nilesh shah: Have disruptors, not dinosaurs in your portfolio: Nilesh Shah
Is this a good time to buy auto companies because hopefully the supply issue will not be there forever and will subside sooner rather than later?
It is facing some challenges — chip shortages, rise in raw material or metal prices, not being in a position to manufacture and create operating leverage even though there is demand, resulting in a six-month waiting period. The positive thing for automobiles will be the announcement of the PLI scheme. Auto and auto components today represent about 7% of India’s GDP and one-third of India’s manufacturing GDP.
A PLI scheme supporting auto, auto ancillary sectors will be very positive. We are underweight in the automobile sector, keeping in mind that near term pressure and also the long-term pressure of moving from fossil fuel cars to hybrid and to electric vehicles. Within this, one has the ability to accumulate at a price.
I am sure automobile stocks will go up and down with news flow. The PLI scheme will lift auto sector stock prices. Metal price increase or chip shortage means depressed prices. One has to be a patient accumulator of automobile stocks, keeping in mind that the trajectory of companies as they move from petrol, diesel cars to hybrid cars and eventually to electric cars. Companies which will be able to transit from this road path should be bought at lower levels.
Has a large part of the ethanol trade already played out or do you think the meaty part is well ahead of us and this is a long haul cycle that we are part of?
The market is super efficient today. We do not have the information asymmetry advantage which we used to have 30 years back. So the market prices things very quickly. The story of ethanol is priced into most of the sugar stocks. From here onwards, the stock prices will reflect the profitability growth rather than the rerating of earnings.
Now within the sugar sector, there are some extremely leveraged companies and some extremely well run companies. My feeling is that now we will see differentiation coming through where well run sugar companies creating a good infrastructure for ethanol blending will do well in the days to come. It is their earnings which will drive the stock prices and not the rerating of that earning that seems to be behind us.
As limited a space as it may be, but what is your reading on what is happening within the telecom space? Are they too big to fail? And of course, we are awaiting a decision on a relief package.
As an analyst, we can try to predict how many consumers we are going to get, what kind of ARPU they can charge and so on. We are incapable of predicting government policy decisions. Hence to invest in a sector where policy and regulations could have material impact, will always create its own surprise or shock. We have been invested in the telecom sector, but our focus is more on the players who are able to work on their own rather than those who will need policy intervention.
In a very simple sense, if a stock goes from 100 to 10, it is a 90% drop and if it goes from 12 to 20, it is a 100% jump. We would rather try to save a 90% drop than get a 100% rise.
Who would have thought that the bull market which the US economy and financial markets are experiencing now will be the longest, biggest and the fastest after World War I. Those who have participated, have made money. Nobody thought 20 years ago that the bond yields which were at 10% in the US economy would go to almost zero but it has happened and those who were short on bonds have made money. What is the big trend now which you would stick to?
On a longer term basis, we will have two kinds of companies; disruptors versus the dinosaurs. There will be companies which will not adapt to the evolving scenarios and they will get massively disrupted by the new age companies.
Today capital is available for ideas and that has taken away one big advantage from established companies. Today regulations are willing to support disruption and that has taken away another moat from large listed companies. Clearly companies will evolve over a period of time using the digital ecosystem or whatever other tools are available and essentially either they will expand the market at a lower cost or they will provide a better service and better product to investors and consumers. These are the companies which will survive.
Now every company will say that we are digital and that we are doing all these things but there will be someone who will be doing lip service and there will be someone who will be doing actual disruption. One wants to be with disruptors and not with the dinosaur in your portfolio.
The second thing which is coming big time is the environmental social and governance (ESG) path. We are seeing shareholder activism coming to India. Earlier many times, it was below the radar. Now it is out in the open. If you are not walking on the path of governance, then a serious rerating of your company is possible. It may not happen today, it may happen two years down the line but eventually it will happen so you have to invest in companies which have good scores on the ESG side. This disruptor plus ESG are two big trends which will impact portfolio returns in the future.