Why digitisation remains the most powerful theme for Indian market

The consumer spending binge could get punctured if interest rates go higher and inflation returns. We could be going through this dangerous patch where growth is getting challenged and inflation gets stubborn which means a rate hike and then the reversal starts. Isn’t that the biggest risk?
That is more a source of volatility rather than the genesis of risk. I believe that interest rates could inch up by 25-50 bps but I do not see a material rate hike happening out here in India. It is also the case globally. Still, policymakers still believe that low interest rates is essentially the way forward and that is the way to bring about buoyancy.

In India, thankfully we are not yet that much a leveraged economy and Indian households and families are not yet so leveraged. Today the home loans interest rates are at 6.5-6.75%. They could go up to 7-7.25% but will that deter an individual and a family from going in for a home loan to buy the next house? I do not think so.

In addition, I believe revenge shopping, revenge travel, pent-up demand still exist and so I do not see a material risk to the overall business environment with a moderate rate hike. I still believe that if at all there is going to be a rate hike, it is going to be a bit moderate and we are going to enjoy an environment of lower interest rates and strong liquidity.

So you are basically saying that unlock trade may stay safe as far as revenge shopping, revenge travel, revenge dine outs go. The last time we spoke, you said you have taken a leap of faith and started owning platform companies. Since then a lot has happened and the IRCTC stock has corrected. We saw what happened with the Paytm IPO. How would you approach that?
I still continue to believe that digitisation is the biggest or the most powerful theme. It has played out very well in the rest of the world markets including the US and China. It is something which is going to play out even in India. It has started to play out but we still believe that this is just the beginning.

Having said that, one has to keep in mind how tolerant public markets are to companies reporting losses. I believe the next couple of quarters are going to be very interesting. Good public markets continue to be supportive of loss-making platforms. The good thing today is that there is a lot of choice amongst the platform companies or the new age businesses. There are a set of companies there which are profitable and there is a set that is loss. We so far are betting only on the profit making companies which are generating cash flows to fund that growth.

We have not yet invested into companies which are continuing to make losses but who knows? The space is getting interesting and all these companies talk about a huge TAM (Total Addressable Market). We as investors, apart from TAM, also need to look at the MAT (Money after Transactions), that they have margins and are generating money. So it is going to be an interesting tussle between TAM and the MAT and that is what we need to watch out for.

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You own ICICI Lombard. What are your views when it comes to the Star Health IPO?
We have been owning ICICI Lombard for a while and it has been a very interesting play. We continue to like what ICICI Lombard is doing especially in the general health insurance space, where it continues to be the largest player with almost 8% market share and are obsessed with its return on equity targets of about 20% plus.

Star Health Insurance is a very interesting play. We are very constructive on health insurance and like the fact that Star Health Insurance has been a leader in that space. It has been growing at a frantic pace and of course, health insurance continues to be relatively more under penetrated. So we like that space.

It is just that the valuations seem to be on the higher side and therefore one would probably want to wait for sometime before investing into Star Health Insurance. Honestly do not know when that opportunity comes up but I have seen generally over the years that even some of these fresh listings give one an opportunity to get in at a later stage either when the market corrects or when that specific companies having a bad quarter creates an opportunity for one to invest.

I think Star Health Insurance is a great business and it is a space to watch out for somebody who is really constructive for the long term.

You have Cipla and DRL. Have you added any of the healthcare services to that pack? The diagnostic stocks are doing very well. Would you be adding that to your portfolio?
Not yet. We still continue to like the frontline pharma companies. We still believe that the next couple of years could be very exciting for them, given the kind of launches that they have in regulated markets like the United States. We continue to like the large pharma companies out there. We do not own any of the diagnostic companies but we are keenly awaiting the Pharmeasy IPO. We think that is going to be an interesting space given that Pharmeasy also owns Thyrocare which is a diagnostic company. In addition, that means an online pharmacy today.

There are media reports that they are also planning to be omni channel and starting to open stores. We will wait for the Pharmaeasy IPO. In general, we like the online pharmacy space. It is a huge market and is basically set for being disrupted by some of these online players. That is a more interesting space versus the standalone diagnostic companies.

Month to date, have you anywhere in the last month or so trimmed positions?
Yes, we have trimmed positions. We have in a way exited the position in Triveni Turbines which we had bought a few months back and that had a ferocious run up. Pretty much a fair value came into the price. So we have exited Triveni Turbines. There are a couple of more positions where we have been trimming our holdings and looking at an opportunity like this.

Do you think the perception change in the Tata Group of Companies — Tata Power, Tata Motors, Tata Steel or for that matter TCS — is over?
In a way, the group has really played out and it looks like it is best to ride on the Tata name. In the past, we have invested in Tata Elxsi that played out really well. We of course no longer own it. So that has played out very well.

But in general, by and large a lot of the PE rerating has happened and when I look at companies like Tata Consumer, TCS and Tata Elxsi, as an investor one cannot bet now on further PE expansion from these kinds of levels. The stock that we like most now in Tata Group is Tata Motors. We believe that is only the start of the story and over the next few years, Tata Motors will play out quite significantly.

They seem to be essentially having all the pieces which are firing well or are expected to fire well — be it an expected uptick in the CV cycle or a huge breakthrough on the EV space. They really seem to have got the best of both worlds. I do not believe that the stock price at current levels factors in the future potential and in the entire Tata Group pack, that is one stock which we like the most today.

The Tata Motor stock has moved up from Rs 350 to 550 after the deal which valued the EV business at $10 billion. What could be the next trigger? Nilesh Shah: For a market as huge as India and for somebody who is a pioneer like the Tatas, if the EV strategy plays out really well, keep in mind that globally the EV space has really played out well in the four-wheeler, passenger car segment and that is exactly where they are going to be.
Of course, it has been different so far. We hear more noises on the EV two-wheeler space but clearly it looks like the Tatas have got a huge edge or a first mover advantage on the EV passenger car cycle. We believe that $10 billion is just the start. Keep in mind that they have talked about that space being profitable and cash flow generative after the first two or three years. That to me is phenomenal.

Two, the conventional passenger car business is where they have been gaining market share at the cost of the other leaders and if that continues, then that business which is honestly an overhang on the Tata Motor stock, is going to act as a huge tailwind to the stock.

The third piece of course is the expected uptick in the CV cycle. The CV cycle has pretty much been moribund over the last two, three years and that is something which is expected to revive over the next two, three years. If you are going to have so much manufacturing, mining, infrastructure related activity, then you are going to see the demand for CVs come back. Out there, Tata Motors is the market leader.

I believe that these three pillars — CVs, the conventional PVs and the expected EVs — all put together are pretty strong tailwinds for the Tata Motor stock not just to rerate but also to move up based on a huge growth in earnings as well.

What about M&M because there have been new launches and a lot of chatter about innovations?
M&M is a great proxy for correction. What they have achieved over the last year or year and a half is phenomenal and they have essentially in a way exited or as we say in our parlance, they have had a stop loss to various loss- making businesses and that has been the first great step.

Two, of course, there are tractors and farm equipment as a space has done well and is expected to continue to do well. On the whole, we believe that M&M is a great kind of an investment over the next few years. It has a strong potential to outperform and we own M&M as well. We believe both Tata Motors and M&M are two very independent segments and in a way it gives us a very holistic and a comprehensive exposure to the entire four wheeler space…