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There is a great premium on growth: Hiren Ved, Alchemy Capital

Because there is paucity of growth, wherever you find growth, the markets are willing to give a kind of a more than disproportionate valuation for growth

ET Now|
Last Updated: Aug 22, 2016, 11.51 AM IST|Original: Aug 22, 2016, 11.31 AM IST
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T the markets would kind of sigh in relief that we have somebody who is of a great stature and intellectual capabilities and experience
T the markets would kind of sigh in relief that we have somebody who is of a great stature and intellectual capabilities and experience
In a chat with ET Now, Hiren Ved, Director & CIO, Alchemy Capital, says the markets are willing to give a kind of a more than disproportionate valuation for growth. Edited excerpts

ET Now: I guess it is time to move on from the change of guard news, isn’t it? I mean the fact that Government of India has voted for continuity, markets are welcoming that and that is in headline but that headline is not having impact on currency, bond or equity markets.

Hiren Ved:
Yes I think there has been a lot of speculation in the last few weeks as to who the RBI governor is going to be and I think it is an excellent decision by the government to get in Dr Urjit Patel. He is also the author of the MPC and I think why the markets are not reacting too much is because the next monetary policy meeting is not about an individual setting interest rates but it is the committee setting the interest rates and therefore people would want to see this new change in methodology that will be in vogue in India for the first time whereby a committee is going to decide on the interest rates and only if there is a tie within the committee, does the RBI governor have a casting vote, so in that sense I think the markets would kind of sigh a relief that we have somebody who is of a great stature and intellectual capabilities and experience but at the same time I think what happens to interest rates is going to be less governed by what just the RBI governor thinks of but it is going to be more governed by what the MPC is going to think about.

ET Now: It has been a good purple patch for us. Both locally and globally, markets are sitting at a record high. Now, if I ask fundamental market watchers, they are of the view that earnings are okay but there is nothing grand about them and markets are moving up only because of liquidity. Now that is an easy answer, isn’t it? I am sure markets do not go up only because of liquidity because liquidity has been abundant for the longest time I can remember.

Hiren Ved:
No absolutely. While liquidity does play a part, markets are pretty smart. If they do sense a recovery six to nine months down the line, they tend to price that in. We only get to know about it in hindsight. I think while liquidity is benign and there is no doubt about it markets will not just go up on liquidity. It is not just in India but around the world. I think what is happening is that because there is paucity of growth, wherever you find growth, the markets are willing to give a kind of a more than disproportionate valuation for growth. So I think we are just in that phase of the global markets right now where growth is at a great premium.

ET Now: Do you think in a market like this, it pays to hold stocks which almost behave like bonds? A case in point is Bajaj Finance. The rally in the stocks just reflects an unprecedented run and there is more to go because earnings have been consistent and the growth momentum has been strong. They are in the right business and the wave of support for NBFCs has only reaffirmed the belief that there is a lot of growth potential in this sector. So would not that be the case that there are opportunities in this market where an equity stock can give consistent returns like a bond and can be a very safe bet?

Hiren Ved:
Yes, I think what has happened is that there are certain stocks like Bajaj Finance which have proven themselves by executing stupendously and it is also matched with the fact that the opportunity is significantly large. So while one cannot argue that the valuations are expensive and one can safely that while one cannot bet any more where there will be an expansion in the PE or the price to book multiple but you will still be able to make money in line with earnings growth and I think earnings growth is still going to be in a reasonably healthy 20-25% plus compounded over the next few years. So I think there are very few companies which have executed so well and therefore investors typically tend to stay invested in these kind of companies for the long term.

ET Now: Just for the benefit of our viewers and maybe a moment of glory, at what price did you buy Bajaj Finance?

Hiren Ved:
Well I think we invested first at Bajaj Finance in 2010. At that time, the stock price was about Rs 450-500. But I think what is more important is not the fact that we bought it early but the fact that we kind of stuck throughout the growth cycle of the company and I think that is equally important for an investor than just identifying the right company is do we have the conviction to ride it through. Obviously we did not in our wildest of dreams expect that the company would deliver so phenomenally well and to that extent we have been lucky but we are quite happy to be long-term shareholders in a company like that.

ET Now: Now you have told us that at what price you bought Bajaj Finance now at what price will you start selling Bajaj Finance I am sure at 10000 the temptation to sell Bajaj Finance would be there, are you locking your gains there?

Hiren Ved:
Frankly, I would not like to kind of talk about my individual trades but I think as I did mention right now that we have had a great run, I think it will remain a core part of our portfolio. We may trim a little bit here or there but by far we still believe that the opportunity is significant. I think people have to understand in perspective that all said and done the balance sheet size this year is going to be just about Rs 40000 crore to 50000 crore so there is a lot of headroom for growth still. HDFC Bank has a balance sheet size of Rs 7.5 lakh crore, Kotak Bank after the ING acquisition is just about Rs 2 lakh crore plus, Bajaj Finance is still at about Rs 50,000 crore. So, there is a significant headroom to grow, the opportunity still exists. Obviously valuations are expensive but then they reflect both the opportunity as well as high class execution.

ET Now: What will be the next Bajaj Finance I think I should have asked you this rather than extensively talk about Bajaj Finance. Where are you laying your bets? It is difficult to find a stock which could be a 20-30x in this kind of an market because market conditions and market levels are different but as a long term investor I am sure the endeavour is to find multibaggers and market outperformers.

Hiren Ved
: I think history has shown us enough that you do not look for the next Infosys, you do not look for the next HDFC Bank, similarly I think it is difficult at this stage to figure out who is going to be the next Bajaj Finance. What as investors you do is you look at the opportunity, you look at the quality of management, you look at the execution, you lay your bets there and you hope and sometimes everything falls into place and the companies’ growth cycle and the markets discounting cycle converge and that is really when you make money.

So, frankly speaking, we have other investments in financial services that we believe have great potential but whether they will turn out to be like Bajaj Finance or not I do not really know. I think each company is very unique in its DNA and it is really really difficult to replace something that has really got high quality DNA. It does not happen too often, it happens seldom. I will only have an answer like this to a question like this may be three-four years down the line having looked back and said look I mean this one too has turned out to be reasonably as rewarding as some of our other previous investments have been.

ET Now: Well looking at portfolio right now it seems like you have a lot of high growth value creating wealth creating ideas as part of your core holding but I think the key question over there was also about and for anybody watching this discussion would be about wow you have made so much money but when do you actually start booking profits because it is not just about the right timing of investment but the right timing of booking profits as well. But we will keep that for another day.

Let us talk about some of your other core holdings which include of course a Britannia, what is the outlook there is this broadly the same line of thought that yes these are high growth companies, yes they are expensive but keep on holding them because that is a better bet than to look at plays which are going through a cyclical downturn?

Hiren Ved:
Again, the story of Britannia is that of very good turnaround and execution in a market like biscuits which is very competitive but I think it is also a market which is premiumising at a very fast pace. So, if you can innovate in a market like that and if you can premiumise your product range and execute well, I think there is still an opportunity. Food is or more importantly healthy food is still a big under tapped opportunity in a country like India. So, I think that there is significant growth ahead of us in sectors like food and clearly I think again Britannia is a company where the management has executed its business plan very efficiently; they have cut costs, they have improved productivity, they have innovated, they have invested behind their brands and they have premiumised their product portfolio.

ET Now: Let us talk about the evergreen themes and the evergreen themes currently for India has been demographic/consumption given the way how interest rates have come off and interest rates could come out. The fact is we will get a big bonanza because of the pay commission outgo and OROP impetus. What to your mind will happen to the entire consumption theme? Consumer staples are expensive but that is a very myopic way of looking at consumption stocks?

Hiren Ved
: We have to one thing to keep in mind that consumption continues to be a very large part of India’s GDP and I think that one of the things is that typically you have these long 8 to 10 years cycles and post the global financial crisis, we have seen that one thing that has held up quite well in India is consumption. Now over a period of time, one can think about how much allocation or weight you want to give to a particular theme in India but the theme of consumption in India is always going to be very central because we are a large domestic market and at the same time the world is still fairly uncertain and also there is a challenge around the world in terms of growth.

I think when people are investing in India they are basically betting on the large domestic market that India has and this domestic market is evolving. In several product categories it is not just about volume growth but it is also about value growth so if you have segments where companies can premiumise and go up the value chain there is an opportunity there as well while there will be certain product categories where you will get a combination of both volume and value growth.

So I think at a more macro level, the consumer theme will always remain very central for investors in India. At various phases of the economic cycle, you could decide whether you want to be overweight or underweight but I do not think people can ignore the fact that their existance is a significantly large opportunity in the consumer space in India. Most of the companies in the consumer space in India are extremely well run, they have strong balance sheets, they have strong free cash flow and as I said at this point in time because everything else is so uncertain and the investment cycle in India has not yet picked up very significantly, there is a premium to growth. A lot of these companies are trading at very rich multiples and therefore some people could argue that there is no great value there but I think typically these long term cycles do not fade away so easily so I think that the continued outperformance of high quality companies will continue to my mind until there is a far bigger broad basing of an economic recovery in India.

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