Global set-up is very scary, Indian market is expensive but I am fully invested: Manish Chokhani, Enam

If you are going to beat inflation in India, you have to be in equities, not fixed income, says Chokhani.

I wish more of Indians were invested in equity markets because if 50% of India is owned by the owners of businesses, 20-25% is owned by foreigners. Where are the Indians in the ownership hierarchy, said Manish Chokhani, Director, Enam Holdings, in an interview with ETNOW.

Edited excerpts:

What a comeback it has been?
Absolutely and you said it right that whatever government comes to power, we are basically a function of what the global setup is and what is the earnings trajectory over here! That so far does not look like it is going to change in a hurry just because the government has changed. So of course, the event risk hopefully is out of the way but I guess, 10 days from now, we will be looking forward to what is the monsoon like, who is going to get the portfolios, who is going to be running the finance ministry, what is going to happen to interest rates and then we will take it from there.

In 2014, we met on the day when Prime Minister Modi got elected. You said, the mood has changed, India has moved decisively to right?
I did say that and I also said subsequently that I realise now that it was foolish on my part to think that a country where 80% of the population really does not have basic income to expect that the government will worry about the two and the 18 of India which is consuming -- is perhaps a bit naive and you did not really have the political freedom given the set up in the Rajya Sabha to achieve what I still think this government ought to now be doing is just massive, massive privatisation to create the fiscal space for themselves to spend money on infrastructure, to spend money on skilling, to create that whole urbanisation and jobs and all of that. I am still hopeful on that but I do not think I will be making statements like we have gone to the right anymore.

Will that really be a priority once the government comes back to power?
So I do think that given the setup now -- assuming these polls are correct and assuming this is the setup which comes back to power -- one of the things I strongly feel that the way to solve the agrarian crisis in India is not by putting subsidies into the farmland. It is actually by urbanisation, because only if you can move people off the farms to the cities and the towns, do you solve the crisis there because you cannot have one country in the world where 70% of the population is on the farm whereas in the whole world only, 15% of the population is on the farm. You have to get them off the farm. And the way to get them off the farm is to put them into cities and that is what will create jobs. There is so much of build out to be done -- whether it is urban infrastructure or actually creating factories -- and getting these people on there.


How does on judge that the slowdown in autos and even in categories like consumer staples and durables? Is it temporary or this is a structural slowdown because we have not seen that gut-wrenching slowdown for a long, long time?
It has been one of the disappointments. When you draw a bell curve, in most countries of the world, you find the way income is distributed is, there are very few poor people, very few rich people and a very bulging middle class. And the India skew is very dramatic. 2% of Indians have maybe a $25,000 per capita, 18% of Indians have $3,000 per capita but 80% of India is actually at $300 and that is why your average is at $1200 or $1400 or wherever we are. Unfortunately in the last 10 years after the global financial crisis, the real wealth effect has not taken place in India.

Also the rupee in 2008 was at 40 to a dollar and it is now at 70. So not only have you suffered a decline in real income in that sense in India, you have not created fresh jobs to create a wealth effect to trickle down to the remaining 80% of India. Therefore this whole policy making now has to be geared towards a stronger rupee, lower interest rates and a lot more urbanisation and factory-oriented jobs because I am not a subscriber to the myth that India can just transform itself from agrarian to services economy without going through intermediate stage.

When it comes to fiscal and policies on the finance ministry front, is there anything in particular that you were displeased with or that you would want to see some sort of a major change?
Politics is the art of doing the possible and you need a politically savvy finance minister and due credit has to be given that the government was fiscally responsible. This government did bring in things like GST which is still transformational for the economy. So you can quibble over that like I always felt that they should have been more aggressive on privatisation. For example, you could have directed a lot more money towards infrastructure spend but it is a question of the political choices you make. I do not think if anyone is put in that job, they might do something very different from what the incumbent finally does.
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If you look at the boom period for India, it came at a time when the political mandate was fractured between 2004 and 2008 or 2009. What are the chances that NDA-2 may enjoy the good work of NDA-1?
You have to be very optimistic about it because this is a period of demographic dividend where India should be at its prime. To be at its prime you need people to be gainfully employed. If the narrative in India is that you are getting jobless growth or you are getting people to become delivery boys or what I call disguised under-employment, that is not going to lift your per capita to a $5000 benchmark which is what we should aspire to.

I also feel the last five years may have been a cleanup period in some sense to get rid of all the hangover of the previous five or 10 years. Now benchmarking from the previous five will probably have to change to benchmarking against the best in the world.

When I started my life, India and China had parity in terms of per capita income and today they are 6x of us. When you talked of the structural versus cyclical in auto for example, in the mid 90s India and China sold one million cars each. Today we are barely inching over three million cars. China went close to 30 million and their average car sells for probably four times or five times the price of the average car in India. So you have a 40-fold expansion of that market and they are not much different from us in terms of population and brain power. I would argue our political democratic setup actually should make us more enduring and more longer term sustaining as a country so that time will also come.

Since you did talk about this global backdrop, it is in the backdrop of it is a ticking time-bomb that we are sitting on. The US equity bull market run has lasted us a good 10 years now and now corporate debt is on the rise. How do you correlate the two? Is that bubble in FAANG stocks going to burst anytime soon?
I do not think any of the gurus in the world questioned whether it will happen, the question is when it will happen. And if you think of it mathematically, the US debt to GDP is 350% of GDP. So, if interest rates go up by 1%, that is 3.5% of GDP. Their GDP growth is not 3.5% which means you have a profit recession over there and therefore each time the Fed says I am going to raise rates, the market goes into a swoon and then Fed draws back and says okay let us release some more money.
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The question is at some point someone in the markets in their wisdom will wake up and say this is not sustainable and remember US is still the most dynamic economy in the world. We do not discuss Europe anymore because nobody knows what numbers come out of Europe anymore. We do not discuss Japan anymore. Fundamentally, it is dead and as someone said, Japan is like a bug in search of a windshield. Something has to go wrong and then it just blows up over there. That is why money is leaving these countries in trillions of dollars and we are able to attract unfortunately maybe $100 billion. So we get happy if we have $15-20 billion of FII flows, but that is a trickle end of a global wash of money which is going across the world.

Even for us at $2-2.5 trillion with a 5% trade deficit, 100 billion is the basic need to attract by way of FDI and if we get a lot more in private equity than we get in FII flows, we should get a lot more by way of debt flows. Having said that, we have so much of stuff available to sell and we have spoken about this as well in the past that if Mr Ambani is willing to sell his refinery, why is the government holding on HP, BP and IOC?
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Ten years from now, if electric is the future, why do you want to hold on to a refinery? It is the same thing with steel mills. If Essar and Bhushan and all are finding buyers, what is so sacred about holding on to Steel Authority of India and so on? There is so much capital which is wrongfully deployed in our country, if that can be released you can create new assets at one time book -- be it roads, airports and then you can sell them at 2-2.5 times book and create a virtuous cycle in this country.

It is a bit of a realistic question. Let us work with the assumption that what we want and we do not get is that PSUs are not privatised?
This time I would beg to different. This government now has the political space to do it. The set up in the Rajya Sabha may also turn out to be very different and for the first time, they made statements like we will get rid of Article 370. That was a sacred holy cow for 70 years. Similarly, it is not that privatisation has not been done before. The first NDA regime under Mr Vajpayee had in fact initiated that and if you think of it, how do you ignite animal spirits in the economy? If you think of it, BSNL had gone to Tata, IPCL had gone to Reliance and so on and the previous administration may have got a bit spook with the suit boot ki sarkar narrative but and may be that does not hold true anymore.

If you can go down that path, the need of the hour is that so you could have argued four years ago and maybe I can still get buy, I still need to clean up the banking sector. You need massive infusion into the banking sector and one of the big trades that will happen in India will be when you have to start putting these PSU banks together. It is the most hated space. Nobody likes it, no one has the courage to go and buy it but you cannot have the whole 70% of India’s banking sector just decaying away.

Is there a case for at least beginning to nibble into any two spaces?
They will have to start, they will have to take action there. They have done the merger in SBI, they have done it in BoB. I am guessing it will happen in some of the other banks as well.

When I started my career, as a house Enam was very bullish on PSUs in 1999-2000. FCI, Nalco. Do you see that kind of a value?
In some spaces that is true. As a contrarian, it is the place you look at because what you are rightly pointing out at that time, I remember BEL used to be Rs 50 and it was selling below cash on its books.

BEML was 20 bucks.
BEML was 20 bucks. Container Corporation was like Rs 100. SBI itself was like Rs 170 and then bonus. In the market, there is a season for every fruit and something will happen.

Are you fully invested?
Pretty much but we are always fully invested, I do not understand that why would I lend money to someone whose equity I can buy so…

What we are trying to gauge here is that since we do not get time to interact with you regularly, we have to get the sense out in whatever little bit of time we get. You are not sounding very optimistic about the global set up?
Yes, I do not have to take a position and say I am some bullish person I have to lead the market in any direction but fundamentally I am an optimistic person. Fundamentally, let us say there was gloom and doom in the world. Let us say there is a terrible government in India and I get HDFC Mutual fund at Rs 1,200. Do I really care about the world and do I really care about what governments in place? I am going to buy it. If HDFC Bank falls to a certain price. It happened with Bajaj Finance in the last NBFC crisis….

Went down to Rs 1,900…
It went down to Rs 1,900 and within what six-seven months it is virtually a double. Do you really care about that?

We spoke about how data is going to change the way how Indians would consume and that is was a mega trend. Anything else which could be called a mega trend for two to three years?
It is probably a longer discussion. Maybe, today people are more interested in the polls but I do think that Indian set up has to change fundamentally. While we keep saying go away from consumption or the financials and buy infra and industrials, the reality is the world has gone away from these. Nobody is buying GE and Siemens globally even at sub 10 multiples. Nobody is buying pharmaceutical stocks J&J and Pfizer. You can buy 15 and 16 and 25-30 being generic stocks.

Fundamentally, the cast of characters in the Indian corporate sector has to change, a lot of it has happened in the private equity space but even there valuations may or may not be sustainable and yet you do see occasionally you will get a windfall like a Wal-Mart comes and buys into a Flipkart at fantastic valuations. Hopefully, you see some of that happening with the deal which was spoken about with Reliance where they can deploy capital and then redeploy it back into Jio and so on but the architecture of a corporate sector is going to change fundamentally.

Are you saying that the markets are still very expensive?
If I have to look at that as an aggregate level the markets not cheap. The market still in my has been pricing in this whole boom that we like we talked of income curbing a J-curve in India that 2% of Indians owns cars, 18% of Indians own motorcycles and 80% of India is either walking bare feet or their own cycles.

If you are sitting in an auto company and let us say you own a Hero Honda stock. It may look like x growth today and it is a 12-13 multiple or whatever, but if 80% of India still has to get on a motorbike, it may still be a growth stock. Then you started worrying but seven years later, if these are all on electric bikes and not on petrol bikes, will they make that change and will they transition to that that is really the sort of bet you have to start thinking about.

What do you worry about when it comes to auto? Do you see that growth visibility or do you worry about the prices that the stocks are trading at?
The prices for autos are actually very interesting. The issue is will they make the transition to the x sort of internal combustion engine era and will the brand therefore be a lot more valuable than just the technologies? The bets so far is that people buy brands, not just the technology.

We have this fund manager survey as well. When it comes to earnings, the consensus call is that is going to take its own course irrespective of what happens with respect to the election. Do you agree with that?
Yes, because if you just take the math for SBI, ICICI, and Axis Bank that itself is giving you 10% earnings growth for the whole index. So the 50% of incremental earnings growth for the Nifty is coming from financial sector.

The point which everybody is debating now is that HUL, Nestle, P&G will grow 10 to 15% or 15% to 20%, depending on the portfolio. But if you buy these stocks at 40-50 even 70 PE multiples, what happens then?
I cannot disagree with that….

You agree with that so you will not buy that…
When you play consumers, you are looking for that J-curve delta what you want is whether the beta is higher. Therefore people got durables and autos because if I am going to trade up as a consumer from a Colgate, I will go from a Colgate Y to a Colgate Total. But it is not a fundamental change in trajectory. Whereas the same consumer trades up from a bicycle to a motorcycle. There is five times the consumers which will have to come in there.

What is your view on the way how the NBFC mess? It is like peeling off onion layers and layers of mystery and stuff. Is the adjustment behind us or more is coming?
I do not know what is inside and Warren Buffett said it wonderfully in his 1992 letter that when he had bought Wells Fargo, I do not know what is inside and when you give money to someone, who can then leverage it 10 times further, you do not bet on the balance sheet. You bet on the person you are giving the money to. Therefore when you are talking of financials, you have to be clear who and what culture you are lending that money to or buying that equity.

If India has to go from a $2 trillion to a $5 trillion economy, which are the businesses which will scale it up?
That is the issue. If 40% of this market has become financials, we do not yet have the tailwind to say which are the guys who are going to take us to the $5 trillion. If you disaggregate our market and you take the $2 trillion, 25% of that market cap -- $500 billion is six companies. 18 companies make the next 25%. So in 23-24 companies, half of India is over.

Among these, half are financials, some are tech, a few consumers. This cannot be the base to take this country from here to there. So if you even think of China, what lifted off that country was not the public sector which largely owned the country, it was the Tencents and the Baidu and Alibabas. Where are those companies being created because these are now held by foreigners? So if Walmart holds Filpkart, Amazon is Amazon in India and now Alibaba and SoftBank between them own Paytm and they will try and create that. Where is the wealth creation happening for Indian entrepreneurs and Indian investors and that is not really coming to market.

So what should one do in next three to five years?
Build your own business, I am involved in that and I have asked myself that…

Lot of our viewers cannot.
When I started my life, my father was in industry and if I said I am going into the stock markets, there was kind of gloom like itna padha likha ke waste ho gaya (All those high degrees are wasted). Now, everyone and his uncle either wants to be a consultant or an investor who is actually going to go and build businesses and those are the guys who are going to create the next level of wealth.

In a country which is young, where 25-27 is the average age, we should have a lot more entrepreneurs going out there and creating businesses and building jobs. There is a lot of capital now available for everybody.

What will new India need? Will they need cars, insurance, what else?
I am not sure they need cars because now they do ride sharing. My own son refuses to buy a car. So the world is changing and that is what I am saying the patterns that we are building on are linear and the world has gone non linear. It has gone exponential. A lot of world may be living in the gaming universe, in a virtual reality universe.

They are growing food in containers…
That is right. So what is holding back Indians who are fundamentally smart people from creating these new models and testing? If you are saying I can do clinical trials in India because it is cheaper to do it in India than to do it in the west, lot of these business models could be tested in India at much cheaper levels and then you do the scale up overseas. That is one of the businesses I am involved in. It is actually going down exactly that path that you do not get pricing in India but you get proof of concept here. Tthen you can scale it up dramatically and that really was the success of Indian IT, Indian pharma because they opened up global markets.

Even now auto sector for that matter has gone global. It is not just about India. You just spoke about Bajaj Auto. , I think half its revenues are now from overseas sales.

30%...
Yes.

But for someone who says I do not have the wisdom or the capital or the maybe the understanding of starting a new business, but I do not mind putting 50,000, 25,000 on a monthly basis? The call which I need to take is three to five years. Do I remain committed to equities?
There is no question. Absolutely without question that if you are going to beat inflation in this country, you have to be in equities, you cannot be in fixed income.

What if this entire US corporate bubble is going to burst in the next 2-3 years?
Okay let us say the US blows up, you get a meltdown in global markets. The question is does India come back or not because consumption is still there? If you can take that temporary shock and your asset allocation is okay, hopefully when the meltdown happens, I can deploy some more money over there.

It is only if you are levered 110-120% in the market that you don’t want blow ups. But if you always have some gun powder dry, you can always put incremental money and in the Indian context, we do not even have 5% of our assets in equities. So the talk of what will happen when the world blows is a bit premature in our context.

I wish more of Indians were invested in equity markets because if 50% of India is owned by the owners of businesses, 20-25% is owned by foreigners. Where are the Indians in the ownership hierarchy. The top six companies all are owned by foreigners whether it is HDFC Limited or Infosys or TCS, I mean fortunately Tatas held on, otherwise all the ownership is overseas.

The other trend is that big is getting bigger and bigger ones are reaching monster levels. Will we see more polarisation where 5-10 companies will be the next one to survive, next one to take a big leap? One needs to just keep it simple, stick to these 10 names.
It is not that you buy them when they are already that big. You hope that the one you buy has the characteristic to become that big and the most fertile shopping ground is for individual investors should be midcap but provided you understand. If you do not, mutual funds are there and there are two already listed and the many more are going to come.

What would be that criteria then for these midcaps?
Do you have a very large addressable market? Do you have a player with whom you can bet? Bajaj Finance was born in the global financial crisis of 2008-2009. It was a Rs 500 stock and it is today effectively 68,000. That is the ride in 10 years which it has given you. Of course, everyone would not become that but even within those spaces, there were other players who came out who have done equally well.

In the near term, do you bet on those same leaders, Bajaj Finances, HDFC Banks of the world?
I do not want to do individual stocks and it is a question of valuation and it is not right if someone is sitting on something from a very low price images we holding on till the very end. For someone to take fresh entry, we started by saying this market is not cheap so you have to be cherry picking and figuring out where I want to take a two year, three year, four year view. Unfortunately most people in India buy stocks, they will buy it in May so that they can sell it by December and life is not as easy as that.

The first time I am going to say today that do not sell in the month of May and go away because of election.
You never know.

You are a big believer of cycles and mean reversion and just to put things in context for our viewers, let us say you bought into private banks in 2000 you hit a home run. You bought into the NBFC boom in 2010-2011 you hit a home run. What could be that trend in making within the financials? Next five, six, seven years what is the trend for you?
Look the easiest one in financials today is the mutual fund space because everyone is under invested. There are two listed and couple more indirectly listed in that space but eventually the mutual fund has to become larger than the banking deposits in this country. There are two or three obvious winners in that. Even I should put a disclaimer I own this that Reliance itself is going to sell its mutual fund to Nippon Life. It is public info. If you look at that there could be a directionally a trend line in something like that which changes. If HDFC Mutual Fund faces a market correction, you could get it at reasonable prices. Why would you not own it for the next 10 years?

You would not buy life insurance or general insurance?
There are prices for everything. I love those businesses as well and I do have lot of those in my portfolio as well and they are ways to play them, there is player I have from south India which looks to me terribly undervalued. But there is enough to do in the market. So I still repeat the global set up is very scary, the Indian market is expensive and yet I am fully invested.

Hand on your heart, NDA-2 is this good news or is this great news for market?
I am always optimistic. Look it is how events unfold and what people do. Like I said the last time I made such a bold statement saying the country is decisively moved to the right, in fact it really stayed on the right even the CPM has now voted for BJP. So, what more do you want?
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