Mihir Vora, CIO, Trust Mutual Fund, says investors “tend to overestimate the short term, but underestimate and quite significantly underestimate the long term in high growth segments and sectors and that the value of the stock which is visible or which can be calculated after the medium term of three to five years, to say 7, 10 years down the line, what will be the growth rate beyond that is something that we need to think about when we are talking about growth stocks and growth segments.”

I would like to draw your attention to PSU defence and railways stocks. What is the benchmark to judge them — PE multiple, price to book, order book?
Mihir Vora: This theme actually broadly ties in with what we have been propagating as our investment philosophy, which is that of terminal value investing. People tend to overestimate the short term, but underestimate and quite significantly underestimate the long term in high growth segments and sectors and that the value of the stock which is visible or which can be calculated after the medium term of three to five years, to say 7, 10 years down the line, what will be the growth rate beyond that is something that we need to think about when we are talking about growth stocks and growth segments.So, what happens is that in emerging segments and I would say defence, for example, is the emerging segment because it was all about PSUs, local manufacturing for local supplies and that also only for part of the demand in India which was there locally. But now we are talking about a segment where probably only one fourth or one third of the manufacturing was local. Now, the government is saying that we need to entirely shift to local manufacturing, and that means the addressable market size goes up by four-five times.

Then, we are talking about the fact that we are going to increase our defence expenditure and we need to, based on the modernisation plan, etc, so then the market does not go by four-five times potentially, but even more than that. And then we are also saying that the private sector will come in. There will be partnerships with the private sector and the public sector and even the public sector outfits can or should plan to export from India.

Now, if we are talking about the export potential, then we are talking about a market which is not Rs 2-3 lakh crore in size. We are talking about hundreds of billions and trillions of dollars. The whole global defence spending is $3 trillion. If one can estimate the potential after five-seven years when we actually open up big time into exports, then sky’s the limit. So, terminal value investing is all about that.Defence, for example, is a classic example. I am not saying a PE of 20, 30, 40 is cheap or expensive, but what we do need to keep in mind is what is the total addressable market after 5, 7, 10 years.

Where else do you see this kind of large addressable market opportunity apart from this?
Mihir Vora: Anything in manufacturing. India’s total manufacturing base is just $500 billion and even the US with one-fourth of population is $2.5 trillion. The whole of Europe combined is $3 trillion. China is $5 trillion. China’s manufacturing is 10 times that of India’s. If multinationals want to shift 10% of China to India, it means that they will shift $500 billion from China to India, which means that India will have to double its manufacturing capacity.

So, if we are talking about this kind of shift, plus the 7-8-10% domestic demand growth, then manufacturing in India whether it is chemicals, pharmaceuticals, machinery, or machine tools, even durables for that matter, can have a runway of 10-20 years before we see single digit growth. So, we can grow at high double digits for long periods of time if this mega trend continues.

Are we in for double-digit returns for the equity market for three to five years? When I say double digit, let us say, early teens? Do you think there is a reasonable possibility? Is there a probability of 8 out of 10 that we could be in for a double-digit return CAGR for next three years?
Mihir Vora: If you are talking about the three years to five years, certainly that is a possibility, especially in the largecap indices where the valuations are not that bubbly. We are talking about 15% growth for FY25 and maybe 12-15% beyond that also. Valuations being where they are, which are a little above average, hoping for a 10% to 13% return for the next three to five years is not a stretch, I would say.

How would you approach global denominated sectors? Metal, steel, to some extent, let us say pharma, is also global denominated.
Mihir Vora: Pharma is different because it is much more complicated. There are approvals required. There are lots of entry barriers and India is pretty much the leader now. So, I am not worried about pharma at all. The global commodities are willingly linked to China and the fact that even for global commodities like steel, the US especially is encouraging local production. So, I would be cautious on the global commodities and metals, including oil, because China does not seem to be anywhere and it is becoming a structural issue given their demographics and the fact that they have over-created infrastructure and real estate. So, there has been over-investment in infrastructure, over-investment in real estate and the demographics are just not supporting it. The hope was that they will shift to consumption mode, which is not happening. The Chinese culturally do not seem to be getting around to becoming consumers rather than producers for the world. That I think has a structural problem in global commodities.

I spoke to a fund manager over the weekend, he said, look everyone is ignoring the fact that the Chinese currency actually has moved the other way around and that in a sense could be a big challenge going forward if the Chinese government decides to devalue the currency. The whole prowess of manufacturing will take a backseat. Right now, India is getting an advantage because of the Chinese currency. If China decides to devalue their currency to get the export back, that could just put a full stop to a lot of great manufacturing export assumptions.
Mihir Vora: Historically, China has never done jerky moves. So, even if they let the currency weaken, it will be a smoother move rather than a one-shot because the Chinese economy itself is too big and there are implications on capital flows. If you shock the market, there are implications on consumer behaviour and savings. There are lots of illegal ways to take money out if people start getting jittery about the currency and there are inflation implications also. So, I see the Chinese shock-moving currency as a very low probability event.

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