ETMarkets.comManish Chokhani, Director, Enam Holdings, says you cannot keep sitting on your laurels for longevity. Look at GE and how it has reinvented itself time and again. Chokhani was talking to ET Now.
Edited excerpts:
Gone are the heydays of 2017 when you could just buy a midcap or a smallcap and put your feet up and enjoy the ride. What are we staring at in the year ahead, given that it is going to be an election year?
I am sure a lot of analysts would have told you about the tailwinds last year in terms of falling interest rates, low oil prices, the government sweeping the UP elections. Everything looked rosy for India and that is the stuff on which bull markets are build.
This year, naturally, everything has turned around. Rates are going up, oil is fairly strong, the electoral cycle looks uncertain. So, this is a holding period for the markets.
If I look at Nifty a year forward, it is probably about Rs 525 of earnings, which is a 10500 sort of band for the top end of the index for now. If you project it a year ahead, then it is probably 625. That takes you to the realm of 12500-13000. But for that, you need conditions to turn around on elections, oil, interest rates and so on. That will also happen.
All the things we are discussing now are in a way in the price. It is a bit like the old India story where you say you consistently disappoint the optimists and you consistently disappoint the pessimists! We are bang in the middle of that.
Last year, it was very divergent performance in sectors and stocks. I do not think it is really a market call that people should be focussed on now, it is more to do with individual stocks and what things are happening there.
If we talk about the larger theme that you have highlighted in today’s discussion, India is undergoing a generational shift and that whole demographic dividend playing out. However, it is not really the demographic dividend which has been driving the consumption theme. Companies continue to be very expensive and continue to deliver growth. That is the key theme that everybody bets on when it comes to the India story.
If you think of India, it is not a composite whole. I love to think of India in terms of three countries. There is a 2% India consisting of about 30 million people which is like Australia with a per capita equal to that of the Australians. It is about a third of our GDP. You take the next slice and that is like Philippines which may be the next 18 or 20% of India and that takes another third of our GDP. And then there is 80% of India, which is really like sub-Saharan Africa and that takes the last third of GDP.
The thesis for everyone in India has been that as you move up, the income J-curve of the people who are in the 2% and who are buying cars, the 18% are buying motorcycles and the next 80% are buying bicycles. Everyone trades up and moves up that value chain.
People are buying refrigerator or air conditioner stocks at 30-40 multiples but the fact is we are selling fewer air conditioners than two-wheelers in this country. You can look at it as glass half empty, consider that this country has no consumption or you can look at it as half glass full.
I started the other way round. You can look at it half glass empty and that consumption lies ahead in this country. Therefore, I could give higher multiples for itThat is reflected in the market indices as well. When you sit back and look dispassionately at the market, you realise that eight companies are equal to 25% of India’s market cap. In those eight companies, there are five consumption stocks. If I am buying a home, there is HDFC; if I am getting a retail loan, there is HDFC Bank; ITC and Hindustan Lever have always been there. Maruti is there now and one could even make the case with some degree of scepticism that Reliance which is now a big telecom and data play though the profits still come mostly from petrochemical.
Will the good become better and the bad remain poor?
It is becoming a bit like that because as the economy formalises, you get everyone into this GST chain. A lot of sectors which were hitherto suffering from unorganised sector competition, seem to now start being beneficiaries of this whole transparency in the chain.
Even the SMEs who are staying outside the taxation chain realise that their systems and their sales and their purchases all become transparent to the banking system. Credit is available for them as well and that is a big game changer for someone who was borrowing at 5%-6% higher. If they start getting loans which are that much cheaper, there is an incentive. Industry after industry is consolidating – cement, steel and that theme is going to continue.
Are you saying that India’s Sub-Saharan Africa part is not going to become Philippines any time soon?
Not in a hurry. If India had played its cards right after the 2008 crisis, the rupee was then 40 to the dollar. We are now closer to 68 which is a 70% depreciation.
We are at 68 by the way today.
That is 70% depreciation, If you were earning a $100 in 2008, it was around Rs 4000. Now if you earn the same Rs 4,000, it is $65 or thereabout. If we had stayed pegged to the US dollar, our country would not have been 2.5 trillion, we probably have been 4 trillion or may be even more. That would have given you purchasing power leading to growth acceleration. Instead we are importing oil, coal and keep depreciating and then cry about inflation. I am not an economist but that is my two bits on that.
What is the path ahead? You are calling for the Ds of disruption in digitisation, deceptiveness, dematerialisation, demonetisation, and democratisation. Disruption is a much abused word. How do you at opportunities within all the concepts that you are giving?
This really came out of singularity. I had done a show for you guys last year as well, that industry after industry is going to be disrupted and there is no two ways about it. As you get disrupted by these new technologies, they tend to be deflationary and make prices go down ultimately making it cheaper for everyone.
But they come at the cost of profitability.
It depends on what you do. The whole industry can be overturned and the easiest example people think about is electric vehicles. It may be 10 or 8 years away but in the Indian context, it stops us from importing oil for transportation fuel. It changes a lot of our current account, it changes a lot of the fiscal deficit, it may make cars cheaper for people.
You can put a solar panel in your home. Most Indian towns and villages would have a ground plus one structure and you can put a solar roof and that then takes care of your electricity needs as well as your transportation needs. It could lead to transformation. Similarly, you look at pharmaceuticals and healthcare which is costly in this country, As you go away from being people who get bombarded by antibiotics or chemotherapy, you can start going to gene therapies which are very targeted at specific DNAs. It makes it that much less painful and hopefully cheaper because the cost of the genome is falling faster than the cost of the computer chip or the solar panel. A lot of this is going to change.
I am looking at disruption across the board from manufacturing to IT to pharma.
The sad thing is India may miss a lot of this like we missed the industrial revolution. We make a lot of noise about AI. While I respect all our IT companies and the fact that they are doing big buybacks, they have completely missed the big IT revolution. Fifteen years ago, there was no Alibaba or Tencent or Facebook and we were sitting on top of the heap and we looked across at China with a degree of disdain that they do not have technology and they are really a robotic army of workers. Look where they are today.
How do you seize the opportunity there if India has missed the bus?
I would not say they have not acknowledged. I do not think we are playing to our strengths. For instance, a TCS or a Infosys which is paying out $2-$3 billion would have used some of that money in developing some of these areas playing at the edge. People would have freaked out but it could have given longevity to the companies because now the the size of their balance sheets is diminished based on the ability to play in that market. Conversely, while people blame a Reliance for going away from the core of petrochemicals and oil to telecom, there may be a renewal in a company like this.
What you are trying to say is that you would give companies a lot of credit for disruption even if it comes at the cost profitability for business?
You have no choice. If you have to be entrepreneurial as a company and to have longevity, you cannot just keep sitting on your laurels. In the US, a company like General Electric has had to reinvent itself time and again to continue to succeed. First, they became GE Finance company and now they are trying to position themselves as a internet of things (IOT) company.
So, companies have no choice. They will have to morph. I would not say that corporate India is not aware of it. JSW Energy is thinking about going into electric vehicles as opposed to remaining a power producer. It is a bet which works, it may be a bet which does not work but at least they are thinking of making that shift.
Tell us more about LivinGuard because that really seems to be one of the big innovations?
The golden era of stock investing which started with the fall of the Berlin Wall, seems to be unwinding post the great reset of 2008. The way Trump is unleashing trade wars, the way the Chinese are going to behave and so on are testament to that. You cannot be taking that sort of full-sized bet only as an investor because a lot of these flows are now disruptive as well.
Also in markets, there is this whole phenomenon of price agnostic funds, the ETFs which are coming in. When we scratch our heads about who is buying these at 40-50-60 multiples, it is often traced back to the ETFs where money has just come in. They are getting deployed and they do not really care about the price because no one knows who is behind it.
I would think it is incumbent on people. It is easy for me to come and say people should be entrepreneurial. But are we doing ourselves? A shining example is our greatest investor Radhakishan Damani. He has built $15-20 billion enterprise today. It can be done and if you have the knowledge and the learnings, why not apply it in things which can be very impactful and this company is therefore something which is close to my heart.
We think we can impact the billion or more lives with it. It is a technology which embeds into any substrate currently in textile where you can kill gems, bacteria and whatever and it is the first of its kind in the world so we use it for water purification. We are using it for feminine hygiene. We are using it for disinfecting wipes, medical and so on.
Is it going to be listed anytime soon?
Well it is a company overseas. Unfortunately, it is not in India but we will have large impact on the Philippines and African end of the market sure.
But feminine hygiene is a very important issue right now and a lot of organisations are taking it up. What about propagating the issue more than getting it into the households?
That will happen. There are two ends to it. The way we have approached is we are really a technology company which will be an ingredient brand inside somebody else. The consumer companies will take this technology and you will probably see some of it on your shelves. I would hope over the next 12 months from some of the leading producers in this space in global companies, will use it.
For the bottom end of the market, the real access can only come through government and we are working a lot with them. A) There are no standards for sanitary napkins in India; anyone can produce it and while it is very popular to see the Padman movie, using unhygienic stuff may be in fact causing more disease than unintended consequences there. So, standards are being built. There is testing going on across the country. We are engaged with a number of state as well as the central governments. We are hopeful something will come out. If not, it is anyway happening in other countries.
Edited excerpts:
Gone are the heydays of 2017 when you could just buy a midcap or a smallcap and put your feet up and enjoy the ride. What are we staring at in the year ahead, given that it is going to be an election year?
I am sure a lot of analysts would have told you about the tailwinds last year in terms of falling interest rates, low oil prices, the government sweeping the UP elections. Everything looked rosy for India and that is the stuff on which bull markets are build.
This year, naturally, everything has turned around. Rates are going up, oil is fairly strong, the electoral cycle looks uncertain. So, this is a holding period for the markets.
Over the years, I have seen that we tend to bottom in complete despair at around a 12 times multiples and tend to be very toppy around a 20 time multiples. The reality is, we are closer to that 20x than the 12x.
If I look at Nifty a year forward, it is probably about Rs 525 of earnings, which is a 10500 sort of band for the top end of the index for now. If you project it a year ahead, then it is probably 625. That takes you to the realm of 12500-13000. But for that, you need conditions to turn around on elections, oil, interest rates and so on. That will also happen.
All the things we are discussing now are in a way in the price. It is a bit like the old India story where you say you consistently disappoint the optimists and you consistently disappoint the pessimists! We are bang in the middle of that.
Last year, it was very divergent performance in sectors and stocks. I do not think it is really a market call that people should be focussed on now, it is more to do with individual stocks and what things are happening there.
If we talk about the larger theme that you have highlighted in today’s discussion, India is undergoing a generational shift and that whole demographic dividend playing out. However, it is not really the demographic dividend which has been driving the consumption theme. Companies continue to be very expensive and continue to deliver growth. That is the key theme that everybody bets on when it comes to the India story.
If you think of India, it is not a composite whole. I love to think of India in terms of three countries. There is a 2% India consisting of about 30 million people which is like Australia with a per capita equal to that of the Australians. It is about a third of our GDP. You take the next slice and that is like Philippines which may be the next 18 or 20% of India and that takes another third of our GDP. And then there is 80% of India, which is really like sub-Saharan Africa and that takes the last third of GDP.
The thesis for everyone in India has been that as you move up, the income J-curve of the people who are in the 2% and who are buying cars, the 18% are buying motorcycles and the next 80% are buying bicycles. Everyone trades up and moves up that value chain.
People are buying refrigerator or air conditioner stocks at 30-40 multiples but the fact is we are selling fewer air conditioners than two-wheelers in this country. You can look at it as glass half empty, consider that this country has no consumption or you can look at it as half glass full.
I started the other way round. You can look at it half glass empty and that consumption lies ahead in this country. Therefore, I could give higher multiples for itThat is reflected in the market indices as well. When you sit back and look dispassionately at the market, you realise that eight companies are equal to 25% of India’s market cap. In those eight companies, there are five consumption stocks. If I am buying a home, there is HDFC; if I am getting a retail loan, there is HDFC Bank; ITC and Hindustan Lever have always been there. Maruti is there now and one could even make the case with some degree of scepticism that Reliance which is now a big telecom and data play though the profits still come mostly from petrochemical.
Will the good become better and the bad remain poor?
It is becoming a bit like that because as the economy formalises, you get everyone into this GST chain. A lot of sectors which were hitherto suffering from unorganised sector competition, seem to now start being beneficiaries of this whole transparency in the chain.
Even the SMEs who are staying outside the taxation chain realise that their systems and their sales and their purchases all become transparent to the banking system. Credit is available for them as well and that is a big game changer for someone who was borrowing at 5%-6% higher. If they start getting loans which are that much cheaper, there is an incentive. Industry after industry is consolidating – cement, steel and that theme is going to continue.
Are you saying that India’s Sub-Saharan Africa part is not going to become Philippines any time soon?
Not in a hurry. If India had played its cards right after the 2008 crisis, the rupee was then 40 to the dollar. We are now closer to 68 which is a 70% depreciation.
We are at 68 by the way today.
That is 70% depreciation, If you were earning a $100 in 2008, it was around Rs 4000. Now if you earn the same Rs 4,000, it is $65 or thereabout. If we had stayed pegged to the US dollar, our country would not have been 2.5 trillion, we probably have been 4 trillion or may be even more. That would have given you purchasing power leading to growth acceleration. Instead we are importing oil, coal and keep depreciating and then cry about inflation. I am not an economist but that is my two bits on that.
What is the path ahead? You are calling for the Ds of disruption in digitisation, deceptiveness, dematerialisation, demonetisation, and democratisation. Disruption is a much abused word. How do you at opportunities within all the concepts that you are giving?
This really came out of singularity. I had done a show for you guys last year as well, that industry after industry is going to be disrupted and there is no two ways about it. As you get disrupted by these new technologies, they tend to be deflationary and make prices go down ultimately making it cheaper for everyone.
But they come at the cost of profitability.
It depends on what you do. The whole industry can be overturned and the easiest example people think about is electric vehicles. It may be 10 or 8 years away but in the Indian context, it stops us from importing oil for transportation fuel. It changes a lot of our current account, it changes a lot of the fiscal deficit, it may make cars cheaper for people.
You can put a solar panel in your home. Most Indian towns and villages would have a ground plus one structure and you can put a solar roof and that then takes care of your electricity needs as well as your transportation needs. It could lead to transformation. Similarly, you look at pharmaceuticals and healthcare which is costly in this country, As you go away from being people who get bombarded by antibiotics or chemotherapy, you can start going to gene therapies which are very targeted at specific DNAs. It makes it that much less painful and hopefully cheaper because the cost of the genome is falling faster than the cost of the computer chip or the solar panel. A lot of this is going to change.
I am looking at disruption across the board from manufacturing to IT to pharma.
The sad thing is India may miss a lot of this like we missed the industrial revolution. We make a lot of noise about AI. While I respect all our IT companies and the fact that they are doing big buybacks, they have completely missed the big IT revolution. Fifteen years ago, there was no Alibaba or Tencent or Facebook and we were sitting on top of the heap and we looked across at China with a degree of disdain that they do not have technology and they are really a robotic army of workers. Look where they are today.
How do you seize the opportunity there if India has missed the bus?
I would not say they have not acknowledged. I do not think we are playing to our strengths. For instance, a TCS or a Infosys which is paying out $2-$3 billion would have used some of that money in developing some of these areas playing at the edge. People would have freaked out but it could have given longevity to the companies because now the the size of their balance sheets is diminished based on the ability to play in that market. Conversely, while people blame a Reliance for going away from the core of petrochemicals and oil to telecom, there may be a renewal in a company like this.
What you are trying to say is that you would give companies a lot of credit for disruption even if it comes at the cost profitability for business?
You have no choice. If you have to be entrepreneurial as a company and to have longevity, you cannot just keep sitting on your laurels. In the US, a company like General Electric has had to reinvent itself time and again to continue to succeed. First, they became GE Finance company and now they are trying to position themselves as a internet of things (IOT) company.
So, companies have no choice. They will have to morph. I would not say that corporate India is not aware of it. JSW Energy is thinking about going into electric vehicles as opposed to remaining a power producer. It is a bet which works, it may be a bet which does not work but at least they are thinking of making that shift.
Tell us more about LivinGuard because that really seems to be one of the big innovations?
The golden era of stock investing which started with the fall of the Berlin Wall, seems to be unwinding post the great reset of 2008. The way Trump is unleashing trade wars, the way the Chinese are going to behave and so on are testament to that. You cannot be taking that sort of full-sized bet only as an investor because a lot of these flows are now disruptive as well.
Also in markets, there is this whole phenomenon of price agnostic funds, the ETFs which are coming in. When we scratch our heads about who is buying these at 40-50-60 multiples, it is often traced back to the ETFs where money has just come in. They are getting deployed and they do not really care about the price because no one knows who is behind it.
I would think it is incumbent on people. It is easy for me to come and say people should be entrepreneurial. But are we doing ourselves? A shining example is our greatest investor Radhakishan Damani. He has built $15-20 billion enterprise today. It can be done and if you have the knowledge and the learnings, why not apply it in things which can be very impactful and this company is therefore something which is close to my heart.
We think we can impact the billion or more lives with it. It is a technology which embeds into any substrate currently in textile where you can kill gems, bacteria and whatever and it is the first of its kind in the world so we use it for water purification. We are using it for feminine hygiene. We are using it for disinfecting wipes, medical and so on.
Is it going to be listed anytime soon?
Well it is a company overseas. Unfortunately, it is not in India but we will have large impact on the Philippines and African end of the market sure.
But feminine hygiene is a very important issue right now and a lot of organisations are taking it up. What about propagating the issue more than getting it into the households?
That will happen. There are two ends to it. The way we have approached is we are really a technology company which will be an ingredient brand inside somebody else. The consumer companies will take this technology and you will probably see some of it on your shelves. I would hope over the next 12 months from some of the leading producers in this space in global companies, will use it.
For the bottom end of the market, the real access can only come through government and we are working a lot with them. A) There are no standards for sanitary napkins in India; anyone can produce it and while it is very popular to see the Padman movie, using unhygienic stuff may be in fact causing more disease than unintended consequences there. So, standards are being built. There is testing going on across the country. We are engaged with a number of state as well as the central governments. We are hopeful something will come out. If not, it is anyway happening in other countries.
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(What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)
...moreDownload The Economic Times News App to get Daily Market Updates & Live Business News.
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price
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