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NEW DELHI: In an exclusive interview with ET Now, industralist Rajiv Jain of GQG Partners said that cheap valuations, mid-teens growth expectation, earnings predictability, less risk, and no meaningful substance in the US short seller reports led him to buy a stake in four out of the 10 listed Adani Group companies.
GQG Partners, which manages more than $92 billion in client assets globally, has invested close to Rs 15,400 crore in four Adani Group companies – Adani Enterprises, Adani Ports, Adani Transmission, and Adani Green Energy. The investment comes at a time when the sentiments against the embattled enterprise are quite negative due to the Hindenburg Research Report.
Here are the excerpts from Rajiv Jain’s exclusive interview with ET NOW …
What really is the thinking behind this Rs 15,000 crore commitment in the Adani Group of companies?
So as you know we have followed this group for a while and we had never done anything because the infrastructure has been a tough space. In general we have been underweighted in fact we barely owned anything in front of us. For the longest time. But I think the recent events kind of made it very attractive in general. And the other aspect is that the group itself from a fundamental bottom of perspective is better positioned. If you look at Adani Enterprise for example, them getting Mumbai Airport two and a half years ago, that was a kind of game changer but the stock ran away. If you look at the Adani ports and their foray into the more sort of hinterland as such, could make it very powerful. So I think every name had its own unique entity, sort of elements which made it very attractive. And we as you know we have significant investments on the utility type businesses. In fact if I look at it globally, our set of India, we have almost five billion dollars invested in utility type assets, pipeline, airports. So we do understand those businesses. I thought there was kind of a mismatch between how people look at classic PE type stuff which is not really that sort of relevant in the state these companies are. So that was kind of the genesis of how we thought about these, the whole group.
What to your mind led to the sell-off in Adani group of stocks and what gives you the commitment that despite the erosion in the equity value, the group is in fine fettle?
So as you know the starting point, the stock first of all did run up quite aggressively last year and a half, two years. And some of them were Adani Green that ran up along with the other similar names in Europe and other places. So there was a big influx of ESG money, whether index or active, into these kind of names. And that obviously made some of these stocks kind of a bit expensive versus their own history. And then this short sell report came out which obviously was very strongly worded in my opinion. Although as we started peeling the onion, we thought that this was kind of an old rehashed story. And from our perspective, the substance was not as meaningful here. But that sort of triggered this leg which took it down. And I think the other part is that the technicalities of the index players involved so and so kind of made it worse.
As a fund manager, as an investor, what gives you the conviction that both the concerns which historically have been big concerns for Adani group of stocks, those concerns according to you in your playbook is something which is manageable?
If you look at vast majority of the assets are regulated assets. They tend to a very, very long tail. So when you have, you can’t have financial leverage along with operating leverage. These companies have very sort of predictable long term trajectory, even if you slow down the growth. So that’s the first part of it. And when you adjust for the leverage, in fact, if you look at the US utilities, and you own a bunch of them on an average debt to EBITDA levels in US utilities, and these are some of the best of the breed is around six to seven times debt to EBITDA. If you look at the leverage here, it’s around three, three and a half times. But the growth capex is why the negative free cash flow kicks in. So I think they have predictive earning stream that has 20 plus year visibility. These are regulated assets. And in growth utilities, they tend to have negative free cash flow. That’s the norm. That’s in fact, you want to have them have negative free cash flow. That means because they’re able to deploy capital on a longer term basis with fairly attractive returns. So the debt levels, when you look from a utility perspective, is actually on the lower side, not on the higher side. But if they lower the capex plans, which they already announced, I think it becomes a fairly attractive sort of risk reward.
The fact that Arani Enterprises’ FPO did not go through, that means the proposed capital in the company will not come in and that will have impact on the growth plan. Are you conscious of that?
Of course we are. And I think that again is a growth capex issue rather than maintenance capex, because a lot of these businesses don’t have a lot of maintenance capex. So I think from that perspective, we feel it’s perfectly fine. They just have to tune down the growth rates, but it becomes a lot more stable and hence arguably higher valuation.
Rajiv Jain has always maintained that the way you invest is that good news and good prices never come together and you never waste a crisis. So is this some kind of crisis where you are investing the classic Rajiv Jain way, never waste a crisis?
Yeah, I think that’s an important part of what we do, because if you think about investing, it’s nothing but an arbitrage between perception and reality. If there’s a perfect company, so chances are the prices would be so expensive that it actually becomes an imperfect stock. And I’ll give you a couple of examples. I remember the first time when we bought ITC in a meaningful way was 1996 when there was a tax liability risk on them and the stock declined, I believe this was early 1996, but almost 35% plus. And as you know, we own ITC, we ended up owning ITC for over two decades, I believe almost 21 years. Then if I go back to actually 2004 elections, we bought significantly during the election, the market is almost 25, 30% in a matter of days. And then the last one would be the sanctions, US sanctions against India in 1998. And the market is down almost 35, 40% in a matter of six, seven months. In fact, but I will also tell you, I’m telling you some of the winners. So to be fair, I have to tell you one of the losers, which was I got very nervous in early 17 after the demonetization, which obviously was a huge mistake. So yeah, so in general, if you buy fundamentally sound businesses with a very high baggage to entry, because think about it, you cannot replicate Mumbai airport. Can you predict earnings growth of Microsoft, which is a fantastic franchise, 12 months out, they’ve gone from 20% revenue growth to five, 6% revenue growth. That is in other words, compared to Mumbai airport, it’s actually much more predictable long-term story. The question is, you’ve got to buy cheap enough.
So why did you shy away from buying Adani Group of stocks earlier? They still had the airport, they still had the infrastructure projects in place, and they did not have any kind of concerns which a lot of analysts have raised about high valuations and high leverage. What stopped you from buying them in 2020, 21 or even 22?
Yeah, so I think if you look at the ports, for example, the regulatory changes have been much more recent by the way. So I think that the fundamentals of business today are better in the last two years than they were before at the margin. Number two is we deploy a lot of capital. You can’t simply start chasing because you can’t execute in two days or something. When you talk about hundreds of millions of dollars, I mean, half a billion dollars kind of stuff, we would move the price. So we do need some sort of a shakeout for us to enter. And these things had such a strong momentum. And the valuations were getting extended, so we could have executed them in a proper manner versus, let’s say, in my opinion, a mini crisis like what we’re seeing now.
What is your view on the debt market reaction to Adani Group of companies? There is a royal in the bond market as well. So do you think apart from equity market, the bond market also has overreacted?
In fact, it’s interesting because if you look at the bond markets, they initially reacted, but I mean, they’re down to sort of low teens to a high single depending. I think transmission, I believe, is nine percent Asian and green is on 13, 14 percent. And green, as you know, is the one of the more leverage ones. So I think I think they behave reasonably well. And I do believe that the if the stock price reacts favorably, those will also come in. So globally, interest rates have gone up everywhere in the world. Right. So when you look at the spreads, the spreads have not widened as much. I mean, they did for a brief moment, but they have sort of calmed down. Almost all the rating agencies have have have reaffirmed. So, in fact, the bond markets are kind of telling the same story that that this is not a crisis situation from our from our underlying fundamental business perspective. Yes, the growth will be slightly slower than what you would have without that. But I think that makes it more stable and hence, you know, a lot more defensive.
A lot of global investors and you just refer to ESG concerns. Do you think this investment of yours in a sense gets that ESG endorsement as well? Because that’s one concern which again has been raised off late by global investors and by global rating agencies.
Well, I think if I ran my portfolio based on what rating is telling me, I’ll be a bump on the street. Okay. So I couldn’t care less what they say. In fact, I believe it, but if the indices taken out from index, I’ll be happy camper because I think it’ll just allow us to increase position if you need to. So I think a lot of these kind of mechanical box checking exercises, which really don’t mean anything. So I’ll tell you an example. I mean, Reliance, we first started buying in a big way in this cycle in 2016-20, actually early late 2016 and early 2017. They had not rolled out the geo that point. And I think similar concerns and what they are for those two. So look, I mean, this is saying that there has to be some reason for pessimism. I mean, otherwise there wouldn’t be any pessimism. But I think I’m actually perfectly happy for these rating agencies to take these stocks out of the index or what have you. I mean, it’ll be a good thing, not a bad thing for us.
Let’s change gears and talk about what is your outlook on equity market/ First 2020 interest rates came down, interest rates are now going higher. Warren Buffett always says that interest rates are like gravity. They put valuations down. So in this rising interest rate environment, what do you think one should expect from equity markets, especially global equity markets?
So global equity markets, I feel one has to be a little bit more cautious because interest rates have not fully, they’ve gone up quite a bit. But if inflation doesn’t come down in a meaningful manner, then there’s a possibility interest rates can still surprise on the upside. In fact, if you look at the consensus expectations on US interest rates, they have moved since February, by the way, almost 65, 70 base point in terms of where interest rates could end up by end of this year. So I think there’s still some risk. The other part is by the way, the geopolitical risk on a higher side. So I think we have to incorporate that, which by the way is another reason I actually like India because it has less geopolitical risk. So the risk factor is a lot more favorable in India than most of the other places. If you look at the constant barrage of news coming out of Washington, DC against China in terms of sanctioning its companies, products and so forth, that is not a recipe for rewriting for China per se. So in general, I believe that the market return expectations should be on the lower side, not higher side, because there’s been a whole generation of investors who have basically seen nothing but low or declining rates. And that, I think, I think, I think that movie is pretty much over.
In general, the view on India is that Indian economy is in a fine fettle. And we are very proud that we have one of the fastest growing economy in the world. Stability I think is something which is obvious, both in terms of the corporate predictability and the political stability, something you refer to. But my question is that everybody has also raised concerns about valuations in India, the reverse of what I asked you. It’s like saying that in India, the market is great, but you’re buying gold at the price of diamond.
I think valuation is always an approximation, first of all. Part of the India’s issue is the index composition. And I’m not saying in a bad way, but just a fact. So if you look at, for example, state owned banks in India, well, they’re selling similar value to state owned banks in China. You get energy companies in India, same in China, tech companies, very similar in China. But the index composition in China is a lot more cyclical versus index composition in India, India, right? So if you look at former companies in China, they actually a little bit more expensive. Some of the best staples in China are similar valuations in India. So I think when you adjust for that, the valuation gap is not really different, much different. Not to mention if it recently companies like Ali Baba and Tencent, the government has taken golden share, which basically means that in my opinion, they are quasi state owned. The problem is the state owned company in China traded five times earnings. These private sector companies, which in my opinion are trending towards becoming state owned, they’re 25 to 30 times earning. So when you adjust for all of that, I mean, I think the valuation of fairly reasonable. Would you be looking at increasing your India exposure since you are a global fund now and you got the options to invest in other countries as well? Look, I mean, we try not to make these predictions whether we’re going to increase or not. It’s a very bottom up story. I mean, so for example, if let’s say the Adani Group hadn’t faced the issue that they’re facing now, in my opinion, these are very short term issues. I don’t think we’ll be discussing three, five years. We probably won’t have bought those, right? So I think it’s bottom up stock specific, but in general, our India exposure is been trending higher, not lower.
But can it be assumed that when you’ve invested in Adani Group of companies and the way you’ve invested in the past, this is not like a trading bet. This is not like a tactical investment. This is more like a multi-year investment.
Look, these are businesses which we really have. In fact, we tend to take five percent every business. We would not own a business if you’re not sure how the business looks like five years. So I think this could be a very, very long term trade. In fact, look at the HDFC banks, I think we’ve owned it for almost 20 plus years. Housing Development Finance Corporation, I’ve owned for 24 years. So a lot of these names we’ve owned for a very, very long time. And by the way, HDFC bank in 2002 wasn’t exactly as popular as it seems to be in the last few years. There is an election cycle in 2024 as a global investor. I don’t know if I’ve actually sold or bought stocks simply before elections because I think there’s more fear than a substantive change that happens because of elections, because I think there are a lot of self-driven momentum that you’re seeing in various states that the policy, the reforms that have happened last five, six years are quite dramatic. And I think sometimes I feel they don’t get enough day and sun, which means that the growth might be a lot more sustaining for the foreseeable future. I’m not saying for 20 years, but in the foreseeable future. So I don’t believe it will change much at all. In fact, as I said, some of times, again, there’s a mini crisis because elections, because people always get either too excited, too depressed because of who’s running. But I think over the last five, six years, the changes that have taken place, the reforms that have taken place from almost every sector, there’s a sort of a self-driven element of a lot of these, which will help the earnings growth.
If I just talk about your current holdings, the India Romance, some would argue, is centered around IT, consumers and financials. But you have little exposure to consumer staples and IT. Why is that?
Look, there’s nothing wrong with them. But in my opinion, there are just better opportunities. So if you look at staples, I mean, ITC last year, when we started buying in a bigger way, was 14, 15 times earnings with a 5% dividend deal. And thanks to the ESG, so I have to give them credit that we made some decent money. So we always have to thank somebody for the opportunity to get in. But we really don’t own any other staples. They’re fine. But Hindustan Unilever is not exactly being given away at, I don’t know, 55 times plus times earnings. So those are comfortable names to own. And the problem with comfortable names is that it’s hard to really beat the averages with those comfort names. In fact, if you look at the portfolio construction today, it looks very different than what I’ve had in the last 15 plus years. As you know, I mean, I don’t know, it’s close to 30 years that I’ve been investing in India professionally. So there’s a big infrastructure thrust. There’s a big thrust on some of the state-owned companies. I think we actually like NTPC a lot, as an example. We don’t own IT services because they would be more cyclical than what people think. They’re fantastic companies, by the way. So if I didn’t own anything else, if I’m running an India fund, I probably would own them. But we like to run it very concentrated. So they just don’t fit the bill when you add everything up. They’re just better opportunities elsewhere.
There’s NTPC, there is State Bank of India, there is NTPC in your portfolio. The common tag here is these are PSU banks. These are PSU-owned. And historically, global investors, at least who’ve invested in India, even the folks who’ve been investing for more than two decades now, they’ve not bought PSUs. You are buying them. Why is that?
Well, I think it takes two to tango, right? So for every buy, there’s a seller. But I think, first of all, I disagree with something you said. If you were sitting here in 2005, SBI used to trade at 15%, 20% premium for foreigners. Foreigners couldn’t buy at the market, by the way. So like everything else in markets, the sentiment is cyclical. And I think in our opinion, it’ll change. But the good news is the way we think about it, that our job is to get earnings growth and the dividend combination right. If the valuations increase, that’s wonderful. But even if they don’t increase, we should be able to compound a double digit. That’s how we think about it. We don’t wait and hope for others to agree with our view. Maybe they never agree. But in the meantime, the earnings growth plus dividend gets us to double digits. We are happy owners.
You’ve always insisted that market price is a function of EPS into PE. PE is perception. EPS is growth. In Indian market, where do you think there is scope for PE expansion as well as EPS expansion? And where do you think there is scope of only EPS expansion and no PE expansion?
Yeah I think the second bucket you’ll get the companies like Nestle is on this world. I think these companies will continue to deliver. But Nestle, I don’t know, 70, 75 times, something like that. Earnings have kind of lost track. And Nestle, as you know, was a large position for a long time. So could they be degraded as the earnings growth shifts away to other areas? Because you have to look at one different, one aspect. Over the last decade or so, globally, earnings growth was on a slower side. So a lot of these defensive type businesses were re-rated because investors look for growth, including us. So growth was scarce. Now, and interest rates were low. So you got a bubble in tech, not so much in India, but elsewhere. On the first bucket, look, I think we talked about some of those. I mean, State Bank of India, why does they have to sell at eight times earnings? Because I think they’ll grow at mid-teens plus earnings. So could they deliver those returns? If they keep delivering those returns, could the multiples be higher? I think so. In fact, even some of the private sector banks have recently been degraded too. So in fact, I would argue that most of the names that we own have a reasonable chance of multiple expansion. But if it doesn’t happen, it’s not the end of the world.
What makes you so bullish on State Bank of India?
If you look at the corporate side, besides ICICI, I think they’re probably one of the better positions on the corporate book. But I think the question always is what is discounted in the price? So yes, I agree the return ratio is not as good. But who would be able to grow earnings at mid-teens plus in a much more consistent manner and what the market is not anticipating? I think that’s where we believe the rubber meets the road in terms of the gap between what is a perception reality. So at eight times earnings, if you take a five-year view and they grow earnings at, let’s say, mid-teens plus, it becomes a fairly attractive proposition, especially because they have a much better… I mean, there are a lot of private sector banks who have really no experience in lending to the corporates, by the way. But that was a strength for them. But would that become a weakness going forward.
Have you had a look at the Indian internet and consumer tech companies which have gone public? There’s a Paytm, there is a Nyka, there is a Zomato. These are exciting businesses. These are businesses that some would say are the future high growth businesses of this decade.
Yeah, look, we look at a lot of things and we looked at some of the US and the European ones too. And if you look at the profitability expectations that these companies had, they are being cut pretty aggressively. And the reason is some of these businesses have really no barriers to entry. So the growth is fine, but is this sustainable long-term growth? And one of the things we look for all the time is what are the barriers to entry? Can somebody else replicate those businesses? And at this point, there’s no evidence that these are truly business that have any pricing power or barriers which can make it difficult for others to come in. So the valuations are still on the expensive side for what they’re delivering. But I’m not saying people can’t make money. As they say, there are a hundred ways to heaven, you just need to find one. But from our cup of tea, there’s just better fish to fry in some of the other areas.
Mr Jain, every market follows a cycle and there’s always a theme which is at play. So in 2000, it was TMT. Then it was infra between 2003 and 2008. Then good old consumer stocks which you bought aggressively, the HULs and the Nestle’s of the world. Can I say that looking at your portfolio positioning in India, you’re betting on the infrastructure boom for next three or five years?
Look, I think we are pretty bullish on that because I think there are a lot of things in place because the execution under this administration has been strong, which is important here. And the second part is that we saw the similar in China in that stage of development where the infrastructure actually took off in a big way almost 24, 25 years ago. So we feel that India might be in a similar sort of setup where the other countries could accelerate. The problem is there are only few foreign names in the infra side, right? Quality names, they’re not dime a dozen. Like banks, there are a lot of names you can play. If you look at consumer staples, there are a lot of names. But infra side, there’s a little bit dearth of those. But I agree that I think if I take a five plus year view, which is what we take, none of what we do is sort of on a short-term basis. I think infra, we feel is a lot better place to be. And foreign investors are totally missing in that space, by the way. IT services, Pharma, or especially consumer staples is kind of what are called comfort zone.
Every investment which you do comes with an underlying risk. So for any group of companies, how would you define your risk? What could go wrong which you currently are aware of, but that is something which you’re factoring in? What is the risk according to you?
Well, I think as you said, there are always some risk in that. I think the risk would be the gross low zone dramatically in some of the companies that we own because the regulatory issues that they might face on a go forward basis. Because in regulated businesses, the biggest risk always is regulation, right? That’s the positive, but that’s the negative. So we don’t see any signs of that yet. One of our concerns was in terms of sort of managing growth because these are complex projects. I think that, by the way, is something not well appreciated is that the baddest entry in infrastructure anywhere in the world are very high, particularly in India, execution extremely difficult. You might remember that POSCO, Iron and Steel tried to acquire land for seven, eight years, couldn’t even acquire land, and then they left. So greenfield projects are very, very difficult. And that’s what actually we quite like about this group is they have shown remarkable ability to execute on greenfield projects. And I feel that they don’t get full credit for that in terms of ability to pull that off.
Source: ET NOW
GQG Partners, which manages more than $92 billion in client assets globally, has invested close to Rs 15,400 crore in four Adani Group companies – Adani Enterprises, Adani Ports, Adani Transmission, and Adani Green Energy. The investment comes at a time when the sentiments against the embattled enterprise are quite negative due to the Hindenburg Research Report.
Here are the excerpts from Rajiv Jain’s exclusive interview with ET NOW …
What really is the thinking behind this Rs 15,000 crore commitment in the Adani Group of companies?
So as you know we have followed this group for a while and we had never done anything because the infrastructure has been a tough space. In general we have been underweighted in fact we barely owned anything in front of us. For the longest time. But I think the recent events kind of made it very attractive in general. And the other aspect is that the group itself from a fundamental bottom of perspective is better positioned. If you look at Adani Enterprise for example, them getting Mumbai Airport two and a half years ago, that was a kind of game changer but the stock ran away. If you look at the Adani ports and their foray into the more sort of hinterland as such, could make it very powerful. So I think every name had its own unique entity, sort of elements which made it very attractive. And we as you know we have significant investments on the utility type businesses. In fact if I look at it globally, our set of India, we have almost five billion dollars invested in utility type assets, pipeline, airports. So we do understand those businesses. I thought there was kind of a mismatch between how people look at classic PE type stuff which is not really that sort of relevant in the state these companies are. So that was kind of the genesis of how we thought about these, the whole group.
What to your mind led to the sell-off in Adani group of stocks and what gives you the commitment that despite the erosion in the equity value, the group is in fine fettle?
So as you know the starting point, the stock first of all did run up quite aggressively last year and a half, two years. And some of them were Adani Green that ran up along with the other similar names in Europe and other places. So there was a big influx of ESG money, whether index or active, into these kind of names. And that obviously made some of these stocks kind of a bit expensive versus their own history. And then this short sell report came out which obviously was very strongly worded in my opinion. Although as we started peeling the onion, we thought that this was kind of an old rehashed story. And from our perspective, the substance was not as meaningful here. But that sort of triggered this leg which took it down. And I think the other part is that the technicalities of the index players involved so and so kind of made it worse.
As a fund manager, as an investor, what gives you the conviction that both the concerns which historically have been big concerns for Adani group of stocks, those concerns according to you in your playbook is something which is manageable?
If you look at vast majority of the assets are regulated assets. They tend to a very, very long tail. So when you have, you can’t have financial leverage along with operating leverage. These companies have very sort of predictable long term trajectory, even if you slow down the growth. So that’s the first part of it. And when you adjust for the leverage, in fact, if you look at the US utilities, and you own a bunch of them on an average debt to EBITDA levels in US utilities, and these are some of the best of the breed is around six to seven times debt to EBITDA. If you look at the leverage here, it’s around three, three and a half times. But the growth capex is why the negative free cash flow kicks in. So I think they have predictive earning stream that has 20 plus year visibility. These are regulated assets. And in growth utilities, they tend to have negative free cash flow. That’s the norm. That’s in fact, you want to have them have negative free cash flow. That means because they’re able to deploy capital on a longer term basis with fairly attractive returns. So the debt levels, when you look from a utility perspective, is actually on the lower side, not on the higher side. But if they lower the capex plans, which they already announced, I think it becomes a fairly attractive sort of risk reward.
The fact that Arani Enterprises’ FPO did not go through, that means the proposed capital in the company will not come in and that will have impact on the growth plan. Are you conscious of that?
Of course we are. And I think that again is a growth capex issue rather than maintenance capex, because a lot of these businesses don’t have a lot of maintenance capex. So I think from that perspective, we feel it’s perfectly fine. They just have to tune down the growth rates, but it becomes a lot more stable and hence arguably higher valuation.
Rajiv Jain has always maintained that the way you invest is that good news and good prices never come together and you never waste a crisis. So is this some kind of crisis where you are investing the classic Rajiv Jain way, never waste a crisis?
Yeah, I think that’s an important part of what we do, because if you think about investing, it’s nothing but an arbitrage between perception and reality. If there’s a perfect company, so chances are the prices would be so expensive that it actually becomes an imperfect stock. And I’ll give you a couple of examples. I remember the first time when we bought ITC in a meaningful way was 1996 when there was a tax liability risk on them and the stock declined, I believe this was early 1996, but almost 35% plus. And as you know, we own ITC, we ended up owning ITC for over two decades, I believe almost 21 years. Then if I go back to actually 2004 elections, we bought significantly during the election, the market is almost 25, 30% in a matter of days. And then the last one would be the sanctions, US sanctions against India in 1998. And the market is down almost 35, 40% in a matter of six, seven months. In fact, but I will also tell you, I’m telling you some of the winners. So to be fair, I have to tell you one of the losers, which was I got very nervous in early 17 after the demonetization, which obviously was a huge mistake. So yeah, so in general, if you buy fundamentally sound businesses with a very high baggage to entry, because think about it, you cannot replicate Mumbai airport. Can you predict earnings growth of Microsoft, which is a fantastic franchise, 12 months out, they’ve gone from 20% revenue growth to five, 6% revenue growth. That is in other words, compared to Mumbai airport, it’s actually much more predictable long-term story. The question is, you’ve got to buy cheap enough.
So why did you shy away from buying Adani Group of stocks earlier? They still had the airport, they still had the infrastructure projects in place, and they did not have any kind of concerns which a lot of analysts have raised about high valuations and high leverage. What stopped you from buying them in 2020, 21 or even 22?
Yeah, so I think if you look at the ports, for example, the regulatory changes have been much more recent by the way. So I think that the fundamentals of business today are better in the last two years than they were before at the margin. Number two is we deploy a lot of capital. You can’t simply start chasing because you can’t execute in two days or something. When you talk about hundreds of millions of dollars, I mean, half a billion dollars kind of stuff, we would move the price. So we do need some sort of a shakeout for us to enter. And these things had such a strong momentum. And the valuations were getting extended, so we could have executed them in a proper manner versus, let’s say, in my opinion, a mini crisis like what we’re seeing now.
What is your view on the debt market reaction to Adani Group of companies? There is a royal in the bond market as well. So do you think apart from equity market, the bond market also has overreacted?
In fact, it’s interesting because if you look at the bond markets, they initially reacted, but I mean, they’re down to sort of low teens to a high single depending. I think transmission, I believe, is nine percent Asian and green is on 13, 14 percent. And green, as you know, is the one of the more leverage ones. So I think I think they behave reasonably well. And I do believe that the if the stock price reacts favorably, those will also come in. So globally, interest rates have gone up everywhere in the world. Right. So when you look at the spreads, the spreads have not widened as much. I mean, they did for a brief moment, but they have sort of calmed down. Almost all the rating agencies have have have reaffirmed. So, in fact, the bond markets are kind of telling the same story that that this is not a crisis situation from our from our underlying fundamental business perspective. Yes, the growth will be slightly slower than what you would have without that. But I think that makes it more stable and hence, you know, a lot more defensive.
A lot of global investors and you just refer to ESG concerns. Do you think this investment of yours in a sense gets that ESG endorsement as well? Because that’s one concern which again has been raised off late by global investors and by global rating agencies.
Well, I think if I ran my portfolio based on what rating is telling me, I’ll be a bump on the street. Okay. So I couldn’t care less what they say. In fact, I believe it, but if the indices taken out from index, I’ll be happy camper because I think it’ll just allow us to increase position if you need to. So I think a lot of these kind of mechanical box checking exercises, which really don’t mean anything. So I’ll tell you an example. I mean, Reliance, we first started buying in a big way in this cycle in 2016-20, actually early late 2016 and early 2017. They had not rolled out the geo that point. And I think similar concerns and what they are for those two. So look, I mean, this is saying that there has to be some reason for pessimism. I mean, otherwise there wouldn’t be any pessimism. But I think I’m actually perfectly happy for these rating agencies to take these stocks out of the index or what have you. I mean, it’ll be a good thing, not a bad thing for us.
Let’s change gears and talk about what is your outlook on equity market/ First 2020 interest rates came down, interest rates are now going higher. Warren Buffett always says that interest rates are like gravity. They put valuations down. So in this rising interest rate environment, what do you think one should expect from equity markets, especially global equity markets?
So global equity markets, I feel one has to be a little bit more cautious because interest rates have not fully, they’ve gone up quite a bit. But if inflation doesn’t come down in a meaningful manner, then there’s a possibility interest rates can still surprise on the upside. In fact, if you look at the consensus expectations on US interest rates, they have moved since February, by the way, almost 65, 70 base point in terms of where interest rates could end up by end of this year. So I think there’s still some risk. The other part is by the way, the geopolitical risk on a higher side. So I think we have to incorporate that, which by the way is another reason I actually like India because it has less geopolitical risk. So the risk factor is a lot more favorable in India than most of the other places. If you look at the constant barrage of news coming out of Washington, DC against China in terms of sanctioning its companies, products and so forth, that is not a recipe for rewriting for China per se. So in general, I believe that the market return expectations should be on the lower side, not higher side, because there’s been a whole generation of investors who have basically seen nothing but low or declining rates. And that, I think, I think, I think that movie is pretty much over.
In general, the view on India is that Indian economy is in a fine fettle. And we are very proud that we have one of the fastest growing economy in the world. Stability I think is something which is obvious, both in terms of the corporate predictability and the political stability, something you refer to. But my question is that everybody has also raised concerns about valuations in India, the reverse of what I asked you. It’s like saying that in India, the market is great, but you’re buying gold at the price of diamond.
I think valuation is always an approximation, first of all. Part of the India’s issue is the index composition. And I’m not saying in a bad way, but just a fact. So if you look at, for example, state owned banks in India, well, they’re selling similar value to state owned banks in China. You get energy companies in India, same in China, tech companies, very similar in China. But the index composition in China is a lot more cyclical versus index composition in India, India, right? So if you look at former companies in China, they actually a little bit more expensive. Some of the best staples in China are similar valuations in India. So I think when you adjust for that, the valuation gap is not really different, much different. Not to mention if it recently companies like Ali Baba and Tencent, the government has taken golden share, which basically means that in my opinion, they are quasi state owned. The problem is the state owned company in China traded five times earnings. These private sector companies, which in my opinion are trending towards becoming state owned, they’re 25 to 30 times earning. So when you adjust for all of that, I mean, I think the valuation of fairly reasonable. Would you be looking at increasing your India exposure since you are a global fund now and you got the options to invest in other countries as well? Look, I mean, we try not to make these predictions whether we’re going to increase or not. It’s a very bottom up story. I mean, so for example, if let’s say the Adani Group hadn’t faced the issue that they’re facing now, in my opinion, these are very short term issues. I don’t think we’ll be discussing three, five years. We probably won’t have bought those, right? So I think it’s bottom up stock specific, but in general, our India exposure is been trending higher, not lower.
But can it be assumed that when you’ve invested in Adani Group of companies and the way you’ve invested in the past, this is not like a trading bet. This is not like a tactical investment. This is more like a multi-year investment.
Look, these are businesses which we really have. In fact, we tend to take five percent every business. We would not own a business if you’re not sure how the business looks like five years. So I think this could be a very, very long term trade. In fact, look at the HDFC banks, I think we’ve owned it for almost 20 plus years. Housing Development Finance Corporation, I’ve owned for 24 years. So a lot of these names we’ve owned for a very, very long time. And by the way, HDFC bank in 2002 wasn’t exactly as popular as it seems to be in the last few years. There is an election cycle in 2024 as a global investor. I don’t know if I’ve actually sold or bought stocks simply before elections because I think there’s more fear than a substantive change that happens because of elections, because I think there are a lot of self-driven momentum that you’re seeing in various states that the policy, the reforms that have happened last five, six years are quite dramatic. And I think sometimes I feel they don’t get enough day and sun, which means that the growth might be a lot more sustaining for the foreseeable future. I’m not saying for 20 years, but in the foreseeable future. So I don’t believe it will change much at all. In fact, as I said, some of times, again, there’s a mini crisis because elections, because people always get either too excited, too depressed because of who’s running. But I think over the last five, six years, the changes that have taken place, the reforms that have taken place from almost every sector, there’s a sort of a self-driven element of a lot of these, which will help the earnings growth.
If I just talk about your current holdings, the India Romance, some would argue, is centered around IT, consumers and financials. But you have little exposure to consumer staples and IT. Why is that?
Look, there’s nothing wrong with them. But in my opinion, there are just better opportunities. So if you look at staples, I mean, ITC last year, when we started buying in a bigger way, was 14, 15 times earnings with a 5% dividend deal. And thanks to the ESG, so I have to give them credit that we made some decent money. So we always have to thank somebody for the opportunity to get in. But we really don’t own any other staples. They’re fine. But Hindustan Unilever is not exactly being given away at, I don’t know, 55 times plus times earnings. So those are comfortable names to own. And the problem with comfortable names is that it’s hard to really beat the averages with those comfort names. In fact, if you look at the portfolio construction today, it looks very different than what I’ve had in the last 15 plus years. As you know, I mean, I don’t know, it’s close to 30 years that I’ve been investing in India professionally. So there’s a big infrastructure thrust. There’s a big thrust on some of the state-owned companies. I think we actually like NTPC a lot, as an example. We don’t own IT services because they would be more cyclical than what people think. They’re fantastic companies, by the way. So if I didn’t own anything else, if I’m running an India fund, I probably would own them. But we like to run it very concentrated. So they just don’t fit the bill when you add everything up. They’re just better opportunities elsewhere.
There’s NTPC, there is State Bank of India, there is NTPC in your portfolio. The common tag here is these are PSU banks. These are PSU-owned. And historically, global investors, at least who’ve invested in India, even the folks who’ve been investing for more than two decades now, they’ve not bought PSUs. You are buying them. Why is that?
Well, I think it takes two to tango, right? So for every buy, there’s a seller. But I think, first of all, I disagree with something you said. If you were sitting here in 2005, SBI used to trade at 15%, 20% premium for foreigners. Foreigners couldn’t buy at the market, by the way. So like everything else in markets, the sentiment is cyclical. And I think in our opinion, it’ll change. But the good news is the way we think about it, that our job is to get earnings growth and the dividend combination right. If the valuations increase, that’s wonderful. But even if they don’t increase, we should be able to compound a double digit. That’s how we think about it. We don’t wait and hope for others to agree with our view. Maybe they never agree. But in the meantime, the earnings growth plus dividend gets us to double digits. We are happy owners.
You’ve always insisted that market price is a function of EPS into PE. PE is perception. EPS is growth. In Indian market, where do you think there is scope for PE expansion as well as EPS expansion? And where do you think there is scope of only EPS expansion and no PE expansion?
Yeah I think the second bucket you’ll get the companies like Nestle is on this world. I think these companies will continue to deliver. But Nestle, I don’t know, 70, 75 times, something like that. Earnings have kind of lost track. And Nestle, as you know, was a large position for a long time. So could they be degraded as the earnings growth shifts away to other areas? Because you have to look at one different, one aspect. Over the last decade or so, globally, earnings growth was on a slower side. So a lot of these defensive type businesses were re-rated because investors look for growth, including us. So growth was scarce. Now, and interest rates were low. So you got a bubble in tech, not so much in India, but elsewhere. On the first bucket, look, I think we talked about some of those. I mean, State Bank of India, why does they have to sell at eight times earnings? Because I think they’ll grow at mid-teens plus earnings. So could they deliver those returns? If they keep delivering those returns, could the multiples be higher? I think so. In fact, even some of the private sector banks have recently been degraded too. So in fact, I would argue that most of the names that we own have a reasonable chance of multiple expansion. But if it doesn’t happen, it’s not the end of the world.
What makes you so bullish on State Bank of India?
If you look at the corporate side, besides ICICI, I think they’re probably one of the better positions on the corporate book. But I think the question always is what is discounted in the price? So yes, I agree the return ratio is not as good. But who would be able to grow earnings at mid-teens plus in a much more consistent manner and what the market is not anticipating? I think that’s where we believe the rubber meets the road in terms of the gap between what is a perception reality. So at eight times earnings, if you take a five-year view and they grow earnings at, let’s say, mid-teens plus, it becomes a fairly attractive proposition, especially because they have a much better… I mean, there are a lot of private sector banks who have really no experience in lending to the corporates, by the way. But that was a strength for them. But would that become a weakness going forward.
Have you had a look at the Indian internet and consumer tech companies which have gone public? There’s a Paytm, there is a Nyka, there is a Zomato. These are exciting businesses. These are businesses that some would say are the future high growth businesses of this decade.
Yeah, look, we look at a lot of things and we looked at some of the US and the European ones too. And if you look at the profitability expectations that these companies had, they are being cut pretty aggressively. And the reason is some of these businesses have really no barriers to entry. So the growth is fine, but is this sustainable long-term growth? And one of the things we look for all the time is what are the barriers to entry? Can somebody else replicate those businesses? And at this point, there’s no evidence that these are truly business that have any pricing power or barriers which can make it difficult for others to come in. So the valuations are still on the expensive side for what they’re delivering. But I’m not saying people can’t make money. As they say, there are a hundred ways to heaven, you just need to find one. But from our cup of tea, there’s just better fish to fry in some of the other areas.
Mr Jain, every market follows a cycle and there’s always a theme which is at play. So in 2000, it was TMT. Then it was infra between 2003 and 2008. Then good old consumer stocks which you bought aggressively, the HULs and the Nestle’s of the world. Can I say that looking at your portfolio positioning in India, you’re betting on the infrastructure boom for next three or five years?
Look, I think we are pretty bullish on that because I think there are a lot of things in place because the execution under this administration has been strong, which is important here. And the second part is that we saw the similar in China in that stage of development where the infrastructure actually took off in a big way almost 24, 25 years ago. So we feel that India might be in a similar sort of setup where the other countries could accelerate. The problem is there are only few foreign names in the infra side, right? Quality names, they’re not dime a dozen. Like banks, there are a lot of names you can play. If you look at consumer staples, there are a lot of names. But infra side, there’s a little bit dearth of those. But I agree that I think if I take a five plus year view, which is what we take, none of what we do is sort of on a short-term basis. I think infra, we feel is a lot better place to be. And foreign investors are totally missing in that space, by the way. IT services, Pharma, or especially consumer staples is kind of what are called comfort zone.
Every investment which you do comes with an underlying risk. So for any group of companies, how would you define your risk? What could go wrong which you currently are aware of, but that is something which you’re factoring in? What is the risk according to you?
Well, I think as you said, there are always some risk in that. I think the risk would be the gross low zone dramatically in some of the companies that we own because the regulatory issues that they might face on a go forward basis. Because in regulated businesses, the biggest risk always is regulation, right? That’s the positive, but that’s the negative. So we don’t see any signs of that yet. One of our concerns was in terms of sort of managing growth because these are complex projects. I think that, by the way, is something not well appreciated is that the baddest entry in infrastructure anywhere in the world are very high, particularly in India, execution extremely difficult. You might remember that POSCO, Iron and Steel tried to acquire land for seven, eight years, couldn’t even acquire land, and then they left. So greenfield projects are very, very difficult. And that’s what actually we quite like about this group is they have shown remarkable ability to execute on greenfield projects. And I feel that they don’t get full credit for that in terms of ability to pull that off.
Source: ET NOW
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