What are we starting with, the market, your investment in VARI, how banks have done well, or the fact that the prime minister and the parliament yesterday did indicate that PSUs in general are doing very well? You can choose four options.
I will stick to what I understand. I have no idea about the politics, so I will stick with the market. So no, I think we have been discussing that we are probably in a small minor corrective phase in the markets. But I think the larger uptrend still remains intact. In fact, I do not see any reason why we should be correcting any deeper than 5-7%. And of course, in such kind of a scenario, it is not like it’s a uniform correction across the board, something or the other still keeps doing well. So might as well focus on playing the larger trend than trying to understand these small minor moves.Why do you think the correction will not be more than 5-7%? What gives you the conviction?
We are early in the stages of the business cycle of this country. Our corporate PAT to GDP bottomed at around 1% and it has bounced back to about 4.2%.
In the 15-18 month period when the US was raising the interest rates, we had a $40 billion outflow. At that point of time, we were facing some margin issues because raw material prices went through the roof and freight costs went through the roof as well.
So there was a question mark on growth and the margins were dipping. But we negotiated that phase quite well, with just a 15-17% kind of a correction and sideways, probably a sideways move over an 18 month period.
So now, India Inc remains largely deleveraged, unleveraged. So there is no reason for us to have a big crash. It is not like all the corporates are putting up large capex with taking on huge debt and throwing caution to the wind or any such thing.
Even for that matter, in the market, the leverage is on the lower side, I would say, because the SEBI has tightened the screws so much on the leverage side that the margin funding market has pretty much come down, IPO funding market has come down.
So there is no reason for you to believe that there is any kind of a crash in the waiting. The margin issue that we faced in the 18 month period is now correcting because the leading indicators pointing to the margins are beginning to look up.
So raw material costs, freight costs have come down, growth is sustaining itself and operating leverage will play out as the utilisation levels increase.
So all that gives me the confidence that yes, there can be correction, it is a natural course of thing, but there is no crash in the offering.
Let us talk specific in terms of themes with you, something which we’ve discussed. You have been bullish on manufacturing and some of your investee companies have done rather well for themselves. Do you still feel that after the recent run up in some of the AMS stocks, they still have a long way to go? And you will not be tempted to book profits, even though some of the stocks are more than, you know, 100 to 150% in the last three months?
I will refrain from giving what actions we are taking in the portfolio. But I can tell you this much, that this is the beginning of a large, large trend. India is still a very small player in the global scheme of things in the electronic manufacturing. And this China plus one theme is not anymore a figment of imagination or a great boardroom talk or anything.
That boardroom talk is now getting converted into inquiries, which is getting converted into orders. So while the world is actually slowing down or facing a slowdown, Indian small companies are actually facing fantastic demand. In fact, order books are getting swelled to the extent of next three, four years. So that tells you that this China plus one is a real thing.
But it is a theme that will move from sector to sector. It is not necessary that all sectors face this kind of a demand situation across the board simultaneously.
For example, chemicals is one sector which actually was early in this cycle. It started from 2014 when China was facing pollution issues. But now actually China is coming back in the chemicals market and that is causing some demand as well as margin issues for the domestic players.
But other sectors like renewables or the one you mentioned, electronic manufacturing, is just about picking up. So we are still doing low end work. It is largely assembly work but we will move up the value chain over a period of time as more and more OEMs like Samsung, Apple, all set up their base in India, even the semiconductor manufacturing players that will give rise to the ecosystem in India and we will also move up the value add chain.
So I am not worried about the near term overvaluation. You will have to probably live through a year of underperformance or no great performance, but the larger story remains intact.