Where are you seeing the compounders at the moment in India?
I want to make a couple of points and then I can talk about some specific areas where we are seeing that. Number one is that at a high level, the pandemic has broadened the divide I between large companies that have the ability to invest in technology and small and midcap companies operating in the same space that do not have that kind of budget.
In financial services, there are certain large companies whose IT budget for the quarter is basically the operating profit for a small or a medium sized bank or NBFC for the year. And that divide is becoming critical now and that may not have been as important in the past. So it is very important to be cognisant of where one looks first to find those compounders.
Secondly, the compounders have to have a tech first mindset because the moat can only be built through that now. It is no longer about just having growth for growth’s sake. It is really about having a tech advantage. Hopefully, all of that should translate into pricing power to determine the strength of the business, especially if we are entering an era where inflation is going to go up.
Where do I see that? Consumer sector still continues to be the case, the consumer sector has been overvalued for 15 years and people have avoided it but it has still been a very fertile source of compounding for a long time. The CEO of a large consumer company in India is talking about tech all the time whether it is supply chain, whether it is customer obsession. They are redesigning their outlets so that they focus first on what the customer wants rather than just fulfilling an outlet. And they have scale. So we are seeing enough opportunities in that area.
In financial services, we are seeing the same structural trend. When GDP per capita is $2,000, it is not over, it is impossible. There is a long runway to go. The key issue is to be focussed on companies that have built that moat in financial services by using technology. It is no longer just about having the lowest cost of capital and good risk management that is essential but that is not enough anymore.
Finally in tech for the first time, we are seeing companies that are just outside of pure IT services, I mean we have just had a company list in the Nasdaq that is a SaaS product company and it is remarkable that we are seeing product first companies being accepted from India globally. Given the cost advantage and the scale advantage, these could be big businesses in the years to come.
What is your outlook as far as the broader markets go because markets like to look forward as well?
Overall in the broader market, we are seeing very exciting things both in the public and the private space. In the public space, a lot of the companies are in the pipeline to go public in the technology space. One can say I do not like the valuations now and maybe in the future, they will be more palatable but the business models are certainly very attractive.
The businesses in consumption and financial services are never going to be cheap and I draw the analogy to the US tech stock that have generated immense value for many years and the reason is they are compounders because they have really strong dominant franchises and as a result, if the longevity of earnings growth is there, these stocks will trade at a reasonably higher multiple and that is okay.
The areas to be careful about are primarily two; one is public companies that are being seriously challenged by amazing entrepreneurs who are still private and they do not know how fast the change is coming to hit them and there are a lot of public companies that fall in that bucket, especially in the midcap space. But there are many well known companies in the largecap space. That is one area one needs to be careful about.
The second area one needs to be a little careful about is in tech when companies are using shareholder capital to subsidise and get consumers but they do not really have a strong business model. But broadly, markets are looking pretty healthy given the construct and the backdrop especially in the context of the rest of the world.
So where are the new opportunities? In the last three months, what have you bought and sold or may add more of?
Without talking about any specific names, broadly it is around the themes that we have talked about.
There are certain areas that we do not know as well. These areas are manufacturing, infrastructure and heavy capital investment. Not much has happened out there that is exciting over a long-term basis. Over 10 years, very few stocks have actually compounded which is a criteria of how we look at companies. But broadly in the areas of consumer, financials, tech and healthcare, there has been a fair bit of activity. Those areas look very promising for years to come.