“Just like IT came up in 2020 or metals came up in 2021, there are new sectors emerging on our screeners and whether it is inflation or recession I do not know but certainly the churn in the markets is resulting in a new leadership and new names coming up which we are looking at. That will obviously get reflected in our portfolios or has already started getting reflected in our portfolios,” says Charandeep Singh, Founder & MD, Girik Capital.
Is there an open invitation now for long-term investors to start buying? Have the markets reached those levels?
Yes I think so. We have held this view for a while. The caveat is we are permabulls. I must tell you because we have been doing this for 13 years and there have been about six instances of any sort of semblance of any reasonable fall in the Nifty of 10% or more. This is the seventh instance in 13 years where there has been a large fall. Investors should not be fretting or sweating because there has been damage in the broader markets but that is always expected if the Nifty falls 10%. So investors should allocate money and if this fall continues, it is an even better opportunity.
I am going to pick out the NBFCs and financial services. In previous market cycles, IT took leadership. Is this now time for the banks to take the front seat and is it across the board?
With banks too one has to be quite selective. We think banks should do reasonably well in the cycle. Of course, they have taken a hit. The reason is it is a very owned sector. A lot of the India allocation lies in the financial services companies. These are large companies with large free float and so naturally they are prone to getting a lot of redemption.
For the entire sector to make a new high and provide the kind of returns it has in the past over the last decade will require sustained inflows. Whether that happens or not we do not know but I can tell you that one has to be picky over here and stick with the banks or NBFCs where there is some semblance of under ownership or where the earnings can really surprise investors.
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A combination of those things one should make their allocation. But a broad-based allocation to financial services may not be sensible. So it is wiser to be a picker rather than an allocator.
There is one surprise for me that you have not included your old favourite after three years of underperformance?
I think it will do well. There is no harm but whether it will meet our returns threshold is our concern. There could be banks playing catch up in HDFC Bank and there could be banks that also could surprise more than an HDFC Bank because the expectation set could change in those banks or NBFCs. It is better to be a selector or a picker rather than an allocator here. This one is about the return threshold, nothing else. It is about how much money you can make over the next three-four years, the relative IRR is the reason. We do not have it as of now.
What about the big data game digitisation names like
? Is there any particular rationale? Is the overall view changing now? Are concerns emerging?
I do not think there is any issue in IT. That theme is very secular and therefore picking and allocating them in our portfolio becomes about various factors. One has to think where money is going to be made. Great companies may not prove to be great stocks over a three to five year period, they could go into long consolidations after massive rallies and moves. We have to build that into our return profile.
So, our allocation or stock selection decision is really driven by where we feel we are going to make the money. Sometimes headline valuation may not be the best indicator that it is a combination of various factors that we look at and not just the headline valuation or if the earnings trend is going to be really secular.
Sometimes one has to think of the surprise element that could come in through to the Street which could result in more money flows into those stocks and thus push the price up beyond what normal expectations.
When it comes to NTPC, the current interest rate environment cannot bode well. There is no ESG presence. What is the rationale for
in the portfolio?
Rather than really getting into the depths of a stock, what we found when we looked at the power sector is that the only real way to play it was NTPC. On our screeners, the earnings growth was looking interesting. It looked like it was coming out of a long earnings and capex cycle and if one goes out and looks at a company like this and looks at the earnings expectations that the Street models in, it is 6%, 8%, 9%.
We are hoping we get better and these things have trading at very inexpensive valuations from a historical perspective. These are probably the least sensitive to interest rates because they have access to funding relative to any other power utility in the country, they have access to the cheapest sources of funding because of their Government of India rating.
So today to put up a solar power plant where the bidding is cut throat, where the IRRs are low, without funding, one cannot put up a power plant. I think that is a big advantage rather than a disadvantage in a rising rate environment because the competition would not be able to attract the kind of capital at least debt capital that you can.
The last time we talked, you had said it is an avoid on Zomato. Since then, we have seen the
stock come under much pressure. You had a buy on . Are you still bullish?
These are brilliant stories from a very long term perspective. We like it but remember the competition for the top 20 or 25 stocks in our portfolio. So we make tweaks and turns here and there and sometimes we find a stock entering and exiting our portfolio. It is largely based on the selection decision where we feel we can make maximum money over the shortest period of time and that being three to five years on an average.
But the point I would like to make here is that when the market goes to such a vast churn when there is so much money going out of markets from FIIs and it is leadership changing and new sectors emerging is that it will always throw up a new set of opportunities. We are seeing that right now. If we have to limit the number of stocks we own, we have to sell something to buy something that meets our return profile.
Covid changed the way investing was done. Interest rates came down; inflation started moving higher. The inflation crisis has also changed the way investing would be done for next three to five years. Do you think your existing portfolio which is in the public domain holds true for the next two to three years where we will see minimal changes?
We least understand macro and for us, these words really do not matter because we go bottom up and not top down. We were having a bit of a snigger about this at a Monday morning meeting where the entire rhetoric shifted from inflation to hyperinflation. Yes, there is inflation in the world. It has not gone away but that talk has slowly changed into a recession though. So is it inflation or is it recession? I find that really amusing how headlines change so quickly.
Yes the bottom line is that markets do roll over, there are corrections such as these 10% odd corrections every couple of years where you get a chance to go and pick the stock that you want and yes I will take your point that the investing environment does change whenever there is such a churn in the markets. It gives one a chance to look at new sectors. There is a lot of newness in the markets, there are new sectors coming up on our screeners and it is very different from what worked over the last 10 years.
Just like IT came up in 2020 or metals came up in 2021, there are new sectors emerging on our screeners and whether it is inflation or recession I do not know but certainly the churn in the markets is resulting in a new leadership and new names coming up which we are looking at. That will obviously get reflected in our portfolios or has already started getting reflected in our portfolios.
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