Balancing Consumption, Capex Stocks Key To Robust Portfolio, Says Dalal & Broacha's Milind Karmakar
A significant part of their consumption strategy involves understanding the nuances of the Indian consumer market.
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Balancing consumption with capital expenditure is the key strategy behind building a robust stock portfolio, according to Milind Karmarkar, director at Dalal & Broacha Stock Broking Pvt. The fund manager remains optimistic about finding value both in consumption and capex sectors amid the current market conditions.
Despite the recent mayhem in the market due to global factors, Karmarkar outlined that Dalal & Broacha’s portfolio still maintained a balance between consumption and capex stocks. However, the company is expanding its capex exposure to around 15–22%.
"Despite the rising share of capex, consumption remains the major portion of our investments,” Karmarkar told NDTV Profit's Niraj Shah in an interview on Wednesday. This emphasis on consumption has remained steady even after the recent elections and the budget.
(Source: Milind Karmarkar/LinkedIn)
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A significant part of their consumption strategy involves understanding the nuances of the Indian consumer market. Referencing the book 'Lilliput Land: How Small is Driving India's Mega Consumption Story', Karmarkar emphasised that the consumption market in India is often misunderstood.
If we divide consumption into five quantiles, the top two — rich and upper middle class — account for the bulk of spending. The bottom three quantiles, with incomes around $2,500 or less, have very limited discretionary income.Milind Karmarkar
Karmarkar's approach focuses on companies that cater to a wide range of income levels. "We are interested in firms that serve consumers with both high and low per-capita incomes."
This strategy targets retail companies capable of addressing diverse economic segments irrespective of whether they are in rural or urban areas.
Commenting on capex, Karmarkar outlined the company's investments in sectors, such as power and railways. The company is investing in multinational companies involved in power infrastructure, including transformer and HVDC companies, as well as a major industrial gas company. "Our portfolio also includes public sector undertakings related to railways," he said.
This diversified approach to capex reflects confidence in infrastructure growth and modernisation opportunities. Karmarkar's strategy includes a mix of multinational and public-sector investments to leverage infrastructure development.
Karmarkar also addressed recent market fluctuations, saying that the unexpected dip in the market earlier this week was less severe than anticipated. "We had anticipated some volatility and maintained a significant cash reserve — about 40% — to take advantage of any downturns," he said.
The recent underperformance of various companies, attributed to factors like heatwaves and election uncertainties, has created investment opportunities, he said.
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Edited Excerpts From The Interview:
Did your portfolio have a larger share of capex exposure in the recent past and is it changing now or not really?
Milind Karmarkar: Yes, what you're saying is right. We do have an increasing portion of capex also in our portfolio. Though consumption remains the major portion, roughly about anywhere between 15% and 22% is now focused on capex and industrials as I call it.
It has stayed steady. In fact, over the six months, it has moved out. There is no change, post Budget.
Do scares like that of Monday or the follow-up on Tuesday worry you? Do you view them as opportunities?
Milind Karmarkar: Let me be very frank. Actually this came out of the blue. But at the same time, just before the elections, we had created some cash. The idea was that if something goes wrong in the elections, then we would like to invest, if the market comes down. Frankly, the market has not come down as much as we expected it to be. So the market is down maybe 4% or 5%, nothing great.
But at the same time, in our PMS scheme, when people had come in the last, say 4–5 months, we are close to about 40% cash or more than that slightly, in the new accounts.
But is that still the case right now and you're waiting for a further dip?
Milind Karmarkar: We are investing. As and when we see a particular stock falling, maybe because of lower-than-expected results. This quarter, I see most of the companies talking about and many companies have shown lower-than-expected results and the answers which they have given is because of the heat wave and because of elections. Whatever it may be, but if there is an opportunity to buy something, we go ahead and buy it.
Are you seeing these opportunities in the capex end of the sectors or in the consumption end?
Milind Karmarkar: Both ends.
Are you still investing in expensive MNC businesses with a moat and exposure to the new energies theme, or are you invested in some other spectrum? What do you like within this capex exposure?
Milind Karmarkar: Within the capex cycle or within the industrials, we are invested in companies which are to do with power, where we see whether it's a transformer company or HVDC (high-voltage direct-current power) companies and things like that. There are MNCs of course in that. We are also invested in a large gas company, an industrial gas company. So these are the two MNCs which we have.
But we also have PSUs. So our focus is predominantly power and railways, though not the classic railway names. We don't have them as of now, but we have PSUs which are connected to railways as well. So these are as far as the larger companies are concerned.
In the smaller companies, we have an exposure to predominantly power and power ancillaries. So that is the focus.
Some power equipment companies, particularly the wind energy companies—the Suzlons and the INOXs of the world—have rallied thick and fast. Where within this power and ancillary space?
Milind Karmarkar: We are into smart meters. So we are invested in smart meters. We are invested in Thermax which is boilers as well as green energy. So, we are invested in these types of companies.
Have you made a pivot in your consumption portfolio towards a rural-focused space?
Milind Karmarkar: So, let me just explain. I was reading a book called Lilliput Land, a very interesting book, if you're looking at consumption.
So, one of the chapters talks about the Indian consumer and how many MNCs have got it wrong. So in India, if you divide consumption into five quintiles, the top two quintiles take the most of it, which is the rich and the upper middle class. The bottom three, which range from household income of roughly about $2,500 and below, don't have anything left after their day-to-day needs.
So that is the problem and because of that, I think those companies which focus on the bottom three quintiles, along with the top two, will be the significant beneficiaries.
Interestingly, it also says that 17% of the rich in India surprisingly stay in rural India. So frankly, I'm not looking at the rural-urban divide that way. What I'm looking at, is companies which can service people who have a $5,000 per capita income as well as people who have a $1,000 or $2,000 per capita income.
Would these be product companies or tech companies which show all kinds of products? How is this shaping up?
Milind Karmarkar: These will be retailing companies.
Trent, Varun Beverages, Zomato and some others were trading at very expensive valuations in Jan. 2023 and continue to do so. They have given 3 times, 4 times and 5 times returns. Do you invest fresh money into some of these expensive businesses? Why or why not?
Milind Karmarkar: Okay. Let me take the classic example of Trent. I've given this disclosure many times that I hold the stock. We hold it across all portfolios.
The reason for that is simple—it caters to all types of consumers. So a slightly higher end consumer can go to Zara, a middle income consumer can go to Westside, and lower than middle class can go to Zudio. They have an offering for each and every customer. Even if he's getting $1,000 per capita or $1,500 per capita, there is something which you can buy in Zudio which costs maybe $2 or $3. So that is what it is. If you convert it into rupees it is Rs 200–400, when it comes to buying a T-shirt. So that is the kind of spread which they have.
Zomato focuses predominantly on urban India as of now. I think, at least in the coming few years, it will continue to focus on urban India. We bought Zomato when it started making money and we continue to hold it. The reason behind that is that besides the food delivery business, Blinkit probably has a huge opportunity, especially in urban India. I don't think that opportunity exists in the smaller towns or grade A or grade B towns, but it definitely is an opportunity especially in a city like Mumbai where people have less time. So that is the reason why they have continued to grow. So coming to the price-earning ratios of valuation, typically Trent has been continuing to deliver a 40–45% return and in all probablity it may deliver like this for a longer period of time because frankly it's as of now just a $1.5-billion company.
If you look at fashion brands, they're anywhere between 10–20 billion. I'm talking about the global fashion brands. So if you believe that India is going to have a sizable uptick in per capita income, I think these stocks could be interesting. Even the food grocery, grocery business. So there are many grocery businesses, whether it's Avenue, whether it's Star Bazaar and whether it's Reliance. So these businesses also have humongous opportunities, despite Blinkit or many others being in existence because these people can go deep under where you know, the population density is lower than Mumbai, where Blinkit may not work, but these guys will do well.
So that is the reason why I continue to believe that this particular segment of retail, whether it's fashion, but in fashion, you need to get your pricing right. You will need to get your vendor base right and of course, you need to probably get your balance sheet also right. So if these three things are there, fashion will do well. As far as grocery is concerned, again, the same thing. You should have a value proposition and if you have a volume value proposition. I don't see any reason why these businesses cannot be long-term compounders/performers.
Do you buy the argument that rural spend will move up and therefore their numbers could look slightly better over the next 12 months?
Milind Karmarkar: I have looked at rural companies earlier. The issue is that focusing only on rural areas doesn't work, especially in FMCG. I think rural markets are deeply penetrated. So that is the reason why the growth in rural markets may not be significant for FMCG companies. I think, I've talked about it earlier also that even in the US, the top five companies way back in the 70s were all FMCG companies. In the next 20 years, the baton moved to retailing companies, because the pricing power moves from FMCG companies to retailing companies and that's what will happen in India also.
So, even if I want to have a rural play, I will look at those companies, which probably are focusing on the rural areas. They have got their costs under control and they have got their business model right. So between the two, my preference is towards retail, playing the same markets.
Are Indian platform companies coming off age? Are you more enthused about investing in them now than what you might have been 2–3 years ago when they started off?
Milind Karmarkar: So that is correct. As I said that I prefer to invest in companies once they're very close to generating cash profits. So I'm keeping a watch on them. though we have invested in one or two fintechs recently, because we think that some of them have got their platform right, they've got their credit appraisals right. Especially in fintech the credit appraisal is crucial because they are mostly catering to SMEs and small borrowers. So if they have their credit appraisals right and they have their overall capital base well-placed, then fintechs also could be interesting, but in the other sectors fintechs could be interesting, provided they have reached closer to cash profit.
