You are an India fund but our viewers by now know that you also have very large global exposure and the stocks which you own are Facebook, Google, Apple, IBM, which means you have very deep understanding of what is happening to the US tech market and what is happening to US stocks. Are you getting a sense that right now we could be staring at an ugly fall in some of the US stocks and US tech stocks?
Rajeev Thakkar: Anybody's guess. Markets are at all time highs both in India and globally and of course geopolitical events no one can predict what will happen with North Korea or US. Purely from valuations perspective, I do not see a reason for a broad selloff. Things like Amazon or Netflix are hard to value and you do not have too much of earning backup for the valuations, but the stocks that you mentioned like Google or Facebook, these are being valued on a conventional basis. It is not like the previous dot com where eyeball valuation is there. These are real businesses with real users and real cash flow coming in.
But it does not worry you that that you may have bought it a little more expensive considering it seems like a global correction is at play, you could have got it cheaper. I guess that is what Nikunj is trying to ask.
Rajeev Thakkar: The interesting thing is that the stock price in many of these have been going up but earnings have been ramping up much faster than the stock price so on a trailing, or a forward basis may be they are cheaper than where they were at the time of listing.
But you are buying what could be called as the cult group, the FANG group I mean that is the cult group. I was looking at some data couple of weeks ago and the data is that 85% of the fund managers currently are overweight FANG. So you are buying into Facebook or you bought into Google couple of years ago, you have increased your exposure to Apple and you are buying them slightly behind the curve.
Rajeev Thakkar: Let us talk numbers rather than what is ownership.
Or market behaviour.
Rajeev Thakkar: Yes so one cannot be contrary for contrary sake. One is to look at where the earning is going. So Facebook is a company which grew top line 50% in the quarter just gone by, bottom line grew 70%. Now I am not saying this continues for ever, surely there will be a slowdown. But these are among the few platforms which have more than billion users. So Facebook reaches two billion users globally. I mean era of fragmenting media with more and more channels coming in, more and more streaming services coming in, these are platforms which gave a reach and targeted reach for advertisers. Further these are platforms companies. So what starts as a very small service, they keep on extending that. So something like Whatsapp which started as a text messaging service added group chat, added picture videos, now they are getting into payments. So remitting money from my account to your account could be as simple as sending a Whatsapp message leveraging UPI. And we all know that India is seeing huge increase in users on internet, smartphones. So this revolution is going on across the world and what is two billion users today could be three billion, three-and-a-half billion a few years down the way.
Let us talk about the domestic market. Is this correction something where you may want to sell in any of your holding, add more if the stocks correct or are you just waiting to sit out and see where all of this pans out?
Rajeev Thakkar: So as we discussed on your show earlier also we have been sitting on some cash. In fact our objective is to get attractive opportunities where we can deploy money. So clearly momentum has gone out and people who are playing momentum are now scared. There are some pockets where you are seeing pessimism and we are closely watching those spaces to see if some buying opportunity comes by.
Like any new areas or are they the same stocks that you have been holding?
Rajeev Thakkar: They could be new as well. So we have a small exposure to pharma space but that is something which is undergoing a tough time, a lot of pessimism in that space, again one could look at some of the companies over there to build small positions.
I know while you are Buffett fan, I have also started following Howard Marks of late and Howard Marks in a sense gave this wonderful one line to me and Tanvir when we met him and that is that you never get good prices when there is cherry consensus and I get a sense that there is a lot of cherry consensus in NBFCs, private banks, some consumer names. You own private banks, you own consumer names. Are you looking at getting out of let us say Zydus Wellness position or HDFC Bank position?
Rajeev Thakkar: I think people are getting too excited about the corporate banks. The whole problem is not behind us. So we have cleared the legacy problems, the current problem which is coming up is the telecom sector which will start hitting the balance sheets soon. Power is a sector where people are underestimating the problems. You will have all this renewable energy coming. You will have older contracts being reneged upon by SEBs and things like so I am not that bigger fan of corporate banks. We own a few corporate banks so we own ICICI Bank and Axis.
But those are corporate banks again then, I would argue that...
Rajeev Thakkar: Those are corporate banks true so HDFC Bank or Kotak would be more retail whereas these are corporate banks so although I own a couple of corporate banks, I am not sure whether the bad times are behind them completely so I would not be gung ho in selling some of the retail banks and getting back to PSUs or some of the corporate names. There still may be some tough period left ahead of them.
What about the correction that is playing out right now, how steep could it get, I know it is unknown times, we do not know what is going to happen between US and North Korea but how steep could the fall be?
Rajeev Thakkar: We have what from the top fallen about 4-5%, it is not that we are in a 2008-09 kind of situation where suddenly companies start to buy back shares or promoters start upping their stake or people who have been sitting on the sidelines suddenly come back. What has happened is just the momentum guys have taken a breather so selectively yes you could see opportunities but otherwise people who are really looking for good value opportunities may be staying on the sidelines for a while. It is still not-- the overvaluation in some spaces has clearly not gone away with the small fall that we have seen.
In your history of public when you manage public money which is one stock you think you sold very early? The regrets?
Rajeev Thakkar: I think the entire consumer space.
Give me an example.
Rajeev Thakkar: Nestle, Lever or Marico, all of these we sold off too early. Based on their historical valuation numbers they were clearly at upper band and beyond and they kept going up, Asian Paints, so that entire space. So Zydus as you mentioned is the only name in the Indian consumption space that we have, others are foreign.
You have been owning Persistent for about two, two and a half years now and every time we talk to the management I get a sense that look they are trying to differentiate themselves by digital offering but when numbers come out the standard explanation is look my old business is getting completely whacked, my new business is not big enough to take care of all the decline. How far are we from this turning point in IT?
Rajeev Thakkar: It is going to be tough so I do not think every company will make the transition from a typical application development, maintenance, outsourcing kind of business to the new age thing but I think Persistent at least in terms of the efforts that they are making seem to be moving in the right direction.
So you are not worried about that exposure, the stock has come down from ₹ 900 to about ₹ 600?
Rajeev Thakkar: It is around where we have bought and Rs 900 is nowhere near our purchase price and anyway we are looking at the prospects going ahead rather than the past.
A stock which I am going to ask is going to make you feel slightly nervous: Ipca? You still own Ipca right?
Rajeev Thakkar: We still own Ipca, another stock Dr Reddy's so...
Both of them four-year low? Is it too late to sell pharma, is it not?
Rajeev Thakkar: Actually according to me it is time to look at buying opportunities in that space. As we mentioned last time that we have been buying these after they got into trouble. What has happened is after they got into trouble they got into more trouble so..
Bad has become awful.
Rajeev Thakkar: Yes, so that is what has been happening and again these are not among our top holdings or these are not the large positions. In fact, overall we may be underweight pharma as on date but everyone is going through that pain and I think that is one space where you could see some opportunities coming up.
The original article could be seen here.