We are seeing a 5-10 year growth path for India: Deepak Shenoy

“India’s corporate profits are sub Rs 10 lakh crore if you add them all up. If you add up the listed universe, it is substantially lower. In fact, it used to be Rs 5 lakh crore a year back and now may be a little bit more than that. The next 5 or 10 years are going to make this multifold both because new companies will list and also because of financialisation and GST coming into play and changing things.”

“In some financials, we are seeing an expanding margin profile largely because banks and NBFCs are able to raise liabilities or deposits at a much lower rate, compared to their ability to increase whatever they are lending at. We expect some margin compression on this front next year. Financials are running very strong right now and we are seeing in general a five-10 year kind of growth path for India,” says Deepak Shenoy, Founder, Capital Mind.

How is the earnings visibility and earnings quality of your Surge India portfolio now?
In the last two years during Covid, some of the IT companies showed a massive increase in margins in 2020 and probably till the middle of 2021 and since then, margins have been coming down. In certain other cases, we had a crunch on both revenues and profits which have rebounded big times. So it is a mixed bag in the last two years.

In some financials, we are seeing an expanding margin profile largely because banks and NBFCs are able to raise liabilities or deposits at a much lower rate compared to their ability to increase whatever they are lending at and that has helped them. We expect some margin compression on this front next year. So while financials are running very strong right now and the market expects some of that to come down, we are seeing in general a five-10 year kind of growth path for India that will perhaps change the trajectory of where we are right now to a much higher one.

India’s corporate profits are sub Rs 10 lakh crore if you add them all up. If you add up the listed universe, it is substantially lower. In fact, it used to be Rs 5 lakh crore a year back and now may be a little bit more than that. This is roughly about Apple’s profits in a year. We are really small.

The next 5 or 10 years are going to make this multifold both because new companies will list and also because of financialisation and GST coming into play and changing things.  A few of these factors plus actual physical infrastructure in play will change the game.

I want to understand some of the observations you are making on bigger macro trends in the economy in the market based on which you have formulated your portfolio strategy?
One of the big things happening in India is the financialisation in general. We are looking at financial infrastructure being built at a very rapid pace. GST has ensured a uniform taxation structure for pretty much most of the things except petrol and alcohol.

UPI started off really small in 2014 or 2015 and now is seeing more than 11 times the number of transactions happening on credit cards. Of course it is free, it is relatively cheap for even merchants that decide to pay vendors for their services and ubiquitous. One can go to any part of the country and pay using UPI, even small vendors’ tickets. That is already established.

New surf is coming around the ONDC platform which is an ecommerce set up largely for small merchants in smaller towns to integrate logistics and ecommerce into a common framework so that they do not have to be dependent on monoliths like Amazon, Flipkart, Swiggy, Zomato, Uber and so on.

This idea of ecommerce for logistics, ecommerce for physical goods will actually see a pretty dramatic change in infrastructure soon. There is a dedicated freight corridor which should reduce logistics cost, India is one of the highest logistics cost payers in the world. We pay roughly 14% of the effective value-added or effective price of the goods. This will come down to maybe 7% to 8% once the dedicated freight corridor is in place. The first set will start coming in 2023.

We also have a change from typical crude based transportation which is your petrol and diesel cars and trucks to electric and perhaps hydrogen over the next few years. We have an account aggregator which allows anybody to share their details of both investments credit and deposits to third parties electronically with consent. The framework is so powerful that I think it will change the face of credit in the country from where it is right now.

Typically most of India’s bank credit goes to industries and to large companies. It should be the other way round. Industry should be borrowing from the bond markets and retail players should be borrowing from banks and small financial players. That is another change that I expect to happen in the next 10 years.

Retail credit will expand, SME credit will expand from the banking sector. Take all of these together and regardless of whatever else happens anywhere else in the world, this is pretty much an India phenomenon because it is Indian infrastructure that is getting built and Indian entrepreneurs are going to get help. It is not so much India serving the world but India serving India and that is a huge thing because we import a lot of not just crude oil and gold but we import a lot of the stuff that  we use in everyday life as well.

If India is propelled further whether it is by the PLI scheme or by these digital and physical infrastructure, a lot of domestic industry will benefit dramatically. We are already seeing the first signs of it, whether it is from UPI or from logistics changes that are starting to happen in the country. so we have positioned a portfolio alongside so there is a logistic sector that will get impacted positively is manufacturing different areas that will get impacted positively. I am not so focussed  on exports here but I am more focussed on the replacement of imports by domestic production and domestic suppliers. It is pretty long term, maybe a 5-10 year trend that we are looking at.

I am curious to know your view on export oriented sectors and the shadow which they are coming under due to global slowdown like say IT and pharma exports.Are the valuations attractive enough or not yet?
Not yet. The problem here is that we do not know exactly how budgets are going to change in the coming year. Pharma is a different play. It is having an issue with FDA coming into play and in the past, they have been very strict on Indian companies. They have started issuing  warning letters. One needs to fix certain things. Sometimes these are frivolous in nature but this is how FDA has always been. It is more politically driven than perhaps logical at some point. But that is a headwind for the sector.

For IT, the exports have been decent. It has not been fantastic. Margins have been crimped because of over hiring and because in general, work from office coming back. The costs which had gone out of the window have come back. The efficiencies which they have built in the last two years will take some time to go away but the order flow has not been exactly as kind as it used to be. There has been a cost-cutting attempt by American companies and by perhaps some of the countries around the globe. They will look to India because India is relatively lower cost even now and with the dollar at 83 definitely so.

Also, India has availability of labour which is right now a big problem in the west because of high inflation and wages are still very high there. Cost-cutting has already come into play in a lot of companies. December is seeing some of the highest layoff announcements in the West. I think by next year, we will start seeing an increase in deal flows for IT companies. So, maybe next year is a good time to start building those positions. I still see some headwinds for both IT and pharma which are  one of the largest sector.

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