You had very recently said that this decade is going to mirror the 1990s. Why did you say that and how is it panning out? Are you expecting the value and growth to come from exports? What are you betting on?
From a macro standpoint, India is about 3% of the world GDP and if we just limit ourselves to the Indian economy, there is very limited growth that one can get till the economy picks up. Look at the companies or the entrepreneurship that India has created when it stepped out.
Take the IT sector, take pharmaceuticals, look at what is happening in chemicals and obviously in some of the commodity businesses, we have the entire value chain present and cost competitive. Now if we put all of this together, the profitability of some of these industries could be significantly larger than what they could be if they just addressed the domestic market. We are finding our space out there. It is much easier to grab a bigger share of the export market now that the world’s largest manufacturer, China, has stepped back. Now there is pricing power also. Both things are working together. There is price and volumes. That probably is one of the best advantages any Indian business entrepreneur has today.
Is that where the opportunities lie? Should we look at the midcaps and largecaps which are export oriented?
That is exactly where it is. Take the volumes driven by the Indian environment as well as international demand. Pricing is internationally led. We see inflation in manufacturing, inflation in commodities and of course in a number of agricultural products. All of that is reasonably good for corporate profitability.
We will have to wait and see if demand continues for a little too long as demand will have its problems. In a sense, we are cost competitive which is what we saw when we were emerging out of the 90s. We have got the market opportunity and today we have got scale and we have been able to address a number of larger industries than just one or two. I get the sense that some of the Indian companies that are already out there could be quite large in the next five or six years.
Everything from aviation to hospitality to multiplexes have been holding up of late. Auto sector, which has underperformed because of various reasons and mainly due to chip shortage, seems to be making a comeback. Should one just stick with the ones which have given you good returns and ride the tide?
From a strategy standpoint, the cycle has changed and what we are seeing right now is a completely new side of business, companies that will do very well. In the last decade, there was the leveraging of the consumer and the consumer economy which led to a reasonable amount of growth. That cycle has essentially changed. We have got a whole lot of manufacturing businesses, backed up with a certain amount of utilities. Demand for power will move up if India shifts its entire economy to a manufacturing zone.
Reopening trade or consumer demand is going to be very geography specific. It is going to be all about urban India, it is not going to be pan India. It won’t be anywhere close to the rural parts of the environment. What is happening in rural India is very specific to a few businesses that will generate enormous amounts of cash flow over the next two years.
A lot of these companies are already debt free and they will generate this kind of capital. Take the largest aviation business, some of the QSRs or even some of the multiplexes. When these kinds of cash flows are generated in the next few years, just because the utilisation levels will be far higher than has been seen historically, one will be able to fund one-two years of growth without recourse to external resources .
The reopening trade is about how much cash flow can a company generate over the next year-two years and how do you put that cash flow to work productively to expand your network. It is all about how well you position yourself if you survive the downturn. So there is an opportunity out there. It is very profitable and it is very scalable. Some parts of the country are going to be very consumer centric but it is going to be very urbanised rather than a PAN India consumer economy.
In this reallocation, is there merit in being market cap sensitive?
I tend to be very market cap agnostic but that is a preference that I have chosen to be and if you are very good at moving from largecaps to midcaps to small caps and back again, then good but I think that is a very different skill set and very difficult allocation to look at. We are very agnostic to market cap and today we find opportunities right through different levels of market capitalisation.
Why are banks underperforming? Corporate banks, which are a proxy to economic growth, are not massive outperformers.
Some of the commodity companies are going through a capex cycle. But India’s top three or probably four companies will make Rs 25,000 crore of cash flow in one year. They are out of the borrowing cycle for now. If at all, corporate India’s debt equity will hit an all- time low in 2022. We are almost at the bottom end of the leveraging cycle for corporate India. Corporate borrowing is not coming back for sure. So from a bank perspective, they did very well over the last decade and a half. So give them some time, there will be a couple of banks that will do well but from an entire industry perspective, the best is behind us.