How are you analysing the construct of the market right now? There was a bit of a scare when we had fallen to 18850 in the middle of last week but that correction resulted in a very shallow swift move and then we are back. Midcaps especially have rebounded very sharply. What are the key points you are observing to make your construct right now?
On the market front, we are broadly going to be in a sideways market between now and March ‘24, I would believe. There are many reasons for this sort of stance. Basically the dollar index is closer to all-time highs. The Middle East problem can flare and oil inflation remains a worry. Interest rates would still be rising at least in the US and if the US was to move up and oil is a problem, then interest rates are likely to move up in India also.
We have seen a good rally as far as the broader markets are concerned. There is a tighter liquidity environment currently in our country as well. All of this translates into the fact that we will broadly be between 18,500 and 20,200, the previous highs that we crossed. Markets are really not going anywhere in a hurry. It is going to be a pick and choose market for all that you know. But it is a very good time to create a portfolio for the medium term, post the central elections in 2024. Obviously, in the long term, it is a golden decade for India. I reiterate my stance. So, that is how I would look at it. Largecaps have more value currently than mid and smallcaps which ideally should be trading at a discount to largecaps. They are probably trading at 25% premium to largecaps, which historically has never stood justified.
Your portfolio which you have curated, is a mix of largecaps and midcaps. What kind of earnings visibility do you have on your portfolio? If one really carefully crafts a portfolio, what kind of earnings can be reflected in the next two-three years?
18 to 24% compounded growth rate in profits for a 25 stock portfolio vis-à-vis market earnings growth historically has been around 15%. I mean, that has always been my thesis. And even for the new portfolio that I am creating out here, it would be broadly the same. So, I would look to buy or discover companies which can be doubling their profits in three to four years, that is to say 18-24% compounded. These would be broadly from structural themes in India’s context as opposed to deep cyclicals, so to speak. Cyclicality is available in all businesses, but deep cyclicals is something which we will avoid.
We are aware of your earlier portfolio as well in your stance. Are you making a completely new portfolio or are there some overlaps as well?
We would have at best five stocks which could be overlapping in a 25-stock odd portfolio. But it is broadly going to be 35; one-third stocks would be largecaps and two-thirds would be mid and smallcaps. We want to create the next big winners between now and 2030 and that is the endeavour.
Okay, sure. Let us talk about some of the themes which you like because you make a very valid point: the six to eight months market could be listless because there are big triggers and one would want to be on the side till those triggers get played out. Consumer tech companies have rebounded quite sharply. Is there any theme within that which is appearing more structural now that the management focus is back on profitability?
Within the consumer tech space and in the listed space, I am extremely bullish on Zomato and we own it in our portfolios out here as well and even in the previous organisation. Zomato can easily double from here. The right to win has got established. The total addressable market size is huge. It is directly based on per capita income growth in the country which could be anywhere between $5 and $7 trillion between now and 2030.
I think the unit economics for food delivery has got established. Of course, this quarter has not been so great for consumer companies per se. So it may be a great time to add this sort of franchise going into the next many years. Blinkit is still an optional play which would break-even very soon and be EBITDA positive. I think 140 crore orders between Zomato and Swiggy going up to let us say 300 crore orders in the next three years is very much doable and that would translate into 24% order growth plus increase in contribution from Rs 20 to Rs 23 per order going up to something like 27-28 or even Rs 40 as some people are opining.
We are building in something like 27-28 and that could translate into a humongous amount of profit growth and the market cap cannot stay at around Rs 1 lakh crore given this sort of unit metrics. I would believe a Rs 2-3 lakh crore sort of a market cap is very much possible in Zomato and they have established the right to win. I am not so optimistic about the other consumer tech companies which have not yet established the right to win. So, the likes of Nykaa or anything. But yeah this is one name that we are extremely positive on.
Anything else which you have researched on lately as a theme? Something which may be an ancillary play to some of the very fast growing categories in the consumer side? Are you playing it directly or indirectly?
Retail is huge in India. I was just reading some numbers, some $800 billion of food and beverage market in India annually out of which $700 billion is in the unorganized space, $100 billion packaged business out of that $800 billion, of which 40 billion is branded. Now this is the size of the opportunity which is out here.
f you look at just retailing between now and 2030 and the way consumption is happening in retailing, I mean it is a generation shift between Gen X and Gen Z, the millennials way of shopping vis-à-vis the Gen X way of shopping, the brick and mortar way of shopping. It is a different ball game altogether. So the growth rates in any form of retailing whether it is your apparel, whether it is food, if you get your unit economics right and unit economics actually means, your store level ROC should be able to grow and increase your area under sales consistently and obviously that is a number which I would look at anywhere between 18 and 24% CAGR for many years to come.
If it is so present in the D2C category, even better, it is an icing on the cake. So retailing in any form could be Manyavar, it could be Trent and so on and so forth.
