It is like an early morning breakfast buffet, there is so much to pick and choose from. What should we start with?
Digant Haria: Maybe why are financials not performing?

I have given up on that now because they are not performing. The only thing I can see now is that when FIIs are selling, they are selling financials, but when FIIs are buying they are not buying financials. Yesterday FIIs were there, they bought Reliance. Last October, November, December, FIIs came in, they were not buying banks. So, it is a very differentiated approach in which FIIs are also not approaching financials.
Digant Haria: Yes, I think you are right. See, the last whole decade, there were so many FIIs who just bought financials. FIIs have a big overweight on financials as it is and if the sector does not do well for a long time, they are also humans like us, they will also have pressure to perform and slowly and steadily they are shifting to other sectors, be it a Reliance, be it the ABB, Siemens, L&Ts of the world because end of the day, they also have to respond to what the markets are.

Two things came as a negative surprise for financials. The RBI tightened the retail lending norms significantly two months back and then this whole liquidity in the system got tight. Both of these measures are the government’s plan to ensure that inflation does not spike up before the elections. So, till elections not much can be expected in financials. I think the glory time for financials, if at all it comes, will be after elections, the large financials.

Let us compare Bajaj Finance and HDFC Bank, two large lending institutions, but both have very different strategies, different growth numbers and different valuations.
Digant Haria: Yes, so much has been discussed about HDFC Bank but we just have to understand that the backdrop for HDFC is not so easy as it was in the last decade. See, last decade, 55% of the system, the PSU banks, were not lending. ICICI, Axis were in NPA problems because of their corporate portfolio. So, HDFC Bank really had it easy in the last decade. This decade, they have to raise deposits to replace the HDFC Limited bonds and then all the private and public sector banks have good balance sheets. So, I do not think HDFC is going to have it easy even after three-six months.

We can say that the stock is the cheapest in the last 12-13 years and I still think there is a bit of a grind in this stock that the numbers and the investors have to go through. When it comes to Bajaj Finance, they are delivering on numbers as anyone would like but again five times, six times price to book. This is a market where there is time correction in such stocks. We see the same thing happening for Chola as well. They are delivering very well on numbers, but the stock does not go anywhere because five-six times earnings is something which people really do not want to pay in this market when a lot of other things are available. So, financials is now a bottom-up sector, not a top-down sector for at least a few quarters.

Let us also get into how you are looking at Dr Reddy’s in terms of what are the expectations. It is a big set of numbers and we are expecting an uptick in the profits and the revenues. If you had to map it out within the entire pharma space, where does Dr Reddy’s stand?
Digant Haria: Unfortunately, we do not track these US generics. This space has still not come into our radar because of the long struggle they had. I would really not be in a position to comment on Dr. Reddy’s.Maybe we should get your take on what the brokerage community is reacting to when it comes to ITC, because the cigarette EBIT has been the slowest in several quarters across the board. There seem to be pretty positive ratings on ITC. How have you read into the quarterly performance?
Digant Haria: Cigarettes benefited last year when the physical economy opened up 2022-23. Some high bases have been made for all the cigarette companies, be it ITC or Godfrey Philip. VST continues to lose market share here. There is a lull for three, six months, which we will have to go through. If the budget does not have any tax increase for cigarettes, which I do not think should be the case, they can again re-tweak their strategy and look at 2-4% kind of volume growth.

I would just look at it as a temporary pause because of the high base that we have made in the last 12-15 months. We continue to remain bullish on the cigarette space and Godfrey Philip is our preferred pick here because of the Marlboro brand. Marlboro is the most premium cigarette that is out there in India.

Marlboro does not even have a 1% market share. Are they significant?
Digant Haria: Marlboro has 3% market share. But globally, Marlboro, in the premium segment, always has a very large market share of more than 30-40%. You look at all the developed countries. In India, it is not the case because we all know that in Godfrey Philip, there is a family dispute, which has been going on for decades now. And when there is family dispute, the attention on developing this Marlboro brand has not happened.

I see that as a big opportunity that Marlboro is just 2% or 3% of India’s market share. It can easily go to 10%. Marlboro works for the young. So I am bullish on the long term story. But as I said, the family feud is something we all have to live with in this stock.

Which is the best power stock to buy? Tata Power is a play on energy and energy transition. NTPC is a play on Indians who will consume more power and they have large capacity.
Digant Haria: I think you mentioned that it’s a breakfast buffet in the power sector. So in the power sector there are these power generating companies, the Tata Power, NTPC, NHPC, SJVNs of the world, who are transitioning from, you know, just a fossil fuel based power generation to renewable and other sources of energy. So there is a lot of excitement there.

But within this space, what we really like the most is wires, cables and transformers. They are a proxy play on the power sector. Like if you have a solar plant, it needs seven times the wiring of a normal thermal plant. So we are playing this through these proxies, the transformer companies and wire cable companies. But even companies like Tata Power, NHPC or Engineers India are going to play a very big role in this energy transition that India is going through. So it is a very large buffet and large investors can focus on the Tata Power and NTPCs and Power Grids of the world. Mid and smallcap investors can focus on the transformer or the wire cable sectors.