Election Not Sole Trigger For Market Volatility: Helios Capital CEO

Dinshaw Irani: The fact is that we've been calling out a very volatile market for fairly from the beginning of this calendar year itself and election wasn't the only reason.

It was obviously the quarterly numbers, which were fairly clear that they wouldn't be that good as compared to the past. So that was the first reason.

Obviously, the second one was the elongated one-and-a-half months of election period, which itself brings along a lot of volatility in the market, and the third one was the result.

But we are very clear in our mind that if something like 2019 happens, we are more than happy. Obviously, we want the old government to continue because we need continuity in the market. If that doesn't happen, but I don't think there's too much probability of that. But even if it does, then probably our India Story gets postponed by a year and nothing beyond that because the new one who comes in has to realise that growth is the way forward and they can't be doing whatever they've been planning to do. So let's leave it there.

And obviously, the final reason was the Budget. I think a lot of questions are moving around the Budget, basically on capital gains. If that is tinkered around with, then there's a definite problem going forward.

Dinshaw Irani: Basically, I don't know how they're going to do that. They can’t categorise an options trade as a separate trade. It's already on your marginal tax rate. So I don't know how they're going to change that but the fact is that it will be left to the exchanges, to do anything, if they want to do anything.

But if they even tinker around with that, maybe it will temp down the market a bit. But ideally, I would want that liquidity to continue because that is the segment, which provides liquidity to the cash trades. There are options traders, the arbitrageurs and stuff who really provide the liquidity. It's not that the the cash flows can absorb the flows of equity. So you need that market to be there. So I'm sure some better sense will prevail if they decide on that as such.

The bigger issue is, if the short-term capital gains in equities are marked to what they've done for real estate and debt. That will be a game changer. That will be a game changer, as it will be a spoiler, totally, for the markets.

Dinshaw Irani: You're right about that. In fact that's what we tell everybody that the stretched valuations can sustain for a very long time. The valuations can't be the only reason for the market to correct.

There has to be a negative trigger for that and our feel was that the quarterly numbers which are coming in, there will be pockets which will be fairly full of disappointment. You saw that in IT. I mean, fairly disappointing numbers coming back.

In terms of FMCG also, I mean, I think there's a run to safety, that's why the FMCG stock didn't correct. But the fact is that the results were fairly disappointing, though they came out with a commentary that rural markets are seeing some kind of green shoots and stuff like that, but my feeling is it is too early in the day to even call that out.

I mean, if monsoons fail again, it's going be a problem. But fortunately, the IMD has predicted more than normal monsoon. So that's the good part. So there'll be pockets where there'll be disappointment.

There'll be pockets where there'll be surprises, positive surprises, that's what's happened. But if you look at the overall mix, I think the bigger issue is that the earnings growth, as you rightly mentioned, have tapered off a bit.

In fact, in June quarter itself, again, we're seeing earnings growth further tapering down as such. If the interest rate cuts are postponed till say December, as what is being talked about in the US, then obviously, there's an issue again, such as the earnings growth front because that was a bigger kicker, which is going to come through.

So our feel is that, more or less, the big growth story in earnings is over. From here on, it's rerating, which we will look forward to, going forward.

Dinshaw Irani: Financials, I think, is one area which has really lagged in that sense. I mean, the financials itself have underperformed the overall broader indices in the last four years.

Our belief is that, that is the area where you should see some kind of rerating happening. Already, you are seeing the numbers looking exciting and once the interest rates kicks in, obviously they are the sensitives that should react further to those numbers.

But our feel is that if our economy is going to grow by 10–11%, this segment is what should really drive the economy going forward. In fact we are so convinced of this, that we are bringing out a financial services fund, going forward.

Dinshaw Irani: Fortunately, financial services is a very vibrant sector for India. If you were to go back some 10 years, you would have had only PSU and private sector banks.

But today, there are so many participants in the whole story apart from the NBFCs, which are again, really diversified. You have mortgage companies, you have consumer lenders and stuff like that. You now have market participants in the form of brokers and exchanges and depositories and stuff like that. So it's a very vibrant market and that's what we like overall.

So basically, your per capita is going to grow. This is obvious because your population growth is going to be far lower than your GDP growth. So, obviously the per capita will grow. When that happens, I'm sure the expenditure—not only on discretionary but also on the savings products—will move up substantially and that is what we are trying to capture in terms of this.

If you look at the financial services index, it is quite bank heavy. In fact, it is private sector bank heavy. We're very clear. We're going to be totally agnostic to what the index is representing. In fact, you have seen that in our flexi cap also.

We've been very agnostic to the index. Fortunately, we outperformed quite a bit to the benchmark. So that is what we're targeting here also. We'll be agnostic. We will be picking up sectors where we think the sub-sectors within financial services, which should do far better than what the market is expected to get.

Dinshaw Irani: The problem that RBI faces today is plenty. I mean, ideally left to RBI, they would have cut rates fairly long back.

If you look at the real interest rates, they are quite high as compared to what India has seen earlier, because our inflation is low and the interest rates are higher.

Now they can’t further increase rates. That's going to impact the economy as such. So, they have tried to suck out the liquidity from the system and control the lending process.

The good part they did was, they let go of these Rs 2 lakh crores of reserves that they gave to the Government of India. So, in a way, that basically eased out the government's borrowing plan, to come to the market to borrow. So that should have impacted.

But as I said, liquidity is the issue right now. And I don't think RBI is keen on letting that go today, because they don't want inflation also to be moving up. They're stuck between a rock and a hard place.

Dinsaw Irani: JP Morgan inclusion, I think that will start kicking in from June onwards. You will see some flows happening. The first year itself is going to be a big one, $20 odd billion of loans coming in. But beyond that, there will be marginal flows, as weightages move up, that's what the flows will be.

So, one-time impact may be there, but I don't think it's going to be substantial numbers. In the overall scheme of things, $20 billion is not that big a story, going forward.

Dinshaw Irani: So basically, we've been very, very conservative in the PSU bank space. We got the largest PSU bank and we have one more PSU bank. You have seen that in our portfolio.

Basically, what we did was, during the time of Covid we realised that the banks which came out smelling of roses, basically, in the sense that despite the heavy NPAs, the banks which really managed to curb their NPAs, those were the ones we were looking at.

And fortunately, there was only one out there which really came out. The other one, which was there, I won't name it. The fact was that liquidity was an issue. So we didn't even get there. So we went with these two. Probably, this is what we're looking forward to.

Even the government of India thinks of that, because the 27 banks that were there earlier have been now reduced to 12 PSUs. So obviously, they are also trying to consolidate. So once that consolidation game gets over, probably we'll look at few other banks.

Dinshaw Irani: When you see my portfolio for 31st, you will see that presence reduced quite a bit. But anyway, I won’t tell you much more than that.

But the fact is that there were certain stocks which looked appealing. But we realised later that basically the call, as I said, that earlier call was going to be a very volatile market in 2024. Now we wanted to run to safety for that reason, and that's why we got into that space.

But going forward, we don't think that a P/E of 60-70 times forward earnings with the earnings growth of 11-12-13-14% gains, or mid-teens kind of earnings is going to support those kind of valuations, even if rural turns around. That's the kind of growth you're looking at. So the best case scenario didn't appeal to us. So we started reducing our exposure there as such, and I think we will stick to that.

We'd rather be more aggressive in the market today because we are stock pickers. Even when market volatility is there, you always have opportunities to pick out good names and that's what we're trying to do out here.

Dinshaw Irani: I think one positive, which really came about, was financials. The numbers were really phenomenal. I mean, whenever the numbers came out, the stocks did react but somehow at some point in time this again started correcting and stuff like that.

But I believe that just because of the FIIs selling that's happening today, the other biggest sellers, in the financial sector per se, I believe that is going to reverse after the election results and obviously when the Budget comes out and things are on an even keel. You will see the FIIs coming back in. So what they've sold is what they'll buy. That's what our assumption is out here. So that's on the financials.

The other sector that really did fairly well was consumer durables. But that again, I mean, the valuations are pretty stretched out there. So there's no way you can look at that sector and say, okay, fine. I mean, I want to be there because our mentality is very clear. We say that we want to buy growth at a value and that doesn’t appeal, that sector doesn't appeal, given the growth and the value that they're quoting out today.

Dinshaw Irani: In defence space also, I mean, our call is fairly different from the rest. The rest are saying that it is indigenisation and obviously spends by the defence of the Indian government. But our call is that it's a matter of time before India becomes an outsourcing base for the world in terms of defence products.

It's already happening. In certain stocks, it's already happening. I won’t name them when it's already happening there, apart from the move to indigenise the defence imports.

So that if you see globally or the world is spending more on defence, given what's happened between Russia-Ukraine, Taiwan- China, and obviously Israel and Iran and all this old Middle East area. So it is obvious that this is a very exciting sector to be in, where the growth rates are higher.

In FMCG, the problem is that the growth rates can’t be exciting, because there's only that much that you can grow, because you're talking about a product which is saturated in terms of the Indian markets. So that's why I said a mid teens kind of growth is the best that you can assume in FMCG.

But at least in the case of defence, you know that the growth rates are going to be far higher and the future also looks far brighter. So that's why you can stick along with valuation, but there again, the valuations are not that much away, they're not like three four times peg, it's like max two times peg as such. So you can very well assume that things will pick up at some point in time.

Dinshaw Irani: We love some of these names. I mean, you've seen that in our portfolio. Basically, we call them platform companies. The fact is that you should look at the potential of these guys.

I mean, to name one particular company that we've been associated with for a very long time is Zomato. The fact is that the kind of optionality that that particular platform has, is humongous. He has not even got into data mining right now. So that is another optionality that he has.

But the fact is, look at the growth story out here. Globally, there are only two players in the all the markets that dominate the market. I mean, look at the US. There is DoorDash and probably UberEats. You look at China. There's Matawan and there's one more who is a marginal player. I can't even pronounce that name. In Singapore also, there's GRAB and there's one more.

So in India, there's no difference. And these two guys are going to dominate a market, which ultimately will be around 300–400 million consumers at some point in time, given the kind of demographic changes that India is going through.

So it's obvious that the growth rates are going to be phenomenal and you've seen that in the case of Zomato. For him to turn to profits was not a big deal at all. That's what he kept telling everybody that look, I'm in losses, because I've chosen to be in. I want to grow right now and I can turn into profits whenever I (want to). So that's what we like about these platform companies.

What you look for in platform companies are four things. One is do they provide convenience? Is that mass convenient? Is it encashable? If these three answers are yes, and the fourth one, is it easily replicable? If that answer is no. You want to be in that platform company, given the base that India provides.

Dinshaw Irani: It shouldn't be easily replicable, convenience is always there, you should be able to encash that convenience and shouldn’t be easily replicable, which is the case with Zomato.

But if you see some other platforms like in fashion. There were a few. I don’t want to name them but it is an easily replicable model. So that's why we don't like those kinds of platforms.

Dinshaw Irani: If you talk to my pharma analyst, he wants to push all his stocks into our portfolio but the fact is, things are looking brighter out there, given that the destocking in the US went to an extreme.

So those companies, which are supplying to the US..., they are looking far better now, because they can now price their product, which was earlier getting chopped up because of the destocking. So, now restocking is happening. So you will see an opportunity for one or two years when these companies start capitalising.

On the domestic front, which we have always been gung-ho on, the fact is that as per capita GDP is moving up, more and more will be spent on health care, which today is a marginal portion.

Even in hospitals, we are quite constructive on the biggest name that is there today. We believe that, that is the area which we'll get into your medical tourism at some point in time. Insurance is picking up, obviously the domestic guys are also moving into organised hospital plays and stuff like that. So we like that space.

Dinshaw Irani: Actually it is, because you've seen the single, individual hospitals also getting merged with the organised guys.

To an extent, a doctor can start his own, but beyond that, to attract the kind of customer base, he has to move into an organised player and that organised player can provide him that platform where it's like plethora of customers.

So it's a matter of time before it turns into an organised play totally. And obviously, when we talk about medical tourism, they don't go to these individual hospitals. They go to a chain which is well-known and that's why they basically benefit and our belief is that going forward that is a kicker that India will provide in terms of medical tourism.

Dinshaw Irani: Yes, we are. But unfortunately we don't have many plays there. We are exposed to a few and we have a rejection process where we weigh on quite a few parameters. The unfortunate part is on the management parameters. There are quite a few, which move out and then on the accounting parameters a few more move out. So we are left with a very limited play out there though we like that sector a lot.