You are one of the few people or one of the few funds that invest globally. What is happening with some of these technology companies?
Google grew its profit margins by 20%. Facebook saw 60% net profit growth year on year and you wonder why these things happen! There is this trend of digital advertisement that is growing over a period of time. It is eating into the other sectors of advertisements space like traditional media plus it is growing on its own organically all over the world.
Do you think buyback is one of the key reason why some of these large names are also liked by investors? Every year, they do big buybacks. I was just reading somewhere that Apples buyback is by far be one of the biggest?
Yes. Apple is a different case. In terms of Google and Facebook, the buyback values are significantly smaller as compared to balance sheets. They need capex but at the same time they keep generating cash but the idea is that cash can be used to acquire some other company or some other technology which will drive the growth in the future.
What do you do in this market Do you buy more of the same because you think the good is only going to become better and the poor get poorer. Is that the kind of market that we are staring at?
What we stick to is, first, is this a good business to own? Are these people capable of running the business over a long time, have they demonstrated good business acumen in the past and the most important thing is this a right price to buy it? If it is not the right price and the two other criteria fit our bill, we wait. There is no need to rush and put your cash for something which is expensive when you know it is expensive. We wait for the opportunity and since we are diversified geographically, the valuations in other markets are not as expensive for some of the companies that are there in India vis-à-vis the earnings growth that we see.
Where else are you hunting in this market? Are you just sitting on what you already own and seeing where the market goes because you have got a quite a bit of question mark still looming large? You do not know which way crude is going, you do not know how strong the earnings recovery is going to be and whether this is a trend in plac. Then of course, Karnataka election are coming up and until 2019, politics is going to dominate the markets sentiment!
What looks like sitting around and not doing much is actually doing a lot of work in the background, trying to build our competence, trying to reach our entire universe of coverage of stocks that we have and making sure that we know all these businesses very well. We know what is the right price to enter these stocks. So, it looks like we are sitting around but actually the research team is busy looking at different sectors and companies and building our knowledge.
You own a lot of private sector banks. You had HDFC in your portfolio. Earlier we had Adrian Mowat, a well known strategist, say that well run banks despite the valuation look cheap. Would you agree or would you go with corporate banks which are suddenly moving 5%-7% based on the results?
Raunak Onkar: It is an interesting point because a lot of these banks have spent the past couple of decades building their franchise and network and that cannot be taken away.
Second, they have a huge base of depositors and savings account to keep opening every time the corporate accounts keep growing. That cannot be taken away. There will be problems like loans being turning bad for a short period of time. Now the banks have to make sure that they revert to mean somewhere and figure out that they are principally on the right track in terms of lending systems and all these other policies that they have but otherwise the retail franchises cannot be taken away from these people.
A name like ICICI Bank has all their subsidiaries listed which has a value. The insurance business is now doing very well. Securities has been listed at a different valuation and the core banks are now starting to look cheap. Would that be the correct approach to buy any of these names or any such names?
I would like to differ to what Mr Buffett has said about banks. He said that when you are buying a bank, you should look for quality and it might come at a little expensive valuation but quality has a meaning to it. It is like they have these processes in place which will not fail and of course one of the banks that he has owned has also demonstrated a lack of process somewhere in terms of facing a big probe and fines but that happens. The point is can you recover and can that system in place continue to grow that network of bank and keep that business afloat? If it can, then quality should be valued.
So PSB should be a complete avoid?
We have never owned PSBs stocks in our portfolio.
What are the newer opportunities that you are looking at?
Banking is one trend that is still playing out. The tech trend is still playing out. You do not have to look for too many opportunities beyond that. The point is you have to keep track of how these opportunities can be affected by new competition. For example, in case of Facebook, there were data privacy problems which led to problems for the company. They had to represent themselves before the government and answer queries.
Do you track midcap IT in India? The sort of move that has happened in Mindtree or anywhere else where there is a digital word, has done well has essentially done well. Would that be a proxy play to some of this growth?
Digital is a much abused word. Every contract has 90% traditional work and 10% digital. Contract become digital directly so it is a narrative thing that people are working on. The most important thing is that you should understand that there is lot of volume of work to be completed in the market.
It is not like customers are saying that we do not have IT work anymore, it is just that the pricing at which the work is being given to the vendors has changed over a period of time. The newer technologies will obviously have some premium because there is less staff available to work on those but traditional businesses along with newer things that is what you are seeing the volume growth in many of the companies.
But when you talk about the Indian IT space can you just tell us that now it will be a differentiated move so the company that gets work and institutes it properly will get more and more work versus unlike earlier where every company was getting a good amount of work say about 10-12 years back?
Right now, it is going to be the basics of business and sales productivity. If you have a very efficient sales team, you can keep churning these work far more often because the longer term contracts which we saw in the heydays of IT, are now shrinking to smaller term contracts. So you will need sales efficiency and sales team to constantly keep churning new accounts.
What about consumption because that is where you are seeing the maximum number of volume growth be it a Dabur or a Titan. Urban consumption as a trend has really managed to stand out, though Dabur has a rural flavour too. What within this pocket do you like? Or do you think the valuations have reached a peak and the stocks could move only so much?
We not sure about the valuation peaks but valuations are certainly stretched. If you are getting 8% earnings growth but the stock is trading at 50-60 times earnings, I do not think it is a great opportunity for us to look at them right now. But we keep tracking them. It is not that we are not aware of what is happening. It is basically about rational decision making. How much do you pay for what kind of growth and sometimes you miss on opportunities because you think they are very expensive. So, it is okay.