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Ajay Srivastava: All markets are difficult. When the market is down, you wonder when you have to invest and when the market is up, you wonder if you are investing on the top. But as I keep saying, if you have a vision of the market, you need to find ways and spots which are trending outside. Go to the laggards. There are lots of sectors which are trending up, which have consolidated and which are going to see the next leg up post election.
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So, I do not think one has to be very scared in terms of where the market heights are or that there are so many lakhs of opportunities. The market always gives chances to invest. Market gives you chances to buy into and at the end of the day, if you are not very old, you have no choice but to buy today. Therefore, one should stay clear of mind and say past is past, the future looks good, we need to find a way to invest. How much to invest, when the timing issue is a different matter but to worry about the market is on a high, I do not think you need to be worried about it. Look at the right sectors and you should be fine.
An excellent point with age comes experience and with experience comes precision. I think this is the only game where you get better with age is it not. It is in your favour. The precision is only increasing, is it not?
Ajay Srivastava: I wish so. I wish doctors would find that they get more money as they become older. You would not find a trader in New York who is over 35 years old, by the way. In fact, we have a disadvantage because we know the history of share prices and therefore we get bogged with it. The guy in my office who just walked in this year, joins this year. He does not know what happened 15 years back and therefore he comes with no baggage.
So, to some extent, our experience, grey hair is a disadvantage. The only advantage is having seen so much, done so much. We are not scared of anything. We do not fear the market. We love and embrace the market. That is the only difference perhaps that comes with age, that you tend to know that the market will surprise you, market will over guess you, market is smarter than you and I think once the thought is in your mind, you are much better off investing.
There is a saying on the Street that there are old traders and there are bold traders but there are no old bold traders. But then Buffett made the bulk of the money after 50. So, the best of the returns are backhanded. Indian PSU stocks were never graded as investment grade. They were just point A to point B and then exit kind of plays. Over the years their business models have become more robust and efficiencies are clearly visible in numbers, but valuations did become a question mark because they shot up in a very short span of time. During 2024, if the PSUs correct, would you be comfortable getting back in there for a three- to five-year view?
Ajay Srivastava: Getting back I do not know because we are already invested in it. In some sectors, you have no choice but to go into PSUs like the defence sector. We do not have any big private defence company in this country, at least at this point of time. Some may emerge over time. Bharat Forge may come in or a smaller set up may go, but if you want to buy defence you have no choice but to buy the PSU company.
If you want to buy oil marketing companies which have a huge reach in this country, you have no choice but to buy PSUs. If you look at power stocks at this point of time, the company with the highest power capacity is a PSU stock. If you look at transmission companies, you do not have an option but to buy into a PSU transmission company because there is none which exists in the private sector.
So, the debate whether we can buy or not is not a choice if you want to be in the transmission, defence, big power and oil retailing sectors. In these four sectors, there is no choice. Yes, you have a choice to buy a PSU bank or not to buy a PSU bank, but if you look at these four-five sectors, you have no choice. My guess is that these sectors will have just seen the first run-up after almost two decades. We have seen PSUs not performing for two decades or maybe more. After the first leg, people have kind of rarely said it is the new high, but I think it will go higher. PSUs will get more traction certainly in the five sectors we have spoken about just now because simply there is none which exists and there is no competition and anybody who wants to come into India in these five sectors has to go to the PSUs. So, my guess is that these five-six sectors including say power finance, now that is a unique niche in this country which again with the PSUs, you cannot go anywhere else, PSUs.
You want to ignore the sectors? Sure. You want to be in the sectors, PSU is your game and I think they will give much better returns because for one reason the dividend policies are now specified. So, with the dividend yield, these become very attractive buys and debt is not their concern, they are government guaranteed so they can borrow the best rates, professional management well one can say yes to some extent but OMCs would say it is not professionally managed because the rates are governed by the government at this point of time.
Having said, overall it looks positive and with the new government coming in, there will be more divestments and more accountability, boards will get professionalised. So, it is a good wicket to be in at least in the five sectors.
What are your thoughts when you compare PSU banks with private banks?
Ajay Srivastava: We do not have too many banks in our portfolio, neither in advisory at this point of time for the simple reason that these are behemoths who have lost to the competition. They did not invest enough and once the RBI removed the umbrella of no new licenses and the fintechs came in and NBFCs got a little bit of a leg-up, these banks were found wanting. Leave aside HDFC Bank where the merger was a disaster. So leave that aside, it is a good institution but it will take its own time to come up. But by and large, this is one sector which has lagged behind because when RBI gave them such a comfort of no competition, they never thought of the consumer at the end of the day and that is what fintechs came and did.
The core constituency of the banks was to keep your money cheap and lend at leisure including government securities. So, you kept your fixed deposit at 5-6%, they were putting in government treasury at 7-8%. CASA was next to nothing. I think that model is under threat at this point of time and therefore banks will see a consistent problem because their raw material, the cheap raw material, is now becoming more expensive, just like any manufacturing company. If the raw material goes up your margins tend to shrink because the customer can get his options.
So, the banks are going to have a problem with their basic raw material, cheap deposits whittling down, it cannot disappear, people love to put money in the bank but it will whittle down. Therefore, I would tend to believe that our industrial sectors, our equity linked sectors would be far better choices than banks at this point of time in terms of return on capital.
You may have observed that big money seems to be positioning in some of the very beaten down kinds of NBFCs in the last few weeks. Just yesterday, Florintree along with Brookfield decided to put in a big chunk in Indostar, the CV financier that had bombed out. Last week we saw Rs 4000 crore come in the rights issue of Indiabulls Housing. Would you be keen to look at some of these names or will you be wary of them?
Ajay Srivastava: We have moved into but very large NBFCs. We are not moving to small NBFCs and the reason we moved into large NBFCs is the climate for their ability to raise money directly from the public is very good at this point of time. Therefore, among some of the leading funds, one company raised Rs 5,000-crore NCDs in exactly two days from the market.
For the larger NBFCs who can diversify away from the banks, their funding resources, it is going to be a very good time for the next two to three years because they have a clean market for themselves.
Number two, as the banks start to get out of NBFCs or become a little bit careful, the smaller NBFCs will be in trouble in terms of raising. If you can raise equity, like you mentioned, your NBFC is safe and fine. But if you cannot raise equity, we should see lots of consolidation, lots of stress plays happening in the NBFC space. But the top five NBFCs of this country are very good and one can put money in the NBFCs because these guys are getting better yields. They can give LAP loans, commercial vehicle loans. They can give personal loans and control quite well at this point in time. Banks cannot do that. They are going to rely on industrial loans where the yields are going to be low. So, if you look at 4% yields, you have to be in NBFCs. For banks, gradually, the yield will shrink to 2-2.5% at this point of time and therefore, relatively speaking, large NBFCs would do much better for equity returns.
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