In the Indian context, among the listed companies, he believes one of the companies, which has the potential to thrive over the next decade is Zomato. The company is a disruptor in the food business, albeit offering a win-win-win solution, he says.
With 18 years of experience in the portfolio management space with Emkay, he believes most of the large-cap Indian IT service companies are available at very reasonable valuations. The order book and revenue visibility are also quite decent at this point of time for most of the large IT companies, he adds.
Are you super bullish on new-age tech companies and is it the right time to take exposure to new-age tech companies?
We are very closely evaluating opportunities in the new-age businesses space, particularly now after the sharp correction in stock prices over the last year. In fact, we have initiated our journey by investing in Zomato over the last one year. We believe Zomato is a perfect play on a new age tech company and rising consumerism in India. In the Indian context, among the listed companies we believe one of the companies, which has the potential to thrive over the next decade is Zomato. The company is a disruptor in the food business, albeit offering a win-win-win solution.
Zomato offers a solution by being the bridge between the needs of the consumer & offering scalability/distribution to manufacturers (restaurants). As we all understand the gross margins (ex-raw material cost) are very high (around 65-75 percent) in food business, but it is the fixed overheads cost for the restaurant owners, which is heavy. Therefore, for every incremental revenue if the restaurant has to share a certain percentage (15 percent) with the distribution partner like Zomato, it is still a very high margin/contribution on marginal costing. And, from consumers’ perspective access to variety, ease of ordering and delivery are great value propositions for a minimal cost compared to time & logistics cost/hassle that the consumer will benefit from.
What is your view on the RBI monetary policy and commentary by the governor?
Well, I think the RBI governor has been articulate in their thought process, in the sense that at this juncture they want to adopt a wait & watch approach to understand the impact on inflation & overall economy for all the actions they have taken so far in the last twelve months.
And rightly so, as there is always a lead-lag effect between the time of implementation of policy decisions to their impact on the economy. Therefore, I think it is quite pragmatic of the governor to take the approach of reviewing before any further action.
Do you see the possibility of a significant cut in interest rates in the second half of FY24 by RBI?
We believe there is a possibility that we are close to the peak of interest rates, but to say that there will be significant rate cuts in the near (6-12 months) term will be jumping the gun too early.
We have to understand that there is a distinct possibility of Western world structurally witnessing higher inflation for many years to come, from the excess amount of money printing (fiscal deficit) that they have incurred over the last 10-15 years.
Are you gung-ho about the capital goods sector given the infrastructure push by the government ahead of the general elections in 2024?
Interestingly, in the post-covid environment, the demand has bounced back at a much faster & higher pace than anyone expected or anticipated, leading to a significant amount of higher capacity utilisation for most of the sectors in the manufacturing space. Therefore, at this point in time, the cash flow generation by the overall manufacturing sector is quite strong. This has created a very strong base/foundation for the overall manufacturing sector to leapfrog to the next phase of the high growth-era of the coming 5-10 years.
There are also a few catalysts at play, leading to support and further acceleration of growth in the manufacturing sector. Government support for the manufacturing sector starting from 2019, when they reduced the corporate income tax rate from 33 percent to 25 percent and for new manufacturing units to only 15 percent is a big policy action in the right direction. Also, other government policies like PLI (production-linked incentive) scheme are also very well received and reciprocated by the industry players.
Another important catalyst for the manufacturing sector has been the developments in the post – covid geo-political environment. Most of the importing countries have decided on creating alternate supply chains for the products they import from China. In many of the industries like auto & auto-ancillaries, chemicals, pharmaceuticals, engineering, textiles, etc Indian companies have proven their domain expertise, demonstrated the scalability of operations and production, and also gained the confidence of customers on protection of IPRs. Therefore many of the industries are witnessing significant amount of export related order book inflows leading to a strong growth outlook.
What do you prefer in the IT space – largecap or midcaps?
IT stocks, particularly largecaps results and management commentaries were quite encouraging. We believe the mega trend of transformation & migration of businesses moving from traditional in-house servers to digital & cloud-servers is a trend that will play out over at least the next 3-5 years. This is a mammoth exercise for every large & mid-sized global organization and it is an established trend, which will accelerate with every passing quarter as the consumers have adapted to new age of their interaction with the service providers and therefore it is pertinent for companies to adapt the change at the earliest.
This is a very large opportunity for large Indian IT offshore services. We believe most of the large-cap Indian IT service companies are available at very reasonable valuations. The order book and revenue visibility is also quite decent at this point of time for most of the large IT companies. Also, in the past we have witnessed higher outsourcing whenever there are cost-cutting initiatives in US Inc.
Do you think the growth to slow down to below 6 percent for FY24?
The global headwinds are expected to continue in CY23, therefore the outlook for Indian equity markets for CY23 will be highly dependent on the growth drivers and actual growth in domestic economy. After a strong rebound over the last two years, the pace of growth may be slightly lower in CY23 as there is some waning of the last 2-3 years of bunched-up (pent-up) demand, also as some high base of current year kicks-in from next year.
Sachin Shah
Fund Manager, Emkay Investment Managers Ltd.
Sachin is a seasoned fund manager with over two decades of experience in the Indian equity markets. By virtue of his extensive research, Sachin realised early-on the need for a framework in which companies with evasively tricky standing needed to be filtered out very objectively, leading to the development of E-Qual Risk, EIML’s proprietary module which helps us to evaluate and compare listed companies on various aspects of governance. Sachin shares his knowledge and insights through various media interactions across print and digital platforms.
