Let us know some of your stock ideas for 2023?
I really feel very excited about what’s going to happen to India next year because what we’ve seen this year in terms of the mixed performance of the Indian markets and the recognition of the Indian economy, it’s not been a one-off. I think it’s the beginning of a trend. To me, it seems that all the stars are teaming up for the sake of the Indian economy and the Indian markets because the fact remains that we are in a phase where the world is very volatile and developed economies are on the brink of recession.
How about a stock idea for 2023. See when Santa comes, Santa will always give you something nice and instant gratification.
I think this year started with a lot of optimism and a lot of these Internet names have unfortunately taken a heavy hit from a public market investor standpoint.
But I think next year could be a year where these stocks can make a lot of money for investors, and I’m still very positive or optimistic about some of these Internet names because their core business is going very strong.
I think now that these stocks are getting a fairer appreciation in the context of their growth and more importantly that these companies are now making the rapid transition to profitability that they weren’t doing when they were private companies.
Extraordinary returns are made in sectors that are generally very unpopular. First of all, I see a classic mix here where the sectors are very unpopular in the sense that investors have burned their fingers and there is some degree of fear in terms of investing in these companies and that’s right. More importantly, the underlying growth is very strong and these companies have very strong operating leverage which effectively means that they will generate a massive amount of cash flow once they become profitable. So I think some of these Internet companies could be a dark horse or a wild card for next year.
According to this logic, what was and what was low has descended. Do you think banks in 2023 will decline?
Not right. I still think there might be some profit-taking in the early part of the year, but on a year-over-year basis, they’re still going to do well because the underlying growth in the economy is still strong. We are all aware that finance and banking are at the heart of the economy playing a role in all sectors of the economy and playing a very vital role in the growth of the economy. The valuations in the public sector are still reasonable in that context so I feel it will make good returns although there could be some profit taking as it has done quite well especially in the last three months. But I still think they should do well in the medium term. More importantly, 2023 could be a year in which the pharmaceutical sector will do well because it is a sector that has not done well for the past two years. We’ve seen lower earnings growth in this segment over the past three years for a variety of reasons including significant price pressures in the US generic drug markets and a couple of other factors. But we’re at a point where this year is going to be a tough year in terms of earnings for the healthcare industry as a whole, and next year onwards, the sector is going to start to have healthy earnings growth. So in that context, I think next year could be a year where the pharmaceutical sector that hasn’t been favored and hasn’t had positive returns may be one of the better performing sectors next year.
Can I ask you more details on that, there are some people who think pharmaceuticals could be the dark horse of the new year. Where are you going to put your money in pharma because if you look at the last earnings season as well, that’s the only thing that stands out?
Yeah, you’re right but I think basically what we’re seeing is that price pressure in the generic drug market in the US is starting to ease and it should probably be really tough towards the end of this year and as a result, let’s say for a lot of these companies
Alembic or Alembic has made significant investments in products and facilities over the last two or three years and hasn’t yielded the desired results for these companies that are likely to start generating income next year, so I think the sector as a whole should benefit.
Indian companies have a very dominant market share due to our low cost manufacturing base in India, so I think broadly most companies will see a nice rebound in earnings. We obviously have our favorite picks across the segment starting with Sun Pharma and then we like Alembic as well. We like some of the middle name drug companies including
Tell me a little bit about your first three holdings and do you think the first three holdings are likely to stay that way for the next 12 months given the information we have?
Yeah, well, if you look across the portfolios, our three largest holdings are going to be banks and intrabanks that we own
And the . We own a telecom company which is basically Bharti and we have a healthcare company which is Sun Pharma and I think given our approach to investment where we look at the business for three years and review it every three years, it’s very unlikely that there will be any changes to it.
Having said that, this year was a year in which we were actually underinformed in IT because at the beginning of the year we feared that there would be a slowdown in growth in the US and that would have some impact on these companies and valuations at the beginning of this year. We are very rich in the IT services company but given the fact that these shares have now corrected anywhere between 20% to 30% over the course of the year and the growth outlook has softened although these companies can continue to deliver healthy growth. Sometime next year, I think we’ll change our stance on that, and we’ll probably add more IT to our portfolio next year, but other than that our top holdings will remain the same.
We must have discussed Bharti in 2020 countless number of times, 2021 also we kept discussing Bharti and how data consumption is going up but the stock didn’t oblige and when Bharti was behind, Bharti stock went up and we did. Don’t you talk about it?
Yes, I totally take your point and I think I’ve been positive about telecom as a sector for some time now. I think the good thing is that the sector if you look at it from a slightly broader perspective has become a classic oligopoly in India because five years ago we had more than 10 players and now we have as few as two and a half or three players as we would like. to call it.
More importantly, we’ve seen pricing power return to the segment, so over the last couple of years we’ve seen these companies have raised calibrated prices and I think that trend is going to continue because with the three player market it gets a lot easier and so is the competitive intensity. much less.
As you rightly said, in fact, Indians consume the most amount of data globally. Five years before the advent of Jio, the average data consumption per consumer in India per month was around 4GB, today we consume around 17GB of individual data per month on average which is very high even by global standards.
I think with more penetration with the launch of 5G and smartphones in Tier 3 and Tier 4 cities, that number is only going to go up which means there will be significant growth in data consumption for these companies and more importantly as I said these companies will take calibrated price increases and finally all companies These connections, and Bharti is also at the peak of its debt, so its leverage will continue to decline thanks to the large amount of free cash flow that these companies will generate.
So I think telecom as a sector will become a secular growth story in India over the next five years. More importantly, it’s very rare around the world when you look across sectors where you encounter oligopolists and utilities with strong pricing power and it’s a very unique case of the background conditions that we have in the telecom sector in India. When these types of mergers happen in any large sector, this type of profit opportunity in such sectors lasts for a very long period of time.
So I totally take your point that Bharti looks very exciting from a next year perspective, but I also think we’ll take it more as a secular growth story over the next five years.
(Disclaimer: The recommendations, suggestions, opinions and opinions provided by the experts are their own. These do not represent the views of the Economic Times)