Are you comfortable with the kind of market valuations and the levels we are staring at?
I will just start with a quick quote, a very famous quote from Sir John Templeton. He says bull markets are born on pessimism, grow on scepticism, mature on optimism and they die on euphoria. I think this is very relevant. I actually believe that this is so relevant for times like ours because we have gone through such a great cycle of optimism and then pessimism, probably scepticism now. So I think maybe we should take some inspiration from that quote of Sir John Templeton. Very hard to predict markets but so I would not really comment on that but I think that what is being said here is very relevant.
As a fund house, you are following a very differentiated strategy. There is no cement, auto and hardly any traditional IT services. What you have right now are the new age digital businesses?
Actually, that is a really good observation because we were having our Monday morning call in the office yesterday when we were going over our portfolio. What we typically do is we set aside some time to look at portfolio concentrations, industry concentration and we are well balanced in small, mid and large caps. We go through a risk management exercise to check how many illiquids we have in our portfolio. We do it in a very process driven and disciplined manner.
One observation that came to the fore between the two of us or rather between our team was that a lot of our companies are digital ready. Many of them are great companies with superb leadership, great management, no governance issues. They are true leaders with accelerating earnings. All these companies over the years have invested far in advance in great IT, great HR personnel. Not knowing a pandemic was coming, they have invested in ensuring that they are always digital proof, IT-enabled and technology-ready so that they can take leadership when the tough times come.
It is very easy for such companies to take market share at a time like this. The large will get larger and this is a time when that is happening. A lot of the platforms that we are invested in are digital ready. As far as old economy stocks are concerned, I would like to take a step back and say that in our last conversation, we discussed some of these names. They were very early on our screeners. These companies were throwing up very early for their leadership and their earnings potential and the earnings growth that we expect from them over the next several years.
So not only are these companies digital enablers, they have also came up very early on our screeners for the quality of earnings momentum that they are showing. So in a sense, it has all come together pretty nicely and the portfolio has a lot of these digital leaders. It is not really by design. As far as the old economy stocks are concerned, I am sure they will have their time. As of now, we do not see them as real money making opportunities but let us not call them old economy stocks. IT services stocks are not necessarily old economy stocks. They also benefit from the pandemic. The sector is showing up very regularly on our screeners. It is just a question of what to buy. Something has to fit all your criteria and something has to make money for the investor and that is really why we do this. The eye is on the bottom line, it is not our own ego or our own thesis the ultimate aim is to make money for the investor.
You like to buy leadership companies. Why do you have both Bharti and Reliance in your portfolio, given that the dynamics of the telecom sector are still not stable? Is your thesis on owning Bharti turning sour now?
Not yet. I would not say that is the case yet. We are in the very early stages of a possible duopoly type situation. At worst, there are going to be three competitors. It is too early to throw in the towel and say this is not a money making opportunity, this is not a secular opportunity because you have potential price hikes coming.
The question is if the tariff hikes do not come or if they are delayed, what happens then? But in the market, ultimately you are playing with a range of outcomes and possibilities. Not everything is going to go in the direction that you want in the timeline that you want. But a short answer to your question is a duopoly like situation to well funded competitors and all the price war is behind us. The profit pool for the entire industry grew. We believe potentially all three should benefit. Let us see what happens. The next six or nine months will at least give us some idea as to whether our thesis is in the right direction but historically it is clearly a tough investment. The leadership is there. The earnings acceleration is not there. Let us see if that changes in the next six months to one year.
What convinced you to buy IndiaMart because that stock has given great returns?
We noticed this company at the time of the IPO. We did some work. We tried to really understand the history of the people, the history of the platform. What really did it for us was the customer validation that we heard about. This all started when one day we were playing golf with a friend and he actually mentioned that he did business with these guys. He is one of the largest distributors in this segment in the state. He said we should check them out. They do phenomenal work and many of us in our industry, in our segments do not really have a business without them. They are very good at what they do and the customer feedback we found was overall excellent. That got us really started with this company.
We found that they have created a sort of network effect. If you look at any website or if you look at any app, once you get a network of buyers and sellers or viewers, that is when the traction really starts picking in. We found that the numbers were very compelling and the interesting thing is post Covid and through the Covid crisis, the visits to the site shot up. They are going up even more. One would say we got in for possibly the right reasons and for something that was to play out over many years. The Covid crisis has only helped the business. You will now have more users which probably results in more page subscribers because the page subscriber base out of the registered user base is very small.
One more thing we liked about it is that it collects all its revenues upfront and so there is a lot of visibility. There is always that risk of competition coming in. There is Jio. There is UDAN. There are several people who would try to do this. Why would anybody leave an SME market in India, a market of such a large magnitude? But I can tell you one thing about organising such unorganised markets, moms and pops stores is a very difficult thing to do. Look at China. India is very similar in its demographic profile in the space of SMEs.
In fact, over here if you are able to provide an SME service and are able to reach customers better and easier, that creates massive loyalty. So the call to make here really is have they crossed that inflection point? Do they have the critical mass to sustain and grow this? These are all the positives.
As fund managers we have to keep rebalancing our portfolios. When things run up this quickly, we do the right things. We rebalance our portfolios. So we do a little bit of profit taking here and there. I hope that answers your question. As for the question on Jio, I would not be in a position to answer that beyond a point but I can tell you network effects over here on digital platforms are very powerful. Arguably they could be an acquisition candidate for somebody big who wants to come into India. That would be my take on this.
Should investors look at the change of guard in HDFC Bank? Mr Puri has created an institution, he is a legend. Will shareholders miss him or is he leaving a ship which is in fine shape?
The whole street is talking about this and we at Girik would evaluate this by looking at the leadership change very closely. To put things into perspective, HDFC, HDFC Bank are great institutions. The people are extremely professional, extremely diligent, process driven and they have great talent and highly professional boards. So, they have leadership, they have governance, they have the history of delivery. You really cannot beat that. You are talking about possibly the institution in India. They are number one across every vertical that they operate in. Who are we to question their decisions?
But yes, whether the leadership change will go well remains to be seen. Of course, it is not easy to grow an institution that is this large because you just have so much size. So for a Rs 10 lakh crore balance sheet to become a Rs 30 lakh crore balance sheet, it may take a long time. We may not necessarily have the growth but with such phenomenal raw material, such great people in place, we have to bear that even if these institutions get it wrong in the short term. I am not saying that this is a bad or a good decision to hire the gentleman that they have hired or rather to promote him to MD, but institutions like this ultimately go back and get it right. Look at Infosys. It is a great company but it had the so-called governance issues, it had leadership issues, it had so many people change over the last decade. But governance kicks in and there are people out there watching the genuinely empowered boards who will ensure that you get the right person in the place to run the institution.
It is the same with HDFC Bank. It is possible that there could be a decade of no returns. Investors just have to be mentally prepared for that. There are two things — whether the decision is correct but that is a different matter. Will the investment be a good investment and how much time do you have as an investor? If you go into a period of 10 years of no returns, are you willing to live with it? This is something that investors must always be aware of. When they are buying something, they must have that thesis, the process and the discipline.