Secret of Smallcap Investing with my Mentor! 👨🏻‍🏫

Summary

In this enlightening episode of the SOIC podcast, an engaging discussion unfolds with seasoned investor and mentor, Mr. Sidhan Bandari, revealing the nuances of small-cap investing. Drawing from years of collaboration, they delve into insightful strategies, illustrating them with relatable case studies. The conversation extends into analyzing Warren Buffett's unique investment style, exploring various sectors with an intriguing dedication to understanding market dynamics. Moreover, the discussion highlights real-world experiences, underlining the importance of investing philosophies adaptable across different scales of portfolios. This podcast promises to empower retail investors with practical wisdom and strategic foresight into the small cap landscape, blending insightful client caution with real-world success narratives.

Highlights

• In-depth discussion on unique small cap investing strategies 💼
• Exploration of Warren Buffett's replicable investment tactics 📊
• Case studies in consumer sectors illustrating growth through innovation 🚀
• Unpacking the potential of international investing ✈️
• Insights into adapting investing methodologies to personal capabilities 💪

Key Takeaways

• Understanding small cap investing requires dedication and the right mentor 💪
• Warren Buffett's strategies can be replicated, sometimes even surpassed, by picking better sector leaders 💡
• Sector-based analysis is crucial to identify unique growth opportunities 📈
• Priced right, even decently run companies in good sectors can yield great results! 🎯
• Investing is about finding your unique style and sticking with it despite market volatility ⏳

Overview

The podcast opens with a warm introduction to Mr. Sidhan Bandari, whose insights have guided the host through understanding complex small cap investments. Their conversation underscores the value of mentorship and collaboration in navigating international and domestic investing landscapes.

Highlighting Warren Buffet's investment prowess, the discussion explores replicating and even outperforming his strategies by identifying and investing in superior companies within each sector. This segment inspires listeners to think critically about market leaders and existing opportunities.

Concluding the talk, they delve into various real-world case studies across sectors like consumer goods and aviation, emphasizing the substantial influence of pricing and market positioning on investment outcomes. These discussions provide a robust framework for listeners to cultivate their investment strategies.

Chapters

• 00:00 - 01:00: Introduction to the Podcast The chapter introduces the podcast and the guest speaker, Mr. Sidhan Bandari, who has been closely associated with the host over the last four to five years. Mr. Bandari is highlighted as a mentor to the host and is known for his international investments. The episode revolves around a discussion featuring Mr. Bandari.
• 01:00 - 05:00: Introduction of Mr. Sidhan Bandari and Persistence Capital This chapter introduces Mr. Sidhan Bandari and provides an overview of Persistence Capital. Additionally, it touches on the topic of investing in various sectors in India, focusing specifically on small and mid-cap funds as avenues for retail investors.
• 05:00 - 14:00: Discussion on Warren Buffett's Investment Strategies This chapter delves into Warren Buffett's investment strategies, likely examining his approaches, ideologies, and perhaps some of his most renowned investments. It's expected to provide insights into what makes his strategies successful, offering a fascinating case study for investors to analyze and learn from.
• 14:00 - 25:00: Consumer Sector Case Studies: Radico and V Beverages Sadhant discusses his relationship with the SOIC community and expresses gratitude for being considered a mentor, although he feels the relationship has been reciprocal in terms of learning and sharing ideas. He mentions his familiarity with Ishmort and the exchange of ideas that has been ongoing for several years.
• 25:00 - 40:00: Airline Industry and Indigo Case Study The chapter discusses the constraints in the airline industry, specifically when managing a fund, along with a case study on Indigo Airlines. It revolves around the challenges and considerations in the fund's operation, including the implications of discussing or purchasing stocks, and the sustained interest in launching a fund owing to previous collaborations.
• 40:00 - 43:00: Introduction to SOIC Membership and Financial Literacy This chapter discusses the inception of a fund managed with a consistent investing philosophy shared amongst partners. The manager initially feels that his lack of recognition might deter investment, but argues that investing his own money in the same manner as other fund investors demonstrates commitment and alignment with investors' interests.
• 43:00 - 52:00: Rate of Change in Consumer Businesses The chapter titled 'Rate of Change in Consumer Businesses' discusses the context of net worth in relation to stock investments in India. It introduces 'Persistence Capital', a venture started about six months ago. The narrator shares personal background, having been born and raised in India and completing undergraduate studies at Stanford in the USA. The narrator has been involved in investing in India since 2015, covering various stages of the business cycle, and initially worked in venture capital with a firm now known as Peak 15, having moved on from venture capital since then.
• 52:00 - 76:00: Discussion on IT and Banking Sectors This chapter discusses the intersection of IT and the banking sectors, with particular emphasis on private equity and capital investment. The speaker reflects on their experience working at Capital Group, a significant but relatively unknown player in the stock market and private equity space. They mention Capital Group's involvement in a $3 billion private equity fund and highlight their role as early investors in companies like Mankind, a pharma company preparing for a public listing. The chapter outlines the speaker's training and focus on small to mid-cap companies and private equity transactions aimed at companies poised for public listing.
• 76:00 - 85:00: Debate on Small, Mid, and Large Cap Stocks The chapter discusses an individual who managed the India book for a US-based hedge fund for five years. During this time, they began collaborating with SYC, and subsequently, they launched a new venture called Persistence about seven months ago. Despite a busy period, they are satisfied with the progress made so far.
• 85:00 - 98:00: Global Market Perspectives and Macro-Economic Discussion The chapter titled 'Global Market Perspectives and Macro-Economic Discussion' begins with a standard disclaimer that reminds listeners nothing in the podcast constitutes a buy or sell recommendation, noting that any case studies are purely from the perspective of analyzing businesses or industries. The chapter then introduces an intriguing discussion on a prominent case study involving Warren Buffett, recognized as perhaps the greatest investor in the world. The segment sets to delve into insights shared by Buffett, suggested by an engaging question posed before the formal start of the recording.
• 98:00 - 101:00: Advice for Young Investors and Learning Resources The chapter discusses Warren Buffett's investment portfolio, highlighting Apple as a significant success within Berkshire Hathaway. Precision Car Parts, a more specialized investment, is also mentioned. The conversation suggests insights into successful investment strategies and choices suitable for young investors.
• 101:00 - 101:00: Conclusion and Final Thoughts In this chapter, the focus is on summarizing the investment portfolio of a notable figure in the business world, which includes significant shares in the aerospace parts business and banking stocks, specifically Bank of America and Wells Fargo. Additionally, the figure owns a large railway company, Burlington Santa Fe, Geico, a well-known auto insurer in the US, and Coca-Cola. The chapter emphasizes the breadth and diversity of the investments, highlighting iconic brands like Coca-Cola as central to the portfolio.

Secret of Smallcap Investing with my Mentor! 👨🏻‍🏫 Transcription

• 00:00 - 00:30 hi investors welcome to sic podcast we are hosting Mr sidhan Bandari with whom I work very closely because last four to five years discussion and also interesting thing in some ways I also consider him to be my mentor because he also invests internationally different today we are doing this
• 00:30 - 01:00 podcast investing India different sectors Small midap funds as a retail
• 01:00 - 01:30 investor fascinating case study start
• 01:30 - 02:00 first of all thank you for calling me a mentor although I think our relationship has been a lot more equal in terms of giving and taking but thank you for having me i've learned a lot from SOIC and from the YouTube channel so I hope I can add some of that value back uh today so hi everyone my name is Sadhant ishmort and I have known each other since he started SOIC we have been exchanging ideas now for four or five years um for a long time I think there was this pull from the SIC community uh
• 02:00 - 02:30 that you should launch a fund but obviously first passion is teaching and once you launch a fund there are a lot of restrictions in terms of what you can do what you cannot do if you talk about a stock can you buy it if you buy a stock can you talk about it and so for the longest time nothing happened but um I think through some of the great work you've done over time you a fan following sort of built and the clamor to launch a fund kept going up and since we have been collaborating for
• 02:30 - 03:00 5 years we have the exact same or similar investing philosophy he said hey why don't you run the fund and my first reaction was that sounds like a great idea except no one really knows me so why would anyone invest in a fund that I'm running however if you invest all your money in India and the Indian stock market via the same units as any other AF investor then that has some sort of value that has skin in the game you know you're not just philosophically aligned but you
• 03:00 - 03:30 know sort of your entire net worth which is mostly in stocks in India is also on the line and uh he was he agreed and so about 6 months ago we launched persistence capital very quickly my background I was born and raised in India I did my undergrad in the US um at Stanford I've been investing in India since 2015 and across the business cycle so I actually started off in India in venture so I used to work at SEOA now it's called peak 15 i moved from venture
• 03:30 - 04:00 to private equity so I worked at Capital Group which is obviously one of the largest FIS in the stock market but not well known to a lot of people they also have a $3 billion PE fund they were a pre early investor in a company which is now listed mankind they are early investors another pharma company that will list at some point in so I spent some time getting trained there we obviously spent a lot of time looking at small mid caps but we also looked at private equity transactions for companies that would list at some point um I spent some time there and then I
• 04:00 - 04:30 ran the India book for a US-based hedge fund for about 5 years and when I started the hedge fund is when I think SYC roughly started that's when we got to know each other and yeah we launched Persistence I guess about 6 months ago 7 months ago 7 months yeah it's been an eventful 7 months uh but we're happy with the way things have shaped up so yeah thanks for having me great so uh just before we go into questions and a lot of examples and case studies just a
• 04:30 - 05:00 standard disclaimer nothing in this podcast will be a buy or sell recommendation any case studies that we are taking is purely from the perspective businesses or industries with that out of the way to first case study say discussion start which is a very interesting one i think uh this is to do with perhaps the greatest investor in the world that is Mr warren Buffett yeah and before I started before we were shooting start question he gave a very interesting case
• 05:00 - 05:30 study one buffet actually interesting insight to say can you please repeat that case study for the audience because that can be very insightful yeah absolutely so let's look at the biggest parts of Warren Buffett's portfolio there's Apple which has obviously been the biggest winner in the Burkshshire hatway complex um there is Precision Car Parts which is a niche
• 05:30 - 06:00 aerospace parts business there are the banking stocks which is Bank of America and Wells Fargo principally he owns two banking stocks he owns a large railway company it's private i think it's called Burlington Santa Fe he owns obviously his iconic Geico which is the auto insurer in the US and then he also owns um Coca-Cola i mean no discussion is complete without that right Coca-Cola so broadly if we had to summarize he owns
• 06:00 - 06:30 logistics via he owns banking via the two banks he owns aerospace so niche aerospace parts consumer business which is Coca-Cola insurance I mean there are many insurance companies he owns but Geico is obviously an iconic example and then in tech he owns Apple now part of Warren Buffett's genius I would say is finding sort of these businesses that are advantaged in sectors that are advantaged and holding on to them for a long time so here's a
• 06:30 - 07:00 thought experiment warren Buffett's investing style the iconic thing about him is it's the same today as it was 10 years ago so could you have replicated Warren Buffett's portfolio we would go so far as to say that not only could you have replicated you could have actually picked the better company in each sector so in banking it's well known that Wells Fargo and Bank of America they're decent jp Morgan is the best run bank in the US if you look at Pepsi it's outperformed
• 07:00 - 07:30 Coke for 1 3 5 10 20 years i'm not talking about One Beverages i'm talking about Pepsi in the US if you look at autoinsurers GEICO has been consistently losing share to Progressive in the US progressives listed been a massive wealth creator if you look at niche aerospace parts precision cast parts as an as an acquisition has not worked out maybe as well as Transdime would have if you just bought and held Trans Time apple is very hard to compete against
• 07:30 - 08:00 but our submission is uh more fang companies like Google like Facebook and probably Netflix have delivered similar returns over the last 10 years so really with the exception of the trading houses that he bought in Japan one or two years ago where he borrowed money in Japanese bonds at 1% and bought dividend yielding stocks at 9% and those stocks have tripled therefore basically tripling your money for free you could have actually replicated Warren Buffett's
• 08:00 - 08:30 largest parts of his public equities portfolio by actually buying better companies i forgot in railways in railways the better railway is actually listed i forget the name now i think it's Canadian National Railway um that's the name but there's one more so you could have actually bought the themes that he is most excited about that he remains convicted on over the long term the better version of each of those companies in the stock market and you could have outperformed now this to me
• 08:30 - 09:00 is a very empowering fun fact and I think that's what makes Warren Buffett special is that with a lot of great investment funds whether it's AOA I mean you know what they do they back legendary founders who are trying to build iconic companies like Nvidia or Airbnb but they find them at series A can a retail investor realistically replicate that no Renaissance I don't understand what they do I don't think anyone outside of Renaissance gets
• 09:00 - 09:30 certainly right but they make a lot of money can anyone replicate that no what's amazing about Warren Buffett is that you could have actually replicated what he has done himself but even better from a peer-to-peer analysis and generated similar if not better returns so for us the takeaways are two i mean what we like about Warren Buffett is the fact that his teachings are so accessible and his style is accessible it works as well when you're managing like $1,000 it works as well when you're managing a billion dollars and that's
• 09:30 - 10:00 really amazing that the strategy can scale that well but there is no entry price like there would be in venture capital like there would be in Renaissance but the other part which is interesting is I mean you listen to enough fund managers and everyone takes pride in the fact that they buy the market leader in the sector they want to buy the number one player and that is a and identifying that number one player is a critical part of generating value over the long term But what's really interesting if you look at Warren Buffett's career is that with the
• 10:00 - 10:30 exception of Apple none of these companies objectively are the number one in their category but he has been so disciplined about the way he's bought them that he has outperformed and I guess the biggest lesson for here us for for us here is there's no one way to skin the cat you can buy a better portfolio of companies and outperform the index as we have just shown with examples across insurance or railways or paints i forgot to mention paints but Shervin Williams has done better than
• 10:30 - 11:00 Benjamin Mo which is the paints company Warren Buffett owns but the other insight is hey if you pay the right price even a decently run company in a good sector can be a great investment you don't have to actually buy the best one and I guess the big most liberating lesson at least for me is there's no one right way you have to find the method that you can stick to because the method that you can stick to and hold through in periods of volatility is probably the one that will help you over the long term i think in spite of owning the
• 11:00 - 11:30 inferior business Yeah he has still done extremely well yeah yeah because his entry price and margin of safety focus that was of paramount exactly i mean just let's look at eight different examples so again just for the audience's benefit in banking I'm comparing JP Morgan which is a better bank against Wells Fargo and Bank of Ma let's exclude Apple from the analysis apple is truly a unique company so that's its own that is and I think that has been his biggest winner so in fact when he has combined both his
• 11:30 - 12:00 superpowers that is the biggest winner in his career now let's look at the other companies precision cast parts which is niche aerospace it's not as good as trans pepsi interestingly much better RAM than Coca-Cola has done much better over the long term progressive has done much better than Geico which is the insurance company the publicly listed railway companies boast superior operating metrics to the one that he has bought shervin Williams has consistent which is paints it's the Asian paints for the US has consistently done better
• 12:00 - 12:30 than Benjamin Moore which is the one he's won so we've gone through the big I forgot to mention sorry Visa and Mastercard have done better than MX over the last 10 years so it's actually really interesting like he has done so well because of his focus on margin of safety and the one instance where he got margin of safety with the company right it has been the biggest winner the world has ever seen which is Apple so I think there's a liberating lesson there which is if you follow the strategy you don't
• 12:30 - 13:00 focus as much on valuation it could work out but even if you get the company wrong if your price is right the space is good you could still do well over the long right but I think the holy grail would be quality plus margin of safety Apple yeah that type of setup and that became the holy grail for right so this actually was a very insightful learning because margin of safety or valuation hindsight focus correct that is where it can be used a lot by all the investors absolutely now coming to the second set
• 13:00 - 13:30 of questions is that now this was with Mr warren Buffett different sectors and we'll go towards some of your past case studies yeah sure consumer sector start how do you think the consumer sector has evolved in India and some of the case studies which can be very insightful because we have seen over last four five years there has been a differentiation which has happened in consumer sector
• 13:30 - 14:00 aviation trafficker that is bound to grow at a K of 9% which is also very interesting exactly so how do you differentiate between the consumer sector itself multiple subsectors and what is the mental model that all of us can learn by some of these case studies
• 14:00 - 14:30 yeah absolutely so look in consumer ultimately all these businesses trade at in general in India at an elevated earnings multiple so what's really important is getting the growth right and if you can get some margin expansion along the way that's the holy grail now growth can come if you just look very conceptually from from top to bottom first is what is the penetration of the category of the country so like toothpaste is well penetrated you can grow best case you know population growth plus minus is your volume growth
• 14:30 - 15:00 maybe you'll get some pricing but that's really what it is so penetration within the broader population and that can either come from affordability or it can come from distribution so if you're a buja brand like BKA or something in south India or north India and you're expanding to another part of the country so penetration and the drivers of penetration being affordability or geography is a good place to start third one in penetration is affordability which is I could not afford premium spirits 5 years ago i can today now
• 15:00 - 15:30 they've allowed a few more liquor stores in my neighborhood so I can consume this so that is sort of one really powerful mental model for us which is like you ideally want to be in categories which are underpenetrated you know from a population standpoint um from an and which can be linked to distribution which can be linked to affordability so sometimes you know you it's toothpaste it's probably there and move to the country but if it's a liquor store the number of liquor licenses in a shop are
• 15:30 - 16:00 capped so over time if more liquor licenses are given there is that distribution advantage that you have and then there is an underlying affordability angle as well which is I could not afford premium liquor 5 years ago I can afford today now our view has always been that look these are not sectors that are cheap so you have to have to have high visibility of near-term growth and that growth you have higher visibility on volume ideally within topline pricing may or may not come margins may or may not come because
• 16:00 - 16:30 the growth margins might get hit because of commodity price so yeah just so actually sales is a function of volume into value exactly so you're basically saying volume growth exactly double digit volume growth like if you look at most consumer categories in India that have created wealth it is when they have shown very high single digits volume growth with some realization like I think Titan has for 10 years in a row or ideally low teens to mid- teens volume
• 16:30 - 17:00 growth which you know at one point Nestle had that but now today it might be world beverages and now this low to mid- teens volume growth comes from where it comes from distribution comes from improved affordability or it could come from completely new category creation ideally you want it to come from all three because if you it come from all three then that 14 15% is much more durable and can last for much longer than if that 14 15% just came from one of those
• 17:00 - 17:30 three vectors you've not invented a new product it's just that you were present in so many kana stores this year and that number will go up over time because that has a shelf life at the end you will hit a ceiling at some point and so you know if you look at different consumer stocks the ones that have shown the best shareholder returns have actually done something unique which is they have grown volumes in their core categories at a healthy pace and they've managed to create new categories altogether so if you recall from our
• 17:30 - 18:00 earlier conversations let's discuss two stocks Radico and W beverages radico a lot of people don't know this like USL is considered the best run spirits company in India but and and today maybe the narrative has shifted today and people think Nagatico is the best run but actually if you pre-COVID in 2019 and you looked at spirits as a category in India no one spoke beyond USF the conversation began and ended with us so when we were at high west then we actually did a lot of work on this category and we learned some some things
• 18:00 - 18:30 that were interesting for example in 99 when Santo was coming to India Santo is a Japanese whiskey brand they didn't want to buy USL they wanted to buy Radico because they thought Radico was better run it's just that Radico is not up for sale so they tried to buy a minority stake in USL so even from the '90s Radico which was purely a contract manufacturer launched a brand and its first brand was a millionaire brand i forget the name is it 8 p.m 8 p.m black 8 p.m black yeah pakistan India water exactly i
• 18:30 - 19:00 think they did well in that CSD department right and what was unique about Radico compared to other guys is that because they knew that it would be very hard to compete with USL in whiskey and whiskey was moved to the market they tried to dominate every new type of spirit that was coming around so for example magic moments cornered a 50% market share in vodka in India and they did this at a time when people thought vodka as a category was not real in India um in fact there's a really
• 19:00 - 19:30 interesting anecdote you know among all the hard liquors vodka is the only one that doesn't smell so one of their sales pitch in like tier 2 to tier five towns was actually you can have it and no one will find out right now it's unique and it worked and something an MNC is unlikely to copy so Radico if you look has always consistently been at the forefront of category creation first they did it with magic moments then they started this whole movement of pre super premium whisies in India and not just
• 19:30 - 20:00 whisies I think they did brand also but like Rampur single malt was one example uh they did some Jelme gin I believe they did uh some super premium rum I forgot Morpheus or something right Morpheus Morpheus so they invented three new categories that they then tried to dominate and what they used to their advantage was the simple fact that you know for USL Whiskey is so important the management doesn't have bandwidth to do anything else um so to us like you know
• 20:00 - 20:30 in 20 today Radico trades like whatever 50 60 70 times earnings in 2019 you were basically buying Radico at 15 times trailing earnings when margins were not full you looked at the 13 5 year 10ear data the volume growth was spectacular and what was more impressive was the DNA to create a new consumer brand i mean it's one thing you know in USL the sales pitch was always global portfolio and we will make money but for radico they didn't have that luxury they
• 20:30 - 21:00 actually had to create it so what did they benefit from they created new categories premium liquor became more affordable as the country premiumized as people became wealthier and then distribution advantage is there because you're not USL radical was originally from north India so over time they added distribution in south India and distribution in a canteen system is tough you need to have scale to even do it because your balance sheet has to support the working capital so it was the holy trifecta of they got distribution new category creation and premiumization right if you look within
• 21:00 - 21:30 consumer categories it's one of the best stocks actually over the last not as well spoken about because maybe it's a smaller company but you have made a four fivex just on the multiple and then the earnings growth and obviously the mix shift from um more country made liquor to more premiumization liquor that has an impact on margins and then as the company became better people actually started noticing that radical corporate governance were not bad in fact was better than USL i'll give you a fun example people generally say MNC's in India have good corporate governance but here's a counterfactual dutyfree liquor the
• 21:30 - 22:00 largest listed MNC in India for liquor uh for spirits uh when they sell alcohol in duty-free they don't record that in the listed entity that's in the unlisted entity right but all the surrogate marketing which is responsible for driving sales where does that happen in the listed entity does behave that way no so To us it was very interesting that as the business became more discovered people started picking up on these cues
• 22:00 - 22:30 that actually their corporate governance isn't really inferior to what is considered the bell weather of the sector right and so they sort of hit that holy trifecta of creating a new category growing penetration and also affordability and premiumization and I mean we got lucky also there was margin expansion along the way but let's take another example v beverages exact same story if you look in 2017 and you spoke about consumer stocks no one spoke about beverages in the same breath as a
• 22:30 - 23:00 Nestle and how did Beverages pull it off well first they consolidated their leadership right they started off in North India they acquired bottlers in South India distribution second their core category is growing low double digits because of refrigeration right soda has grown low double digits because now villages have electricity third they created a new category Sting which is an energy drink now in most parts of the world especially the US energy drinks have been phenomenal wealth creators because
• 23:00 - 23:30 it's a sticky consumer habit i think Monster Energy and until recently Celsius had also done quite well in the US india may got both gifts in one stock which is the same soda company also won the leading energy drinks company so that's a new category that they grew in now they took distribution to another level which even Radico could do but in small amounts which is Radico was selling premium liquor to Indian diaspora overseas but V beverages actually built a overseas business by acquiring franchises left right and center and parts of the Middle East
• 23:30 - 24:00 parts of Africa and aggressively gaining market share and so if you look among mid-large cap consumer stocks it's been the best one when you look at it five six years ago it was not considered as high quality as your Nestle's uni levers of the world um obviously because you know they do bottling it's more capital inefficient but hey I mean at the end of the day if you showed low double digit volume growth in your core category you create a new category and you expand distribution I mean it's pretty hard to
• 24:00 - 24:30 beat that even if your business is not 100% ROSI because ultimately the ROSI is above cost of capital it's 25% right so I just think like if you can find all of this that's when you've hit sort of the home run within the consumer sector and like we are desperately looking for the next one but we want all of the above and it's hard to find all of the above I think especially with your first example of uh radical especially it's a media dark industry you cannot just go and advertise exactly so once a brand is
• 24:30 - 25:00 created maybe it is even appreciated more by Exactly exactly I think for the audience the learning could There could be some other alcohol companies or other consumer businesses where the holy trifecta gets uh exactly met margin expansion only a possibility category creation and double digit volume growth yeah yeah yeah and ideally penetration penetration that's the most important one people keep creating new toothpaste but now everyone already has a toothpaste so like at best they'll replace it
• 25:00 - 25:30 right exactly full based exactly right interesting push back because I would actually flip and say that infinite Rosi might not necessarily be a good thing correct because if you have infinite rosy high high volume growth then at least for a newcomer in
• 25:30 - 26:00 India to come and attack your category it's easier because they know it doesn't cost you much money that's why if you see the first mode attack didn't really come for wild beverages it has come now but it first went towards the HLS of the world like people tried to start up retail or like the Asian paints of the world where people started a paints brand because it was a higher roy category sold i think a lot of reason why these stocks folks are ignored is because the ro is good just not as good
• 26:00 - 26:30 as what you're expecting to expecting to see in a consumer business but that actually worked to their advantage because people ignored the category because of that and also like we've seen with businesses like page industries or businesses like uh your Asian paints example or even with the likes of Huls of the world a lot of D2C startups have come exactly right i think high roes are a target on your back i mean it's good to have high roses but then you have to hope that your business can withstand a mo attack
• 26:30 - 27:00 i mean we can't on one hand say that the country has matured and become competitive and then say that because I have delivered 10 50% RO for 10 years in a row and created a valuable business that now trades at 70 times earnings no one else is going to come why would someone else not try they know that worst case they'll lose a small amount of money because the RO is so high right very interesting point linked to the Beverages case study is competitive very interesting case
• 27:00 - 27:30 study and consumer volume yeah
• 27:30 - 28:00 yeah again it is like very interesting to see investing correct and and generally consumer businesses staples they're defensive here are the numbers last 5 years we have seen COVID 0% interest rates 5% interest rates negative oil $100 oil war in Ukraine now trade war very volatile 5 years how have
• 28:00 - 28:30 these defensive businesses done we can pull up examples of businesses that are perceived to be less defensive whom actually have given better shareholder returns so even consumer it's not easy it's very it has that appeal because it's something you can touch and feel and it's tangible but that doesn't mean it's very easy to run it's easy to make money now consumers say connected right because we are crossing that perap income clothing shelter and food now
• 28:30 - 29:00 comes the necessities of life so things like music Yeah yeah or things like traveling for examp
• 29:00 - 29:30 so how do you think about some of these trends of changing tastes and habit and how do these end playing out with consumer businesses yeah yeah so like actually great you picked up airlines so we actually invested in Indigo you know at high west during co like at the co bottom today Indigo is considered this high quality company I can assure you if
• 29:30 - 30:00 you called someone in 2020 and you pitched them Indigo even if they were your best friend the phone would have gotten cut and the narrative today is that it's a proxy to India's travel aspirations the narrative then was it's an airline warren Buffett sold his airlines don't pitch me an airline during don't you know no one's going to travel again whenever I feel like an aerol I'll dial this number please stop me exactly exactly exactly so actually Indigo is a great
• 30:00 - 30:30 example in sort of a industry that is not as easy to make money not as sexy in general but is capable of generating tremendous shareholder wealth um so what got us interested in Indigo so this was a crazy stat then it's a little misleading because it doesn't do full justice to the soio economic disparity in India but it's still a jaw-dropping stat in 2020 more people took the train or I mean pre-COVID more people took the
• 30:30 - 31:00 trains every two weeks than flew in India every year every two weeks so you know that there is enough of a penetration story just if you can get the affordability thing to work out because every 2 weeks there's that much demand so that's good that means that people travel enough and there's room to at least grow volumes then the second thing is okay but maybe there are too many planes and you know these planes don't make enough money and then it got interesting so we looked at Indigo and the entire fleet size of the Indian sort
• 31:00 - 31:30 of all the airline companies put together forget US and China it's I don't think it's worth comparing to US and China china because they have high speeded rail and US because it's literally like 30 times each other in India but we compare the fleet size to Russia Indonesia Brazil india actually had a lower fleet size in aggregate terms we like oh interesting supply is actually seems very rational and this is before before co so the supply fell so that I thought was an interesting setup which is okay your demand in travel is
• 31:30 - 32:00 this high clearly someone's not traveling from a train because they enjoy sitting in the train for 3 days it's just affordability and maybe that will get solved maybe it won't but maybe instead of every 2 weeks may there are more train passengers than a plane for the whole year it could be every four weeks or 5 weeks and that is tremendous volume growth and that's still a huge disparity at the end so that you know the exit pay there's growth and then you know that the fleet size is rational so okay that that is a favorable demand construct if we believe people
• 32:00 - 32:30 fly this is a sector that could work in theory but what's important is now let's assess the supply side supply side is where it got even more interesting the net cash balance that Indigo had in the co bottom was more than the net worth of its entire competitor base put together so basically if Indigo had let's say 7 or 8,000 crores of net cash if you added
• 32:30 - 33:00 up the net worth of jet spice jet go and whatever other airlines were uh functioning then are still functioning now indigo's net cash was more than everyone's net worth put together so you knew that for the industry for people in India to be able to fly Indigo has to survive if it does not survive no one else can even think of survival right but obviously that's a theoretical construct maybe the pandemic rages on for three years so then we checked okay
• 33:00 - 33:30 let's assume there's zero revenue the next two years and I know that my friends don't want to talk to me if I pitch Indigo so maybe it's hard my friends like talking to me maybe it's hard for people to Indigo to raise money in the stock so if they don't get any revenue how long can they survive and just based on the unrestricted cash they had they could meet their expenses i think for 18 months with zero literally zero revenue we knew that that's how good their supply side positioning was and so like okay we like the demand we
• 33:30 - 34:00 like the supply there's been a massive dislocation but I mean it is still the airline business like what is the why why should Indigo be so special why should they survive what have they done right historically we need to understand that and so we went and studied the founders background um Rahul Bhya actually is a software entrepreneur that's how he funded Indigo he started a travel content distribution business called ITQ um which actually when I was at Capital Group we invested in Rakkesh
• 34:00 - 34:30 Gangal was a CEO of a US-based airlines rakkesh Gangal could get the supply together and he had this unique insight that the way lowcost carriers worked in the US and the way they won against high cost carriers is that they standardized the fleet one fleet one offering if you have one fleet maintenance downtime costs are controlled turnaround time is faster and obviously you get a better price because you're buying only one jet the second thing second insight that he brought to India was this concept of
• 34:30 - 35:00 sale and lease back i buy a plane I buy planes in bulk 300 planes from Airbus or whatever I sell them immediately and I lease them back right and I buy planes obviously at a discount because I'm buying 300 i don't sell 300 back i'll sell 30 year 30 year 30 year 30 year i make money on each transaction i don't dividend out that cash i leave the cash on the balance sheet because I've left the cash on the balance sheet what happens to my counterparty risk it falls it falls with the lessers the people who
• 35:00 - 35:30 are lending uh the plane to me so I pay lower interest my maintenance rates are lower because I have the best balance sheet in the industry and I'm buying 300 planes at once right and so my two biggest costs that you can control I mean outside of payroll I've actually minimized so they did that they started with one plane and in a disciplined fashion by doing sale lease back sale lease back they built up a large fleet but then they went one step beyond and this is what really blew our mind like the level of customization they did they
• 35:30 - 36:00 custom made seats for their planes their seats are legendary in how thin they are i hope you don't have to sit on a flight that's turbulent but they're really light and they're really light and there were stipulations on you know hot food what type of food you can serve there were restrictions so they really fought for every gram in that plane they brought the fuel cost down and they ensured that this is the lowest cost offering that the country seen but importantly unlike peers in the west they actually have two advantages which
• 36:00 - 36:30 I think is underappreciated so if you look in the US actually full service carriers won in the end why because they tried to match them on cost structure but they had access to the best airports like lowc cost carriers like Southwest would not go to JFK in New York it will go to some Newark airport or something else and that's not ultimately where the business travelers want to fly indigo took that but also made sure they didn't have that they took the playbook of low costs but they got the best routes they got the best slots so they even the
• 36:30 - 37:00 business traveler wants to fly Indigo because I mean at some point the seat is uncomfortable but I have to come to the business meeting on time i can't say I'm not there because you know it's Indigo um so they got the best seats and balance sheet if you look at the US planes what did they do when times were good they levered up and they paid out a lot of money as dividends what did Indigo do when times were good nothing it let the cash sit on the books they only did a massive dividend before the IPO so the promoters could take some money off the table and so when they entered CO they are the only ones that
• 37:00 - 37:30 the counterparties were interested in serving so as India's income grew supply didn't grow because not only did supply not have the same balance sheet or discipline supply also if you ask me got unlucky like they had these Boeing engine issues that could have happened to Indigo as well and that hurt supply even more and so what happened like you could have bought India's largest airline I think and we made the investment the stock price was like 750 rupees so maybe it was like a 30,000 cr company and out of that no 35,000 cr
• 37:30 - 38:00 company out of which I think 8 10,000 crores was cash so you were buying India's largest airline and the only solvent one really for $4 billion and you knew that the growth was there growth runway is there because of that railway versus airline fun fact you knew the supply discipline was there because your net worth is can't even match this company's net cash you knew that the DNA was there of keeping costs low and you knew that the balance sheet and the roots they had the best ones so if
• 38:00 - 38:30 humans ever traveled again and at that point it wasn't if this company has to thrive for its competitors to survive and I think that sort of played out like um supply side dominance actually went up right and uh I guess like so market cap followed and obviously today it's like you know like if you told someone then that you were paying 20 25 times earnings for this I don't think you they would have taken you seriously i mean here we are today yeah i think the
• 38:30 - 39:00 interesting point with this escape is such is the attention to detail i think friend of mine we have a running joke right because they don't keep a microwave exactly in the flight yeah and I think probably because the run rate of it is at probably 5 years because world become such he is doing 6
• 39:00 - 39:30 7,000 cr of pat already yeah probably four and a half to five times earnings four five years out yeah that's the type of opportunities also people get when there is a pessimism exactly exactly exactly and these finer details like this is a crazy fun fact by the way so like I remember when I was at Capital Group because we had invested in Raata's software business we met him and you could tell that he was his DNA like he was a frugal guy i mean at that point
• 39:30 - 40:00 Indigo was a large lististered business I'm talking about 2019 2018 or 2017 um he used to still carry a Blackberry like an old Blackberry i don't know which one but like I guess maybe the weight was lower than an iPhone so he didn't feel guilty taking it onto his own aircraft i think that is uh those are the insights which uh usually one gets and I think all these insightes are there in the book also that's the beauty of
• 40:00 - 40:30 researching companies which have already won over last 15 years and you keep getting opportunities in the stock market because of the cycles of pessimism to optimism because it never stays in between correct correct correct i mean and also like you have to respect the fact it's a hard to predict business like if you look at reports from 2019 on Indigo they had overhired 180 pilots they had engine issues they didn't predict demand well and so there were a lot of questions at that point on Indigo's operational abilities and so I mean ultimately think about what a
• 40:30 - 41:00 difficult problem they're solving they have to send so many flights every day all these flights have to be on time they have to hire pilots in excess in advance of demand because it's not as simple a job as maybe food delivery like pilots have to be very well trained they have hundreds of lives in their hands you might overhire and then what if demand doesn't come what if crude shoots up what if crude doesn't shoot up but FX shoots up your lease payments are ultimately in dollars they're not even in rupees so when so many variables are not out of your control it's a difficult
• 41:00 - 41:30 business which makes their execution that much more impressive in my eyes at least now just before going forward in the life of an investor every new financial year represents a new opportunity so as a part of beginning of FI26 what we aim to do in India is to spread financial literacy and complete investor sic membership part one of the membership about entire thing about financial literacy asset allocation mutual fund planning financial plan
• 41:30 - 42:00 second part of the SYC membership we teach you about fundamental analysis fundamental analysis companies in third part of the SYC membership we teach you about intrinsic valuation of different businesses intrinsic value in fourth part of the SYC membership we also teach you different different we also teach you how to screen for businesses and finally we have a sectoral analysis thing different sectors
• 42:00 - 42:30 and as a bonus we have also started insights with different different sectors and different different market pivots webinar for the SIC members all these things are part of one SYC membership and you can use coupon code SOIC FI26 to get an exclusive off which is valid for the next 7 days now coming to the next set of question is that of rate of change yeah right laws of motion and Newton key something at rest stays at rest
• 42:30 - 43:00 something in motion stays in motion but there is also moment when something at rest gets into motion which is a rate of change so some of the examples which I think I remember was there this company which used to be in music licensing yeah that we sort of study then second one probably is a slow rate of change it happened over the last
• 43:00 - 43:30 10 15 years it took entire decade for it to play out is that of the telecom sector yeah yeah yeah so in both case studies because both the businesses are linked to the consumer right right right similarly music is the most frequently consumed form of entertainment yeah favorite movie yeah favorite song that I've heard
• 43:30 - 44:00 almost 25 30 times correct correct correct so how do you analyze this mental model of rate of change with respect to consumer businesses but especially some of the case studies as an Yeah yeah yeah so music is actually a great example because this is a sector that is very close to everyone's hearts
• 44:00 - 44:30 and it's a sector which has been disrupted one way or the other every decade for the last three decades so in the '90s it was big business you would buy like a CD or you would buy cassettes then uh if I remember correctly and you know IP was getting monetized then there was this thing called the internet which came along then you could immediately download things online via a Napster for those of you who are remember this and so you no longer have to pay for content so the music industry which was doing really well suddenly had this massive
• 44:30 - 45:00 revenue shortfall then they got saved by the iPod so now instead of buying a CD you could buy like a track for a dollar but then that content people were still like I'm paying a dollar per song that is not like I can just download it for free why am I doing that it was not enough that the price fell or that you were allowed sache consumption for someone to actually pay for music they needed convenience they needed a product that was so much better or so cheap on a
• 45:00 - 45:30 per stream basis or per song basis that I might as well just pay for the convenience and that was streaming right which is your Spotify Apple Music Prime Music so why is this important why does this link to the labels well the label is not a consumerf facing business the music label just owns the IP so the more you can monetize it the more consumers pay for it the more money you'll make the less consumers are willing to pay for it because they can download everything for free the less money you can make and so if you think about it
• 45:30 - 46:00 Spotify really started once the iPhone became prominent so like the early 2010s and like most consumer movements it starts in a wealthier country so in this case interestingly not even the US Sweden and then the US and then obviously it came to India like by 2018 2019 2020 but still for a small slip of population why is all this relevant until it came along who in India was paying for music you would just go to some store have a CD burnt put it in your car that's your music right and so
• 46:00 - 46:30 the music labels were worth not much pen drive to tech forward pen drive is for tech forward people right right song download exactly exactly um anyway and so music labels were not that interesting and now broader media ecos anyway there aren't dedicated sellside analysts for media right it's not that big a sector you do media then
• 46:30 - 47:00 you do telek maybe you do something else and on top of that media because of the nature of the business model where there's glamour celebrities films there is room for hanky panky there's room for making decisions that maybe are not purely good in terms of capital allocation maybe you did it because you wanted access to some party so the sector in general has not reliably created wealth sometimes you can have a media business that has some political link so like there are different reasons why the sector has not been a reliable
• 47:00 - 47:30 wealth creator now if you top that with the fact that music labels as a business model were not viable no one cared about them so I mean Saigama is obviously today a much bigger company it's more than a billion dollars but um we were looking at this business after co and we did this analysis where it was trading at like some I don't know 2500 crores they had land near Kolkata airport of course they were never going to sell the land but I'm just trying to um highlight how cheap it was that land was worth
• 47:30 - 48:00 like 5 600 crores so you're getting underlying music label for maybe 1,900 crores now just let's take a step back they have largest back catalog in India bigger than T-Series you can argue back catalog is old it's not as recent but India is a film obsessed country and you have the largest back catalog in the country for 1,900 crores that's a pretty low number like that's what $250 million i think at that point Savan and Spotify were worth like a half a billion dollars because they became unicorns but the
• 48:00 - 48:30 underlying catalog basically you were getting at a very low multiple now one push back I get on these top down frameworks although I find them interesting you know you want the absolute EV to be low then you know you could make the big money right but one push back I get is that so what if the absolute EV is low like maybe they don't make money and then why is any value fair but here's where it got interesting Saiama actually made money on its music IP back then it used to trade at like 15 times free cash flow and here's where it got even more interesting they had I think uh 10 to 12 crores of money rupees
• 48:30 - 49:00 that they were losing every year on open some random magazine that the promoter started right right um so effectively you were not even paying up for this business and you knew that the growth was inflecting because people are now finally consuming music i mean it's effectively free on YouTube you just have an ad they still get paid for that and then some people have I mean ad supported streaming services and it's just more convenient than like putting a pen drive how do you update the pen drive for new songs how do you select new songs easily there are so many form factors so we felt that Saiama was at
• 49:00 - 49:30 this place where the revenue could grow but there were two questions one does this company exist like okay if it grows like Warner and UMG they'll come and they'll kill the competition their balance sheet is so big that's where there's a very unique Indian insight at least we thought which is in India music cables play a kind of unique role in the film ecosystem film is a heavily positive working capital business you first produce the film then you make monetize it so you have to put up the money up front and you're obviously not
• 49:30 - 50:00 getting bank funding for this right because it's highly risky endeavor and you're not getting equity capital for this because what equity values in one film right and so how do films get funded back in the day it used to be illicit sources of funding then it later round became you were sort of a successful businessman this was your vanity project you got to hang out with the celebs what was the third source of funding music labels why because if you sold the music rights to the company you could get some cash up front the music labels would help you market how do you market a film it's the music videos
• 50:00 - 50:30 right right with the trailer and so the music labels actually were kind of in a way helping out with the working capital and UMG and Warner don't do film music in India sony does but the others don't and so we felt that okay because of this unique role that music plays in the ecosystem but it's not as artistdriven although that's changing you know there is a reason these guys have to exist and at some point Warner will at UMG they're not they're wellrun companies they may also change their mind and enter but for
• 50:30 - 51:00 that these labels have to be worth something right they have to be worth like a billion dollars there has to be some business case there has to be some underlying pat so by then how does it matter right to us shareholders right so we felt that there was a clear qualitative right to win like there was with Indigo there was a clear reason why these stocks were under owned under represented under understood i don't know if that's a word but anyway you get the point and they were cheap and so here's where it got even more interesting and this I guess ties back in some ways to persistence framework which is fine a business is cheap but a
• 51:00 - 51:30 cheap business because it's financials are hard to understand it's underground underlod how do you know that's not a value trap i mean nine out of 10 times it could be a value trap and so what do we focus on we have always said okay the lead indicators of the business uh have to change financials are lag indicators but the lead indicators need to change and then we're willing to invest because we know that when the lag indicators catch up that's your V rating event so in SAMA what was the lag indicator the IBIDA was all choppy why because the CEO
• 51:30 - 52:00 of the company whom we respect a lot because he's created in a way market cap in this category in India he invested a lot behind car which is a speaker business and ultimately selling speakers it's not it's not a high quality business and if you try and burn money doing that like it's not going to work out for you and because he spent money doing this the P&L was wonky what happened during co people are scared you don't want to spend money on anything that's not making money he stopped the burn what else happened in co film
• 52:00 - 52:30 production stopped and what happens if film production stops how do you acquire new content so on one end your content spend fell off cliff the other hand you lost the appetite to burn money on your speaker business so we knew that the choppy P&L will suddenly look like a massive margin expansion because your cost of IP is fixed correct and so that sort of happened I guess like I guess we bought the stock at about pre-split like maybe 100 rupees or something and it was literally at 15 times free cash flow but
• 52:30 - 53:00 I guess like that's the sort of the work which is like you have to understand these businesses the history what makes them tick what makes the CEO tick the CEO owned 2% of the company he had massive skin in the game he's not related to the going he's a professional CEO very high quality um and then you have to make sure that the lead indicators have turned but they don't reflect in the lag indicators which is why you're not paying up for the stock and so frankly like you need that zone of disillusionment even within a consumer business like there's this notion that I'm buying a new business which is already well established
• 53:00 - 53:30 whether that's an underwear company or paints company what have you and it'll just work out because they will compound at a very high rate for a very long time but that ignores how challenging it is to grow a real business in a country like India which is competitive u where there's an affordability constraint so maybe it's better to play in sort of these zones now coming to the next sector managers large caps safety majority or
• 53:30 - 54:00 banks 36% of index and it is also a dominant part right so what do you think about both the sectors and it sectors nearmations Yeah yeah so it actually and see Ishmo and I talk all the time we
• 54:00 - 54:30 discuss a lot of our conversations are a lot more unfiltered across sectors across stocks and this is one sector that I have been always calling and crying about and asking what has changed compared to precoid to today to deserve the sharp premium versus preco example let's exclude TCS and Infosys two companies that actually trade in line with their pre-COVID P multiples if you look at Tech Mahindra you look at Bipro at LTI Minry you look
• 54:30 - 55:00 at most of these large IT service providers their HCL tech they actually trade at a premium to pre-COVID levels have margins improved compared to pre-COVID levels no has revenue growth visibility improved no it's worsened the only thing that has improved fundamentally and maybe could be an excuse to justify the valuation today is the dividend payout ratio so pre-COVID a stock like Vipro had a 10 to 20% dividend payout ratio it traded at 15p so barely you were getting maybe 1 one
• 55:00 - 55:30 and a half% dividend yield today the stock has almost 100% dividend payout ratio trades at forward let's say 20p so maybe you have a 3 4 5% dividend yield so one could make the fundamental case if you are growing earnings 6 7% a year and you're generating 4% in a pre-tax dividend yield so maybe 3 2.8% 28% post tax dividend yield that's sort of a fair multiple in line with the market that's one argument you could
• 55:30 - 56:00 make but I have not understood the appeal I mean we are now 2 years into supposedly the budgets coming back for some of these IT companies first it was an FY25 story H1 then it became a FI25 H2 story now it is a back half of FI26 story already so now for 2 years they've not seen the growth but we have se not really seen the D-rating that comes with this lack of growth and lack of
• 56:00 - 56:30 visibility right with the exception of the one or two mega caps they're still trading at a significant premium and we're not talking about best-in-class execution we're talking about techmahindra Vipro companies which have historically been lagard in terms of demonstrating revenue growth in terms of demonstrating margins the other thing um is that this doesn't even take into account the impact that AI can have on their business model now AI can lead to outcomes based pricing like depending on how well you use AI it can shorten the
• 56:30 - 57:00 time frame to do tasks when it shortens the time frame to do tasks there are two downstream impacts on IT companies the first one is you can't bill the same amount as you were billing before because your client recognizes that it maybe took you a lot less time to do the same work so they will ask for a rebate and this might not happen in most business models but it definitely happens in IT if you look over 10 years IT service margins have I think broadly stayed the same or actually declined in
• 57:00 - 57:30 some cases the second thing is maybe it leads to margin expansion but again this is a competitive business no one has really expanded margins over the last 5 10 years i mean sure they might have expanded in very niche categories like ER and meme whether it's KPIT or TATAX but the broader IT service majors have not really expanded margins so what I'm unable to understand is you're paying a premium for pre-COVID growth you don't know when this growth will come your margins are not going to
• 57:30 - 58:00 go up and your payout ratio is already maxed out so what is the I'm not able to quite figure out like what is the appeal there are one or IT companies are growing fast like kof through its acquisition of signity its underlying sort of uh deal wins persistent is obviously operating in a league of its own but there are also like these stocks that showed phenomenal growth but have tail risk like let's take auto companies auto companies who are the main clients auto companies in Europe what is
• 58:00 - 58:30 the biggest risk of auto companies in Europe even before Mr from Chinese competition right and now they have a tariff so in that environment when your customers struggling and you're printing 30% margins and you have to hope that they don't wake up and look at your annual report exactly right so I understand that the sector is perceived to be defensive because it has behaved defensively in the past like in
• 58:30 - 59:00 2008 2009 the growth rate fell from it fell but it fell from let's say 30 to maybe in the 10s or whatever but it still grew today it's not growing 10% and so I understand that these companies do well in an environment in which FX weakens right but what if you have a regime change and the FX strengthens it's happened in India's history in the past so a supposedly defensive business model could sort of not be that defensive for your portfolio so I mean
• 59:00 - 59:30 if you look at persistence capital we've had basically zero IT exposure since inception i don't even think if I look at what's in the pipeline it's anywhere on the horizon i mean never say never things could change but it's very hard to justify sort of why you would pay 20 23 times earnings for at best 10% IRRa unless the growth in the US in flex but if the growth in the US in flex and there is this boom maybe there are stocks that instead of growing 10 12% grow 20 25% so even in that argument why
• 59:30 - 60:00 would you own it you could own something else because PEG ratio a lot of these companies are already at three or four times PEG yeah yeah absolutely absolutely and I understand that there are large caps and it's fashionable to say large caps are perhaps cheaper in value because they have not run as much as small caps but I mean that is sort of the top down you've looked at the charts and arrived at the conclusion but ultimately for a company to grow stock price to work you need earnings growth
• 60:00 - 60:30 you need rerating and you need additional liquidity right you need all three or some combination of the three and what could be the like because the sector is also going through a period of disruption so what do you think AI adds to it subtracts from it or how are you thinking about it because today I think Yeah and I think it's evolving quickly so it depends like if you're a BO maybe AI chat bots are going to be much more effective at entrylevel tasks
• 60:30 - 61:00 than they were before so if you have a BO like for like first source or Zensar it depends on whether your mix comes from complicated problems or for simple problems if you look in the US BPOS's like Taskas or Telus they've derated massively they trade at 8 10 times earnings so the BPO mix is important that the second mix that matters is where is your revenue in the US or where have you where is it coming from if it's coming from auto companies good luck I mean you can't be that defensive if your
• 61:00 - 61:30 end client is not that defensive so that's one thing the third thing is we don't know in this sort of fog of war as AI is getting adapted whether adopted sorry whether it's a good net negative or net positive near-term let alone long-term long-term I have no idea but even near-term I have no idea it could be deflationary for revenue because things get done faster client wants that cost saving to be passed on to them and if you have margin expansion perhaps you retain it perhaps you don't because you know that your stock price works on revenue growth like I when I see
• 61:30 - 62:00 companies uh IT services businesses whose stocks pop why do they pop oh the constant currency growth rate was 4 to 6% now it is 5 to 7% so if you know that you are going to win a contract because you can undercut just a little bit and you can get that pop you might be tempted for to do that right um but what I have fundamentally not understood is I mean we aren't debating whether the growth rate is 5% or 15% we're debating whether the growth rate is 4% or
• 62:00 - 62:30 8% and for that 100 200 300 basis points we are paying like 20 23 times earnings i mean Nvidia trades at 19 times forward earnings and IT service businesses that are large cap they are driven by FIFOs fis have a global cost of capital like in some cases small caps FIF flows don't matter as much because they're not the incremental buyer anyway um and a domestic capital has fewer avenues to invest in so they might be a little more price insensitive visa v some of these
• 62:30 - 63:00 fi so there's even that flows argument right like if you're tra if Vipro is trading at a premium to Nvidia maybe a DI will look at it because it's the safety part of the portfolio but this is a large company you need the FIS to buy and what is the case for them to buy google's at 15 times forward earnings nvidia's at 19 times right right and these are companies who are actually into innovation and they're growing faster yeah yeah they're just growing faster also that is quite an interesting take because see this sector I think pros the
• 63:00 - 63:30 economics are really good yeah you'll never see a lossing it come right but cons even though the economics are good but where does the growth come from at this point point of time cuz they're so well penetrated already in the world yeah yeah that's the pros and cons balancing act I think that one has to keep thinking about and I mean net there's another thing which is that maybe companies don't want to outsource as much as they used to like I'll give an example like incrementally what was the case historically if you were like
• 63:30 - 64:00 an airline or a bank in the US you struggle to hire tech talent you would want someone from India to do it for you if you're like Twilio or if you're Google look at their campuses in India some of their largest incremental campuses are coming in India if you look at real estate companies and you talk about their office leasing activity it's pretty robust where is their office leasing activity coming from it's not coming from IT services it's coming from GCC's global captive centers so if I'm twillio in the US I can outsource my business to TCS but there are value
• 64:00 - 64:30 there's value not outsourcing things I have greater control on what I can make my team do maybe I'll just hire 2,000 people in Hyderabad myself I have the balance sheet to support it and unlike a legacy client I'm a tech company I understand how to hire retain grow engineers right so there's that headwind also because I would be very scared head for the country if the proliferation of services stops or slows down what's really interesting in Feb feb export data service exports have again grown I
• 64:30 - 65:00 think mid to high teens dollar terms manufacturing has lagged but if services are growing that fast and IT services is struggling with growth where is that growth coming from it's what the real estate companies are saying it's GCC's right and actually I think there's a data also from GCC's key the employment uh growth rates from GCC's has been at a 19% gagger yeah over the last four to 5 years which is probably the fastest growing sector when it comes to hiring exactly and there maybe AI is a good
• 65:00 - 65:30 thing because I was listening to this podcast by Satan Adella recently the CEO of Microsoft um and he said something interesting he was asked the question will AI replace all jobs i said well then you have to ask the question that if someone makes a mistake in the job if AI makes a mistake in some task can it be sued can it be taken to court if you're unwilling to change that legal construct there has to be a human signing off at the end and so maybe before we get to the stage where jobs are replaced either we improve the
• 65:30 - 66:00 productivity of workers in the west or AI makes workers in the east in India super productive in which case the case for GCC is just dramatically improved i have no idea but I'm saying in this environment why bother with IT services they're in a situation where I think what four as before the March rally four and five stocks were down 20% or more so like that one in two stocks I I'm talking about companies with the market cap not a thousand one in two stocks have drawn down 40% or more
• 66:00 - 66:30 surely at that point there's something easier to do right right I think now because it is one part of the large cap index now the second part of the large cap index is banking sure and uh we have seen that who's and of the investing world it's a consensus contra let me put it that way yeah that's interesting that's An interesting take because every interview watch banking consensus because everyone thinks
• 66:30 - 67:00 banks comfort growth rates we don't know because pressure but what is your take on the banking sector and what do you think how is this sector positioned as of now first of all I take objection with the fact like there's a difference between valuation and value low valuation doesn't mean good value and high valuation doesn't mean bad value like
• 67:00 - 67:30 let me give an example if I'm 15 times earnings and I'm growing earnings 2% a year and if I'm 25 times earnings and I'm growing 20% a year what is good value and what is bad value the 25 times earning stock in my opinion is the more desirable stock to own but it's expensive and we were just told that P multiples matter that's why you have to look at large caps so let's talk about that in the context of banking so there are a few popular cases for banking i'll just try and attack them one by one the
• 67:30 - 68:00 first one is oh look at these banking stocks they have derated dramatically in the last 1 3 5 10 years and the classic examples I keep hearing are HDFC Bank Otak Bank what is worth asking is how has the thing how things on the ground also changed from 10 years ago so first let's look at how that has happened for these two banks 10 years ago how many banks did 15% ROE i'm talking about Nifty50 banks two banks HDFC and KOT today how many Nifty50 banks do 15% ROI
• 68:00 - 68:30 until the innocent controversy everyone sdfc Kotak ICICI Access SBI Bob Indian Bank I think Canada Bank all the large banks do 15% arguing what is the competitive differentiation in terms of capital efficiency there is none now you can argue ICIC bank does 17 this guy does 15 i get it so you obviously deserve some premium for every extra percentage point of RO but I think 10 years ago no one even did RO above cost
• 68:30 - 69:00 of capital so now if you have to buy banks in India you're an FII India for you is a foreign emerging market you have one bank which has grown 20% for as long as you can remember and it has a good ROE and there is Kotak and he's smaller and he's growing then you have five other banks where there's no RO but yeah maybe in 2 years it will turn what are you going to buy you're going to buy these two banks second thing growth rates how fast was HDSC bank growing 10 years ago i think
• 69:00 - 69:30 25% a year right and 20% a year was the meme HDFC 20% meme 20% exactly exactly Kotak was growing also that fast if not faster because he was small right how fast are they growing today kak is growing one and a half times system so still faster how fast is HDFC bank growing today I think in the last quarter he grew 1% sequentially why is he growing slower two reasons he's become too big he's 15% of system I mean this is the law of
• 69:30 - 70:00 large numbers if you compounded 20% for forever you can become the system at the end somewhat that has happened the other thing is RBI RBI said that credit to deposit ratio has to be 80 and you have merged with HDFC limited you have to replace the deposits and you have to grow deposits in excess of loans so what's the solution either you grow deposits 30% a year but you're already pretty big so you can't do that or you cut your growth rate he's done both okay so now your growth rate is gone your differentiation versus everyone else is gone 10 years ago you could have made a penetration story we discussed this in
• 70:00 - 70:30 consumer you were one and a half 2% of system credit what are you today 15% of system credit so can you make a penetration story maybe but it's not as compelling as it was the third which is the competition which doesn't even meet the eye which is 10 years ago how many conglomeate NBFCs had scaled even Baj Finance have scaled yeah yeah yeah chola was a small cap correct how many conglomeate NBFCs today have loan books of 50,000 crores or more it's a pretty high bar but I'll list it out anyway
• 70:30 - 71:00 bajach Adita Bulla Capital Chola Punala wants to get there in three four years i think Jio has pretty big plans so the competition isn't just from PSUs that are wellrun it's also from these conglomerate NBFCs that didn't exist so your growth is not as differentiated it was your competition is sharper regulators not in your favor and you have like 10 companies that are going after your blood and then let's add more leadership transition right you had Mr purya the
• 71:00 - 71:30 helm for 25 years then you had a leadership transition HDFC we're going through the same thing with Kotak there's been churn I think the federal bank has come from Kotak so it's not even like the leadership is stable so if you if I didn't tell you the name of the company and I just gave you these five stats and I said do you think D rating is warranted it would be hard to argue that it's not warranted so sometimes I feel like when these comments are made that oh large caps because the P multiple is lower than it's 19 times
• 71:30 - 72:00 that's the long-term average that is a very sort of top- down view which doesn't take into account the bottoms up reality I mean P multiples are an output but the business outcomes that they are driven by is the input right you have to also look at that so for us at least we have been saying yes there is value in financials but the part of the market that actually persistence capital owns and by the way none of this is a disclosure investment recommendation we'll change our mind anytime we could sell the stock this is just for illustrative purposes is what we like
• 72:00 - 72:30 about banks is the fact that they have low cost of funds so they have the ability to pick boggers what we dislike about banks is practically everything else we don't like the fact that they have to raise liabilities it's really hard to raise liabilities in a country like India in a liquidity constrained environment so what is the closest proxy to banks conglomerate owned NDFC's AB Capital AAA rated Baj AAA rated uh Chola I think it is on the way to getting AAA rated i'm pretty sure it'll get there given their track record so what advantage do they have they don't have a
• 72:30 - 73:00 credit deposit ratio that they even care about so they can grow faster and they have over the last one year b they don't actually have to do the hard job of raising deposits they actually just raise money from the banks and they can make the banks with fight with each other because they're all AAA rated and they have great track records so that's the second thing in their favor the third thing is they don't have CR SLR ratios because they're not a bank they're an NBFC so their ROIs are structurally higher so you have the ability to pick borrowers as well as a
• 73:00 - 73:30 bank or close to as well as a bank but you don't have the headache of raising liabilities you don't have the headache of managing a CD ratio you don't have the headache of dealing with a regulator that's obviously a lot more sensitive with banks cuz banks are systemically important institutions so I guess like that is the part of the value chain that we find interesting because it doesn't have asset side issues that a subprime lender like micr finance or something could have doesn't have the liability side issues that a bank does and I guess
• 73:30 - 74:00 like yeah people point I guess one push back that you could logically make after hearing this is well you say all this but banks have worked but you know what's worked better than banks this year Baj Finance Chola LTF AB Capital all four stocks I think actually up this year no exceptions and Baj and Chola obviously the best performing lenders here today and I think of just to add to the point a wellrun large cap bank at best will have a 157 17% ROE yeah at best and in the very long run your
• 74:00 - 74:30 returns of the stock that you hold should converge with the ROE of that particular invest yeah yeah so that is the type of expectation should ideally one should have if they're able to grow yeah yeah exactly if they're able to grow but they're not even able to grow in fact here's the crazy thing they're considered expensive but uh I think we did this analysis at the start of the there were only two stocks that we could find with a market cap north of 1 lakh cr which are not cyclical whose PG was under one cha and maj bank everything is cheap but
• 74:30 - 75:00 actually the PG might be like three times right so that's the interesting part I think a lot of unintended consequences after this merger of HDFC happened it also led to deposit wars right and they're not and they're not ending And the other thing that's happened is there's also more of an equity culture in India and by the way this is what you get if you have high inflation if you have high inflation your FD doesn't make you any money so if the the complaint from the banking ecosystem is that we are not able to
• 75:00 - 75:30 raise deposits that to me is I don't know how to solve i mean that's a tough spot to be in but it's pretty rational on the part of the depositor to not park deposits because they're not making anything after inflation so who is capturing the benefit of this zero inflation return it's the banks and if you believe after there has been enhanced investor awareness why would people sign up for no returns after inflation right right 6 to 9
• 75:30 - 76:00 months that is true but every but they could have put it in fixed and come out correct just kidding so uh I think linked to this coming to the last part of the podcast is that we've heard this entire debate so uh about small caps being obscenely expensive midcaps being very expensive and large caps being reasonable so the question arises should we as if someone is a basically bottoms of stock picker should they be focusing on caps that is the first question and
• 76:00 - 76:30 secondly the should one if one is doing active investing actually be believe in this theoretical constructs that is B because it also decides the flows and C just I think is that key whether you actually believe in this narrative actually large cap banking it oil and gas names so they might be cheaper versus some of the other peers and grow and small cap yeah so I there are very
• 76:30 - 77:00 few things that I feel strongly about this is an issue I somewhat feel strongly about i think it's irresponsible to say that one sector or one part of the market you know should be sold whatever lock stock and barrel and everything else is a buy uh because I rarely think things are this black and white um and so maybe the best way to illustrate this is with the data uh because the data is not my opinion these are the facts so let's dive in um when you look at different indexes they don't
• 77:00 - 77:30 adjust for what is the PAT contribution and where is it coming from simplistically if I take an index and it only has two consumer stocks another index has two banking stocks the banking stock index will be cheaper but does that mean it's fairly valued if it's a 25 times earnings and this is a 35 times earnings no it might still be overvalued so looking at the P multiples without looking at what is the underlying business model that is driving the PAT through which you're coming at the P multiples is I think
• 77:30 - 78:00 irresponsible so first things first in large cap land banks and PSUs I think make up like 40 45% of the PAT for NFT50 index right the same percentage of total PAT coming from these two sectors is 8 9% in small cap index so obviously if your PAT is coming from stateowned entities levered business models should you get a discount yes now the second thing is okay maybe the PAT contribution is 40 but me as the person who's
• 78:00 - 78:30 creating the index I may give that a lower weight to adjust for that discrepancy but here's where it gets more interesting in Nifty50 again banks are 35% you add PSU it might get to 40 45% that same number in small cap land is 14% small cap lenders are way cheaper than large cap lenders so if I made the weights the same my nifty small cap P multiple collapses but I have not made them the same i have not adjusted for the fact what is driving it's like comparing multiples between NASDAQ and
• 78:30 - 79:00 the Chinese index one might have a ship building company and a telco one will have Nvidia and Google you'll just look at one index and say that oh this is cheaper and this is more expensive i mean that's not how life works you have to be a little more bottoms up uh than that that's the second thing so we actually this analysis and we tweeted about it which is hey what if I excluded financials and PSUs what's the median P multiple then because that is actually a clean representation here's where the data got really stuck large caps 40
• 79:00 - 79:30 midcap 150 50 times earning i'm talking about P multiple median X financials X whatever PSUs yes and for small caps the number is 28p is 28p expensive yeah but is it's still cheaper than 40 times earnings and that in of itself is a jaw-dropping data point now let's get into further nuance we keep hearing that large caps are cheap let's look at the
• 79:30 - 80:00 bottoms up growth story of large caps compared to before it services businesses struggling to show double digit earnings growth they need FX to depreciate for that to happen large cap lenders struggling to show double digit earnings growth asian planes struggling to show double digit volume growth fmcg staples struggling to show low singledigit volume growth maxed out margins auto EMS everyone's operating at high margins we are looking at the volume data every month good luck for
• 80:00 - 80:30 the earning season and we aren't even talking about right what else is left we're left with Telos when did BSNL add subscribers for the first time in the last year why because price hikes were taken by Reliance and Etle they're operating at high free cash flow margins now they've gone through a capex cycle they've killed competition they've won is they've won the business right but now they're in the harvesting cycle can they keep showing elevated earnings growth no yes you will have your Oh now let's come to farmer a lot of farmer pat in the last year was given by Revly
• 80:30 - 81:00 revment won't be there next year so there goes the earnings growth visibility l&d is subject to India's capex cycle india's capex cycle can get hurt if there's populist schemes announced by elections now does this mean there's no growth in large cap no there are companies that are executing really well mindra is doing really well in um growing its SUV business zumato i mean we can come to it later and I don't know what they'll do again this quarter but in general they've shown good growth same with trend same with Apollo now you can argue that okay there are these three four large caps that are showing
• 81:00 - 81:30 growth look at their multiples where is the value right and because even the ones which are showing growth are at some 100 200 exactly it's like doesn't make sense now one push back I could get is tanisk but what is tanish prone to lab grown diamonds right whose margins get hurt the most if lab grown diamonds become popular which they are tanish so okay we have said that large cap stocks are cheap empirically we've shown that doesn't exist adjust for what sectors actually drive the pat what weight you gave those sectors what is the P
• 81:30 - 82:00 multiple if you exclude the sectors and now I just went bottoms up and said that okay like I have just covered 80% of the index show me where the growth is correct like and then the last point that was made is oh hold on to your large caps because when FI has come they will come back that is factually incorrect if you look at FI data their ownership in small caps has gone up in the last one year it's fallen in large caps because contrary to popular belief people don't come in India to sit in
• 82:00 - 82:30 defensives for fiis India in any form is not defensive if they want to buy defensive they will buy Coca-Cola in the US they're not going to come to India to buy TCS because it is defensive if they're coming to India they want growth and the growth is not there in large cap so therefore they're going to small caps um and so we've always said that only in India do people care about small cap midcap large cap as a reason for why stocks need to trade at a discount or a
• 82:30 - 83:00 premium if I look in the US there are small cap companies data dog Doximity so many of them they all trade at a premium to uh Nvidia and Google and Apple i've never heard anyone tell there that oh but this is a small cap therefore we should give it a discount u this is not to say small caps can't correct it's possible and it has happened but from a business analyst perspective I'm not able to make sense of this argument and
• 83:00 - 83:30 so we've always maintained this position that look we think that if the market has gone down this much there has to be enough value there has to be something to do but if you still can't find enough value maybe the problem is you're managing too much money like just don't take a cash call like let the client put the cash maybe help out HDFC with the deposits or put money in fixed income uh but if after such a violent draw down you still believe that there is no value to be had maybe the case is that it's
• 83:30 - 84:00 too big a fund that is also a problem that happens with law of large numbers and I think the argument that was made was actually beautifully earnings expect volume growth low single digit right so multiples might fall terminal
• 84:00 - 84:30 value already 10 15 that is also an issue that arises insurance again beyond a point 20 25%
• 84:30 - 85:00 growth that is the genuine issue that arises right maybe only cement space is left cyclical earnings recovery but volume growth 5% growth sector exactly that's a conundrum that active investors to active investing yeah that's the problem that arises i mean this is one of the few rare instances where being upscale might
• 85:00 - 85:30 be an advantage you don't need the market to show earnings growth you need 25 stocks that is a far easier problem I would say than trying to find growth at scale how do you even do it and I think that's the beauty of people who are also doing individual investing correct you can get faster earnings growth you don't need to stick to this construct large cap large cap right just for example I think I still
• 85:30 - 86:00 remember 18ap I love to take this example is that it used to be at some I've seen it once at 2800 market cap today it's 41,000 cr market right 12 months grow but since then I think business
• 86:00 - 86:30 volume wise quart they've reported a volume of almost 8 lakh 40,000 ton for the quarter per the quarter yeah so volumes have sort of quadrupled right and pat and I everything has gone up by more than three four times working capital employ the return on travel employed improve everything went through the roof there so that is where the real delta happened so APL even at that time was a large cap
• 86:30 - 87:00 in a small industry absolutely right it's like the flavors and fragrances thing right correct correct like SHK and PIV are small caps but they're actually behemoths in their sector so are they small caps are they large caps i don't know and the other thing is like I think people also like have this bias towards large caps in times of high volatility because the single day moves are not sharp correct but what that hides you from is the draw downs over an elongated period of time what is the peak to draw
• 87:00 - 87:30 down for Asian banks what is the peak to draw draw down for Avenue what is the peak to draw down for Infosys correct it's all north of 20 30% it's just that it didn't happen in Feb and Jan it happened over 6 to 12 months it's like a boiling frog syndrome exactly exactly but I think if you're an individual stock picker that is the beauty of this market absolutely i think being subscale in any format like right now is the because even if
• 87:30 - 88:00 you look at from a first principles basis like there's this notion that index investing works but really where has it worked it has worked in S&P 500 NASDAQ and India it's not really worked in most of the markets like which market can you point to and why has it worked in these markets it's not because of some rocket science reason it's because these companies showed earnings growth with good RO they were naturally part of the index if you put the if you put coal mining companies telos banks stateowned banks in the index then how can ETF
• 88:00 - 88:30 investing work or index investing work and so the problem I have with large caps again now one more first principles analysis which is what are the six drivers for earnings growth that a company has taxes financial deleveraging capacity utilization margin expansion revenue growth these are the five levers there's nothing else that you have to show earnings growth correct right okay tax cut are you getting in India no you've already gotten it financial deleveraging are you getting nose debt to equity ratio is 500 debt to equity ratio is the
• 88:30 - 89:00 lowest since the index got invented in fact same fund managers are saying we should invest in large caps are saying well if there's been so much QIP in small cap presumably the debt has also been repaid right so and also corporate balance sheets like SIB banks like south Indian bank which are corporate banks are showing negative slippages obviously there's no deleveraging then capacity utilization so capacity utilization we have been waiting for a private capex cycle in India for last 10 years still hasn't occurred what does that mean if the revenue is still grown that means capacity is reasonably well utilized at
• 89:00 - 89:30 this point so your DNA is not going to grow that much slower in sales now it comes to margins margins we've already highlighted in it there are no margins expansion because of the nature of the sector in auto we're looking at slowing demand with tariffs in Telos they're looking at BSL like gaining subscribers which means you have limits to how much price hikes you can take in FMCG you have sort of elevated margins with low volume growth if you want to reacelerate volume growth you have to cut margin or you have to do something on that front um what else is left and in banks you have peak ROIs because everyone's at 15% RO there's no delta and roe right now
• 89:30 - 90:00 between HDFC and SBI so clearly their margins cannot go up so I have just eliminated four levers what is the last lever that's left which is revenue growth which is why we started off the conversation by saying okay if you're saying that they're cheap hopefully the PEG ratio is reasonable and if the PEG ratio is reasonable because the earnings growth is there but the earnings growth has to come from topline growth and where is the topline growth i mean how many companies in Nifty50 are growing revenue 15% you effectively rate of change large caps positive yeah
• 90:00 - 90:30 banks IT sector already coming off a high base it is led by rev limit FMCG disruption rate of change but yeah exactly right we're just anchoring to the P multiples of years gone by now I think uh coming to the last two questions and uh the question world market may
• 90:30 - 91:00 what is your view on different geographies because you also invest internationally especially US and Chinese and European markets and also uh the last question is because a lot of youngsters are also watching this is that any young investor who wants to get into investing how do they keep themselves updated tools podcast what are the habits of an active investor which can really help basically young investors to investing up yeah yeah yeah sure so
• 91:00 - 91:30 just very quickly first on global markets I mean it's a super interesting year i think if you had started this year and told someone okay I'm not very positive on mag 7 but I think China tech is going to work you would have been sort of not taken seriously yet here we are and I think what's basically happening is as an equity investor you kind of have to pay a little more attention to macro than you used to because countries are using
• 91:30 - 92:00 policy as a weapon for against their own companies and that really matters like that only mattered historically in China where business model could be made illegal overnight but what is the Chinese government saying this year that we need to realign our economy to be more consumption oriented therefore we need to do stimulus we need to prop up local growth we need to get tourism in and we need to um de-risk from the US make our own chips make our own cars make our own robots make our own drones
• 92:00 - 92:30 and it's interesting phones they have dominant market share drones have 99.4% market share cars they're gaining market share and in robots unitary which is their robot is much cheaper than Buffton Dynamics which is owned by Hundai but American company um and the Chinese economy seems to be doing a lot of things that are conducive for shareholder returns which is stimulate ease low flatting P multiples under road and so surprise surprise it's one of the
• 92:30 - 93:00 best performing markets if not the best performing market this year pockets of Europe are doing well and I always assumed that an unintended consequence of Ukraine Russia is that Europe would be industrialized even faster which would make the economies more challenged what I did not bargain for was an American president that is so hellbent on making the world multipolar that he's managed to convince Europeans that they need to also re-industrialize and so if you look at stocks like Ryan Metal um or other
• 93:00 - 93:30 businesses that are listed there obviously not as close to every single industrial stock in Europe they've had quite a run this year counterintuitively again because of policy changes made in the US and now if you look at policy changes in the US it's not all great like you have several challenges which is let's take the Mac 7 netflix has run out of that penetration volume growth story nvidia makes 90% growth margin on some
• 93:30 - 94:00 of its chips so obviously everyone in the world wants a part of that pie and the US doesn't want Nvidia to export to China so they have that regulatory overhang and then you have some commentary from Microsoft that maybe AI we're overbuilding and that is enough to take the wings off the multiple people are worried about Google and they're worried about Google because they think Chad GPT can take some of the searches away and so if you look at Google it trades at 15 times forward earning Nvidia is now 19 apple's actually still the most expensive because no one denies
• 94:00 - 94:30 that you'll still need a smartphone even in the world of app it's still in the medium term and so the stocks that have held up better are Amazon which is a net beneficiary of more AI models but even that's now been hit because if there's tariffs and the US consumer hurts who gets hurt with it amazon if there is indeed $1 trillion of excess spending by the government that gets cut who gets hurt the US consumer amazon us is after 60% consumption economy so if you look at Max 7 what has held up it's meta
• 94:30 - 95:00 because it's relatively immune to all these trends although now if the US economy falls if Meta and Google are like $2 trillion of combined market cap they are the ad market so now the ad market is also more cyclical because they are the market there's no penetration story away from um cable network or paper print so even those stocks are hot so actually if you look at mag 7 it's a pretty challenged outlook and then downstream you have small caps that are trading at a premium but really they've still drawn down a lot year to date and so when the US is a
• 95:00 - 95:30 big market of 4,000 listed companies there will always be stocks that do well but what makes the index work is Max 7 and that specific set of companies and we haven't even spoken about the impact that Apple will have if they're not allowed to sell phones into China and we're not speaking about the impact that PDD Pindoo which is a Chinese e-commerce company with global ambitions will have on Amazon if they decide to enter that market more aggressively than they're
• 95:30 - 96:00 already doing and so that pocket of the market is challenged and as is like most things in life if something is very good for very long it can't stay that good forever like Max 7 is in trouble not saying that none of this will rebound but the limited point I'd want to make is that a lot of this rests on what happens in the White House because the White House has two conflicting goals they want to bring the deficit down you cannot have a recession and bring the deficit down but you want to enact tariffs so if you enact tariffs cut
• 96:00 - 96:30 spending and cause a recession your deficit won't collapse so you can cut spending but you can't blow up inflation because then your cost your debt funding your risk-free rate will not fall so there are these three four conflicting goals that they're trying to micromanage and put it together and that's hard and I'll repeat the goals you want to cut spending that's spending out of the system right you want to raise tariffs which in the near term inflationary is
• 96:30 - 97:00 inflationary but you want to bring down your tenure bond which is hard to do if it can happen if you're in a recession but what if you're in a stagflation then you can't even do that and now you're moving to this multipolar world where there could be tariff wars like Canada doesn't it's your closest ally they don't want to talk to you anymore china Japan and Korea have never agreed on anything i think they've agreed on United tariffs you've managed to convince Europe that they need to re-industrialize so I would say that in
• 97:00 - 97:30 that form of war earnings multiples need to discount down and that's happening and there will always be stocks that work but it's a pretty tough setup for someone who is massively overweight that part of the world correct i think but these are classic basically recipes for a stackflation environment where growth inflation yeah and you can't even spend yeah so stagflation on I don't know what else it
• 97:30 - 98:00 might say oh but then maybe we can go into fixed income but what will happen if rates go up and you have fixed income tough setup especially in American markets very tough setup yeah yeah i think uh that is with the world market environment right now majorly consumption or domestic economy yeah and Nilan Masha the stat no US is 1% of our GDP right exports and so if we have 10% tariff that's a.1% GDP
• 98:00 - 98:30 hit that's the beauty of being born in India or investing in India at least right so uh last question just for the young investors who are watching this I think that that that was the one yeah absolutely so like look I think the great part about I guess at least why I enjoy investing is that this is a profession where you'll only do well if you enjoy learning because the day you feel like you know everything chances are that you're in for a rude surprise correct um so you kind of always have to be curious always have to be open-minded you can't have be
• 98:30 - 99:00 close-minded to business models you can't be close-minded to regime shifts it's these regime shifts that make or break careers and so learning is obviously very important um what is interesting is I would say depending on where you are in your career if your early career in your investing journey uh your classics are a good place to start which is the Ben Graham book uh book on Warren Buffett a book on valuation uh Peter Lynch's book these are great places to start if you want to run the 0 to1 of stock picking um if you
• 99:00 - 99:30 want to master the one to n then I think what's important the first thing that the best teacher is real life realized losses so you need to start investing however small big it doesn't matter it will help you sort of learn more about yourself your risk takingaking appetite and how what is the best style for you um the other thing that I would suggest is podcasts because what's happened is that the industry is evolving so quickly and frankly The best investors today to
• 99:30 - 100:00 have a viable investment management business also need to have a public presence which is a great gift for any newcomer to the profession because you learn from the best because they teach freely publicly because they also have to build distribution this is a big trend in the west not so much in India but definitely in the west so podcasts like acquired invest like the best uncapped business breakdowns uh those are just four that come to mind that are sort of really high quality i know that
• 100:00 - 100:30 PPFS has a business series as well in India which is pretty good on YouTube i was going to say SYC but then you know I don't want to come across as biased but that's definitely something you should listen to and yeah so I think podcasts are a great way to stay on top of sectors and investment frameworks for sectors the classics are a great way to think about valuation and different ways to make money and then for India for earnings calls and stuff like I mean I have like the guys who build screener have done this massive massive sort of
• 100:30 - 101:00 service to the investing community like we at persistence we'll use everything Bloomberg fact we pay for all these services but what's wild is even we spend 80% of our time on screen right that's the beauty of the interface I think exactly so hats off so I think as a bonus element in this podcast what we'll do is that whatever basically resources S has spoken about resources Google spreadsheet description include so that all of you can take advantage of those resources
• 101:00 - 101:30 and a lot of them are freely available as well absolutely absolutely right so on this note we'll conclude hopefully we meet for a podcast again soon and this time probably in the next one we'll analyze an industry sometime soon for sure and uh thank you so much for watching this no thanks for having me great great and to the entire audience job top five to top seven key learnings podcast do let us know in the comment section below with this gent