Story outline
- We have to wait and watch which companies start growing going ahead.
- People overestimating technology in shorter term and underestimating it in longer run.
- Disruption continuing in areas where it was there anyway
Demand has to come back for companies to keep earnings and sales growth positive over a period of time. It has been declining because of cyclical pressures and structural changes in many of the sectors, says Raunak Onkar, Research Head, PPFAS MF. Excerpts from an interview with ETNOW.
What is the market mood? Is the market believing all this chatter coming in from New Delhi, the prime minister telling ET that he will take whatever it takes to revive animal spirits, the finance minister hearing out the FPI fraternity on Friday?
It is interesting to talk about animal spirits and it gives a quotable line every time but the point is are businesses seeing the demand that they were seeing a year ago or even a few years back? So the demand has to come back for them to keep earnings growth and sales growth positive over a period of time, which has been declining because of cyclical pressures and structural changes in many of the sectors that we see. That happens and it is a part of the economic cycle and each company has to go through it. We will have to wait and watch as to how businesses will cope with it, how the competitive pressure eases out and which companies emerge to be growing going ahead.
One of the sectors that has borne the brunt of this slowdown is autos without a doubt. We have heard company managements acknowledge that numbers that have been coming out have reflected the slowdown. What makes you then bullish on the space in the long term?
If you know the Amara's law, it is that people are overestimating technology in the shorter term and underestimating in the longer run. A lot of times, people talk about EVs and all not considering the fact that the infrastructure has to be in place. In countries like the US and China where EVs have come in, people underestimate the amount of effort and capital required to put up the infrastructure to make sure that EV charging points are there and you have battery technology available -- like a swappable battery or ease of charging at a speed -- so that people can use it like a normal auto. A lot of things are changing and others will take some time to change.
At the same time, if cyclical lull happens in the industry, you need to look at it as a cyclical lull only. So how soon can we expect our own cars to change from regular fuel source to electric vehicle? All these things have to be taken into stride and if it is a cyclical downturn, you have to take it in stride and say that okay this business has the capacity to suffer for a short term and it can grow again when the cycle turns.
Does it? Is that the feeling that you are getting because looking at the prices it does not seem to be the case. It seems that this transition is coming at a cost and that the pain has just started?
In fact, if you look at the entire global auto industry, the consolidation has already happened in some of the larger names. You probably will have less than 20 auto companies across the world which are at scale and the brands that we know are actually part of larger groups. So five-six groups actually operate the entire auto industry in the world.
In that context, consolidation has happened. Capacity is already with the larger players who have capital and they can wait for the cycle to turn and this has not happened for the first time. Cyclicality has hit auto industry in the past as well. So local changes and at the same time, larger changes in the global scenario where capital is available for investing in newer technologies -- those things are impacting. You should wait and watch and see how companies take it in their stride.
Is the pain going to continue for some of the PSU banks as well? Given the overall systemic risk, we have been talking about NBFCs as well, the overall credit crisis, what is the view on banks as a whole?
We have traditionally always held on to the view that private sector banks have the technology and scale to keep doing what they have been doing for the past several decades. That advantage continues and they will take over the market share from the PSUs wherever it is possible.
Some larger PSUs might benefit but we do not know if the smaller, non-performing PSU banks might be merged into the larger ones but we do not know the strategy over there. So capital on one side, strategy and consumer brand image that these private sector banks enjoy will continue to be the case even going ahead.
Have you made any changes to your mutual funds portfolio -- any additions or deletions in the last three months?
Yes, we have added a couple of new companies in the portfolio; one is Cadila Healthcare which goes with the broader pharma theme that we have to build a basket of companies with a traditional approach to investing in generics. At that same time, we have added CDSL which is a regulated duopoly in the KYC and depository space. It has a good cash flow business going in and right now its valuations are a little cheaper than what it was a few months back. So, we decided to add a little bit of that.
No. We added to the existing holdings where the valuations were compelling even now.
How have you read into the earnings? What is the outlook on global factors saying that the recession could be worrying for global markets as a whole? How are you looking at some of these variables?
When you look at the earnings, this is clearly a disappointing quarter for many companies and industries. We have seen that growth has tapered off and people have been guiding that. It is not like it suddenly happened. Many companies have been saying that growth is not going to be sustainable at any level the same way as it was in the past.
It is okay to have a lower growth period for a short term. We have to keep a watch. But the other side is capital is completely unconstrained; you are getting a lot of low-cost capital still for businesses to invest in. VCs and all are pumping money into technology.
On the other end, disruption is continuing in areas where it was there anyway. We are seeing newer companies scaling losses like Uber and all. It is quite amazing to see that despite those losses, the market still believes that these companies can scale and become large players. But these are platform companies with different dynamics in the way they operate. We have to look at how they integrate with the existing economy, how it affects the auto business and how it affects technology business overall.
What is the market mood? Is the market believing all this chatter coming in from New Delhi, the prime minister telling ET that he will take whatever it takes to revive animal spirits, the finance minister hearing out the FPI fraternity on Friday?
It is interesting to talk about animal spirits and it gives a quotable line every time but the point is are businesses seeing the demand that they were seeing a year ago or even a few years back? So the demand has to come back for them to keep earnings growth and sales growth positive over a period of time, which has been declining because of cyclical pressures and structural changes in many of the sectors that we see. That happens and it is a part of the economic cycle and each company has to go through it. We will have to wait and watch as to how businesses will cope with it, how the competitive pressure eases out and which companies emerge to be growing going ahead.
One of the sectors that has borne the brunt of this slowdown is autos without a doubt. We have heard company managements acknowledge that numbers that have been coming out have reflected the slowdown. What makes you then bullish on the space in the long term?
If you know the Amara's law, it is that people are overestimating technology in the shorter term and underestimating in the longer run. A lot of times, people talk about EVs and all not considering the fact that the infrastructure has to be in place. In countries like the US and China where EVs have come in, people underestimate the amount of effort and capital required to put up the infrastructure to make sure that EV charging points are there and you have battery technology available -- like a swappable battery or ease of charging at a speed -- so that people can use it like a normal auto. A lot of things are changing and others will take some time to change.
At the same time, if cyclical lull happens in the industry, you need to look at it as a cyclical lull only. So how soon can we expect our own cars to change from regular fuel source to electric vehicle? All these things have to be taken into stride and if it is a cyclical downturn, you have to take it in stride and say that okay this business has the capacity to suffer for a short term and it can grow again when the cycle turns.
Does it? Is that the feeling that you are getting because looking at the prices it does not seem to be the case. It seems that this transition is coming at a cost and that the pain has just started?
In fact, if you look at the entire global auto industry, the consolidation has already happened in some of the larger names. You probably will have less than 20 auto companies across the world which are at scale and the brands that we know are actually part of larger groups. So five-six groups actually operate the entire auto industry in the world.
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Is the pain going to continue for some of the PSU banks as well? Given the overall systemic risk, we have been talking about NBFCs as well, the overall credit crisis, what is the view on banks as a whole?
We have traditionally always held on to the view that private sector banks have the technology and scale to keep doing what they have been doing for the past several decades. That advantage continues and they will take over the market share from the PSUs wherever it is possible.
Some larger PSUs might benefit but we do not know if the smaller, non-performing PSU banks might be merged into the larger ones but we do not know the strategy over there. So capital on one side, strategy and consumer brand image that these private sector banks enjoy will continue to be the case even going ahead.
Have you made any changes to your mutual funds portfolio -- any additions or deletions in the last three months?
Yes, we have added a couple of new companies in the portfolio; one is Cadila Healthcare which goes with the broader pharma theme that we have to build a basket of companies with a traditional approach to investing in generics. At that same time, we have added CDSL which is a regulated duopoly in the KYC and depository space. It has a good cash flow business going in and right now its valuations are a little cheaper than what it was a few months back. So, we decided to add a little bit of that.
Any deletions from the existing portfolio?
No. We added to the existing holdings where the valuations were compelling even now.
How have you read into the earnings? What is the outlook on global factors saying that the recession could be worrying for global markets as a whole? How are you looking at some of these variables?
When you look at the earnings, this is clearly a disappointing quarter for many companies and industries. We have seen that growth has tapered off and people have been guiding that. It is not like it suddenly happened. Many companies have been saying that growth is not going to be sustainable at any level the same way as it was in the past.
It is okay to have a lower growth period for a short term. We have to keep a watch. But the other side is capital is completely unconstrained; you are getting a lot of low-cost capital still for businesses to invest in. VCs and all are pumping money into technology.
On the other end, disruption is continuing in areas where it was there anyway. We are seeing newer companies scaling losses like Uber and all. It is quite amazing to see that despite those losses, the market still believes that these companies can scale and become large players. But these are platform companies with different dynamics in the way they operate. We have to look at how they integrate with the existing economy, how it affects the auto business and how it affects technology business overall.
These are things we keep in mind when we look at companies and wherever we see earnings not declining too much or longer term trajectory going in terms of ROCs and everything being maintained, we prefer to own those companies rather than just buy the newer age companies.
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