“If we do not have our manufacturing and infra and real estate right, we can probably not grow beyond 5-5.5%, that 1-1.5% extra has to come from fixed asset creation,” says Mihir Vora, CIO, Trust Mutual Fund.

What is the second mega trend.
Second mega trend is linked to manufacturing and demographic, which is the increase in the working age population. From now till the forcible future, 10, 20, 30 years, India is the only large country in the world which will grow its working age population. We are going to add 80 lakhs to one crore working age population people every year for the forcible future. China has already peaked out. China’s working age population is reducing. Japan anyway peaked out much earlier. Europe has peaked out much earlier. US will be flat. So, the only labour supply in the world will come from India and we can already see that.

And apart from the fact that China is a geopolitical question mark, people are getting worried about China, this also, demographics is a big factor to consider.

So, manufacturing has to come to India, whether we invite it or not. So, it will come. And then, within that, if you look at the relative size, the total size of manufacturing in India is 0.5 trillion. The world manufacturing GDP per year is 11 trillion. So, we are just 5% of the world and we will add 20% of the working age population for the forcible future.

But will everything in manufacturing do well because manufacturing starts from cars to even electronic phones, even pharma is manufacturing, everything is part of manufacturing. What will do well in manufacturing?
For example, in cars, we already have a critical mass of ecosystem because we have done it for the last 30 years now, that cars and two wheelers, ecosystem is very well developed. Electronics, we have barely scratched the surface. Defence manufacturing, we have barely scratched the surface. So, there are many segments, renewables, for example; semiconductors, we have barely scratched the surface. These are the segments which will have a much longer runway. Of course, auto, auto ancs will do well. Pharma, we are the number one in terms of volume manufacturing. Pharma chemicals, we are anyway doing well. But these new segments can have a much higher growth rate for much longer than we think.
What about risk of automation? Let us say 10 years ago, if I would have made a template for Indian IT sector, no one would have thought that the sector would see a single digit growth. No one thought that AI in a sense will have a basic problem in terms of absorbing the coders. So, automation and technology has changed the way how IT would do well. Why do you think that cannot happen in manufacturing?
For example, even to manufacture those robots, you need people. So, there is wheels within wheels and net-net is that you cannot do away with labour completely.

Textiles, for example, it is a labour intensive job. Of course, you need people to man the machine, so maybe you will upgrade the skill set requirements, but that does not mean you do away with people entirely. And especially given the fact that elsewhere the labour pool is shrinking. So, you might just need a million robots just to compensate for shrinking labour pool, if nothing else.

What is the trend number third? We have discussed per capita. We have discussed manufacturing. Trend number third.
First is premium consumption and that includes financialisation of savings. So, that means that segments, of course, banks have been growing. We are positive on banks, etc. NBFC is well known. But when you are talking about, again, premiumisation and higher income levels, it means that you probably see capital market linked segments like brokers, AMCs, insurance, wealth managers, retail, retail financing, those segments can grow faster than the rest of the economy.

Premiumisation and financialisation of savings is one theme. Physical asset creation is another one and manufacturing is a big part of that.

Infrastructure, because it is chicken and egg, right? For manufacturing, you need infra. But also, it happens that if you create infra, then manufacturing is attracted and it comes automatically. And third, offshoot, of course, of all this real estate.

You need commercial property, industrial property, and household property. I am very clear that our target growth of GDP of 7% growth cannot happen without physical asset creation.

If we do not have our manufacturing and infra and real estate right, we can probably not grow beyond 5-5.5%, that 1-1.5% extra has to come from fixed asset creation.

Even today, China is creating gross fixed asset per year of $7 trillion. We are creating fixed assets of $1 trillion. So, every year that we do not grow, the Chinese lead on physical assets is growing.

So, we have a long way to catch up and this can have that 10, 20, 30-year runway.

These are the kind of things that we should look for when we are talking about the longevity of the runway.
And the third one is, the third theme that we are talking about is technological disruption and digitisation. So, this whole ecosystem that we have developed of Aadhaar, UPI, Jan Dhan, mobile has had so many implications across categories.

Delivery of government services, subsidies, healthcare, etc, has become much more efficient than before, helping many more people directly, lifting them out of poverty directly or indirectly.

The fact that now you have so many fintechs and B2B, B2C companies disrupting existing business models and creating new business models which did not exist. And we have only seen I think the tip of the iceberg in terms of a few listings in the last two-three years which listed at a premium, went down and now again are coming back to profitability.

The consumer tech and the fintech companies.
Consumer tech, fintech, even B2B companies will come because I think this whole ecosystem is below the surface, we have just seen the tip of the iceberg. There are like hundreds and thousands of startups which have been funded and I am sure a lot of them will keep coming. There are hundreds of drone companies in India. I did not even realise how many drone companies are in India till I started doing a study. There are literally hundreds of drone manufacturers, robotics manufacturers, all those will come to listing. So, technology and digital disruption is another big theme that should grow faster than the rest of the market.

So, a lot of folks who say, okay, railway stocks are overbought, defence stocks are priced to perfection, there are hundreds of drone companies, it is a crowded trade. You think the defence as a theme still has a long, long, long way to go?
Oh, certainly. I mean, do not even get me started on that. Our entire defence spending is probably 2.5 lakh crores, 3 lakh crores. We are talking about $40 billion, $50 billion, which will probably go to $60-80 billion in the next five-seven years. This was all imported mostly, 80% imported, 70% imported and the government has given a path to 70-80% atmanirbharta, indigenisation and item by item they have laid out the plan as to this item will not be imported from this year onwards.

It is a clear path. So, our local manufacturing is, as of now, after many years, has come to 1,00,000, 1,20,000 crores and three lakhs is the spending which will anyway go to six lakh crores because 8-10% CAGR happens for spending in any case.

So, this one lakh crore can anyway go to four to five lakh crores in the next five-seven years which is a local substitution of local procurement.

What has also happened is that for the last forever, we did not allow private sector participation. So, there was no sophisticated private sector ecosystem of supply chain. But now, that has come in. In the last four-five years, we are seeing public-private participation increased. All the PSEs are also sourcing a lot more from the private sector because they need to ramp up. Everything cannot be done by the public sector.

We have seen in sector after sector, whether it is auto which started in the 80s, pharma again started in the 80s, IT, wherever private sector comes in ultimately that ecosystem develops, we become efficient and we become world class competitive. We have not even scratched the surface of exports. The whole export market, our three lakh crores is what I said, approximately $40-50 billion, the trade in defence is $1 trillion which we have not even touched.

We do not talk about it, but after financials, I think it would be the largest, biggest industry in the world. It is just that numbers are hard to document.
Exactly.

Now, when you say terminal value, one core pillar of terminal value is leadership. And it is easy to identify the leadership stocks or leadership companies in any sector. Banks, HDFC Bank. Food delivery, Zomato. Jewellery, Titan. Cement, UltraTech. So, would you be buying these leadership stocks wherever the mega-trends are?
We are looking at existing and potential leaders. Stocks which can become leaders in their respective field. And it is a very good question that you asked. The one big example that we discussed for a long period of time, the jewellery company, that was a leader to start with. So, the misconception happens if you are looking at multi-baggers, you need to look at microcaps or smallcaps. No, that is not the point. We have example after example of companies in 2006, the largest biscuits company, for example.

Paint company.
Yes. So, all those companies were large to start with, but they continued to compound. So, it is across the board. There is no bias towards market cap. There is no bias towards any sector. Leaders can emerge from anywhere or existing leaders themselves can continue to compound.

Will you shy away from buying IPOs? Would you wait for companies which have a five to seven-year track record, then only will they qualify as part of the portfolio? A lot of fund managers follow that. I mean, Nalanda, we would look at least a five to seven-year history before it qualifies the cut for us to be part of their portfolio. Would you follow that kind of a rule?
No. If I am able to give a valuation to the company, then I would definitely consider it. So, if I have enough data for the future or enough visibility or a view on the future, whether it is in terms of target addressable market or the company’s growth plans, etc, then I do not mind putting some value to it and then check whether the IPO price is worth it or not.

So, it does not matter to me whether the company has had a profitability track record for the last two-three years or not, provided I have a visibility for the future.

Will tactical trades be part of this portfolio? Every fund manager has to identify tactical trades. It could be metals. It could be IT. It, for that matter, could be PSU banks. What about the tactical allocation of this portfolio?
Tactical, we would like to avoid as far as possible. But sometimes, as you rightly mentioned, for me, for example, the oil marketing companies, they will never be strategic plays. But at some point in time, they become so cheap that you can see that there is a 50-80-100% upside and we have seen that pop happen from time to time.

Commodities, again, I do not think commodities are a strategic buy. But if China, for example, right now is coming back and there is an increase in demand, the fact that these commodities have beaten down for so long may mean a tactical trade. So, maybe 5-10% of the portfolio can be in those areas, but not as a conscious decision.

The charm of Trust Mutual Fund are the promoters, Utpal Sheth, Nipa Sheth, husband and wife, but like you said they are really masters of their craft, Utpal in equity, Nipa when it comes to debt. What is the brief from the promoters? Run it like what we have done so successfully or run it differently?
Run it to build a long-term institution. We are in for the long term. We want to do the right things the right way and we are not PE funded or VC funded. There is no exit strategy required for five years, seven years, nine years. As long as we are following our core principles and I think we have very clearly defined our investment philosophy, we will continue to do that because we are very confident, it has worked for us. It is also my inherent style, my other fund manager Aakash Manghani, we are all growth investors and we do genuinely believe in this style and short-term performance, underperformance, they will not matter to us as long as we are confident that we are sticking to our core philosophy.

Typically, when schemes they start and especially when mutual funds they start, they have options to invest in small and midcap stocks, but as they grow, I see the portfolios change and if you look at some of your peer AMCs who had very recent beginnings, their portfolio three years ago versus now has changed completely and when I ask them why, has your investment philosophy has changed? They say no, our size has changed. We cannot invest in those stocks in a meaningful manner. Are you likely to follow the same that today because when you are raising capital, you would be starting at a small base, you would have different names to invest in as you grow. It could be compulsion, it could be risk management, the portfolio could change completely in terms of names.
I would like to have that problem. We go to such a size that I start facing that problem, but at least in the initial couple of years, I do not see that problem happening, frankly speaking, because this style is not a high churn style. We are not going to churn the portfolio. We are going to take active bets, which means our bets will be away from the benchmark. We do not have to hug the benchmark, but it does not mean that we trade very actively.