Huge operating leverage is about to pay off both in insurance as well as the AMCs, says market expert Ajay Bagga.
On the Adani Group
Around the world, there has been very high returns for a few companies and few groups which are positioned well. The Adanis are positioned well with their foray into renewable energy, their power company turning around, their city gas distribution company as well as the ports. East India is now run by Adani Ports and they are getting stakes into western India as well. The conglomerate has really come of age and it has been a blockbuster year for them when most of their businesses benefited from Covid and they managed to catch the tailwinds in all these companies. Valuation-wise, the price to book for quite a few of the companies is on the higher side but that is based on the kind of growth that is embedded and that is what the market is paying for.
On insurance space
Insurance with formalisation and financialisation is a mega trend. We are at the ground floor as far as insurance and mutual funds in India are going. They are going to double every few years and the companies which are running them will concomitantly get a lot of that operating leverage. It does not take much more man power to run Rs 100,000 crore and if that is scaled up to Rs 500,000 crore, the cost does not really go up concomitantly.
So the huge operating leverage is about to pay off both in insurance as well as the AMCs. AMCs were priced to perfection last year and we saw a little bit of correction there and now again things are moving up. Insurance is very well placed in comparison but I would choose both AMCs as well as insurance and across life and general insurance, there is huge growth and no further requirement of capital because they have become self-sustaining. The parameters on which the insurance companies are valued are looking very attractive.
As the government allows further FDIs, re-ratings are happening with Indian players slowly selling off or institutional Indian players growing. But the Indian partners would start looking at sales and that will also lead to a re-rating. Overall, it is a mega trend, a 10-20-year play where you will see very monolithic companies coming out of India on par with the Chinese companies which have grown over the last 30 years. The same is going to happen in India over the next 10 to 20 years in insurance and in mutual funds.
On opportunity in speciality chemicals, pharma and healthcare sectors
Specialty chemicals did very well last year especially at the height of China plus one movement, where everybody was talking about creating alternative supply chains. Fifteen years ago, we were on par with China. China rose to capture about 30% plus market share of the global supply chains and we were left with about 2%. A lot of the western majors exited very high pollution chemical industries and they left it to China which really grew with virtually zero cost of capital, lots of hidden subsidies and a strong lack of environment. But now there are a lot of environmental issues and the Chinese government is forcing these companies to close down. That has also led to the China plus one movement and Indian companies are getting bid up.
The other big move is that nearly every big private equity player is looking at acquiring specialty chemicals and API space players because they see that what China did India can do. India can move from that 2-3% global market share to 10-15% share and that is the kind of funding that is coming in. As a sector, they are quite highly valued and that is why we saw them going sideways a few months back when there was a breather.
Now we are seeing a lot of interest coming back. I would say specialty chemicals will be a very high momentum growth area and a lot of private equity money is also chasing this sector so the funding will be there. You will see scale coming up. The easiest way to play this is to stick to top three to five companies. These will be small companies which will do very well but one has to do a lot of research, meet the managements, check out their backgrounds and then pick them. It will be easier to stick with the top three in each of the segments. Chemicals has 8 to 9 segments and specialty chemicals itself has a lot of sub-segments.
If we stick with the winners there, the top-end companies are the ones who will take the lion’s share. I have invested in a couple of them and had very good returns over the last one year. I would not like to talk about specific stocks as such but the sector really deserves a look in and if you can get it right, over the next five years you could see three to four times price returns in this sector.
On prospects of realty and Mumbai-specific co like Lodha
The affordable and mid tier segments are doing very well. Tier-2, tier-3 are doing well, residential is doing well but commercial is really suffering because of the work from home culture and a lot of corporates are giving up office spaces.
So just like around the world, the Indian commercial space is also seeing a surfeit of supply and I do not think we will get a new supply coming in or getting absorbed that soon. Again, retail is suffering because of the lockdowns. There is a lot of back and forth between landlords and the retailers, malls not doing that well either. Maharashtra accounts for about 15% of India’s GDP, and we have got a virtually a complete lockdown going on as far as retail and private offices go in Maharashtra. That will have another knock-on effect.
Real estate has done better in the last six months and with stamp duties being brought down, we saw a rush to register. But overall, year-on-year, we are still about 30% of the highs that this sector has seen. The premium and the luxury segments are really suffering. The Rs 1,000- crore deal of Damanis is a once in a generation deal. It is something like the Poonawallas buying the American Embassy for Rs 750 crore which actually did not go through.
But overall, luxury apartments are suffering, the premium side is suffering. The suburbs, the more affordable segments are seeing traction. Overall, just look at the statistics; yesterday’s IMF report brought out that 32% of the middle class in India has slipped out of the middle class over the last year. That is the grim reality with the job losses, with the cuts in jobs that have happened. Consumption has stood up because the affluent classes have continued to do well.
In real estate, whoever can pivot to the affordable segment, the smaller one-bedroom, two-bedrooms condo kind of offerings are doing well in a non urbanisation kind of a move. People are moving to suburbs looking for a little bigger house because of the work from home of dual income couples and children studying from home. Those are big trends that are happening but volumes on a year-on-year and peak versus last year are off quite a bit.
On pathology, healthcare & diagnostic space
Long term there is opportunity to get into that space. In the short term, they have run up a lot. About 25 crore tests were done in India over the last 13 months of Covid. These companies have been natural beneficiaries plus a lot of unlisted local players who got some part of it on a subcontract basis in terms of collections.
But still an RT-PCR test costs anything from Rs 975 to Rs 1,500. It is taking 36 hours to 48 hours to get the test done. It is not like the old days where you could fly out of Mumbai anytime. Now one has to get the RT-PCR done and then wait for the result and hope to take the flight and try and be back within that 72-hour window as otherwise you will have to take another test on that side to be allowed entry back into Mumbai.
On vaccines, one small point I want to make is that when the government recently did the audit of Serum Institute, the number that the government has brought out is 60 million. That is the monthly production of Serum Institute and what was being used was the inventory that had been kept over the last six to eight months.
Half our production has gone into exports or in vaccine diplomacy. Not only Maharashtra, Rajasthan government has also written and Covaxin is producing only four lakh per month and the amount is very little. What the producers are telling the government is a two-fold strategy; one go ahead and approve the Pfizers, the Modernas the Johnsons and the Sputniks so that the Dr Reddy’s, the Panaceas can start producing and supplying. Today Shilpa Medicare said on Whatsapp they can make a lot of doses. So Serum has to put up new lines; Covaxin Bharat Biotech has to put up new lines as otherwise we are in a spot of bother. We need to reach at least 50 lakh vaccinations per day in India so that in six to eight months, we at least get to a herd immunity level.