Let us know some of your stock ideas for 2023?
I genuinely feel very excited about what holds for India in the next year because what we have seen this year in terms of divergence of performance of Indian markets and recognition of Indian economy, it is not a one-off. I think it is a beginning of a trend. To me it seems like all the stars are aligning together for Indian economy and for Indian markets because the fact remains that we are at a stage where the world is extremely volatile and the advanced economies are at a brink of a recession.
How about a stock idea for 2023. See when Santa comes, Santa will always give you something nice, instant gratification.
I think this year started with a lot of optimism and a lot of these internet names unfortunately have had steep losses from a public market investors point of view.
But I think next year could be a year where these stocks can make lot of money for investors and I remain very positive or bullish on some of these internet names because their underlying businesses are going very strongly.
I think now these stocks are much more fairly valued in the context of their growth and more importantly these companies are now making rapid pivot to profitability which they were not doing while they were private companies.
Extraordinary returns are made in sectors which are generally not so popular. To begin with I see a classic combination here where sectors are not so popular in the sense investors have burnt their fingers and there is a degree of fear in terms of investing into these companies and rightly so. More importantly underlying growth is very strong and these businesses have a very strong operating leverage which effectively means they will generate huge amount of cash flows once they turn profitable. card for the next year.
Going by that logic what was up has come down and what was down has gone up. Do you think in 2023 banks will go down?
Not really. I still think maybe there could be some profit taking in early part of the year but on annualized basis they will still do well because the underlying growth in the economy remains strong. All of us understand this that finance and banks being at the heart of the economy, have a play across every segment in the economy and they play a very vital role in the growth of the economy. Valuations in the overall sector are still reasonable in that context so I feel that they will generate healthy returns though there could be some profit takings because they have done very well especially in the last three months. But I still think in the medium term they should do well. More importantly 2023 could also be a year where pharma sector will do well because it is a sector which has not done well for the last two years. We have seen earnings degrowing in the sector for the last three years for multiple reasons including significant price pressure in US generics markets and couple of ot her factors. But we have reached a stage where this year will be a tough year in terms of earnings for healthcare sector as a whole and next year onwards the sector will start delivering healthy earnings growth. So in that context I think next year could be a year where pharma sector which has been out of favor and has not delivered positive returns could be one of the better performing sectors next year.
Can I ask you to elaborate a bit more on that, there are some people out there who believe that pharmaceuticals can be the dark horse of the new year. Where would you put your money in the pharma space because if you look at the last earning season as well it is really only that stood out?
Yes, you are right but I think what we essentially are seeing is pricing pressure in US generics market has started moderating and probably should tough out probably towards the end of this year and as a result lot of these companies let us say a
or Alembic have made significant investments into products and into facilities over the last two or three years and they have not been yielding desired results for these companies which probably they will start monetizing going into the next year so I think be sector asld a whole it shou
Indian companies have a very dominant market share given our low cost manufacturing base in India so I think on a broad basis most of the companies will see a very healthy profit recovery. Obviously we have our preferred picks across the sector starting with Sun Pharma and then we like Alembic as well. We like some of the midcap pharma names including
Tell me a bit about your top three holdings and do you think the top three holdings are likely to remain like this for next 12 months considering what information we have available?
Yes, well if you look across the portfolios our top three holdings would be banks and within banks we own
and . We own telecom that is essentially Bharti and we own healthcare which is Sun Pharma and I think given our approach to investing where we take three year view on businesses and we review them on every three year cycle it is unlikely that will make any changes to them.
Having said that this year has been a year where we were actually underweight on IT because at the start of the year we feared that there will be a growth slowdown in US and that will have some rub off effect on these companies and valuations at the start of this year. We are extremely rich in IT services company but given the fact that now these stocks have corrected anywhere between 20% to 30% during this year and growth expectations have moderated though these companies could continue to deliver healthy growth point. At some of time next year I think we will change our stance on that and probably we will add more IT to our portfolio going into the next year but otherwise our top holdings primarily will remain the same.
We must have discussed Bharti in 2020 umpteen number of times, 2021 also we kept on discussing Bharti and how data consumption is going higher but the stock did not oblige and just when Bharti was on the back foot, Bharti stock has gone up and we did not talk about it?
Yes, I completely take your point I think I have been positive on telecom as a sector for quite some time. I think the good thing is the sector if you look at it from slightly broader perspective has become a classical oligopoly in India because five years back we had 10 plus players and now we are down to two and a half or three players as we would like to call it.
More importantly we have seen return of pricing power coming back to the sector so we have seen last two years these companies have taken calibrated price hikes and I think that trend will continue because with the three player market it becomes much easier and the competitive intensity is much lower.
As you rightly said in fact Indians consume highest amount of data globally. Five years back before the onset of Jio, average data consumption per consumer in India per month was about 4GB and today we consume about 17 odd GB data per month on an average which is very-very high even by global standards.
I think with further proliferation with the launch of 5G and smart phones in tier three and tier four cities that number is only going to go higher which effectively means there will be volume growth in data consumption for these companies and more importantly as I said these companies will take calibrated price hikes and finally all these telecom companies and for that matter Bharti as well are sitting at peak debt so their leverage will keep reducing by virtue of the significant amount of free cash flows these companies will generate.
So to my mind telecom as a sector will become a secular growth story in India over the next five years. More importantly very rarely across the world when you look across sectors you come across oligopoly and utilities with strong pricing power which is a very unique situation of circumstances of backdrop that we have in the telecom sector in India. When these kinds of consolidations happen in any large sector then these kind of profit opportunities in sectors like these continue for a very long period of time.
So I completely take your point that Bharti looks pretty exciting from next year perspective but I also believe we will approach it more as a secular growth story over the next five years.
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