You always buy good businesses at a good price. Are the valuations that some of these names are at look comfortable for anyone to add positions? I am not talking about those who have been holding and riding the move on these counters or even buying afresh?
Ashi Anand: Honestly, not really. In certain hot consumer names, it becomes very, very difficult to justify valuations. If you try to build a DCF, you have to honestly have projections that start bordering on ridiculous to justify where some of these companies are trading. We are seeing this in certain pockets of consumers. We are seeing this in certain pockets of capital goods, defence.
Small cap is another space, a lot of smallcaps have similar kinds of issues. So in a market where the overall underlying momentum is quite strong, the sentiment is positive and the longer term outlook is looking good, it is important not to get carried away. There is a right price at which you need to buy a company. And if you ignore that, your investment story may not be very pretty.
What is your take on consumption right now? Urban consumption and the entire premiumization wave and which stocks do you think are best placed to play that theme?
Ashi Anand: This is clearly one of the most attractive themes in India. I know valuations are a bit stretched but what we have always seen globally is the moment you cross something called a $2,000 per capita mark, something called an S-curve that plays out. There is a sharp rise in discretionary consumption and we are clearly seeing that in terms of underlying trends taking place in the Indian economy, especially urban consumption over the past few years.
From the longer-term perspective, we are very positive on discretionary consumption. Just over the slightly shorter term, we are seeing some amount of base effect having caught up. We are seeing weakness in certain parts of urban consumption; rural consumers who have been weak for some time, are coming back.
But on the urban consumer part, we are seeing certain pockets of weakness. You can explain this by some amount of weakness in the startup ecosystem in terms of startup funding; the IT sector is a bit weak. These are strong drivers of income creation and which is where we are seeing some pockets of weakness in terms of urban discretionary consumption. This is something we are not too concerned about over the longer term but just that you may get better pockets of opportunity to kind of buy into some of these names.
In the last two months, if you have been a buyer or a seller anywhere in the markets, have you changed any of your portfolios anywhere?
Ashi Anand: The change that we have had is that we have gone from a slightly more cautious to a clearly more bullish kind of outlook now. This is selective, this is more large and midcaps. You can see froth in small caps. Fundamentally, since two months back, there were a number of headwinds to the market and we are starting to see low clear skies so if you just kind of look at the what has changed two months back, you would be concerned about elections coming next year, But with various state government election results coming in, that risk seems to have reduced. The Fed was fairly hawkish. They have turned clearly dovish and we have seen a 10-year G-Sec yield in the US fall from 5% to 3.9% that was a major overhang for the markets that has gone away. FIIs were pulling out over $2.5 billion for three months straight, last month they have turned positive.
Oil prices also started to pull off as geopolitical risk around Israel and Palestine have also not increased. Broadly from an environment where there were a number of reasons where markets could potentially correct or they were clear headwinds that we were seeing the next part of.
We are starting the ending of the year and we hopefully will be starting the year with fairly clear skies. For some time, we have had a number of potential things that could go wrong and markets have been moving up or climbing a wall of worry. Now when we are looking at things for the coming year, hopefully in the new year, the strong momentum we are seeing in the markets continues and we start with a longer term bull market.