Indian companies have a window of opportunity as China is losing its competitiveness on the manufacturing side, and small finance banks is the space that is going to pan out, says Ravi Dharamshi, CIO, ValueQuest Investment Advisors (Market Makers). He spoke to ETNow's Nikunj Dalmia.
Nikunj Dalmia: When I saw the Indigo numbers, I started scratching my head; when I saw Jet Airways numbers my first reaction was hello, where is the pricing power for some of the aviation companies? They are growing but pricing power is not there. Are you a contra buyer in aviation or you are avoiding it right now?
Ravi Dharamshi: No, I am going to avoid simply because they have had the best of growth in terms of passenger traffic and they have had the best of crude prices. If they did not make money hand over fist in that time, I do not think they will make it, unless something changes in the structure of the industry which takes out the supply in a big way.
I do not think that pricing power is anytime coming back. You need not make the mistake of thinking that these companies will ever have pricing power. It will always remain a cyclical play and you have to buy it in a down-cycle and sell it in an up-cycle. I believe that is how it is with the aviation companies. Only a few companies will stand out or will manage their balance sheet in a way that in a tough time they will not lose much and in an up-cycle they will do well.
Nikunj Dalmia: So, aviation is a big no?
Ravi Dharamshi: I am not buying, yes.
Nikunj Dalmia: One more sector which you have tracked in the past, you have spoken about in the past and you have owned in the past is speciality chemicals. A lot of variable factors, trade war… this could go wrong and that could go right, it is getting very complicated. You do not know which Chinese product is coming under tariff and which European product will come under tariff. Has the big picture changed for speciality chemicals?
Ravi Dharamshi: No, I continue to believe there is a window of opportunity. China is incrementally losing its competitiveness on the manufacturing side because of two, three factors; one is of course the US tariff, which is the latest thing, and second is the increasing cost of environmental compliance. Due to these reasons, Indian companies have a window of opportunity.
Now, because it is such a tough sector to understand, there exists a research arbitrage, but the understanding is not clear. Market will start believing okay these are sustainable numbers or these are not sustainable numbers, or this is the product that will benefit. There is a lot of scope for going wrong as well, so it is a challenging opportunity.
India is roughly about 3-3.5 per cent of the worlds chemical manufacturing. I believe over the next eight, 10-year period, we will move to 7-8 per cent kind of a number and we will gain that market share from China. That is a long enough runway for a lot of companies to do well.
Identifying those companies and the products that will do well is a challenge. There will be cyclical ups and downs in various products and you have to live with that. So, you have to have a broad enough portfolio of companies and products for you to sustain those ups and downs.
Nikunj Dalmia: Investing sometimes could be a very lonely process. You may buy a stock which nobody likes; you may own that business for couple of quarters and then only market recognises that. So, where do you think you are currently feeling lonely, nobody is in sync with your thought process but you are confident of your thesis?
Ravi Dharamshi: Just now what we spoke about, I think capex is one theme which has been out of radar of most of…
Nikunj Dalmia: Selling consumers is lonely, but capex has been a hot and cold kind of a theme?
Ravi Dharamshi: Right. But I believe, it would be reflected in the market cap, and if the stock prices have not moved anywhere for the last 8-10 years, that tells you that it has been an ignored part of the market and nobody wants to be with a company that is not performing. Whether it is going to be an across the board performing company, I still doubt that. So, you will have to do your stock picking within that. But, there are many such opportunities which will unfold over the next three, four, five years. The market is, right now, not willing to look beyond six, 12 months and there are enough lonely spots in the market. I am also an owner of some of those where I believe, eventually, the market will come around.
Nikunj Dalmia: Where are you with the crowd, where you think that okay, I do not want to be lonely I am with the crowd, because crowd is getting it right and everybody will make money?
Ravi Dharamshi: One space, where we have placed some bet and believe is going to pan out but has not panned out till now, is small finance banks. We have spoken about it in the past.
NBFC is becoming a bank, so that story is yet to pan out in my opinion. Some of them are already valued highly and some of them are not. I think, as a space, it has legs over the next 5-10 years.
Nikunj Dalmia: What have you read in the last three years? What have you come across which, in a sense, has stayed back with you? Give us an original thought, maybe an idea or something, which you were able to capture to make your investment process better?
Ravi Dharamshi: Difficult one. I cannot think anything from the top of my head. I am not able to recall anything, but there have been a lot of good blogs that I have been reading. Time to time, you keep going back to the basic concepts to clear up your mind. There is one Morgan Housel who writes good blogs. Then there is Shawn Eddings, then there is Intelligent Fanatics. So, those are some of the blogs that I have been reading incrementally and I really like that thought process and how it clears up our mind on how to think about an opportunity. They take one particular concept, whether it is position sizing or whether it is how to create an idea or how to research, and that has helped me refine my process as well.