M&G Investments’ Vikas Pershad Finds 'Indian Markets Pricey, But Not Expensive'

Vikas Pershad: It's difficult to predict short-term movements, but I will say that, as a global investor in a global context, Asia looks pretty good. China looks good. Japan looks good and India still looks good also. Our time horizon is long enough that this short-term volatility is less impactful to our portfolios, our positions are large enough, but we don't trade in and out.

There are days like today where we're seeing acute pain in one sector, the auto OEMs, and then also that’s flowing into other areas as well, two-wheelers, the auto ancillaries. So, we took advantage of where some of these stocks opened this morning to add to our exposure and what we did heading into earnings season because of what we thought, the markets are more resilient than perhaps they should have been, given the geopolitical risks.

We reduced the name count in the portfolio, and we consolidated our holdings. So, in the tumultuous space, we now only own one of the names earlier in the year, we own three of them, and so that portfolio management has been helpful so far. 

Vikas Pershad: It depends. It's always bottom up. It's stock specific. What I would say is that the market is pricey, not expensive. The reason there's a distinction in our mind is that something is pricey but not expensive. It's because that's where the growth is.

So, if you look at what a one-year forward multiple is telling you, not so much in the context of what that multiple becomes, then that is more important. You need to do your work. You need to be very specific, very selective, and that's what we feel like we do. The markets have done well. We have it as well and it's this approach that India is a market for long-term investors.

You can’t just own the entire market. There are opportunities outside if you do your homework, and you have to think long term so that works. We've been having this conversation for many years that India is very expensive. I've never really espoused that fear. It's pricey, but not expensive, and the longer your time horizon, the less pricey India becomes. 

Vikas Pershad: We have been for the past two years, the average cash balances that we had going back to The Big Short Seller report that came out in Q1 last year, has been close to zero. We have been fully deployed. We continue to see opportunities. When we went through this portfolio exercise over the last one to two quarters of consolidating our holdings and what we thought were the winners in each sector, whether it's Auto OEMs or Hospitals or I.T. services. We did the same thing. We went through the same exercise, and we just redeployed the cash into our core holdings. We did not sit on any cash.

But the trick for this year has been even more so than last year. But there have been many ECM opportunities, equity capital markets opportunities, IPOs, Blocks, QIPs, and we have participated in some. Most of them, we have not, but we like our portfolio. So if we need to buy something, or we want to buy something, then we need to sell something. That's what we've done. But we were really fully deployed even now.

Vikas Pershad: Well, the good thing about the portfolio is it's quite diverse. We own all of these. We are shareholders in Auto OEMs. Over the last two years, that exposure has shifted from four-wheeler passenger vehicles, to CVs, and then this year, there's more split between CVs and two wheelers. If you look at Healthcare, we have consolidated our Pharma holdings, we have consolidated hospital holdings, but we have exposure to those as well.

There's no pattern when it comes to market cap. We're just looking at long-term prospective returns. So, in the pharma sector, we have some exposure to companies that are sub three-billion market cap and then we own some that are much larger hospitals. We own the large hospital companies, but then also some of the small ones as well. So it's a pretty diverse portfolio. We own the metals companies, but again, we've been through this exercise of following some of the smaller positions and focus, concentrating our capital on what we think are the leaders. What is a clear gap in the portfolio, but by design, is consumer staples.

The first few days after the election results came out in June, there's a big rally in Staples. We used that rally to reduce our exposure. We'd have more zero weights in that sector than in any other and we consolidated our holding. But it’s still into consumer facing names. It's just not consumer as is defined by the staples companies. So if you look at the air conditioning sector, for example, if you look at hotels, if you  look at real estate. You're very much exposed to the Indian consumer, but more towards the high end now than before, and much less to the staples sector. 

Vikas Pershad: It is aspirational spending, and more on the retail side, less on the some of the brands, some of the newer listings over the past two to three years, those are fewer in portfolios that we are exposed to Quick Commerce and to food delivery already, and we like that exposure that we have consciously tried to add this year is exposure to the very high-end Indian consumer. There are some views on how sustainable this demand is. We think that it is sustainable. Something different has happened. What we originally thought was a K-shaped recovery coming out of Covid seems to have become a K-shaped economy, and there's clear acceleration at the high end where there's hotels or airlines. India's largest airline has added business class as an example.

If you look at some of the more prominent properties, hotel properties around the world, the suites get booked before the lower category rooms. First time we're seeing that. You've seen the demand for large high-end homes in the NCR area, and we believe that that will continue to other parts of the country as well. It is not exclusively a focus on the ultra high end, but that is more prominent in the portfolio than it had been. Also, we haven't spoken about PSUs yet. Our PSU exposure on the Banking side today is lower than it was heading into the elections, and we had lowered our Defence exposure, also heading into the elections, but we gradually started building that out in recent weeks in Defence companies. I mean not so much the banks.

Vikas Pershad: I agree with that. Asset management, we have exposure to some of the companies is basically a duopoly in the companies that provide services to the mutual fund industry. We have exposure there. Now the Wealthy Management firms. I admit that our exposure is lower than probably should be. So, we're continuing to do our work there. I presume that the next time we speak, the exposure that we have to that sector will be higher than it is today and like with many sectors there, we have seen re-ratings.

Over the last two years, we have seen an earnings acceleration over the last two years. But all these stories are still pretty early. On a sector wide basis, we don't need to own all of them, we just need one or two in the portfolio. So, I agree with you. This is an area where investors should be spending more. 

Vikas Pershad: So, this is the same debate we had internally and we, in the first half, in the second and third calendar quarters of this year, exited the life insurance sector. Our exposure is in the insurance sectors outside of that, so you framed it correctly and that's the exercise we went through, and we decided not to have any life insurance exposure anymore.

That could change over the next few quarters. We'll see how they trade. I would say that since we exited that particular sub sector of the financial market has traded better than what we expected, but we’ll see.

Vikas Pershad: Again, you have anticipated something that we internally were talking about not very long ago. So when it comes to the Indian metal companies and Metal companies across the region and around the world. If  an investor’s new thesis is to buy because of what's happening in China, we think that that's a bridge too far to cross. They're not very related. The initiatives on the ground in China are directly to benefit the consumer in the short to intermediate term, it's not so much on the construction or property side, on the metal side yet.

We believe that is our view and so you asked earlier, what's going on in China? A lot is going on in China, but we're not materially changing our China exposure because of any announcements over the past two to three weeks, we made a big allocation to China at the start of the year and the middle of the year, and we continue to be positive on that market for both absolute and relative performance. So that's a separate conversation. We can talk more about China if you like. But when it comes to the Indian companies, again, we have consolidated our holdings into fewer and fewer companies, in Steel, in Cement, in other metals and mining companies, and they are for India specific, or at least non China specific, reasons.

Vikas Pershad: This year the count is a little bit higher than normal, because we have been participating in all these IPOs, and as you know, most of them are quite competitive, even for the anchor-round allocation. So we end up with some small allocations. What I'll share is that the bulk of the risk is in the top 15 or so holdings, meaning that if you concentrate our active bets, more than half of that is in the top dozen to 15 or so bets that we have, and then we have some tier two players in the same sector, perhaps, or it's in the small and mid-cap space.

Also, what I'll share is we have an allocation for small and mid-cap companies. It's the highest that it has been in the past three years, but it's not at the max levels, and we have been steadily adding to it, again, being very selective, and we continue to find a lot of opportunity options in small and mid-cap space. Again, the longer your time horizon, the better the prospective returns you'll find. But the amazing thing about India, the Indian market, is how it has changed over the past two decades. There are now 6,000 listed companies in India. You are approaching 2,000 companies with a market cap that exceeds 100 million US dollars, and the sector has represented every niche there, even high-end middle to high-end semiconductor manufacturing.

It might not be there today, but in five to 10 years from now, it will be there, and the right companies are available from the groundwork even for that kind of exposure. So it's a market that is evolving, if you look at the underperformance last year. This year's not done yet, but in 2023, 70% of the index, outperformed. When you look at where the underperformance is concentrated, it was in the large mega cap names that once upon a time were the leaders of the market. That will happen again, today's leaders won't be the leaders of five to 10 years from now and we're investing in the India that is rising, in the forward India, the futuristic India and we see a lot of opportunities all across the board.

Vikas Pershad: Well, yes and no. So, if you look at some of the old economy companies, some of the most advanced and forward-thinking adoption of technology, broadly defined, is in the Renewal space, is in the Construction material space. It's how software is being incorporated. It's how hardware robotics, Factory automation, is being incorporated. Tracking or shipments is being incorporated. So, you have some of these old economy stocks, like Cement companies, like Metals and Mining companies, Construction companies, but then you also have Logistics, quick commerce, food delivery, at the forefront of technology adoption.

So, when we talk about the India of the future, we're talking about a lot of the sectors that are frogging waste stations along the way that someone might have expected. So, for example, one of the best examples people talk about, or have talked about, in the past couple of decades has been the Telecom sector. Most of India went from not having landline to straight having mobile. We are going to see leapfrogging in other sectors as well. Quick commerce is a good example of that.

We've gone from talking about a structured retail sector that is less than 10% and how that will play out on the organised retail side, looking at it through the lens that we do western markets now you look at the adoption of digital payments and quick commerce, that's another leapfrogging event that's taking place, and this is going to be very large and we hope to be in that exposed sector for a long time.

Vikas Pershad: Directly on any specific IPO, I'll hold from commenting, but I will say that we are probably nearing a peak level of activity when it comes to QIPs and large IPOs, but a deceleration won’t be bad. It will be healthy. But when you have multibillion-dollar IPOs and blocks coming through in a very short period of time, that does absorb liquidity. What has been impressive to me is how much liquidity there actually is, and how much continues to come in every month from the retailer, the domestic retail investor. So I think that will continue.

The IPO activity will continue, but this has been a pretty frenetic pace that we've seen on the IPO front. All these IPOs are very healthy. I'm not surprised that parent companies abroad, whether they are in South Korea or in Japan or in the northern part of Europe are continuing to list their subsidiaries in India because of the valuation uplift that you get, but again, this is where the growth is. So we expect to see those continuing.

Vikas Pershad: It's low, it's low, we evaluate a lot of opportunities and as you know, a lot of these companies, if not all of the companies, do come through Singapore. I need to meet them. It's heartening to hear their stories and where they come from. But again, we like our portfolio, as I was saying earlier. If we want to buy something new and we do need to sell something, we're not sitting in cash. We are fully deployed. So we have to be very selective.

The hurdle for investing in an IPO is higher than it is even for companies that have been listed for a long time, because the information asymmetries are too high for us to be participating very frequently. But we are spoiled for choice, small IPOs, large IPOs, mid-size IPOs in the automotive sector, textile sector, hospitals. I met two companies just yesterday, in the B2B sector and in the hospital sector. I have another couple lined up for today and tomorrow.

So it's a very active market. It's good to be busy. It's better to be busy than not to be busy. It's good that these companies are looking to get some liquidity. What's also encouraging is that you're not seen founders materially cash out/up. These are largely OFS type deals. There is primary capital, but it seems to be going for good purposes, and it seems to be functioning relatively well at the IPO market. So at least we've done a very good job of vetting ideas and delaying IPOs if they're not satisfied. So we are getting very high quality options to choose from. 

Vikas Pershad: Well, I would like to think that we are always long-term greedy, and India is a good market to be long term greedy in. But because of the valuation uplift that we have seen over the past two years, and you see some of that, the impact of that today in the two-wheeler space, when you have earnings going up, but then a re-rating going up, much more than that.

Stocks in the short term can be vulnerable to any surprises that are neutral to negative, and so for that reason, we have consolidated fewer and fewer holdings. I believe we're largely done with that exercise.... As I mentioned earlier, we think that this IPO activity, probably is near P/E, but even a healthy correction from this, this case/pace, still offers a lot of choice and that we see continuing. 

Vikas Pershad: So, you touch on a few things there. I'll say a couple of things that we don't make predictions. We do run scenarios. We think probabilistically, and we spend as much time thinking about what happens if things go really well, especially in the market like India, as we do spending time not thinking about what if things go wrong. How do we lose capital? What are the downside risks, we think that that is a very healthy exercise within the realm of expectations for each company that we look at, as we think probabilistically, we have indeed, over the past two to three years, widened out of our scenarios.

When we look at India in particular, the upside looks like either the probability is higher, or the magnitude of the upside could be higher in many of the companies we are looking at. But then given the geopolitical risks that you mentioned, we have lowered the potential downside. We raised affordability for the wings. We've assumed more harsh assumptions for supply-chain disruptions or less pricing power, higher costs of money, interest rates being higher, inflation being higher. But I would say if two years ago, three years ago, you had told me that there would be conflict in Eastern Europe, conflict in Western Asia, potential for conflict between large countries out here in Asia, I would be very surprised by the resilience of the markets.

We can't time any bear market, and this is why we are fully deployed and not sitting on cash. But we are thinking probabilistically and we have widened out the scenarios. If all the markets in the world were to close up today for the year, India would be the only major market in the world, the only market in the world to have gone up nine consecutive years and because the rupee has been generally stable, even foreign investors who are investing in dollar returns, will have gotten a large portion of those those returns. That's a big difference between India, Japan.

Japan has done very well as a market, but the yen has weakened materially. So, if you were a dollar investor, you didn't get those returns. So yes, we might have borrowed some future returns, but we're thinking on a five, seven,10-year horizon and beyond. We are looking to be aligned with the promoters of these companies, they're making long-term investments, and so are we. A pullback would be healthy. But on the balance of what we know, we'll be adding to our positions, rather than panicking.