Let’s start with Sunil Singhania the market timer. What is your view on the market based on technical and other aspects? Then we will talk to Sunil Singhania the stock picker.
Sunil Singhania the market timer is a pathetic Sunil Singhania. I do not know, but what has happened very clearly is that in March, as investors, we were all ruing the day we invested in equities; come September and we are regretting why we were not adequately invested in equities. That is the fun of investing. Having said that, the equity market is all about one being optimistic about the future. Unless you are optimistic and you believe that tomorrow is going to be better than today and the past, you should not be an equity investor. As economies open up, things are coming back to normal or near normal and that is what the market is reading into.
The second factor is that the returns from alternative asset classes are falling day by day — be it real estate or fixed income. Therefore the relative attractiveness of equity as an asset class is going up.
The third most important thing which is particularly true in India and also in some other countries is that in the last three-four years, the market had become narrow and we were only looking at 8, 10, 20, 30 companies which were trading at 70-80 PE multiples. Now a confluence of that realisation and a little bit of push from the regulatory steps has meant that investors are now looking at the broader markets and there is still value. That is what we are seeing as we move forward. From a fundamental perspective, there are more than enough companies to invest in if your return expectations are relatively moderate. If you are looking at momentum, maybe you will have bouts of reactions but those reactions are going to be short and swift.
Some old timers say suddenly there is no cynicism in the world and there is a lot of optimism. Everybody believes that the worst is behind us. Do you think that there is froth and greed in the market and a lot of people are ignoring it because of the price action?
Unfortunately the right time to buy was maybe March-April but that time fear was at its peak. Now to some extent, there is greed. I think greed is always there. But having said that, what we are also looking at is a scenario where we have gone through a one-off once in a century kind of an event and the most optimistic of the economists and investors would have written off the world for at least two-three years.
From thereon, wherever the economies have opened up, the response of people in terms of coming back to normalisation has been pretty decent. Markets are all about expectations versus reality. They are not about the actual numbers. If India’s GDP is expected to go down by 10% in FY21 and we have a number which is 8% down, we will suddenly have markets being very enthusiastic. So it is more about relativity rather than the actual numbers.
“Things are shaping up much better than what we are expecting. There is general optimism that some good medicine or some vaccine should be available to mankind before the end of 2020 and that is also aiding optimism.”
The other thing is we do not take into account the benefits from a corporate perspective. In India, the biggest benefit which corporates as well as the normal Indian citizens would get is the lowering of interest costs. Short term CDs are now available below 6% for decent companies. It used to be 9%. That is going to aid profitability. Good consumers are getting house loans at below 6%. The EMI has fallen. Yes there are stresses. There have been some job losses. We will have some salary cuts in some pockets. Economy obviously has to come back to normalcy. At least in India, this constant lock down and opening up is not helping. We need a consistent kind of scenario.
But ultimately things are shaping up much better than what we are expecting. There is general optimism that some good medicine or some vaccine should be available to mankind before the end of 2020 and that is also aiding optimism. It is a combination of a lot of things and it is all over the world, it is not only in India.
We saw a scary selloff two weeks ago in the US tech stocks. The Apples, the Alphabets and the Teslas of the world corrected between 5% to 15%. The Indian markets didn’t fall as much. Can we make a case for outperformance and decoupling or is it too early to use that word?
In the near term we are always going to be coupled and we will move in sync. In the medium and long term, countries do decouple. Nasdaq by far has been the best performing equity indices in the world. Even this year year to date, it is the best performing. No other index comes closer to it.
As I said earlier, globally the markets are now going to be volatile. A lot of news flow, a lot of money coming in, going out, lots of options, derivatives strategies, machine trading, quant strategies are being used and therefore on an enhanced basis, this volatility is here to stay. I do expect the markets to have swift and sharp corrections and that 5% to 15% correction which you mentioned in Nasdaq even in India. There were a few companies in the broader markets which corrected between 5% and 15% in those 15 days though the index might not have corrected. So these moves of 10-15% on the upside and downside are here to stay and investors have to be prepared for it.
Do you think for the next couple of years, double digit growth for IT is back and is here to stay?
I will just give you a perspective. If you take the last 10 years, the growth rate in Indian IT companies as a basket is in double digits — both in terms of top line as well as bottom line in rupee terms. We are investing in rupee so we look at rupee. The growth rate is more than the growth rate in most FMCG companies. The cash flow generation is similar to what we see in the FMCG companies but FMCG companies or consumer companies trade at a PE multiple of 80 times and tech companies used to trade at a PE multiple of 12-13-14 times even after moving up. So, there was always a huge value gap.
Second, technology is a big beneficiary of what is happening in the disruptive world. We have started working from home, studying from home, consuming from home, entertainment from home. Anything you do from morning to evening is dependent on technology and we cannot wish that away.
The other thing is there are two sectors in India which are globally competitive; I would put pharma and chemical as one together and IT services as the other one. We have to be proud of it and we also have to give them that credit and PE multiple. When you are working from home technically you are saving a lot of cost. For every person who goes to office, the companies end up spending Rs 15,000-20,000 on their tea, coffee, lunch, breakfast, transport, electricity. All that is saved now. I am not talking about rent because we are presuming that the companies will not give away their facilities but even without rent, this is a saving. The other thing is most IT companies within a month, enabled almost 95-97% of their people to work from home.
The other thing is that even the consumers are now pretty okay with getting services even if people are working from home. The US is doing very well, Europe is doing very well. Every company has a digital strategy, every company has an IT strategy and our view is that at least for the next three, four years, IT spend will surprise on the upside.
H1-B visa was banned by Trump because it is an election year and despite that, we are seeing all kinds of moves in the IT space. Post US elections, if things start to get liberalised, there will be an added 1-2% move in their top line growth estimates just because things have started to get more liberalised. So I would still be optimistic on this sector, valuations are in our favour and earnings are in our favour.
IT sector is already trading at PE multiples of about 20 times one year forward. For a sector which will grow in early double digits, that is the best case scenario. Can PE multiples of 20 plus be justified for a sector like this?
There are only two major companies which are skewing the 20 PE multiple. There are a lot of companies which are still available between 12 to 16 PE multiples and that is where we are focussing on.
Secondly, it is very unfair to call a double digit growing sector expensive if it starts to trade at 18-20 PE multiples while a whole host of consumer companies growing at 5-7% are trading at 70-80 PE multiples and you call them quality and keep on buying them. One has to be fair and one has to be very clear on what we are getting into.
Everybody we have spoken to are saying that post Covid crisis, one needs to go digital. Some are buying Reliance, some are buying platform companies and some are buying both. But your view is that you have to bet on digital but the best way to bet on digital is by buying traditional Indian IT companies or Indian IT services companies.
Digital is a great theme, we love the theme but unfortunately we missed quite a lot of stocks because they were expensive and unfortunately for us, they became more expensive. The problem for Indian investors is that there are not too many listed digital companies and in this respect, I would say that we as an economy have been too much liberal. We allowed the Facebooks and the Googles and the Amazons of the world to be 100% present in India, thereby dissuading the Indian investors from benefiting from the growth in these companies. We have to play it in an indirect way. Reliance is a great indirect way to play and there are others as well.
Those are the new themes but the backend for every company whether it is a digital company or a brick and mortar company or a retail company is IT. A lot of Indian IT services companies are now there on the digital services side of the business. There are companies which have between 20% and 50% of their services coming from doing digital work. So it is an indirect way to play digital, plus you have cash flows. These are not hope companies, these are not companies which are making losses but are actual cash generating companies with good dividend yields doing buybacks from time to time.
Most large Indian IT companies between dividend and buyback, give 4-5% of yield every year which is a great yield and is equivalent to what you are getting in a one-year FD. We have to combine the absence of digital with good IT companies. You will have to just mix and match.