Mid-Caps Poised For Correction On Stretched Valuations: Helios Capital's Dinshaw Irani
Opportunities for investors are rising with India growth story, he says.
The markets are poised for a correction in the mid-cap space while the overall trend will remain range-bound until the Budget, according to Dinshaw Irani, chief executive officer of Helios Capital Management (India) Pvt.
There might not be any major negative or positive news until the Budget announcements come in. The Budget will lay down a specific trend of the market, depending on the policies that will come out, Irani said in an interview with NDTV Profit's Niraj Shah. "The fact is you may see the markets being in a tight band up to the Budget."
On the valuations front, Irani said the large caps are trading at 20–30% premium and are not stretched as compared to the mid-cap space. "Our feel is that mid-caps are at a 60% premium to what the large caps are quoting at and are fairly stretched."
Dinshaw Irani, chief executive officer at Helios Capital. (Source: NDTV Profit)
Normally, mid-caps were trading at an average of around 20% premium to the large-cap valuations for the last 10 years and it is about 60% currently, he said. "I think the pool of 150 stocks is too small and high inflows from mutual funds are creating the high valuations."
The valuations of small caps are at par with the large-cap stocks, Irani said. "Maybe you will see some kind of correction coming in the mid-cap space and not others."
Opportunities for investors are rising with India's growth story. The valuations in India's tech companies are more or less "done and dusted", but still this would not excite them to go long, Irani said. "Because we don't see much growth coming in and artificial intelligence is a very limited portion for most IT players in India."
Watch The Conversation Here
Edited Excerpts From The Interview:
How do you feel about the markets currently?
Dinshaw Irani: …On the market itself, I don't see any major negative news or any positive news, in fact also, till the time of the Budget; the Budget will lay down specific trends for the market, given what the policies would come out there.
But the fact is that you may see the market being in a tight band up to the Budget, and from thereon, the move could be either way depending on this because frankly I mean, on the valuation front, the large caps are more or less, looking at history, they're expensive.
But our belief is that the world has rerated India… However, having said that, the mid caps look totally stretched. I mean, our feel is that with a 60% premium to what the large caps are quoting, they're fairly stretched. Normally, if you see the last 10-year average, it's around 20% premium to the large-cap valuations that the mid caps normally quote at. But this time around, they hit 60% because I think the pool is too small. The pool of 150 stocks, they absorb so much money, which goes into mutual funds. That is creating a problem with those valuations.
On the small-cap side, they are more or less at par with large caps. So maybe, if you look at history, they were at 10% discount to large caps. So, they're more or less there. Having said that, maybe we'll see some kind of correction coming in the mid-cap space, otherwise I don't see much happening on the other side.
There's this interesting set of companies that are getting unearthed. Goldman Sachs yesterday wrote a note on a company which is a B2B airline company as well, talking about a possibility of a free cash flow to PAT ratio of 100% Ebitda CAGR of 30% for the next six years. There are multiple such notes that have come out in the recent past.
I'm trying to understand the range of opportunities available in the market currently, a very wide set because we usually talk about sectors and themes, but there are a lot of stocks, which are just one or two in the sector. Zomato, case in point, is the only listed play out there. Is the opportunity set very wide at the broader end of the spectrum?
Dinshaw Irani: So basically, the company you talked about, it's a platform company, and frankly, what the other guys do in the other spaces, he's doing in the travel space as such. …But I mean, obviously we are also sanguine on the fact that you have to look at valuations given the growth opportunities that are there in the market.
Zomato, that company we love because we've seen that globally, it's a very established model and the fact is that there's only two players globally in every single country that you can think of. So, it's the same between being replicated out here and that's why we like that and given the opportunity that company offers, it's obviously going to be huge.
So, you're going to be very clear on which segments are going to appeal to you, which sectors are going to appeal to you before you take a plunge into these newer names as such. Obviously, valuations is one thing that you need to keep in mind and with a backdrop of whether the opportunities that they offer, the growth opportunities going forward are looking exciting or not. So, that's what you have to keep in mind though you see a lot of variety coming into the market today.
In fact, we are also looking at a Financial Services Fund. We shut our fund last week, and the fact is that financials are still not so strong. That's what we thought of as only banks and NBFCs. Look at the variety which is available out there and that is what is exciting us for that sector itself. So, I think the more India grows, the more variety we will see coming in.
There's a technical note today from one of the brokerages which speaks about how IT stocks could actually have a run-up ahead of the results. Accenture numbers were bad, but their comment around the AI generative deals and maybe some others led to that stock flaring up. IT has not been at a bad time since then. My question to you is, while the valuations aren't exactly cheap, are negatives baked in or do you reckon it's still some time away?
Dinshaw Irani: So, the fact is that you are right in the sense that the valuations are more or less done and dusted. So, maybe we won’t be carrying any shorts in our books, but that still would excite us to go for a long in IT, frankly, because even at Accenture right, the numbers that they showed up, were basically…they showed growth in Japan where we are almost not present and the Indian IT guys are not there. They have shown growth in government-run service in the US. Again, we are not present there. So it was fairly, a very considered pocket where the growth came from and that didn’t excite us much, but obviously looking at the way the stocks have done in the past and they have in fact corrected when the market has moved up. So, it's obvious that relative to the market, their valuations have become fairly now down to probably sensible levels, but are still not exciting us because we don't see much growth coming in AI that he talked about. It's a very limited portion for most of IT players in our services guys in India. So, we're going to keep it on the backburner. As of now, I don't see much excitement in that sector, in this particular fiscal year, that is in FY25. Maybe we'll take a call closer to the end of this fiscal year looking at what the growth rates are looking like when they meet the management and they get a feel of how the USA is panning out.
Amara Raja is in the spotlight. Up over 15% right now after the company's arm inks the licensing pack with GIB EnergyX. Amara Raja now does this battery pact with a large company, presumably some more in the anvil with auto OEMs as well. This space was completely absent in India. Does it improve the multiples, does it make it noteworthy or are the valuations too stiff?
Dinshaw Irani: By the way, we don't own any of these companies. So, my negative views are obviously my own and everybody should read it accordingly. The fact is that one thing by the way, and lithium ion is because lithium is such a scarce commodity. There's already work going on sodium ion batteries now. So, that's one shift that the industry may be seeing very shortly as such and maybe that is why the international guys are more keen on tying up with companies and letting the technology, which they're keeping earlier very close to their hearts as such. So, I don't see that to be the exciting part and frankly, what is the USP that we bring to the table because anyway, these are not labour-intensive industries. They are very capital-intensive industries and obviously, capital in India is not cheap. So, there is no arbitrage out here in terms of labour also that can be played out. So, maybe we're just trying to replicate the world as such and frankly, I don't see much of other optionality out here of getting into a stock as such, so that's why we are fairly away from these.
Auto ancillaries per se, I mean leave batteries out, select other pockets have had a really strong run, some now might not just be pure auto ancillaries because they're doing defence, they're doing Railways, so on and so forth. What do you like in this pocket if you do?
Dinshaw Irani: Basically you said it, the fact is that they ran up because of other options rather than purely being auto ancillaries... So, that is where the excitement is and that is what we are also looking at frankly, I mean our belief is that the auto space itself will go through a lot of upheaval, thanks to the shift to EVs.
EVs are a different platform, though. It's substituting your IC product, but it's a different animal altogether. It's a different platform model. You are probably talking about electronics out here while you're talking about mechanical out here. So, there are two different things, there is no after-sales service and EVs. It's mainly uploading software. So, it's a different ballgame for the existing ICE guy to survive in that environment or to adapt to that environment. It's going to be a tall order. So that's why we'd rather be on the sidelines. See this play out and then probably take a call later.
Remember, they are on the cusp of launching a BFSI fund. It's essentially a financial services fund, and he's been constructive on that aspect. Dinshaw, I want to take that conversation a bit forward on the non-lending financials because we've seen SEBI activity on brokers, on AMCs, on platforms, etc, leading to some bit of moderation at times.
It's a great runway of growth, these businesses, even your business will do really well I'm sure over the course of the next 10 years. Does this heightened flow of activity from the regulator dampen the valuations a little bit or you don't agree?
Dinshaw Irani: …Actually, I think the regulatory actions are needed in our industry because, frankly, I mean, you need some control if you were running a fiduciary duty or managing other people's money. So, it's obvious that the regulator has to be honest and on his toes all the time, and really, if you talk about the mutual fund space, there's one or two issues here or there, but that's about it. There's not much here because it's fairly well-regulated, and that's why it's very well-managed. So, that we leave out of the space.
Having said that, even on the non-lending side, you talked about brokers, exchanges, and obviously, custodians and stuff like that. I think they're doing a wonderful job too because I mean, you look at the fact that India's going to grow GDP, probably the fastest growing GDP in the world in the next four or five years, every year. That is what we are talking about, or we feel will happen, if that means you're talking about per capita moving up sharply and obviously, when that happens, there's a wealth effect which kicks in. So, all these sectors that I talked about are mainly the gatekeepers to wealth. That is what we are excited about in the financial services that everybody thought it was only lenders in the space there, actually other ancillaries, which are like 12 or 13 are all ancillaries really working in that space and I think that is one space that we are fairly excited about.
Obviously, we will be very careful on the valuation front and frankly, wherever there is a lot of aggression by the player. Whenever it's a regulated space, you have to be careful with that space. You got to be careful with that aggression. So, that's why we'll be very sanguine on that factor and we've been very selectively investing our money that we've raised, and I don't see a problem in that sector because our belief is that the sector will grow far higher than any other sector for the next five years at least.
You've told us that you looked at these (food delivery) businesses globally, how it's a duopoly in most markets, it's turning out to be that way but within the duopoly too and these numbers may change of course, but within the duopoly the listed player seems to be finding an edge on the basic food delivery business and then there are add-ons which are known like Blinkit and then there are some more add-ons which are not even known as yet about the efficacy. Do we look at it from a quarterly numbers perspective or do you ignore those and think about the bigger picture story over five years or 10 years? What have you?
Dinshaw Irani: You're right, actually, you're looking at the potential and so basically one thing that you'll be very clear about these platform companies is that globally they should be established more in this particular space and we have seen that.
Secondly, the food delivery business, it's the number one player, always has our upper hand over the others. Look at the US, for instance DoorDash, 60-70% of the market share being controlled by that one company, food delivery or you look at China, Meituan again some 70% being controlled by that one particular food company. The second player is a margin player around 20% in both the markets. So it's obvious that in India also Zomato was probably the lead player who came in the space and I am not saying that they will go to that level but Swiggy has a tough competition to beat out here. So, our belief is that India, the market is good enough to have two players totally growing at a very fast clip.
...So, you got to look at the potential too and the fact is that part two profit are very clear for these guys. They just have to capitalise on some delivery module and that's what I think Zomato has done very well as such. Swiggy is still having a problem because Swiggy is having some losses, still showing some losses, going forward.
One more thing that you should keep in mind is that in the case of Zomato, Blinkit is a separate platform altogether. It's not a part of the Zomato platform. They are two different platforms. Well, in the case of Swiggy, it is one single platform for the Instamart business. So, still it is not clicking that much means that Blinkit is really getting a separate traffic altogether. So, that's what's exciting about the opportunity I think for Zomato to come forward. That's why all in all, we think we got a winner in this and we'll stick to that as long as the growth is exciting out there.
Where is it that you are skittish currently on valuations or otherwise?
Dinshaw Irani: Basically, consumption space and specifically staples or FMCG. I think that is one area which is really concerning to us. We have seen companies talk about green shoots, but those green shoots are in the rural markets and in fact in the cities and metros and all, that consumption space is going down. So, that is a concerning part because that can really drive down valuations also going forward for these guys where they already had stretched valuations. Another area of concern for us is the paints sector. Again, apart from the paucity of demand right now, the amount of new players which are entering is going to create a lot of mess and valuations again here are very stretched. So, that's another area of concern. There are only specific pockets. Obviously in the PSU space, railways are definitely looking stretched to us. Certain pockets are looking stretched to us others. There is a lot that is concerning and very little that is exciting us today, I suppose.
