Still see high quality private financial services cos as clear winners going forward: Shiv Puri

Leaders in the sectors that have the most attractive long-term tailwinds are going to survive and emerge stronger and therefore those are the best opportunities going forward., say the Founder & MD, TVF Capital Advisors.

We have seen a fantastic run over the last quarter. Share with us the top trends. What are you eyeing as we head into the following quarter, one that perhaps is more uncertain than when we first saw the pandemic hit us?
The first distinction that the market is making is which are the businesses that are impacted by Covid and which are impacted by the lockdown? There is a big distinction in that. There are certain businesses like movie theatres which are going to find it very difficult to make a comeback in the near future. But a company selling a consumer durable or an automotive vehicle will find that there is a snap-back in demand at some point in time. So there is a big distinction happening there.

Second, in March, there was a point when the global markets and economies were staring into the abyss. Some very strong action by the US Fed and some action by the Reserve Bank in India and other central banks globally has put a floor. I believe that the March lows that we saw globally will likely hold and are unlikely to be taken out.

Going forward, what is the strategy that you would suggest? Would you look for comfortable valuations or would you go for specific companies or sectors that have opportunity to grow?
It always makes sense to look at specific companies within specific sectors that have long duration growth. The areas to focus would be companies that are high quality. Post Covid, the strong will get stronger and that is going to be true for a lot of companies in India. The number one, number two players will become much stronger relative to everybody else in that particular sector.
Just imagine an area like financial services. Today, when the leading private sector bank has a great balance sheet, technology leadership and cost of funds at 3% or 3.5%. But for a smaller bank or NBFC, even if they had access to it, the cost of funds would be 7-8% and they would have to compete for it.

It is going to play like this across different sectors. In auto, there is the largest tractor company in India that makes cars; there is a commercial vehicle company in India that makes cars. They have been losing money for a long time and many of them will start pulling the plug. The trend is to look individually at companies and look at the leaders, look at their balance sheets. If the sector is attractive, it is quite likely the leaders will get stronger.

What the stance is when it comes to the opportunity as well as the valuations within the broader universe -- the mid and the small caps? Do you see potential here or are you looking at this space very selectively? Will the trend of strong getting stronger apply to the broader universe too?
The broader universe of midcap companies faced challenges even in pre-Covid days for a number of years. A lot of midcap companies have done well in spurts for a couple years with earnings, stock prices going up. But over a five or 10 years period, very few of them actually graduate into being a largecap or a successful company. The challenge has only increased during the Covid and post-Covid period. A lot of them are unable to compete in terms of cost of capital, scale and technology. One has to be very discerning in that space they. There are going to be fewer winners in that space. We are seeing this happen globally, not just in India.

How are you looking at consumer driven sectors like the FMCG basket or even autos? Given the mild recovery that we had witnessed in the auto sales numbers yesterday, is there a lot more pain in store or are you seeing signs of things improving?
Near term, it is extremely uncertain and the reason is there is a lot of psychological pain. It has been a tough four or five months for everybody and it is not really the time when people are very excited to go and buy things. But it is important to realise that fundamentally demand has not been destroyed in the products that you have mentioned.

In automotives for example, in the US, Japan or any of the developed countries, no matter what you do, it cannot grow more than 2% as these are fundamentally saturated markets. India is fundamentally not a saturated market and so demand will come back. But the next three to six months look extremely uncertain. In addition, execution is a bit of a challenge. Your distributors are not open, your outlets are not open but having said that, six months from now, demand should come back and a lot of companies should be prepared for a possible snap back in demand.

Where will recovery kick in the fastest? In the last three months, there has been a there has been a shift of leadership. The last one month has not been about banks. It has been about Reliance doing all the heavy lifting, Bharti has come to the fore. There has been a resurgence in pharmaceuticals. Do you think this leadership is here to stay? Will there be newer sectors which will take the markets higher from here and recovery will come in faster there?
It is interesting. I have been hearing about leadership changes in global markets for last 15 years. The technology stocks in the US ten years ago were supposed to lead a leadership change, then five years ago and now. We are not seeing any of that happen. I think this tends to be a little bit more macro analysts forecast rather than realities on the ground.


I still see financial services, especially private sector high quality companies as clear winners going forward. Financial services is the heartbeat of any economy and certainly for any emerging market economy. We can have leadership change from months or weeks but over the next three to five years, these financial services companies will do extremely well as there is going to be limited competition. There are only two or three high quality banks and maybe two NBFCs that are really strong and will emerge stronger at the expense of others.

The other trend which is also emerging is that perhaps in the near term, it is the rural markets which are going to lead the recovery. Be it the FMCG data, construction activity or even tractor sales, thereá the fact that rural India has been a little better off when it comes to the Covid infection. Do you believe there are investment opportunities here in tractor companies, FMCG and rural dominated themes?
Yes a lot of businesses that have a large rural exposure -- whether it is two-wheelers, autos, FMCG -- are seeing less fall in demand in the rural parts of the country because of Covid and that is something that will hopefully sustain. But I do not think that there is anything specifically that one would do because the rural economy is doing alright. The urban economy and the semi-rural economy are also pretty big and so for companies to really come out of this profit slump, all of that has to come together.

So net-net, one should stick with the leaders and you are not going to go wrong?
Net-net, I am saying there are fundamentally two decisions to make. Number one, will the companies survive and number two, if it survives, will it emerge stronger or weaker. And in my view the leaders in the sectors that have the most attractive long-term tailwinds are going to survive and emerge significantly stronger and therefore I feel those are the best opportunities going forward.

Anything that you would want to avoid at this juncture? In the last three months, all of us have gone back to the drawing board and have had a rethink on our investment strategies. Any sectors that you would want to stay away from at this juncture?
Fundamentally, we have stayed away from any sector that requires significant capital outlay with the promise of return or profits down the line. That is a very difficult model and I am not seeing any of that change in this environment. That covers a lot of sectors that are in the manufacturing space, perhaps in the infrastructure space, etc. It is probably wise to avoid that. The second thing to keep in mind is to avoid sectors where technology disruption is rapidly endangering their business model and there are many examples of that in retail or certain manufactured products where they would not have that level of dominance that they once had going forward.

What could challenge the 37% recovery that the Nifty has seen since March 22? Across the globe, one has seen a stunning recovery from the March lows? I know that markets do not react to the same incident twice and I know that fears of a second wave of Covid is emerging but what could stall the markets from here? Is there a fear of return to March lows?
Yes, it is possible. The biggest thing that could happen would be seeing the results that come out in July across the world. These numbers are not going to be pretty for many companies.

The second is that any CEO I talk to, if he is being honest, is saying that he has no idea what is going to happen in the next six months. There is no visibility in too many different variables. So we are flying here in the most uncertain of times which means that the number of variables that could go wrong are more than they have been in the past. The biggest challenge near term would be the earnings numbers that come out in a few weeks.

Looking at Coal India, BHEL and some of the other PSUs, does the call for reforms inspire you to get into this space? If so, in which particular pocket does it still make sense to go after a PSU?
Shiv Puri: The simple answer is no. The change for some of these businesses, if at all they have a strong business model to begin with, is going to take a very long time and most foreign investors would rather wait to see the change before anticipating it.

I have been saying for the last five or six years that the state-run banks are going to remain challenged even if they get capital flows. There are a lot of structural issues that need to be fixed and those challenges continue going forward. I do not see any significant change happening there for the positive.

What about cyclical as a pocket or as a theme? Would you play on the cyclical recovery, particularly deep cyclicals or would you stay away from that for now and focus more on consumption and new leadership names like pharma?
One could say financial services is cyclical. That is an area where the high quality financials will do really well. It is amazing how the narrative has changed in the last six months from long term under penetration, market share shifted from public banks to private. This long runway for growth is only focussing on NPAs and near term unknowns.

I would say that is a cyclical and that is also an industry that has a long runway for growth. Some of the other deep cyclicals are on the manufacturing side. One has to see how the market evolves. There are a lot of manufactured products that do not just offer that return on capital that justify their businesses even when the economy was doing well. I am really not sure how they will do well over the next few years.

Are you looking at the Atmanirbhar Bharat theme playing out? There is a lot of opportunity within a number of sectors. Is there any follow through according to you with this theme to build on the lost opportunity for China?
I hope so, but the key out here is for it to be competitive. We cannot be self reliant if the product costs 50% higher than what it would if it was imported. That disturbs the economics across the economy very dramatically. So it is a great initiative but we must remember that we have to do the necessary policy and reforms associated with it to have a world class competitive product. In that scenario, it would be great.