Venugopal Garre, MD, Bernstein, says the entire India shining story, which is real as well, is being very well articulated by foreign investors. They are going around sending LinkedIn posts saying, hey, I was in India, I saw this bridge! The reality is they are not being able to raise money for China. They are seeing redemptions. So for them, their redemption for their own careers is to basically create another end market, which has a future, which is India, and raise money for India.”
What brings you to India? Just routine visit or big block deals you are working on?
Venugopal Garre: I just wanted to see why there is so much excitement. So, a routine visit with a lot of meetings, trying to understand also how the domestic mutual funds are looking at this.
Did you see the new bridges in Mumbai?
Venugopal Garre: Oh, yes, I did.
The metro construction?
Venugopal Garre: I did. So…
The airport has got a new look?
Venugopal Garre: Exactly.
That is the reason why there is excitement.
Venugopal Garre: Exactly. So, every time I come, it takes much longer to reach places. But the reality is you can clearly see there are very few countries in the world where you have so much activity, especially in cities like Mumbai. But I guess it is a 5-10-year challenge for those who live in the city but the reality is after that, you are going to benefit from that.
We may say India is in a pedestal positioning and we are a special situation market, but the reality is Nasdaq is at an all-time high. Japan has cut out loose after 20 years of a bear market. European markets are also doing well. While absolute gain may not be that large, equities in general have done well. How much of the excitement in India is global in nature?
Venugopal Garre: I would keep India aside from Japan and US particularly. See, firstly, those two are developed markets. If you look at the last 10 years of the entire construct of developed versus emerging markets, developed markets have done really well relative to emerging markets. So, as an asset class, emerging markets’ potential for returns has been questioned and that is the reason why there has been a lot of redemptions as well globally, which is the reason you do not really see too much of FII flows as well.
The second aspect is if you look at the US particularly, we have seen a situation where there is a pretty large concentration of returns for some stocks. But if you look at India, there is a very rare situation where you have broad-based returns. We just isolated a few stocks that may not have worked amongst the top companies.
We were doing this report this week, I think we released it on Monday, where we looked at 150 midcap stocks for the last decade to see where the valuation bands lie and we were surprised that about half of them traded at 40X PE and 25% at about 60X PE. This is the highest we have seen , even higher than during GFC . That is the difference between India and the other countries, I would probably say.
But are Indian valuations a concern?
Venugopal Garre: Definitely a concern. Remember valuations are not always a concern but they tend to be a concern when you tend to see momentum peak off, which is earnings momentum, and when you do not really see further earnings revisions. Alongside this valuation thing, if you see the number of stocks seeing earnings downgrades is higher than the number of stocks actually seeing earnings upgrades. Yes, we are still seeing some earnings upgrades, but the ratio is probably 40-60 now, with 60% seeing downgrades.
The economic momentum is very good in India, there is a cycle brewing for sure, but remember that economic momentum is also moderating. Clearly see from the GVA data that came out. So, that is not bad data, but the reality is that it is moderating so that is not… The markets are basically not reflecting those realities at this juncture.
In light of that, did the move in PSUs that we witnessed last year surprise you?
Venugopal Garre: No, I do not think that was a surprise because I was an outright buy on the market last year. So, for me, it was not really about a narrow focus on a particular sector or a particular category of market cap, we were pretty much an outright buy. Now the question simply is that PSUs, in general, were very cheap on valuations and in fact they are still cheaper than probably their private sector peers.
The second aspect of PSUs has been that they are linked to the economy. There is no IT services PSU. There is no consumer PSU. So, what is happening in the economy is basically you are seeing a lot of the real world which is basically capex linked or things around that primarily recovering. And so what you are actually seeing is also the earnings construct of recovery, but I would just caution that do not call it as a structural change in how to approach PSUs.
Nothing will change, it does not change in the world, forget about India. Once your cycle is run and dusted with, then you will realise that we need to still focus on companies which can manage their own fortunes. That is the reason why people do not really invest in SOEs for the long term. These are good trades to have. And I do not think the trade is over. You can still be very selectively looking at certain areas where there is positive momentum still left for a few years, maybe the returns will be lower.
Where is the positive momentum?
Venugopal Garre: There is still momentum in two areas within the entire PSU pack. Number one, probably the entire financial sector. So, pure banking PSUs. There is no asset quality issue right now. PSU banks, the challenge used to be asset quality and I do not think asset quality is going to be a feature for the next two-three years.
Number two is anything linked to the power sector and that cycle has only started now. You can play an NBFC around that for maybe 15% more return, not a 70-80% return, but that is good enough compared to my own Nifty expectations of 8% return this year. So, you are literally playing for incremental returns right now.
Both the sectors which you mentioned, financials and power, are regulated sectors. When it comes to regulation, it is anyone’s guess how much profit they can make and at what rate they can grow. RBI can come out and say, your NIMs are highest, we need to moderate your profit. Beyond a point, the affordability of power is going to get out of whack. The government will have to come and say you can’t raise the price of electricity.
Venugopal Garre: Okay, so the thing is, there are certain areas where regulation is a bit more clearer. For example, if you are invested in a power sector utility, like an NTPC or Power Grid, you have a big clarity on what changes; it changes every five years and you are more or less clear for the next five years. So, what you are playing incrementally is growth and new orders, new opportunities in the capital goods supply chain as well.
The banking sector is a bit trickier. The level of risk is definitely lower than what it was earlier, but then these interventions can happen from time to time, with respect to who you are lending to and how much money you can make. That is a risk that goes without saying. If something happens specifically in the sector, it is going to impact the private sector as well. So, one is taking a relative call. It is going to be a sector issue rather than a PSU issue.
Are you concerned about the recent RBI clampdown on both JM Finanial as well as IIFL, I mean, NBFCs at large?
Venugopal Garre: It is always good to have a vigilant regulator because such a regulator ensures that you do not reach a situation where you do nothing for five years and then when the bubble pricks, you have challenges for a decade. This is what happened in 2007-08. We all knew there was hardly any regulation at that point of time which was stopping irrational bids. Financial sector was lending without knowing what was happening. We had a seven-eight-year downturn post that. So, I am pretty happy that these things are being very proactively looked at.
Nip it in the bud, I guess.
Venugopal Garre: Exactly.
What about the overall digitisation, gen AI, a lot of these new themes that are picking up? How do you see that affecting the traditional IT players and the new-age tech players?
Venugopal Garre: The unfortunate reality is that we are again becoming consumers of AI. We should be in a situation where we should probably create companies which are able to not just benefit from the trend, but also participate globally. This is the time where we should figure out at an organised scale and the government should also be involved in that. Otherwise, we will end up using an international search engine or international play store, whichever way it is. So, we have no choice.
The second aspect is that people are going to very soon run out of ideas internationally. How much of a semiconductor company listed in the US can you keep buying? It is almost a $2 trillion market cap. You look for new ideas and you need just a couple of billion dollar deals to be signed by these IT services companies and suddenly people say, oh, you know what, they are also a play on AI. You need something like that to happen, but it is not that they are going to re-rate like you have seen some of the global companies, but there will be at least some excitement. I think that is the least that can happen for India, nothing more than that.
Indian IT companies have survived the cycles. From Y2K, the migration was not sudden, it was structural. They came out of enterprise to SMAC brilliantly. From SMAC to pure AI and digital, the migration is great. But with each passing generation, the growth has come down. So, what was 100% growth became 30%; then 20% and now 6-8%. What PE multiple do you think this sector will command when growth would be 10-12% for next two or three years?
Venugopal Garre: By the way 10% to 12% is an amazing growth to have. Consumer companies have 10% to 11% or 9% to 10% growth for the last decade and they trade at 50-60X PE because remember beyond the growth, these are companies with very strong balance sheets. Yes, they do buybacks. They have cash flows. They have decent ROEs. So, you are not going to see a situation where the market rates are 25-30X PE and you have these sectors trading at a significant discount, purely from an Indian construct as well.
They are now at fair value or average value compared to what they used to trade, not as frothy as we saw post Covid. That itself is a good enough reason to probably re-evaluate and sort of assess them. They may not make you a lot of returns because nothing changes in 12 months honestly and US is not heading into a recession, that is fairly clear, so that is also an added advantage.
Do you think post May also there could be influx of flows into India, once the election cycle is over?
Venugopal Garre: My answer is no. I do not think there is any May. I am pretty sure there is no money waiting. I used to have this thinking a year back, the more I did work, I realised there is no money waiting to come into India.
Jisko ana tha aagaya (Those who had to come, have already come in)?
Venugopal Garre: Jisko ana tha aagaya. Incrementally, what is happening is, if you see this entire India shining story, which is real as well, being very well articulated by foreign investors, they are going around sending LinkedIn posts saying, hey, I was in India, I saw this bridge, whatever. The reality is they are not being able to raise money for China. They are seeing redemptions. So for them, their redemption for their own careers is to basically create another end market, which has a future, which is India, and raise money for India.
I look forward to LinkedIn posts from you, hey, I was in ET Now studio.
Venugopal Garre: Of course.
