Wealth is created by holding great growth companies for a long duration. The most common mistake is not buying or selling early. From a long-term perspective, I think Tata Elxsi and Vaibhav Global are great businesses to own, Pritam Deuskar, Founder of Wealthyvia.com, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpts:
Q) The US Fed hawkish stance surprised the market. What is your outlook on markets?
A) Markets usually become anxious and stagnant around such announcements. Unlike no rate hike possibility, Fed first time talked about 2 hikes in 2023.
In my view, such speculation around the Fed is unnecessary and good for some buzz. I will give you two instances where the Fed continuously increased rates and markets had dream bull runs.
From May 1981 to Dec 1982 in order to tackle slowdown, unemployment, and inflation (not an exact situation like Covid), Fed fund rates were dropped from 20% to 8.5%.
Post in 1982, Unemployment in the USA was high and so was inflation but growth started coming back. Except for a few occasions of lowering, Fed rates went higher from 21 Dec 1982 at 8.5% to 11.75% by 21 August 1984. From 1981 to 1987 markets had a great run.
In 2001 post IT bubble and unemployment of 6% in the USA, Fed reversed rates from 6% to 1% by June 2003. Jobs and Growth Tax Relief JGTRRA came under the Bush administration and growth started coming back with inflation rising.
Inflation stayed at an average of 3% plus from 2004 to 2006 with continuous rate hikes from 1% to 5.25% in June 2006. Remember this was another dream run for the bull market from 2004 to 2007.
Q) India Inc. is showing signs of recovery, and with unlock in many states we could be heading for full recovery in the next few quarters. In case we do get a dip – what is a healthy dip which investors should not be worried about?
A) We need to see how much and why growth is coming up in the next 2 years. Even let’s say NIFTY EPS is overestimated to Rs 700 by FY2023 and actually comes to Rs 650 or so still we have confidence for better days.
Also GDP growth after this 9-10% bounce back for FY22, we will have GDP growth of 6.5-7.5% for the next two years. Corporates have not suffered from the situation rather have flourished. IT, Pharma, Cement are coming strong.
This should help overall EPS with the larger reason being Banking distress was much less than expected. We will see what bank numbers come after the June quarter.
We understand that June ending quarter due to lockdown/restrictions from Mid-march April sequentially and not uniformly at the same time in different states will affect some earnings.
A large second wave has come down. Last year June was again a very low quarter. This means there can still be still year-on-year (YoY) growth in many companies as they have handled this current lockdown with better experience and skill.
Also, it has coincided with pent-up demand in many sectors which are customer front-ended like retail, paints, home improvements & decorations etc.
Vaccination issues are getting solved and by Diwali, we can hope for 80% vaccination. If correction comes, honestly, nothing wrong with it. There should be some corrections in between.
If the market comes down by 12-15% which is always possible in a long bull scenario.
Q) How can investors create wealth in such a volatile environment?
A) Investors should focus on what they are buying for what reasons. If sales and profits as per management execution plans, business growth catalysts play out in the coming 2 years and sector overall tailwinds are going to be much higher from current levels within the next 2-3 years with attractive valuation then they should buy.
What can happen in the next 3 months or 6 months to market indices is something nobody in the world can ever predict. And, those who constantly predict looking at charts and levels are the ones who constantly buy, sell and never achieve a large portfolio.
Wealth is created by holding great growth companies for a long duration. The most common mistake are not buying or selling early.
If correction comes and even levels of 14000 or 13700 come up, we should be ok about it. We had a 30 percent correction back in 2006, and in one month if you remember, Nifty was down from 9200 to 7800 between March 2015 to April 2016.
Ultimately, you have to decide how you are going to act in that situation. There can be temporary worries of inflation, crude oil, or the dollar rising, and also we haven’t had a correction of more than 5% from the 7500 one-way rally.
Stocks that you hold if they are here for a long haul and if you have the conviction that earnings growth will be coming in the next several quarters then only one will be able to hold.
If such stocks correct, they will be the first ones to be picked by large smart money. If stocks are only positional trades then there should be a well-thought exit strategy.
Q) What is your call on the broader market space? Do you see small & midcaps underperform and with cheap money slowly receding – time of easy money making in small & midcaps is behind us?
A) It is often thought that small and midcap rise only due to the frenzy of the market rally. If we closely look at the scenario here, the minimum market cap of midcaps (100 to 250 companies as per SEBI definition) has reached above 7500 cr i.e. 1 Billion USD valuations and it’s indeed a pride moment for India.
Many companies in the Midcap space are indeed going global and doing business abroad. Of course, Pharma and IT companies dominate this category but there are others like medical equipment, chemicals, jewellery, Auto components, ratings, other services, and so on.
We always used to ask in the 2000s decade when Indian companies will be known global brands of their domain and we clearly see it happening now.
The situation right now we are in is that domestic consumption has not yet picked up yet. We are yet to see a pick up in Our India manufactured + India consumed products like consumer durables, Autos, Fashion, brands, Capex of companies done by other companies or financial companies catering to personal business loans and lower-income groups.
When that joins in we will have more strength in domestic-oriented midcaps and some small caps too. Individual growth stories from small-cap and midcap which are niche, which has dominance over their sector, which are catering to a sector that is already witnessing and expecting a global rise, sunrise sectors of the new technology world will continue to rise.
They are already doing well selling to Western economies which are anyway supposed to be normal earlier than eastern ones.
Q) What is your call on IT, digitization buzz?
A) I think the adoption of digitisation across all core sectors is just beginning. Most of our IT and technology companies would continue to do better. The world awaits cloud migration, IoT, Digital twins, connected devices and mobility, and size of opportunity as well as an advantageous position for some Indian companies.
For every core business, spend on the online/digital part will be much higher. After Covid, we are a more adaptive species.
I particularly like companies having consistent and little higher spend on R&D than their peers irrespective of their domains. This is how a company stays upbeat on competition and high value better products migration.
Companies that are well integrated or well collaborative on contract research and development in pharma with top-notch global invention giants are poised to grow over the next multiple years. No filings in biologics have substantially gone up in the USA and China.
Companies fighting with more vigor and new technologies and inventions have created room for the next big leg of growth for pharma. Some of our companies will be having a product sales line up of sterile, injectable post FY22. The competency of Indian Pharma is substantially high.
Q) What are your top investment bets from a long-term perspective?
A) From a long-term perspective, I think Tata Elxsi and Vaibhav Global are great businesses. I also want to give disclosure that I had shared our research with clients on these stocks at 1200 Rs and 300 Rs (for adjusted price) respectively.
Note: I am holding these stocks personally too as of now. These are not recommendations but for study and discussion purposes. Last time we discussed ICICI Securities and agrochemical themes, which worked well.
On the above-discussed wave of Medical instruments technology integration, connected mobility, and auto-driving cars using IoT, AI, and ML, I think there couldn’t be a better company available to bet upon.
You need a company that understands and has expertise in hardware-software integrations. Due to Jaguar and Nexon, they have the advantage of experimenting well due to the same group.
Once Autonomia sets a new standard in driverless cars, I think many OEMs will be in the queue. Similarly from Robotic arm for heart surgery and other projects with Narayana Hridyalaya, Tata Elxsi has come far ahead which is evident from one of the World’s best and largest B Braun group Medical Equipment company Aesculap Tie up.
The company is also setting up an advanced technology center for Schaffler in Pune. Some years back the company was not there in solutions for OTT platforms and now it has 40% revenue coming from such OTT with very prominent customers.
There will be at least 5-7 great OTT players in each country apart from Amazon and Netflix. “TEplay” for OTT that Elxsi built up for analysing, measuring content, viewership and advertisements with security and subscription management.
In the coming years and with 5G enrolment will explode Tata Elxsi’s potential. The attrition rate is lowest in Tata Elxsi among IT tech companies rather it was recruiting people last year when some retrenchments were going on in some companies. Return on Equity and margins it generates is also greater than most other IT Tech companies.
Its online retailer of low average cost Jewellery, fashion, and lifestyle products in the UK, USA Canada, and now Germany. It sources from 20+ low-value currency countries and has a manufacturing plant in Rajasthan.
The mode of selling these items is through TV channels and Websites as well as through eBay/Amazon etc. The way of selling by carefully making it exciting for viewers and visitors is one of its kind.
The company has worked very hard on its inventory management and vendor management & delivery model. The number of users of its web/app portal is growing at a very fast rate.
The management has seen more than two boom and recession cycles, due to which I feel confident about them managing business way better in different situations. ROCE of the company is more than 60% now.
The Management Board includes very relevant expertise people. As the company expands to other nations and wins even slightly more market share with growing users and repeat new purchase orders, I think sales and profit growth can be very good from a long-term point of view.
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