The solar theme is one of the best bets and biggest changes as far as the energy transition is concerned. It is a well-discovered theme. From Adanis, Ambanis to Tatas, everybody is laying the groundwork to be prepared for that. They are setting up gigafactories for backward integration as well. Is this still a big investable theme?
Ravi Dharamshi: It might have become popular in recent times, but that does not mean that the trend is about to get over. Just to give you a reference point what happened in China, some of these companies in China, this is not a winner-takes-all kind of industry. There will be multiple big players that will be born in this particular sector.
In China, 10 years back, in 2014-15, these companies were the size of 2-3 gigawatts. Today, they are in hundreds of gigawatts. So, 100x kind of a scale-up in a 10-year time horizon has happened in China when the rest of the world was not even a market. Now, the entire world is opening up. Europe wants to put in new energy, the US wants to do it, and even Africa wants to do it.
And there are certain markets which will be catered to by the Chinese and India will not be able to compete. These will most likely be Europe and Africa. But there are certain markets like the US where they strategically want to delineate their supply chain away from China and that is where there is opportunity for Indian players. This kind of huge scale-up is possible in a 10-year time horizon. But, it would be too early for us to say that the trend has become popular. Many private companies are not yet listed. They will come to the market in the next few years. The economics of this sector have just gotten very, very attractive. The prices have just gotten attractive. For a solar asset developer, now just equity IRR, they can easily get 12% to 14% kind of an equity IRR. And if they lever on it, they can possibly get 18-19% kind of IRR also. If that kind of favourable economics are there, then more and more solar plants will be installed and that will give rise to the opportunity getting bigger and bigger. So, I am not too concerned about the popularity, so to say, about the stocks in the stock market, but the trend has a long way to go and still strong legs.
So, within solar then and let us pick up each energy segment, cohort one by one. Within solar, what is the opportunity?
Ravi Dharamshi: There are multiple parts to the entire value chain. I mean, first, most of the people in India obviously will start with module manufacturing, but then backward integrate. Backward integrate into cell and all the way till ingots. Very few will get into polysilicon. The economics at each stage of the value chain is very-very different. Polysilicon is very-very capital intensive, while cell is very technology intensive, while module lends itself to high scalability. They are the ones who own the customer. So, there are different economics for everybody in the value chain. Then, there are other ancillary services around it, whether it is EPC, there are O&M, operations and maintenance; cleaning services. There will be many and there will be new, new applications that will be coming. The market itself is divided into utility level, rooftop level, solar pump, PM Kusum. There are so many different segmentation of the market and there will be different, different applications that we will see. Solar is also one of the most versatile technology. You can have a malleable panel as well and you can have one on the top of your car or even a small maybe mobile phone will also start having a solar panel, so that is the kind of versatility that technology has and new applications and new industries will emerge around it.
But apart from let us say pure generation, which is clear in terms of how solar is expected to be? Do you think the transmission is also going to go under a sea change and become an investable opportunity?
Ravi Dharamshi: No, in fact, power transmission is more immediate opportunity, I strongly believe, for the reasons I enumerated earlier, that we need a better, bigger, smarter, and efficient grid as compared to the grids that we had when there was only thermal power. So, with that and the money needs to be spent in the next 10 years, if we do not do that, this entire energy transition will fail. So, power transmission is more an immediate area where we need to spend. Now, the good part about it is that no dramatic technological change has happened in this space.
There are these few companies that can dominate the space, they have been here, survived, and they have the right to win. So, there is a maximum delta in the immediate future in terms of opportunity and there are few players to capture the opportunity which is reflecting in terms of the valuations for some of these companies.
Do you think your last leg of the rally was a lot driven by some of the public sector units – the NTPCs and Power Grids of the world and the fact that PFC, REC were the big lenders supporting the ecosystem? Will the next leg belong to the private sector or is it going to be a very good mix of public and private yet again?
Ravi Dharamshi: First of all, I usually do not like to segregate the market in terms of what is owned by government and what is owned by private sector; however, what we do look at is which are the businesses that are likely to do well. Now, if some of these public sector enterprises have a new age angle to it, whether they are catering to the new-age businesses like new energy or they are also financing some of these products, new layouts that are happening, then for sure, a new growth kicker is coming in for a sector that was actually traditionally very lowly valued.
But at the same time, if we go back just in the differentiation between the banks, public sector banks versus private sector banks, I do not think there is any major new growth trigger, which the public sector banks have versus private sector banks. It is the re-leveraging of the economy that is the major trend. From that perspective, the private sector will keep gaining. Already, stealth privatisation is seen in the bank space; but in other spaces, I would not like to generalise.
For example, the defence PSUs are in a much stronger position, at least for the next 10 years, where they continue to be a monopoly in some of the products and are the lead system integrators. Usually the DRDO or the Ministry of Defence gives the order to them. So, they will remain a nodal agency and then of course, the entire ecosystem behind them will develop of subassembly and component guys and that is where the private sector will emerge. But the lead system integrator will most likely remain with the PSU for at least 10 years, then we will have to evaluate after that.
You have talked about energy transition being a 30-year investment opportunity, given the kind of rotation which has happened in the market and will continue to be so. That is the nature of the beast. Would you say that it makes sense to have the largest allocation now in your portfolio to the energy transition theme as opposed to any other?
Ravi Dharamshi: So, that is a matter of choice or that is a matter of your conviction in the theme. And we do have very, very high conviction. So, we have a high percentage in particular theme. But, of course, you have to diversify and be present in at least three-four themes, because you do not want a particular regulation or some competitive dynamics to go against you and that can end up ruining your entire portfolio.
So, from the perspective of being well diversified and ensuring that one event does not damage your portfolio, you should be spread across a few themes. But yes, at this juncture, our conviction level is highest in energy transition. But remember, energy transition is a very-very broad theme, we need to still identify a sector or a subsector that will be the beneficiary of that trend and from the next five years perspective, again, there are technologies which are still not reached that inflection point in terms of either cost or technology. So, we will wait until that materialises and then place our bets.
Bajaj Housing Finance share listed at 114% premium. Would you be willing to pay a price for a housing finance company, which is five-time book?
Ravi Dharamshi: In the short run, the market would end up factoring in a lot of the positives. And it will be difficult to justify these kind of valuation and earning returns from them over a longer term period becomes difficult. However, there are technical reasons why this overvaluation is happening with HDFC Limited becoming part of the HDFC fold, there is actually no large mortgage lender separately listed.
That will mean this stock will become a must own for most of the funds and it will become part of most of the indices starting at a one lakh crore plus kind of a market cap, it will become part of the largecap indices and all the foreign funds will also look to buy into that. So, from that perspective, I can understand why it is happening, but at the same time, it becomes very difficult to generate outsized returns from these valuations going forward.