Days of IT largecaps numbered: Nilesh Shah, Envision

Nilesh Shah, MD & CEO, Envision Capital, says “I believe that the days of the largecap IT companies are numbered apart from short-term trading opportunities that may get created. Otherwise, I see a lot of these specialised technology services companies providing ER&D, services and some of the other software defined vehicle space, are really the kind of opportunities which are headed for strong double-digit growth for the next three to five years.”

What do you make of the price action in small and midcap stocks? Do you think the excesses are out?

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Nilesh Shah: I think a lot of froth is out. I see a lot of stocks which have corrected by whatever, between 15% to 25% and there is a great amount of caution, even at least among investors as well, not to increase allocations for now in the small and midcap segment. So, I would probably say that a bit of that risk-on trade has kind of come off and we are in a bit of a risk-off zone for now. So, there is a lot of froth which is already out of the system right now. A lot of price damage has happened. It is now more about stocks trying to consolidate at these zones and waiting for the next earning season for the uptrend to resume.

I do not want to get this one wrong. Your view is that the excesses in the small and midcap stocks are over and bulk of the price correction is also behind us. Can I say that?

Nilesh Shah: Oh, yes, absolutely. I have clearly seen lots of stocks which are off quite significantly from their highs. A lot of the gains which have happened in the current calendar year from the start of the year are almost out. They are no longer there. Those gains have in a way pretty much eroded. My sense is there is a fair bit of sanity and excesses are out.

But the tactical call in the market seems to be that be safe, move a higher allocation to largecaps; they are the ones which underperformed, the frenzy was all around small and midcaps. Would you recommend any such allocation?

Nilesh Shah: No, I do not think so. These kinds of tactical allocations really do not make sense. Yes, if you are essentially looking for maybe the next two or three months, it is quite possible that largecaps will relatively outperform. They may not fall as much. They might actually rally a bit. But I still believe that a lot of the mid to small-sized companies, a lot of bottom-up opportunities, will continue to outperform over the next one or two years or maybe even three years and clearly, as long as, of course, you are buying good quality, you are buying companies which meet governance standards and meet some of the liquidity norms as well,

If all of that is in place, I still think some of the smaller to mid-sized companies have the ability to grow at a much faster pace or higher pace. A lot of these companies have their balance sheets pretty much intact and well positioned for growth for the medium term. So, as a long-term India believer and if you are an India optimist, clearly having more allocation to mid to smallcaps over the medium to long term will probably still continue to be a better strategy.

Where within the small and midcaps are you still finding those value buys, the bottom-up stories that you just talked about?

Nilesh Shah: I clearly believe across the board, apart from consumer staples which probably still continues to be a weak spot from a growth perspective. But when I look at technology services, when I look at online digital companies, when I look at some of the capex oriented companies, companies selling equipment, consumables and components to the manufacturing and infrastructure sector, selectively some of the export plays, clearly energy is emerging to be a very big theme, clearly believe that energy is a strategic priority for the government and for the economy and for the nation.

So, across the board, there are opportunities across sectors and businesses. I see lots of bottom-up opportunities, especially post this correction and the kind of consolidation that we could see over the next few weeks or maybe the next two or three months.

You are looking very closely at online digital plays, niche IT services. Zomato, in comparison to the other new-age tech listed companies, is the only one that is now hitting new highs. How are you looking at some of these businesses with the adoption of AI, digitisation, fast picking up pace, what this means for the traditional IT plays as well as new-age tech companies?

Nilesh Shah: I believe online consumer or the online fintech space are the businesses which are making rapid strides. The ability to effectively leverage on the digital public infrastructure as well as essentially building their own technology capabilities to become increasingly relevant to a wider mass of consumers across India, I clearly believe that this is helping them to kind of grow and grow in a relatively outsized manner.

Some of them have created very strong moats, some of them continue to be net cash positive which means they have lots of room to invest further and you really do not see too much of fresh competition emerging given that there is some kind of a funding winter in the venture capital and the private equity space wherein their set of investors are asking them a lot of relevant and difficult questions which we in the public markets keep asking the companies and the management.

So, I clearly believe that, yes, these are the companies which will continue to do exceptionally well from a medium to long term perspective. These are, if you ask me, the consumer franchises or the fintech franchises, it is pretty much like betting on some of the MNCs, the HULs, Nestles 20-25 years ago or betting on, say, some of the new banks or then new banks like HDFC Bank, ICICI Bank 20 years ago, so that is one side of it.

On the technology services side, obviously, that is a B2B business focused on international opportunity, looking at developed markets like the US, Europe. Out there, specialised players are going to do extremely well. I believe that the days of the largecap IT companies are numbered apart from short-term trading opportunities that may get created. Otherwise, I see a lot of these specialised technology services companies providing ER&D, services and some of the other software defined vehicle space, are really the kind of opportunities which are headed for strong double-digit growth for the next three to five years.

Let us look at what we discussed and what we have been discussing. You have been a big proponent of Policybazaar. I mean, when the world was looking this way, you were buying into Policybazaar or PB Fintech. Where is that business headed?

Nilesh Shah: PB Fintech and Policybazaar continue to be a very strong technology driven franchise. It has almost become synonymous with the category. They continue to make huge amounts of investments in their brand and creating awareness for insurance. Despite the double-digit growth which the insurance space has witnessed over the last 5, 10, 15, 20 years, I still believe that insurance penetration in India is still a fraction of what it is globally and what it is in developed markets. And so clearly for the next 10-20 years, insurance as a space has the ability to grow in double digits.

Within that, the share of online has been growing rapidly and despite the 30-40% growth rate which the online space has been registering, still its share in the overall insurance pie still continues to be in low-single digits and still continues to be a lot less versus what it is in markets like the United States and China. And this gives a business like PB Fintech and Policybazaar and the entire online insurance as a category to continue to grow in high double digits for maybe the next 5, 10, 15 years.

What makes this business even more special versus the rest of the online and e-commerce businesses that every day you do not have to nudge your customer to keep buying versus that here you have a customer, he buys a policy, he pays the premium and you earn your revenues and these revenues keep piling up over a period of time and they create a stream of annuities.

I clearly believe it continues to be an exceptional opportunity. It is rare to see businesses like this. Of course, there are risks coming in from the regulatory; there can be risk coming in from regulatory side; there can be risk coming in from competition, from disruption; yes, these are some of the risks which are there for any business today but nevertheless net of these kind of risks. I still think on a risk adjusted basis, PB Fintech and Policybazaar continues to be an excellent capital efficient growth opportunity.

The PSU stocks which you have been wanting to buy, are you getting that great entry point after the recent bout of correction?

Nilesh Shah: So, yes, there are several businesses across technology, consumer, I think even in the capex side. For example, on the capex side, we have seen a sharp correction in the stock price of Bharat Earth Movers. It has corrected quite meaningfully and we have just started to own Bharat Earth Movers and clearly, it is in the right spaces of railway, defence, mining equipment. A bit of the restructuring is behind us in terms of the land holdings being hived off. It has probably fallen from those highs of 4000, 4200 to 2800. I think it has created a meaningful entry opportunity out there.

The other is essentially a more ER&D oriented business, which is Sasken, which we have been owning and I think it has corrected from about 1800 odd levels to 1400-1500 zones. It still continues to be reasonably priced or underpriced from a valuation point of view. The company has got a new management or a new CEO a year back. It looks like there are early signs that the business is poised for strong growth over the medium to long term so that, again I think is a good place to be in and I think it is poised for some good times.

Harry Byrne

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