Vikas Gupta, CEO & Chief Investment Strategist at OmniScience Capital
The market has already rallied more than 16 percent from the June-lows. Even now, the market is significantly below its intrinsic value on the basis of long-run discount rates, Vikas V Gupta, CEO & Chief Investment Strategist with nearly 20 years of experience in capital markets said in an interview to Moneycontrol.
He thinks a bottom-up, fundamentally-oriented, scientific investor trained in looking for market anomalies can find several, highly mispriced opportunities which can form a portfolio.
Vikas V Gupta of OmniScience Capital believes except for the US-China cold war, all the other uncertainties are nearly resolved or are likely to get resolved soon.
Vikas founded OmniScience Capital with an idea to provide a scientific approach to equity investments in global & Indian stock markets.
Is the worst behind us now, especially after the market rallied more than 16 percent from June lows?
Practically all the known factors which were causing uncertainty have stabilized and are likely easing out. The Russia-Ukraine war which triggered the crude oil and commodity spike has stabilized to such an extent that wheat is being exported out of Ukraine under a joint deal. This is an indicator of an eventual “truce” in some shape or form. This, and expectations of an economic slowdown due to Fed’s interest rate hikes, has already resulted in both crude oil and commodities coming down by around 15-20 percent.
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Further, there are signs of the global supply chain disruption easing out. Markets have digested the Fed’s interest rate hikes and are fumbling to catch up on the US economic and corporate fundamentals doing much better than expected by Mr. Market.
If you take a bottom-up approach, three out of the four largest US companies with market caps ranging from $ 1.5 to $ 2.5 trillion, are available at price-to-cash flows ranging from 16 to 24. The fourth one creates huge value but doesn’t leave too much cash flows since it invests in intangible assets through its income statement rather than the balance sheet. All four have forward revenue growth rates of 15 percent to 20 percent. It is amazing that the largest companies in the world, which are researched by the largest number of sell-side analysts, are available at such attractive valuations.
It would be no surprise if the remaining companies are available at even more attractive valuations. A large number of high quality companies are available at price-to-cash flows ranging from 4.5 to 30. This means that they are available at yields of 3 percent to 20 percent while growing at high single digits to 20 percent+.
India’s economic fundamentals are even better than the US. However, the valuations are relatively higher relative to the US companies, especially for the well-known, keenly followed companies. But, still the valuations remain quite attractive. If one is willing to look for below-the-radar growth vectors, one will be able to find companies which are growing at 15-30 percent but are available at single digit PE (price-to-earnings) ratios to around 30. This indicates that there is an opportunity for wealth creation for investors.
Do you think the banks are in a sweet spot now and are in the middle of the growth upcycle?
Most of the larger private banks have cleaned up their balance sheets and are ready to lend again and are prepared to grow at a fast pace. Further, most of them understand the huge opportunity to use technology and beat the new age FinTechs at their own game. It looks like the banks are already winning the fintech wars. Digital banking strategy of a couple of banks is extremely strong.
With their existing strong relationships with customers and a large customer base, they are in a sweet spot to become a keystone species in the evolving FinTech, digital payments and banking ecosystem. A few years back it had looked like the new age FinTechs would completely disrupt the traditional banks, be it public sector banks or private banks. However, it looks like the private banks and the largest public sector bank have completely turned the table against them.
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Now some of the FinTechs seem to be struggling with funding drying up and also being restricted or constrained in terms of regulations and licensing from numerous businesses. While the FinTechs and BigTechs have absolute dominance in UPI-based digital payments, the banks completely dominate in the other digital payments, such as, RTGS, NEFT, IMPS etc.
With use of technology, robotic process automation, artificial intelligence (AI), and most importantly, high quality customer-focused digital apps, the banks are enhancing internal efficiencies and enhancing customer revenues from digital banking, respectively. The former combined with increased lending quality will result in increasing return on equities (ROEs) and accelerating earnings.
With a huge capex opportunity from the government and private sector of more than Rs 200 lakh crore over the next 3-5 years, the banks have a huge lending opportunity. With strong consumer demand for retail loans as well, high growth is quite likely for several years.
Most of the banks also have significant subsidiaries in asset management, life insurance, general insurance, credit cards and other specialized financial services. At current market valuations, the banks are available at significant discounts to their intrinsic values.
Has the market discounted all the risks and concerns we have seen in the last three quarters?
The Russia-Ukraine war, US-China cold war and Covid lockdowns are the root causes which resulted in high crude and commodity prices and global supply chain disruptions and resultant high prices for consumer and industrial products resulting in high inflation.
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The Fed has a mandate to maximize employment, stabilize prices and moderate long-term interest rates. With unemployment at 3.6 percent, high GDP growth rates, and low Fed fund rates, the Fed focused on increasing the interest rates to control inflation and stabilize prices. However, the Fed has admitted that its tools cannot increase supply which is the main reason for inflation.
Directly in response to the Fed’s interest rate hike plans, the US markets fell by 20 percent to 30 percent. This caused the FIIs to pull money even from Indian markets which were cushioned by retail money flows of domestic investors.
Except for the US-China cold war all the other uncertainties are nearly resolved or are likely to get resolved soon. Inflation is likely to prove transitory and in a year or two the investors are likely to focus on deflationary risks due to technology and globalization driven by increased utilization of underutilized human and other assets.
As we have been saying for quite some time in our interviews, articles and research reports, Mr. Market has digested all the known risks at those levels. Even now, the markets are significantly below their intrinsic values on the basis of long-run discount rates. A bottom-up, fundamentally-oriented, scientific investor trained in looking for market anomalies can find several, highly mispriced opportunities which can form a portfolio.
With the easing commodity prices, do you expect strong earnings growth in coming quarters?
Except for resource companies, i.e. producers of commodities and crude oil, most of the other sectors should report strong revenue and earnings growth over the next several years. Demand is likely to remain strong in the near to long-term for Indian companies.
On the other hand, US companies focused on US domestic markets are likely to face demand softening in the near-term due to the Fed’s rate hikes. But, one should bear in mind that nearly 40 percent to 50 percent revenues of S&P 500 companies are from international markets. Thus, for most companies in the US the revenue and earnings would grow faster than the US GDP.
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Do you think the IT space is still worried about recession fears in the US and Europe?
There is a notion that Indian IT companies are going to face slowing demand from US and European markets. However, the experience from the Covid period is that the client companies continue the digital transformation projects which are mostly multi-year moving-to-the-Cloud projects.
Digital marketing, online sales, and customer experience are the other focus areas for these companies. While the Cloud projects being strategic and multi-year are immune to slowdowns and recessions, online sales go up as a proportion of total sales during slowdowns. Thus, IT companies are likely to do quite well, or, possibly, even better, during slowdowns.
With the market recovery and easing a lot of concerns, what are themes you are betting on now?
Rather than thematic investing which is a purely top-down concept, we focus on below-the-radar growth vectors. Growth vectors have a large TAM (total addressable market) and high growth rates. The difference between growth vector investing and thematic investing is that top-down themes could turn out to be fads while bottom-up growth vectors are identified using the Scientific Investing Framework from companies actually capitalizing on it historically with proven growth rates and the management having detailed strategic plans for monetizing the opportunity over the next several years.
A growth vector is accepted as such after verifying the former facts and validating it via independent research and in many cases identifying several other companies also pursuing the growth vectors.
In the Indian portfolio there are companies exposed to high growth vectors, such as, defence driven by huge government spending of more than $ 70 billion and export orders from several countries, railway infrastructure driven by investments in bullet train, semi-high speed trains, metro projects, doubling lines and electrification, capital enablers, i.e. companies providing the capital raising infrastructure such as banks, credit rating agencies, stock and bond exchanges, power driven by high GDP growth, digital transformation and metaverse, fintech, digital payments and digital banking. The former are some of the growth vectors which are in Mr. Market’s blind spot and highly mispriced.
For our US portfolio, there are companies exposed to growth vectors, such as, athleisure & fitness, metaverse, Digital Transformation, E-commerce & Payments, Luxury & Millionaires, Home nesting, and AI & Consumer Tech. Most of these growth vectors have mid-to-high single digits to double digit expected growth rates and TAMs of few hundred billion dollars to more than trillion dollars.
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