Rushabh Sheth, Co-CIO, Karma Capital, says “we continue to remain bullish on pharma. We really like the story. We think this a structural story for the next three to five years, especially the domestic healthcare side. From our perspective, we continue to like communications and telecom. Of course, we still continue to own some media. You have seen some speed bumps in the industry in the last two months. But that is a part and parcel of what we do.”

There seems to be a mid-air turbulence in small and midcap stocks. Do you think the party is over?
Rushabh Sheth: They have done very well for the last three years since Covid. Some amount of consolidation was expected. I think some reason always comes through in markets. But our general sense is that, yes, some consolidation will happen which might not be too bad for the markets.

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What has been your portfolio strategy? Are you looking at taking some chips off the table after the recent rally? Is it time to consolidate? Is it time to go cautious now?
Rushabh Sheth: We have taken some money off the table. Also, we have reallocated some money from where we stand. So from our perspective, we have done our bit of it. By and large, we do not move our portfolios very rapidly. Anyway, our changes in the portfolio are much slower. But yes, we have made some changes over the last six to eight months.

Would you like to throw some light on that because last time when we spoke to you, you were bullish on banks and media. Have you changed the pecking order there?
Rushabh Sheth: No, not banks. We were bullish on pharma.

Sorry, sorry. You had no banks. You had no banks.
Rushabh Sheth: We continue to remain bullish on pharma. We really like the story. We think this a structural story for the next three to five years, especially the domestic healthcare side. From our perspective, we continue to like communications and telecom. Of course, we still continue to own some media. You have seen some speed bumps in the industry in the last two months. But that is a part and parcel of what we do.

We spoke to the DLF management. They are saying the investment roadmap in India is looking very promising. In light of the elections and the fact that everywhere, so much infrastructure development is going on, what is your outlook on the capex related theme?
Rushabh Sheth: I think the infrastructure story has to play out because unless we put the physical infrastructure in place, we will not be able to sustain a higher growth rate. So from an investor standpoint, the infrastructure story has to play out because that is critical to what we want to do as a country over the longer term. We are also in many ways, participating in it through some of the companies that we own. However, the bigger story to us is that India will still remain a domestically driven economy. And over the longer term, there are a lot of interesting structural ideas, which we think will do very well. Especially if and when we get to that $5,000 per capita, the kind of spending we will see in the economy might be very different from what we have seen in the last 10 years. So we continue to look for more longer-term ideas. We continue to play some companies in the infrastructure space. It is a mix of everything for us.Fair enough. How about the inherent risk for the Indian markets? Where exactly do you see that stemming from?
Rushabh Sheth: One concern we had this time in the reporting season has been the slowdown in volume growth. So if you look at volume growth across industries has slowed down. And yes, you have seen significantly better profitability because of a lower raw material base as compared to last year. Overall, your margins have looked better. However, the concern is stemming from the fact that a lot of industries are not seeing the kind of volume growth that you would want to see. That continues to be a reasonably strong concern for us, because we came out of a very strong busy season from a festive season perspective.

Even in that festive season, we did not see too much volume growth. Keep in mind that this time Diwali was shifted a little bit further down in the third quarter. That to us is one big concern that we are watching closely.

Some of the popular themes like defence, railways, infra, construction are very cyclical businesses with three good years, five bad years or five good years, three bad years. So these cyclical businesses are commanding high PE multiples. Why is it so?
Rushabh Sheth: Largely from what you mentioned earlier, it seems to stem from the kind of spends that we are seeing on the infra side. Having said that, you are absolutely right that at the end of the day many of these businesses go through cycles and therefore, as an investor, you need to be cognizant of where you are in the cycle.

Optically, what happens is many times cyclical businesses look cheap at the top of the cycle. However, this time, we do not know where we are in the cycle as yet. But clearly, they are not looking cheap. I agree that generally, these companies go through cycles, irrespective of what we say because that is the nature of the beast. We are clearly in the middle of the cycle. Now, we do not know how far down we are in the cycle.

Is it time to bet on a comeback in IT? The stocks have already made a comeback, most of them are already at life highs, including TCS. Is there merit in investing into these names?
Rushabh Sheth: We will have to wait and see how IT pans out. There is a concern on growth, which continues to bother us a little bit. I am saying more about the larger companies. There are niche companies which are doing much better and I am not talking about some of those. So for the larger companies, growth continues to be a concern.

The US continues to be the largest market for many of them. We do not know how the US will play out. We have no clue in terms of how the economy in the US will play out. We are running into an election year in the US as well. From our perspective, we are a little bit cautious on IT. And the valuations are not really attractive. One can superimpose growth on top of the valuations and the outlook on the environment. It makes us a little bit more circumspect.

What could be the next big trigger for the market? The elections outcome is pretty much known. Macro stability is okay. Crude is behaving itself.
Rushabh Sheth: My sense is, we are in a kind of a steady state market. We will have to wait and see. As you rightly said, the outcome of the elections is pretty much clear. The external environment is what we should watch out for. There are a lot of moving parts in the external environment.

If you see, countries around us are slowing down, China is clearly slowing down and it is a large economy. Japan and the UK are bordering on recession and these are the larger economies in the world. The US is still not slowing down, but it is not growing as fast as it was growing maybe a few years back. The external environment to me is something you have to worry about in terms of what might happen there.

Domestically, we are reasonably well poised, except for some pockets of valuation. The economy is on a strong footing and so that is not a concern. But the external environment is something where we do not know where the challenge can come from.

I like to draw attention to the issue of smallcaps. Mutual funds have said we will not accept net flows. We will only accept SIPs. There are indirect indications coming from the regulator warning people. NSE is also saying “soch kar, samajh kar nivesh kar”. This is a space where liquidity has been paramount for the underlying price action. Could we be staring at a situation where liquidity could start drying up because of what the regulator is indicating and where the flows are likely to move and that could have a cascading effect.
Rushabh Sheth: Yes, absolutely right. Liquidity is like water. Even if liquidity does not dry up and just slows down, it definitely reduces the pressure. We have seen the upward pressure on these stocks because there is so much money flowing in. If it slows down, it will have an impact. That is the kind of consolidation that you might see in these companies. And again, it is a part of the market cycle. We have seen very good three years and some amount of consolidation might not be bad for the markets and for some of these companies.

I am not going to draw you to the political waters. But in general, if one looks at the Trump regime, which was pro-US manufacturing, anti-China, anything which is anti-China is good news for India and that is how things are stacked up. Can we say that if Donald Trump is back as the President of the United States, then India plus one story will continue?
Rushabh Sheth: My sense is that it will continue irrespective of who the president is. Biden has also done enough in terms of pushing domestic manufacturing in the US. I do not think people understand the size and scale of new manufacturing coming up in the US. It is only over time that we will see the full impact. My sense is that trend is inevitable and it does not matter who comes in. And, therefore, hopefully, we should benefit from that, if we get our act right.

So, hypothetically, three years from now, if we are engaging in a similar conversation, the world would be different. But what kind of market level, what kind of outperformance, underperformance do you think we are likely to stare at? From a three year time frame, where do you see outperformance and underperformance?
Rushabh Sheth: My sense is, markets will consolidate a bit. But overall, the nominal GDP growth continues to be in double digit. Hopefully, the market should continue to be close to the nominal GDP growth, but for some correction in valuations over the next three years. Clearly, the real bet is on what will do well over the next three years. That is really anybody’s guess right now. But our view is that a very different set of businesses might be doing much better over the next three years versus what is doing well now or what has done well in the last 10 years.

The economic structure is changing far more rapidly than we give it credit for. The underlying change in technology, AI, everything will drive further acceleration in cycles. And therefore, to us as investors, the real challenge is to see what will do well in the next two to three years.


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