Given that you track the IT space closely, how are you reading into the current underperformance and fair share of concerns as well acting upon the market mood?
As far as IT sector future growth potential over the next one to two years is concerned, the concerns are overplayed because the outlook for this sector still remains very strong and resilient because when we look at the commentaries from the top 500 companies globally, all of them are looking to increase their expenditure on technology to digitise their business and looking forward to spend on to new areas of technologies – be it AI or machine learning or making their businesses agile and cloud adaptive.
I think the growth outlook for the Indian IT sector continues to remain fairly strong and healthy and I do not see too much of a concern. I would look upon some of these corrections in the IT stocks to probably nibble into and buy into them from a 1-2 year perspective.
What will change in one or two years is what I am trying to understand and why do you think the selling is overdone? I am being a devil’s advocate here because historically every time there has been a recession or a slowdown in the European and US economy directly or indirectly, it has impacted the IT sector sooner than later.
The current cycle is very different from any of the previous cycles that we have seen in the last 15-20 years because one cannot have a recession in the US when the unemployment is at an all-time historical low at 3%.
When you look at data across the US, for every unemployed person, the open job vacancies are 2X. So the underlying strength in the US economy is extremely resilient and while there are lots of conversations around or apprehensions of the US economy tripping into a recession, there could be more of a technical recession but I do not see the US economy getting into a meaningful recession in any manner, probably over the next year or so.
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Secondly, as far as IT spends are concerned, they are no longer discretionary and for most of these large companies, IT has become the core part of their growth engine. Companies realise they need to invest into technology to drive their growth going forward or else, they could be left behind by competition. Which is why even if there is a slowdown in growth, this time global 500 or Fortune 500 companies are not going to cut back on the IT budgets.
In this context, Indian IT companies being the leading companies and given that today the industry has more demand and is facing supply or talent crunch and are not able to execute the demand that is out there. So while growth might moderate a bit, I do not see a serious growth setback for Indian companies. I still think that the larger companies can still deliver double digit growth over the next three to five years.
TTML, a Tata Group company, had Rs 200 crore of operating loss, the stock is up 50%. Is the tail wagging the dog? Is it time to be careful?
Well for all these names you mentioned I have no idea about it because these are companies with very low floating stock and I do not understand that game. To some extent, it could be some retail exuberance that is playing out or speculative moves in some of these names. I do not feel as concerned when I look at the broader market because we are at a point where valuations are still pretty reasonable.
When I look at the economy, I see very strong undercurrent of demand, especially consumer discretionary, with the festive season being around the corner. After a gap of two years, people are going out and spending. I still think there are pockets of value and opportunities in the market in fundamentally sound companies and strong businesses. Investors should stay focussed on those companies.
Let us discuss about your discovery at the 2020 lows. What next? Today I can see there is a solid 8% spike on the stock.
I continue to remain a structural bull on all internet companies. India’s internet penetration is at pretty low levels and our internet economy is at a very nascent stage. I firmly believe that over the next 10 years, the internet economy will be the fastest growing segment of the overall economy.
The next 10 years in India is all about digitisation and internet and our house view is that probably 10 years out when probably India would probably be a $7-trillion economy, internet itself could be a 15% of India’s economy, which effectively means that the internet ecosystem, which is about $100 odd billion in terms of size, can grow 10X in the next 10 years. In that context, I remain a structural bull on all internet companies over the next 10 years.
Does your bouquet of internet names also include the likes of , ?
Well absolutely right. We like all or most of the internet businesses. One will have to be careful in terms of selecting the right stocks because the other thing that goes hand in hand with internet businesses are businesses, where competitive intensity is extremely high and changes happen very frequently or disruption happens at a very rapid pace.
Essentially the companies will have to be extremely agile and forward thinking in terms of their business models and how they are thinking about their businesses going forward.
One will have to be careful in terms of stock selections but I firmly believe that as a space it offers enormous opportunities for investors. Probably, the fastest wealth creation in India will happen over the next 10 years in internet.
What do you own since you are bullish on the entire space?
With a caveat, we own quite a few of these names including InfoEdge, which we have been holding for a very long time. Apart from that, we have ownership across Paytm and Zomato as well and there are a few other names that we own, which I cannot talk about at this point of time but I will be happy to talk about them at some point of time.
During the Covid, you said you bought InfoEdge because it was fulfilling the basic needs of a person. Any other business you have invested in which fulfills the human needs and will be relevant?
When we look at these businesses with a slightly deeper insight, we find that these businesses have a very strong consumer connect. Look at the whole UPI and digital payment revolution that has happened in India over the last five or six years.
All of us know that last year, India made a trillion dollars of payments on the UPI platform and that still probably will continue to grow at 20-25% CAGR over the next 10 years. Payment is a huge ecosystem or a huge business globally and there is money to be made in the payment ecosystem. We think that Paytm is at the forefront of it and they might do well in the payment ecosystem and once you acquire those customers, there are a lot many things that you can do with those customers.
I have invested in some of these companies including Paytm. Having invested into the business aggressively over the last 10 years, some of their businesses have reached some critical mass where incremental operating leverage is extremely favourable. On top of that, these businesses are growing at a very rapid pace and more importantly, the penetration levels are very nascent which effectively means that we have a very long arch of growth that is visible in these businesses over a long period of time.
It becomes a classical investment story when a great business with great operating metrics can grow at a very high rate on a sustained basis for a long period of time and that is what classically any growth investor would want to own. Many of these businesses tick box for most of our growth filters when we look at them from a slightly longer time horizon.
Even in our surveys across customers of these businesses we nearly came to the conclusion that these businesses have a very sticky consumer base because customers are used to these businesses and they have become a core part of their daily activity or their lifestyle which effectively means these platforms are here to stay for a very long while.
Some very basic changes have happened in the money market. The bond yield has inverted in the US; the dollar index is at 109, the bond markets are telling us recession is coming. If I compare the money market versus equity market globally, equity market participants do not have a sweat on their brow. They are not bothered about what is happening to the money market.
The money and equity markets are normally supposed to align but right now, they are complete poles apart?
I might want to add here that a US recession might not be such a bad thing for India. That would effectively mean a slower global growth and given that now we are seeing a sharp slowdown in Chinese growth also, given the implementation of the whole Covid Zero policy, that effectively in the medium term works for India because that will mean softer commodity prices.
India is a big importer of commodities, especially oil. A $25 correction in oil prices that we have witnessed in the last three months has resulted in about $30 billion of domestic savings in India. That is equivalent to the kind of money we get from FIIs in one single year.
The point I am trying to make is that India’s growth is more domestic oriented and secondly it is driven by productivity gains and probably China plus One strategy where global companies want to shift their manufacturing away from China to India. I do not see that getting impacted as such.
In that context, probably a slower global growth or mild recession in the US might not be such a bad thing for India. It can help India in the sense that commodity prices will remain benign and softer and that helps our domestic economy.
Given that our growth drivers are very domestic-oriented and pretty strong, I would not be too concerned about global growth at this point of time unless we see a very sharp recession in the US or a very deep recession in the US or in global growth which I do not think is the case, at this point of time.
Globally also, consumers and companies have resilient balance sheets, consumer spending is very strong and the underlying growth is still very resilient.
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