Let us talk IT as well, because you have said in the past that Tech Mahindra has the pedigree of the M&M Group so that is a stock that you are looking at. What else have you been adding when it comes to midcap IT?
Well, we have not yet invested in Tech Mahindra. We continue to evaluate it. It is on our radar. Yes, we like the fact that it is part of the M&M Group. So, I think the pedigree is fantastic. They clearly have an edge in the telecom space but yet that has yet to translate into industry beating numbers. Going forward, there is a change of leadership and sometime you are going to see a new CEO take over during the course of this year. So, we will really see what he has in store for Tech Mahindra and its growth prospects and whether he is able to really catapult Tech Mahindra into a new growth orbit. So, we continue to basically still watch that space and watch the company so let us see. In the midcap space, we continue to like the entire midcap space. I think there are some really compelling opportunities of which the most constructive that we are on is being LTTS. We have been owning it now for a while. We continue to like what they do in the engineering R&D space. However, there have been a couple of developments which are likely to kind of, in a way, flatten their growth maybe for a few quarters before they really catch up with their past historical averages in terms of both growth as well as margins. So, we continue to like that for what they do and the leadership there and we continue to evaluate many other midcap and small cap IT companies.
I want to come back to the point that you were talking about in terms of consumption, how it is under-penetrated and we have seen that the luxury end of the market and the per capita income increasing, that entire wealth effect is having an impact on the trends in consumption as well. So, how would you like to play this with respect to real estate, if at all, and autos?
Real estate essentially is a sector which is really poised for much better times. We think with softening in commodity prices and inflation lowering, interest rates probably have either peaked out or are likely to kind of trend lower which I think is going to be a stimulus or a catalyst for the real estate sector.
The sector itself has gone through consolidation for the last 9 to 10 years and I think that like any other sector, this sector is also expected to emerge out of this consolidation phase.
So, we are constructive on the real estate space. So far, the luxury segment has done well but we believe that with broad-based growth, pickup in manufacturing, wider job creation, we think that now the affordable real estate space or the mid-income real estate space is also expected to play a catch-up to what the premium or the luxury end has been doing.
So, we think on the whole the real estate space again is a great proxy for both India’s consumption potential as well as in the short to medium term on where potential interest rates could be headed. So, we like the real estate space.
I know we did touch upon PB Fintech but just curious as to whether or not any of the other upcoming IPOs or some of the other new-age tech companies are appealing or what your view is as a whole.
We are excited about the potential for some of these new-age companies and we have been constructive on the space. But when we have continuously evaluated them over maybe the last six to eight quarters that they have been listed. Earlier on they were just focussed on growth and in the process they were essentially incurring losses and maybe having cash burn as well. They have recalibrated their strategy, taken a few steps back and chose to focus more on profitability which is good news because respecting the balance sheet for us is a very-very important tenet of running a business.
But having said that, it is impacting growth for some of them and in the most recent quarter, some of them have kind of reported a tad lower growth than what you would want to expect them to do so. So, let us see, I still think that some of these new-age companies are still in an experimentation mode and are trying to kind of still dabble between profitability and growth. So, let us see, we are watchful of the space, the moment we get answers to some of these questions, I think we would probably have more of them in our portfolio.
What about the entire capex led industrial growth theme that is playing out in the market at this point of time, the likes of L&T, the industrials, Thermax, Cummins of the world, something on your radar or not really?
Oh, absolutely. We have been very constructive on the entire capex cycle now for more than a year, maybe a year-and-a-half and we have had some really interesting picks out there. They have been part of our portfolios and these have done well for us. So, we like the space, just that in the entire capex space we are more inclined towards the product companies or the equipment companies versus the pure services companies so that is where we have gravitated towards and we own a bunch of them which are proxies for power sector, energy sector, railways as a sector, so we own a fair bit of these capex companies and we have a fair exposure to them.
And which are those names, if I may ask, you own a bunch of them, so at least name a few?
Well, we own KSB Pumps, we own Hitachi Energy, we own TD Power. These are some of the names that we own. We used to own CG Power but we have exited CG Power given the kind of sharp run up that CG Power has witnessed. So, we own a bunch of them.
So, you are talking positively about a whole host of sectors, so what is the space you are underweight on at this point of time or something that you will stay away? What stands out?
I am not too sure about where we are staying away from, but where we are underweight are the chemical space, we are underweight the pharma space, we are underweight the large cap IT space, it is not that we do not have exposure here but we do have exposure but I would say that we are probably significantly underweight on these sectors. We are underweight yet on PSUs as a pack. We are underweight on the large cap banks. We do have positions but I think we are relatively underweight on the large cap banks as well.
So, when you say you are staying away from PSU names, is it specifically PSU banks as well because that was the darling of the market in the year gone by, solid rally, what is keeping you away?
Yes, so PSU banks as a space is something that we have stayed away from. It is probably because we had sufficient choice in private sector banks across large banks as well as mid-sized banks and some of the mid-sized to small-sized banks have essentially done probably as well both in terms of their operating and financial performance as well as in terms of stock price performance. So, honestly, we have been able to participate in the overall banking space.
It is just that because of that there was choice in terms of the private sector names, we have been in the private bank space and we have a fair bit of exposure in terms of the number of names out there as well. It is just that we have a more balanced exposure in private banks towards both large cap as well as midcap banks.
What about metals? Is that a space that you are staring clear from?
Oh, absolutely. One sector or one space that we stay away from is commodities. We really have no wherewithal to predict where commodity prices are going to be and how that would translate into growth and earnings for commodity producers. So, we have stayed away totally from commodity companies including metals or crude oil producers.
Again, come back to your point when you mentioned that real estate is one of the best proxies to play the consumption trend also at this point of time. A) What are those names? Are you playing it specifically with respect to some micro markets and is it trickling down to let us say the cement, the building material, the consumer durable names as well?
Yes, it is a combination of all of these what you mentioned. So, we have been owning Kolte-Patil in the real estate space now for a while and we continue to like in terms of its execution, what it has been doing in micro markets like Pune and some of the emerging markets like Bangalore and Mumbai for it, so we like that.
We like its business model about redevelopment and an asset light strategy, so we have been constructing there. Most recently, about a few months back in building materials, if you call it building materials, we had added a laminate manufacturing company, so that has done well, it has delivered strong performance. We also own a housing finance company called Home First. It is in the affordable housing segment, doing incredibly well in the outskirts of tier I cities and in tier II, tier III cities. It has been growing at a ferocious pace, managing its asset quality well and it has sufficient capital to essentially grow at these kinds of rates for maybe the next three to five years with ROEs continuously improving, so we own that as well.
In consumer appliances and consumer durables, we have been owning TTK Prestige. Demand, of course, has been sombre for this space, especially the kitchen appliances space with margin pressures coming on but we think that probably things might start to look up sometime during the second half of this financial year for some of these kinds of companies, the consumer durables, as growth picks up and margins begin to kind of start to lift up. So, I think we have a pretty comprehensive exposure in terms of real estate developers, housing finance companies, building materials as well as consumer appliances companies as I think an overall aggregate proxy for real estate and consumption in India.
Things looking good. I think the entire hospitality, QSR space has been a very promising sector of late. Do you own anything within this space? Can you just highlight the themes?
We do not directly own any of the QSR names because some of them are either loss-making or some of them trade at some really lofty valuations and our strategy is more about trying to kind of buy into growth at more reasonable or favourable prices.
But the way we have participated in the QSR space is to be through a proxy place. So, I earlier alluded to Mrs Bector, which of course has the biscuits business but also has a very interesting bakery business and they supply buns and some of the other bakery products to most of the leading QSR chains in India. So, to some extent we have proxy to the fast-growing QSR space of India.