Based on the announcements at the AGM, RIL looks to be the Indian FAANG (iFAANG) stock, all of them rolled into one. It is already one of the largest telecom service providers across the world, Dr. Vikas V Gupta, CEO & Chief Investment Strategist, OmniScience Capital, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpt:
Q) What will be the biggest risk for investors in the second half of 2020?
A) The COVID-19 situation is still like Schrodinger’s cat. Only when you open the box do you know whether the cat is dead or alive. Similarly, the resolution of the COVID-19 situation is still unknown.
Only when H2 2020 is over will we know the extent of damage COVID-19 has caused, both, on health and the economy. The impact due to potential small business closures and job losses of people dependent on those is what could impact the demand side, both in India as well as globally.
The most important event around this is the US Presidential elections. That event or the lead-up to that event could create huge uncertainties and impact FII flows.
Q) What is your call on the IT sectors? This has been one of the better performing sectors amid the lockdown. Where do you see value in the sector?
A) We run a strategy called DX (Digital Transformation) for the last several years on the IT sector. Starting from 2015-16, the IT sector as a whole has been focused on this opportunity.
That opportunity which was a minuscule contributor to revenue is now nearly a 50 percent or larger contributor for most Indian IT companies.
The DX segment revenues for most companies are still growing at 25-30% p.a. or higher rates. This is a multi-decadal opportunity.
Typically, crisis tends to accelerate a trend that has a tailwind. The US companies which use the services of Indian IT companies have been forced to speed up the implementation of DX services, such as, digital marketing, analytics, e-commerce, cloud, among others due to the lockdown.
Many companies are getting project enquiries from their clients to accelerate the implementation of projects which earlier were getting pushed out.
The bellwether large caps and most midcaps are at lower discounts to their intrinsic values, though, still at a much higher discount compared to the popular bubble stocks in other industries.
Non-bellwether large caps and some selective small caps are at a much higher discount to their intrinsic values. What is important is to understand the extent of growth in the digital side of the business and the extent of the slowdown in the legacy part of the business for each company.
Further, one needs to understand if there is a valuation mismatch given the fundamentals based on these factors. The opportunity exists to exploit the mispricing rather than just buying a popular name.
Q) RIL's 43rd AGM had a lot of surprises for the D-Street. Where do you see the company in, let’s say, next 3-5 years?
A) Based on the announcements at the AGM, RIL = iFAANG (Indian FAANG). RIL looks to be the Indian FAANG stock, all of them rolled into one. It is already one of the largest telecom service providers across the world with Jio.
With its own 5G infrastructure it could compete with the Huaweis and Ericssons of the world. Given the history of Reliance group launches, it is likely that it will be one of the most cost-effective 5G implementations worldwide. This could help it roll out to other geographies.
Jio TV+ could help it become the keystone species in the entertainment and OTT ecosystem. It could also be creating a new business model compared to what is seen globally where OTT platforms compete on original content rather than aggregation and distribution reach.
The Jio Glass project shows ambitions to enter the Augmented Reality/Virtual Reality space and focus on killer apps for the same, such as education or business. Microsoft, Google, Facebook, all have similar projects in place.
Jio Mart with Whatsapp could be a game-changer in Indian e-commerce and this model could eventually be rolled out into other countries.
There is much more, but in short, the vision unveiled puts it as one of the Big Tech global giants in about 3-5 years’ time.
Having said that, investors should be very careful and watch the debt reduction of the firm, understand the full fundamentals of each growth vector, its scale, profitability, duration etc. and the valuation they are getting as an entry point. We currently don’t have it in our portfolio but will be closely watching its evolution.
(Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.)
Q) One trend which was evident was the new race of investors who joined D-Street despite sharp volatility. Do you think this new breed of investors/traders have come off age and are more matured in making investment decisions? Do you see any specific trend?
A) I doubt that. We have seen more than 100 years of the Indian and US markets and new breeds of investors entering them in each bull phase. As a whole, the investors don’t learn and hence the huge bubbles and busts keep happening.
However, today there is a much larger set of investors who have imbibed the fundamentals of investing and there is more availability of information and a better understanding of how to use it.
But, human nature cannot be changed and Warren Buffett’s guru, Benjamin Graham’s Mr. Market (representing all the investors and traders put together) is still as crazy and is hyper-excited one day and in the doldrums on another day.
A specific trend we see is that a larger percentage of investors are attracted to fundamental investing, though it is still a minority, probably low single-digit percentage, as compared to, say, 20 years back.
Q) What is you call on agricultural space? It is one sector which has remained unfazed from the COVID? What are the top stocks which one can look at?
A) While the agricultural sector has been resilient during COVID, other sectors that we have seen remain resilient are defence and railways. We cannot comment on the specific stocks, but their fundamentals are continuing and some have seen huge improvements due to government orders. We do not have significant exposure to agriculture stocks in our portfolio currently.
Q) Growth is likely to take a hit this is given, but how can equity investors turn the falling GDP scenario into benefit? Which sectors are likely to see a rebound once the tide reverses?
A) The value of a company is not dependent on any particular year but its cash flows in perpetuity. A GDP fall in one year has an impact of roughly 5-10% on the companies’ value.
Further, a falling GDP doesn’t have the same impact across industries. Some of them would have large negative impacts and some could see gains. More important is whether there is a permanent decline for any industry or only a temporary impact for this year.
We think sectors like IT, defence, railways, and power finance have opportunities; and many of these are in our portfolio. However, one has to be careful to focus on companies with strong balance sheets and market prices below their intrinsic values. One should avoid popular bubble stocks.
Q) What is your outlook on the auto and financials -- the two themes which have seen the worst of COVID impact? Can they turn out to be the dark horse of 2020?
A) The auto sector is likely to see a boost from pent-up demand before going back to trend growth. It is possible that the trend growth could be higher than before COVID since people might appreciate the need for personal transport more given the suspension of public transport, restrictions on Uber/Ola-like services, and social distancing requirements during the lockdown.
On financials, one has to be very careful since growth is likely but the quality of growth and its eventual impact on the company’s financials cannot be predicted easily and could differ significantly from company to company based on its sector exposure and the lending policies.
In contrast to other companies where the loss of a single year reduces the value by 5-10%, a bad year for financials could result in wiping out a significant portion of the net worth, thus causing long-term damage to its fundamentals due to the leveraged nature of the business.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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