quarter commentary, I think almost every company
02:40 doused any expectations of a growth pickup.
02:42 However, like you said,
02:44 the results have not been reflected in the numbers.
02:47 So while the numbers have been rather weak,
02:49 the commentary has been still relatively bleak.
02:51 The company share prices have done well.
02:53 And I think what our analysis and research shows
02:56 in our conversations with investors,
02:57 I think there are three or four factors driving that.
03:00 One, there's a consistent investor fatigue
03:02 with the underperformance of the sector.
03:04 The sector has been underperforming
03:05 for since February of last year.
03:07 So it's over 18 months of underperformance.
03:09 And I think investors have taken a call that,
03:10 look, let's look through the near-term weakness.
03:13 You know, F24, it's fine, it doesn't matter.
03:15 So Q1 was bad.
03:16 I think there's a broad expectation
03:17 Q2 will not be significantly better.
03:19 So we will look through this.
03:21 And the focus has shifted to F25.
03:22 So there's a hope that F25 is a lot better.
03:25 Secondly, I think what we're also seeing
03:27 is that to an extent there's an expectation
03:29 that the macro in the US has potentially improved.
03:31 The inflation trends so far
03:33 has been coming lower than expected.
03:36 The GDP has been holding up.
03:37 This is mainly US GDP, right?
03:39 And also the expectation of dodging a recession in the US,
03:44 I think that's risen a lot.
03:46 So the consensus expectation baking in
03:48 is that there probably won't be a recession next year.
03:51 That's an open question, what happens?
03:52 And I think the call investors are taking
03:54 is for IT services, it's a late cyclical sector.
03:57 And if the macro is really improving,
04:00 maybe they will see this later.
04:01 And hence, they're sort of moving ahead
04:02 of what these companies are seeing and saying.
04:05 Third is we're also hearing from a range of investors,
04:08 global tech investors and India domestic investors
04:10 that they have portfolio construction problems.
04:13 Everything in India has risen up a lot.
04:15 Valuations are expensive.
04:16 What do you buy?
04:17 It's leaving a lack of alternatives.
04:19 And we hear this from global tech investors also,
04:20 by the way, when they look at US tech,
04:23 so US software, semiconductors, internet,
04:24 they've all rallied a lot, 60, 70% of this year.
04:27 IT looks relative value.
04:28 And there's been a bunch of new large deals
04:30 that have been announced in the last few months.
04:32 So that's making people a bit more optimistic.
04:34 But when we look at all of these things,
04:36 what we think is we still stick to the belief
04:38 that long-term growth is five to 8%.
04:40 And on that metric, we are actually going below
04:44 or at par with pre-COVID multiples.
04:46 Sector is trading at a much higher level compared to that.
04:48 So which is what makes us very less constructive
04:52 about the sector.
04:53 So which is why we remain underweight.
04:55 We are waiting for if there's a turning point
04:56 of growth accelerators, and maybe this makes sense.
04:58 But at the moment of share prices seem to bake in
05:01 double digit growth at least for the next two years.
05:03 - Right.
05:04 Well, so based on that,
05:06 you're underweight in all IT companies,
05:09 if I'm not mistaken.
05:11 What are the underlying factors
05:12 that you'd like to see improve
05:14 before you start re-rating some of these companies?
05:17 - Sure, so I think what we are looking for
05:19 and hoping for, and number one,
05:20 is if there's any kind of change in enterprise spending,
05:25 technology spending intentions.
05:26 So enterprise tech spend has been weak,
05:28 especially in sectors like banking,
05:30 which has been significantly under pressure,
05:32 led by a lot of the global banks.
05:34 The TMT sector, so technology, internet companies,
05:37 software companies, semiconductor companies,
05:39 telecom companies, they've all been cutting budgets
05:41 very aggressively.
05:42 And in the rest of the economy also,
05:44 US companies especially, there's been tighter budgets.
05:47 So if there's any change in trend there,
05:49 and typically one doesn't have to wait
05:51 for IT services companies to look for that,
05:53 there is a long value chain in enterprise tech,
05:55 there is enterprise hardware companies,
05:56 which see this first, followed by software and SaaS companies
05:59 and finally consulting and then IT services.
06:01 We've seen this play in the reverse
06:02 in the last one and a half years.
06:04 So we're waiting for early convincing signs
06:06 of that happening.
06:07 So I think that's sort of one of the key factors
06:09 we're waiting for, or if the macro convincingly improves.
06:12 So those are the two main things we'll look for
06:14 to see if there's a case for better performance
06:18 of these companies.
06:19 - Sure, sure.
06:20 Right, so Ankur, I'm gonna shift focus
06:22 to telecommunications.
06:24 Once again, you're underweight
06:26 on the two telecommunication companies that you guys track.
06:29 I know that there are high 5G commitments
06:34 when it comes to investments.
06:35 It's not like it's gonna be easy
06:37 in given the current environment
06:39 to go ahead with tariff hikes.
06:41 My question really is then relative
06:44 to the rest of the markets,
06:46 when you turn positive on some of these companies?
06:48 - So I think the interesting thing in India
06:50 has been we've seen one of the most aggressive
06:52 5G rollouts in the world.
06:54 Probably faster than the US.
06:56 We just spoke to Akhil from Bharti just a few hours ago.
07:01 And I think Akhil Gupta was highlighting from Bharti
07:05 that we've probably had the fastest except China, right?
07:08 So we added about 330,000 5G base stations.
07:11 The course of this year.
07:13 And that's more rapid than what's happening in the US.
07:16 The problem is that monetization is not happening, right?
07:20 Nowhere in the world have telcos been able
07:22 to really monetize the 5G CapEx investments.
07:24 And any kind of delay in tariff recovery or price repair
07:29 basically has a negative impact on ROICs for the industry.
07:33 So that's what makes us a bit more
07:35 worried about the industry,
07:37 which is what keeps us on the underweight side of things.
07:40 So we are waiting for the CapEx intensity to recede.
07:43 Once we see CapEx going away,
07:45 our analysis for Asia Pacific telcos also have suggested
07:48 that markets which have gone beyond the 5G peak,
07:52 that's where we start seeing CapEx undershooting,
07:54 which is a great time to own telcos.
07:55 So I think that's maybe one thing.
07:57 Second is if there's any kind of improvement
07:59 on the ARPU side,
08:00 that'll make us potentially more positive.
08:02 If there's any kind of new sources of revenue monetization,
08:05 fixed wireless, maybe we've seen a huge amount
08:07 of fixed wireless launches in the last one month,
08:10 both from the main operators.
08:12 And if that is successful,
08:13 if it genuinely creates a new opportunity,
08:15 those things are the work we really watch for.
08:18 So I mean, eventually it's ROICs.
08:20 If you see any kind of improvement,
08:22 chances of a simple ROIC,
08:24 that probably will make us more constructive.
08:26 - Right.
08:27 You know, Ankur, with the inability
08:28 of at least one of these players
08:30 to not be able to in fact, put in investments in 5G,
08:35 are we heading for an effective duopoly?
08:38 - It's an interesting question
08:39 and absolutely important
08:41 from a market structure perspective.
08:42 You've seen the market structure becoming,
08:45 let's say two and a half to three or four player market
08:49 with two very strong operators.
08:51 One operator which is probably,
08:54 is struggling a bit and there's a government SOE
08:57 as well in India.
08:58 And I think what is difficult to say
09:01 because there's multiple ways this can play out,
09:03 the market structure, it depends on policy.
09:06 It depends on ability to raise tariffs for the industry.
09:09 And they can potentially be changes in the market structure
09:12 driven by regulations or intervention or investor,
09:16 participation in the sector.
09:17 So, all of that is potentially possible,
09:20 but I think it's sort of early to necessarily say
09:23 if it's a duopoly or not,
09:24 but effectively, there are primarily just a couple
09:27 very strong, well-funded operators.
09:30 And in telecom is an industry
09:31 where you definitely need funding,
09:33 which is critical for next generation investment.
09:35 And of course, the 5G is one thing which,
09:37 and in many markets in Asia,
09:39 we believe in many markets across Asia Pacific,
09:41 5G actually has enforced consolidation
09:44 where I mean, to an extent in Malaysia,
09:46 in Taiwan, in Thailand, in Singapore.
09:49 So, you've definitely seen across markets,
09:50 this enforcement of consolidation happening
09:53 where you've gone from five to three or three to two.
09:55 So, it can definitely drive some sort of restructuring
09:58 or potential nationalization of assets,
10:02 which we've seen in other markets.
10:03 - Right, all right, Ankur.
10:04 And a final question then,
10:06 on some of the consumer facing technology companies
10:09 that you have coverage on
10:10 and you're relatively positive for a change.
10:12 Your outlook here.
10:14 - Sure, so we've been quite optimistic
10:16 about the internet or tech companies,
10:18 the consumer tech companies in India, most of this year.
10:21 And I think these companies have done rather well.
10:23 I think what's really worked for them
10:24 in the last six to 12 months
10:26 is they've all given very clear paths for profit break even.
10:31 And to their credit, they have achieved it.
10:33 So, we've seen that come through.
10:34 And one of the drivers for that
10:36 has been a significant amount of streamlining a focus.
10:39 I think to an extent,
10:40 gone are the days where companies
10:41 would try to invest in multiple adjacencies.
10:44 And I think companies have sort of been focused
10:46 on core business adjacencies,
10:48 which are not easily monetizable.
10:50 I think they've been to an extent sideline.
10:51 I think that's helped the companies.
10:52 And there's also been definitely rationalization
10:55 of consumer, basically tech charges,
10:59 customer acquisition costs, marketing costs.
11:03 We've also seen these companies grow.
11:04 And with growth, we've seen platform economics play out.
11:07 We've seen operating leverage coming through.
11:08 So, I think all of that has done really well.
11:10 And as a result, Indian tech companies,
11:12 Indian companies are one of the best performing stocks
11:15 in the internet sector globally.
11:16 So, I think that's really helped them.
11:18 And we remain constructive.
11:19 We think we will potentially keep seeing
11:21 operating leverage play out, platform economics play out.
11:24 This is a market which should see medium to long term,
11:27 solid growth, which will help many of these companies.
11:29 - Right, right.
11:30 Well, Ankur Rudra, that's all I have for you.
11:32 Thank you so much for your time
11:33 and taking us through your views
11:34 on the many sectors that you track.
11:36 That's the outlook on the Indian IT space,
11:41 the Indian telecommunications space,
11:42 and of course, a lot of these consumer facing
11:45 technology companies as well, which are looking up.
11:48 But we're signing off for now.
11:49 There's lots more lined up.
11:50 So, stay tuned to BQ Prime, and we'll keep bringing you more.
11:54 (upbeat music)
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