Right now, are you tempted to trim some profits in any part of your portfolio or are you holding on to the gains?
Sachin Shah: That is a great tricky question at this point in time, to be very honest and frank with you when you think about absolute returns, as you know, the last one year, particularly FY24, overall portfolio returns have been upwards of 40%, which is a great return. Even if you look at the last three years, I think the compounded returns are upwards of 25-30% compounded. So, markets have definitely delivered what we were looking forward to over the last three-four years and that is where as investors we would always be a little bit tempted of taking something off the table, that is one.
Second, we are also seeing some bit of frenzy, euphoria in certain segments of the market, particularly in the smallcap space and those kind of things. Yes, so that definitely gives a thought that maybe there should be some profit booking, maybe there should be some re-asset allocation and those kind of things, but also there is a reality that we are equity managers. The index is always fully invested. We are benchmark against indexes. So, we do not actually take those cash calls. It is the wealth managers who will have to decide because we are equity managers and whatever money that they allocate to us as equity managers, we generally tend to remain invested. But you must be surely flipping positions, adding positions or changing the complex, the entire framework, wherever you are finding. Are you doing those kind of changes, trimming and adding on positions somewhere else, all of that?
Sachin Shah: Yes, so somewhere there has been, say for example, our flagship product, which is Emkay Capital Builder, which is a classic flexi-cap, multi-cap kind of a PMS strategy.
What we have done there is, say for example, a year back we were about 60% largecap, 40% mid and small. If you take maybe three years back, we were probably 55% largecap and maybe 45% mid and small.
As on today, we are now 70% largecap and about 30 odd percent mid and small, so that is the kind of the move that we have done in terms of the portfolio construct where we have moved more towards the largecaps at this point in time because in each of the sectors, at least where we are invested in most of the secular sectors, whether it is auto, private sector banking, IT, pharma, some of the bottoms up businesses, in each of these sectors the relative valuation comfort that we have is in largecaps more compared to mid and smallcaps.
You have a good dose of private sector banks in your portfolio, I understand. Is the worst over for private sector banks?
Sachin Shah: We believe so. So, for example, in the sense that if you see the last one year, there has been serious under-ownership, I would believe, in that sector, that is one part. But I think even in terms of the earnings growth, they have done a decent job over the last 12 to 18 months. Of course, the valuation premium was significantly to maybe the public sector banks or some of the smaller banks. I think that bridge is already taken care of now. And we believe that from here on as again the quality will start performing even better and so we believe the private sector banks today, both, I mean, the top three large private sector banks have now got a lot of baggage that they had because of whatever challenges that they have had in terms of their M&A or some of the other activities I think all of that is behind them. The growth should be very secular for the next three to four years.
What are you doing to your positions in the auto OEM side? I see Eicher is one of your stocks. But what I want to ask is that the two-wheeler part of the auto OEM ran up quite a lot, got rerated going into Ola Electric because they themselves had a lot of EV play embedded in them. Now there is talk of good monsoon and higher rural push. So, two-wheelers are likely to do even better from here on or they have run up so one should be trimming some positions.
Sachin Shah: You have to also be cognisant of the fact that the penetration levels in the overall two-wheeler segment is fairly high. So, from that perspective, I think the overall two-wheeler growth probably will be in maybe mid to high single digit kind of a growth over the next three to five years is what we believe.
But the real big story today in India, not only for two-wheelers but for across products and categories is the game of premiumisation. The young aspirational India is very much looking to upgrade themselves to premium products.
So, even within the two-wheelers like you just mentioned Eicher Motors is one of our holdings or even if you look at Maruti, all of those companies, we are very clearly playing the premiumisation story over there. We believe that today say out of probably 15 million two-wheelers sold, less than a million are probably in the premium category.
So, we believe that segment will actually grow much faster than the overall two-wheeler category. So, the premiumisation story across the auto, like say even if you look at the four-wheeler, what SUV as a segment used to be less than 20% of the overall passenger vehicles, today it is already more than 50%, so that is the kind of the premiumisation we have already seen and I think that will continue.
Not only that, if you would see some of the models within Maruti, for every model they will have four or five variants. It starts with the base model and the top of the line.
So, maybe about 10 years back, probably the second lowest, which is a model notch above the base, used to be the highest selling variant.
But today it is the second highest model, which is a notch below the top, so that is the premiumisation game, I mean the premiumisation trend that we are seeing actually across categories.
So, we are more positioned for the premiumisation story within the category and again within the segments wherever investors or the consumers are looking for more features kind of products.
Are you watching out for Hyundai IPO as well because after almost two decades you will be having a passenger vehicle IPO?
Sachin Shah: Yes, so we are looking forward to it. I think it is always a good thing to have because both Maruti and Hyundai put together will have nothing less than 75-80% plus market share even at this point in time.
So, it is always good as investors to have more options to invest and Hyundai numbers on the face of it look very-very good. Their financials are very strong. They are a formidable player within the passenger vehicles, not only in India, but they have been also very strong on the export side for many-many years.
And I think they have already launched quite a few EV products. So, I think even that part, they are far more progressive. Indian consumers have embraced, I would say, Hyundai as a product for the last two decades at least that I can think of since the Shah Rukh Khan ad.
And they have delivered to whatever the consumers have been looking for. So, I think it is another great investment vehicle for long-term investors like us.
What are your thoughts on electronics? I see some midcap electronic plays in your portfolio. This entire electronic PLI and all, we thought up till now, Dixon and Ambers of the world were actually the big beneficiaries. But have really meaningful large orders or good visibility started coming to name in the mid-tier size as well?
Sachin Shah: Yes, so, this electronic manufacturing space, I think that is a mega trend. It is now fairly well established and we believe that this is here for at least five to seven years.
The government support that they got because if you go back 10 years, there was a lot of inverted duty structures which the government got corrected. In the last few years, we have also seen a lot of PLI support over there.
I mean, there is a lot of catalysts have come into play, plus the overall demand of alternate supply chain from the global customers is another very big mega trend. So today, this China plus one, Europe plus one is a reality today in the electronics manufacturing space.
If you talk to most of the companies, you get a clear sense that what was inquiries for last so many years has actually now got converted into hardcore order books and you will see these order books getting executed over the next three to five years is what we can understand by meeting a lot of these companies. So, we believe electronic manufacturing space is a trend here to stay for at least next three, five, seven years.
What is happening in the mid-tier engineering companies? I mean, they had the time of their life, I mean, many of them have quadrupled, if not doubled. Are things looking fine there in terms of valuation versus earning visibility?
Sachin Shah: Again, a tricky question. Earnings growth is very strong, they have delivered very good and the outlook is also very good.
But I think valuations are definitely a bit ahead of time, if I would say, not in the next euphoria zone, but they are definitely running a bit ahead of time.
So, it is going to be very-very bottom-up, very company-specific when it comes to looking at valuations, understanding the kind of the near to medium-term order book that they have and that they can execute.
Also, some of these engineering companies have done very well in the domestic market in the recent years because, again, a classic cyclical bottom that they hit and from there in the last two years they have delivered.
But the real big story is when some of these companies will actually be able to go and crack the export markets.
And at least a few companies that we track or we have also invested, have been trying to go and crack into those European markets or in some of the US markets also.
So, I think the real big, the proof of the pudding for these current valuations to sustain and to deliver returns from even the current prices is going to be whether some of these companies are able to actually go and crack into the export markets.
Now, if that actually plays out, then yes, we still have a long road. But it is a probability game at this point in time. The valuations are not so cheap where the margin of safety is very high.