Given that you have observed Bharti for a long time, how are you assessing the industry dynamics and whether or not Bharti will be able to brave out the might that Jio brings with it?
There are only two, three players and yet the telecom industry is struggling to barely break even. If you add up all three, there is barely any profit on the table and that is a very sad part of it. This is one of the largest data consuming countries in the world. I think we are far the largest or maybe number two in the world. So everybody is hopeful that some day it will make money. The current valuations are based on price to book rather than reality but that hope is well placed and I am sure in the next 24 months, we will see much better prospects than what we have seen in the last two, three years.
In the next one year, the entire supply chain disruption or shortage which has happened because of logistics will get sorted out hopefully. Today what looks like a problem, may not be a permanent problem next year, but markets will start factoring in and they will start normalising it way before it actually happens. So what is the best way to play on the theme of normalisation of the supply chain?
I do not have a great fix on the normalisation of the supply chain. Whether it takes a year or two nobody knows, authorities are trying things. In some cases, things are becoming better also but if by chance it gets prolonged, one has to look for see the guy who is benefitting from this supply chain problem. He does not want that problem to be sorted out. So it can get prolonged and it can really impair some of the companies.
One of the things one can do is to twist the portfolio between services and manufacturing and you can be a little underweight on the manufacturing and overweight on the services, that is one strategy.
The second strategy is, manufacturing companies which do not have much use of global logistics, inward or outward, can be looked at, but that is very tough. One does not know which level two, level three raw material is coming from abroad and how the linkage is working. So, manufacturing companies will have a tough time, at least in terms of profits till it gets sorted out.
Is auto a pocket where one should be a contra buyer or should one be worried about the EV disruption?
Of course one has to be aware of the EV challenge because now it is clearly in the forefront. Every company is pledging that by 2025-2030, a significant portion of the production and one or two innovations on the battery side will make it a much more serious challenge to the IC companies. But right now, in India, penetration is a big issue in the sense that we do not have enough cars and motorcycles on the road and demand is very high. I do not think people are going to wait for EVs to come.
EVs have challenges of their own in terms of mass customisation but right now, the issue is the supply challenge from the car side. Two-wheelers have a demand issue and that baffles me when we talk about a strong economy. The bottom of the pyramid is driven by two-wheeler consumers and that is not going to do well.
But I think auto is a very great opportunity, post all these problems because there is going to be pent up demand and as the economy gets strength and consumers come out, if there is jobs growth, it is not possible that people will not buy motorcycles and cars. So I remain bullish on the demand prospects in the medium term. It is just that I have no clue when the microprocessor issues are sorted out.
As a traditional investor such as yours do you worry about the kind of valuations some of the IPOs are coming in at?
There is such a rush over the IPOs. Earlier, we never used to bother about IPOs and they were much more reasonable at that point of time. Today there is a rush of IPOs and they are not reasonably priced. I do not know how to negotiate and some of them are very good companies. It is great to beat all the management and understand them. At some point of time, whenever the valuations are reasonable, it would be a great time to participate.
But in general the IPO prices are very demanding. Companies in the secondary markets are cheaper.
So have you not subscribed to any of these mega IPOs?
We do not have any strong feelings against any company but the appetite which comes when you hear of a new story and prices are undiscovered and low, is missing. Digital companies whether local or global are coming into the markets and thanks to Sebi allowing them to come to the markets without even making profits. That has led to a lot of companies coming into the market which are not making profits. It is a great time to know these companies. One can allocate 1%-1.5% in these companies to see whether they are able to scale up. I am quite sure the return on this portion of allocation will be quite low, compared to the rest of the portfolio. But if one does not invest now, one will never learn.
So one should not be anti digital companies. I think in the next five-seven years the digital companies will explode. Once they are successful, they will scale up at a crazy pace and hence that space will be much bigger. What will be those companies and how fast they will grow, nobody knows. We are just booking our space in a few of these companies but we are very cautious in terms of what we are buying.