Consumption Fatigue or Affordability Crisis? What’s Behind the FMCG Slowdown?

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Sanjeev, thank you so much for joining me on the core report. So, I'm really picking up on your firm's approach to valuation, which has been consistent in many months, if not years, and essentially saying, at least in the recent past, about how you are valuing stocks in the Indian markets and seeing them mostly as overvalued. So, I'm going to start with a report that you put out on the 1st of June, where you've talked about the Indian market being stuck between the harsh realities of stiff valuations, domestic growth issues, and global macroeconomic headwinds. So, let's park that for a moment.

Subsequently, around June 16th, which I think builds the, let's say, the macro case or the micro case, maybe more appropriately, you've talked about the fourth quarter Nifty 500 review, where you referred to how the weak trends continue to persist. This is essentially saying something that everyone has acknowledged, that growth in India Inc as a whole, and including in your sample, is not fast enough to perhaps justify those valuations. And I'll come to a more recent one where you've talked about valuations of consumer-facing companies.

And you've said that they fail all major valuation tests, absolute relative to history, relative to global peers, and then gone on to dive into each of those cases. And again, a lot of this is already reflected in the way we are seeing earnings and price. So, for someone who's looking at the prices first, and then trying to work backwards, this is not news.

But I guess the approach is what makes it interesting. So, if I may ask you first, when did you start feeling that valuations were at a level which were not justified by the fundamentals in the Indian markets?

Well, the market as a whole, I would say it's about 18 months. So, starting from early last year, 2024 calendar year, that is. And for some sectors, I would say auto, cement, consumer, and within autos, more specifically two-wheelers, we have been pretty consistent about the fact that valuations really don't have much of a fundamental standing.

And that's been the case for the last several years, in fact. So, our views on valuation haven't changed really. The valuation concepts have been there for the last several decades.

So, nothing is new over there from a valuation standpoint. The question is the context has changed dramatically. And we can dig deeper into this as we go along.

But the fundamental issue, what has changed in India is that growth rates are a lot lower now for many sectors, compared to what you would have seen in the previous decade and the decades before that. And this is more evident in the consumer-facing sectors, whether it's autos, consumer staples, consumer registration rate, the last three, four years, growth rates have come off dramatically. So, that is one change in context.

And there's one more bigger change which is coming. It's across sectors, you are seeing a lot of changes in the market structure, et cetera, et cetera, which is resulting in the incumbents starting to lose the dominance which they had in their respective categories or sectors at one point in time. Markets have become more accommodative, products are losing, I would say partly brands are losing relevance, distribution channels are no longer as strong for incumbents as what used to be historically.

So, somewhere the market is not looking at these big changes which are taking place, which would logically result in growth and profitability both for the incumbents being lower going forward. So, why are the violations the same? That doesn't make any sense, right?

If growth is going to be lower, and you are seeing that for the last three, four years, that is very visible, especially for the consumer-facing terms. And if the medium-term prospects are also more or less indicating the same, given the levels of disruption one is seeing, you have to have a lower multiple to start with, growth is lower, profitability is at risk. So, why is the market still somewhere believing that we should continue to manage companies the way we have managed them in the past?

So, that is a fundamental argument against the way the market seems to be discarding too many sectors and stocks currently.

And I'll come back to the changes in market structure and the incumbents versus non-incumbents in a moment. But you said 18 months is when things turned, at least in your perception. So, September 24, 2024 is when we saw the big market peak, which we have yet to go back to. So, was that one turning point or even before that?

See, ultimately, as an investor, you have to be very cognisant of what you are paying for stock. And you have to be very clear about what is the fair value. And more or less, it can be really 10%, 20%, that's okay.

But you have to be very clear about what is the fair value of something that you are willing to buy. I mean, it's like buying anything in the market, right? You have to be clear, okay, this is the price, which the market is telling me is the price of the product or the price of service.

But I'm not happy with that price. My view is that that particular good or service should be valued at a certain level. So, which is where the sole market, anyway, that's the structure.

That's the reason why the market exists, right? People will have different views. And for the last 18 months, we have been feeling that many stocks are being overvalued in the context of the fundamentals of those companies and in the context of the fundamentals of the sectors.

And to be honest with you, go back to the last 12 months, the market will also not want to get there, right? It's been stuck in that very narrow band anyway. If you look at the FT, it's just about low single digit up.

Even if you look at the red cap and the small scape indices, despite all the open hype around those categories, I mean, the broad indices over there are pretty much flat in the last 12 months or so. So, either way, the market is, I don't know whether recognising that there is a valuation problem, but at least based on my conversation, I don't think I'm getting that. Most people still seem to be, there's a lot of value in the market, which I struggle with honestly.

And like I said, I'm going to come back to some of the sectors in a moment, but let's see if we can understand the psychology of the market as we are seeing in the manifestation of prices, of volumes, and some of the sectors that we've seen. And again, your firm has pointed out in the past, the exuberance we've seen in defence stocks, for example.

So, if I can ask you, and it's more a layman's question, perhaps, what then causes sectors or some sectors to suddenly shoot up and become market favourites, even though let's say institutional investors like yourself may be staying a little away?

I think ultimately expectation that matters as far as stock price is concerned. At some point in time, expectations may be running well ahead of fundamentals. And that's been the case for several sectors in the last 18, 24 months in particular.

We have seen a lot of new sectors in the sense, they have caught the fancy of the market. It started with this whole electrification theme, if you recollect, sometime in the middle of last year, when there was some power shortages, a lot of investors, everybody got excited about the electrification theme, assuming there will be shortage of electricity for a long period of time. That thing didn't really play out the way it was expected to.

Same with when you had people getting very excited about the railway theme. Right now, there's a lot of excitement around defence. So, we have seen various sectors catching the fancy of the market, depending on how, I guess, the majority of the investors are looking at.

And at this point in time, of course, you had, let's look at it this way, starting from 2021, or early 2021, let's say, once the pandemic issue started a year or two recently in the background, all the way till May 23, early 24, the market has been a one-way run. And investors who came to the market obviously have made decent amount of money. And somewhere that seems to have got ingrained in the minds of the investors that irrespective of what point in time you invest, where you invest, what price you invest, you will always make money.

And that is what is resulting in this continued inflow into domestic mutual funds from retail investors. This belief that number one, you will always make money in the market, number two, you will make large amounts of money in the market, and number three, you will make even large amounts of money in mid-cap and small-cap stocks, that has somehow got ingrained in everybody's mind. And that is what is resulting in these sectors periodically coming and going.

So that is what is happening in the market. You can't fight the narratives till the time the fundamentals start reasserting themselves. You can have this euphoria in the market for a long period of time.

And as I said, you have seen so many sectors catching the fancy and then eventually that theme or that narrative petering out only to be replaced by a new one. So that's what I can tell you, I guess.

So just to dwell for a moment on the supply side, and I'm talking about fund flows. So we've again seen record mutual fund inflows, SIP inflows again at highs. Now, what you're saying is that basically, this is because investors feel that they will make lots of money. But is it also because they don't have any other choice in a high inflation environment with maybe lower or stagnant incomes? The only option that you have, at least mentally, is to put money into stock markets because you think it's likely to grow as opposed to any other form of assets.

Which is where the fallacy comes in. Somewhere the belief is that you will make money at every price point, which is obviously not correct. Let's say a stock goes from 100 to 200.

It is obvious that your return expectation has to be lower now. It can't be the same as what you were expecting at 100 rupees. But somewhere the mentality is that you will make money at every price point and make a decent amount of money at every price point.

So that is where I really struggle with, and just based on historical experience, the 21 to 24 period has been very good. So maybe this will continue at every price point. I have three fundamental arguments against this.

First of all, when people say returns in equities are going to be, let's say, better, we have no other option to invest, that is only valid when the valuations are reasonable. Obviously, this argument is not valid at every price point. Number two is the fact that, let's say, why are we comparing debt and equity to start with?

Debt is more or less, in a way, risk-free, if I can use that term. Obviously, everything at risk, but relatively very low risk compared to equities. But somewhere, everybody is just looking at debt and equity in the same way, without looking at the fact that obviously equity has to be priced in for some risk, whatever that may be, 3%, 4%, 5% point.

Some equity has to exist for equity versus debt. So in this comparison that you will make, let's say, 5% post-tax or something like that in debt versus 9% or 10% in equities, I mean, that is okay, because that's how it should be anyway. You have to factor this amount of risk when you're investing in equity to start with.

And if your nominal GDP growth is, let's say, 10% plus minus, that is what we are seeing for the economy now, and maybe the near-term, medium-term, near-term, near-term also, that is okay, fine. But to assume that at every price point, we are going to make 10% return, that is a bit, I don't know. And number three is this belief that somehow there is money in the market.

I think this is a very fundamental misconception which is there. See, money flow does not matter, it does not move stock prices. And this is a very hard-to-believe concept, but the simple point is that there is no money in the market at any point in time.

Secondary market has zero money. Somewhere this concept is simply not understood by investors. Because at every price point, for every trade, there has to be buyer and seller, somebody buys, somebody sells, right?

So the net amount of money in the market always has to be zero. So it's not as if flow is driving the market, it is expectation of returns that is resulting in investors behaving a certain way. Now, let me explain that, what does that mean?

What it means is that, why is the legal community investing in every price point? It is because they expect to make money at every price point. That is why they are constantly giving money to the mutual fund saying, okay, go and invest.

So unless and until that changes, this mentality may continue and this behaviour may continue. So let's say the market will not perform for one, two, three years, hopefully it performs, somewhere the returns expectations start changing. Let's say the last 12 months, nobody has really made any money in the market.

If you look at the broad indices, they haven't really gone anywhere, large capital caps, they haven't done much. Obviously, individual stocks have done a lot, some have lost money significantly also. So if stock prices do not go anywhere for some time, 12-month trading returns start coming down, maybe that is when you start seeing some rationalisation or some rationality coming into the market.

Because currently, people are still very convinced that they will make money at every price point, which is what is resulting in this flows into the market. But you have to understand the very basic concept that there is never any money in the market. Somebody will buy, somebody will sell at every price point.

If I buy, I will take stock from you, you will take my money. That's what happens in the stock market. At every price point, every second or every nanosecond, that is what is going on in the market.

There is never any money in the market, so flows will not matter, it's the expected returns that matters when it comes to stock prices.

And so most fund managers talk about markets being slave to earnings. Now, everyone says this. But from what I'm gauging from your thoughts so far is that while everyone says that, everyone is not necessarily practising it. Would you agree with that?

Unfortunately, the problem nowadays is there's too much discussion on flows and whatnot, and less on fundamentals. So you're absolutely right in your assessment that, of course, earnings are the only thing that matters ultimately when it comes to stock prices. But somewhere that seems to be in the background.

And a lot more discussion seems to be on flows, what the retailers are going to do, how long will he or she continue to put money in the market and whatnot. I think some of the discussion discourse has to move more towards business models of companies, the substantial risk which these business models are facing now, and what does it mean for earnings eventually. Eventually, that is what matters, where are earnings headed ultimately.

And I'm going to come to what could be a strategy in these times in a while. But let's come back to the fundamentals and let's pick on consumer goods sector again, where you wrote a report just recently, where you talked about valuations of most consumer facing companies failing.

And just to recount that you said they're facing on absolute valuation test relative to history and relative to global peers, which of course, is a good reminder that companies in India like Levers or Nestle, quoted much higher price earnings than their MNC parents or their parents. And that's usually been seen as a big plus, which for the India growth story, but I'm sure you may have some views on that. So if you were to pick now, consumer products, and what's going on there, can you walk us through some of those points that you made earlier, you talked about some fundamental changes in market structure, you talked about how incumbents are being threatened, perhaps, in a way that's not happened before. And you also talked about brands losing relevance.

First of all, you look at the earnings growth of these companies in the last decade. If you look at the 2010 to 2019 period, I'm excluding 2020, because the last quarter of 2020 got affected by COVID. Most companies, consumer facing with the state of registration rate, they were delivering low teen to even high teen earnings growth, by the way.

Lever, for example, delivered 13% over the nine-year timeframe. So there was maybe a justification for the high multiples, which the market is willing to give. I'm using HUBR as an example.

And most companies are in the same bracket. And the other thing was also keeping in mind the fact that post the GFC and the pre-pandemic period, you had a period of very, very low global rates. In fact, for most of the 2010 decade, you had pretty much zero global interest rates in all of the developed countries.

So in a way, your cost of equity was also the lowest side. So that could suggest between a combination of very high growth, low teen, mid teen, high teen kind of growth, and very low risk-related cost of equity, you could justify whatever 40, 50p the market was trading at. What has changed?

In the last two, three years, growth rates have come down dramatically. And we will just get into the reasons for that. But if you look at the growth rates of some of these companies, last two years, that was at 523 to 525, lever's top-line growth is 2%, CAGR.

Bottom-line growth is 3%, by the way. Asian paints have delivered negative revenue and bottom-line growth. So obviously, things have changed over here.

Somewhere the market is still not taking cognisance of this fact. The expectation is that we will go back to the jolly good days of 2010 decade. I'm not a believer in that.

For the simple reason of not a change as far as the sectors are concerned. And jumping into the points that you made, what has changed is that fundamentally market structure has deteriorated for the worse. You are seeing more and more competition coming in.

You are seeing basic changes in lifestyle, consumer behaviour of households and customers. All that, in my view, will result in far lower growth for certain categories of products and also risk to profitability. When you look at the four risks which were highlighted in the report, number one is that brands are getting diluted.

That is obvious, right? You are seeing a lot more brands being available in the market. And the reason for that is the distribution channel is now becoming a lot more, I would say, democratic.

What I mean by that is earlier, there was only one distribution channel, which was the general trade channel, which the incumbents used to dominate. And there was limited shelf space in the Kirana store. If you walk into a Kirana store, you would see a few brands which have been selling for the last several years or decades.

And that's it. But now you have several more distribution channels come up. You have the entire model retailing piece, which has come up, which is the big box retailing of like D-Mart or Reliance Retail.

You have e-commerce, you have big commerce, et cetera. So now the chances of a new brand getting launched and making some impact is a lot higher. You have seen a lot of B2C brands have come in and managed to establish a niche and also grow to a reasonable size now.

So that is number one, brands are getting diluted. You're also seeing competition of private-label brands of all these model retailing companies, whether it's Reliance or D-Mart, et cetera. They're all launching their own private-label brands.

So you are seeing a lot many brands getting launched. To some extent, brands are getting diluted. Distribution, which reinforced the brand power of many of these consumer-stable products.

That, as I said, is also getting weaker in a way. Number three is, and this may not be that relevant for consumer staples, but in many other categories, what we are seeing is what I call a standardisation of products. So in a way, let's say you look at a thing like cables, wires, fittings, et cetera.

I mean, Indian companies have been brilliant in creating brands out of these commodities. But my view is that over time, I think the risk of these so-called brands being again reduced to semi-commodity branded products or even only commoditised products exists. I mean, I don't know whether it will play out or not play out, but it's a risk at which the market should be cognisant of.

And I'll give you one example. If you look at any of the building materials, earlier you had a situation where most houses in India were built by the home buyer. You buy a piece of land as part of your house, and effectively you're going to buy your own materials in a way, or you get a contractor to buy the materials there.

So in a way, many of these products had a B2C relevance there. Incrementally, more and more developments are illustrated in this country or in India. This is now based in the form of large developments for large developers in the form of multi-building, multi-apartment, multi-building for developments.

So who's the buyer in that case? The buyer is not a developer. They're not the retainer or the guy who was building his own house.

So it's moving incrementally from a B2C channel to more of a B2B channel or B2B mode, I would say. So the chances of a brand existing in that case will clearly become a lot lower. The pricing power should logically go down.

Growth is not an issue. I'm not debating that point. Obviously, in India, things will grow, so that is not an issue at all.

But I think profitability could be at risk over here. And then you also have changing the consumer behaviour. Earlier, 40 years back, everybody thought alcohol was a very good thing.

A glass of wine every day was very good. But incrementally, all the literature, all the academic studies, everything is proving that it is clearly a problem. So when you start seeing some of this risk getting reflected in the habits of the Indian customer, GNP-1 is coming, which should logically have a big impact on prepared foods and on alcohol also, by the way.

So there are big changes which are coming through, but somewhere the market is simply ignoring all the disruption risks, whether it is brands distribution channels becoming lighter, products getting standardised, consumer behaviour changing in a big way. Everything is adding up, in my view, to suggest lower growth rates for companies and incrementally a lot more risk to profitability.

I think that the standardisation is an interesting example, Sanjeev. You talked about the cables and wires. And I remember in the Economic Times, one of the management folks used to talk about the contrast of building a brand like Gujarat Ambuja Cement. And cement is obviously tangible, but it's not something that you see in front of you. And it's really something that goes into the building of walls or buildings and so on. And what you're saying today is that after all these years, and including in cables, we have so many cable brands in India. And today, it seems to matter less. Whereas at one time, maybe that was a factor that brought them some market premium.

It's a simple question to ask. Anybody who is saying these are brands, you ask them, which brand of cement is there? I can bet 19 out of 100 people will not know which brand of cement and cable has been used in the house.

Because first of all, the guy may not have used the house anyway, because maybe you are going to stay in the apartment these days, right? In the cities. So how would you ever know what cement and what cable and wire has been used in the house?

Fine, there will still be a B2C channel over there. Don't get me wrong. For the simple reason, there will still be individual houses which will get built in the smaller towns, etc.

And for replacement, there will be some demand. But otherwise, incrementally, a lot of these products are going to become B2B products over a period of time.

So let's come to the more fundamental question then. I mean, again, from a layman's point of view, the question is really what is then growing in the market. And there is some debate as I can see around it. So one argument is that, yes, the big brands, the levers and Nestle's are losing out on growth because others are eating in. But fundamentally, the consumer is still consuming at a higher pace. The other argument is, which I guess encompasses some of the first one, is that basically consumption overall has slowed down. And there is data to that effect that the economy has slowed down, which I guess is quite evident. Consumers are consuming less. And that is having a cascading effect on all of this, which is the way the levers and the Nestle's are selling and added to it the additional competition that they're facing.

Yes. Obviously, there are both cyclical and structural limits over here. The cyclical part is what you referred to as the slowdown. Yeah, that's pretty clear there is a slowdown, especially the urban poor have been struggling for the last two, three years. We have started to see some rural recovery. We have had two decent crop seasons.

Even this monsoon looks okay. So hopefully, that kind of rural recovery, which we are seeing companies have been highlighting it, that continues. And over the medium term, hopefully, urban consumption also starts coming back once job creation, etc., start taking place at a faster pace. But the challenge still remains that India is simply not creating enough number of good quality jobs. It is creating jobs, so there's no doubt about that. But in the context of the requirement of job, that is where the big challenge is.

And if you look at incrementally, and there's a lot of government data based on the Labour Force Survey, which the government does, incrementally, what we are seeing is a lot of rural female new workers are ending up in agriculture. And a lot of urban male workers seem to be ending up with a weak economy, where income levels are not going to be very high anyway. So that is one of the big challenges in India that we are not getting enough number of good quality jobs in high end services or manufacturing, etc., which means a lot of people are ending up in somewhat low paying jobs, I would say, which is what is resulting in this cyclical slowdown. And unless and until we fix the job issue clearly, this will be a problem for the medium term also. The structural limit is what I talked about. It's just a lot of disruption now coming in across sectors, across categories, just not consumer.

Any other sector you pick up, it's the same issue. So this is what my humble request to all investors and analysts is that please start focussing more on the business models and how they're changing, what could be a risk area, and so on and so forth. Rather than just simply look at what has happened in the past, that is going to deliver in the future.

Also, that is not going to be the case and massive changes coming through. And somewhere the market has to start taking cognisance of these changes.

So, one of the arguments or points that, again, I've heard in recent months is that maybe in some cases, people are just not consuming more. So, for example, how much soap or how much more soap can you consume or how much more toothpaste can you consume? So, are you sensing that as well in the way when you look at, let's say, again, sticking to consumer products and fast moving consumer products?

I don't think that's the case. I think it is more of a problem of affordability, I would say. Income level is not rising fast enough, I would say, because if you look at the usage in India, it's still very, very low.

This penetration is very high. So, just about everybody has access to toothpaste and toothbrush and et cetera. But what is the usage?

If I recollect some data, Colgate actually had a few years back, maybe it's still relevant, 80% of urban users I still think brush only once a day and rural is the other way around. So, the usage can definitely go up.

The second thing is, remuneration will continue. As people's income levels keep on rising, they will be in a position to afford better products over a period of time. So, it's not as if the companies do not have rivals.

I think usage is on the lower side, that will increase over time, remuneration will continue, all that stuff. It's just that the growth opportunity will be captured by more number of players. Whether the profitability will hold or not hold in a more competitive environment, that is something to keep an eye on.

So, I would assume you should prepare for lower growth rates compared to what we have seen in the past. Yeah, there's certainly a little bit of cyclical slowdown, but hopefully the country will overcome that.

So, if we were to now look at companies that can outgrow this phase or can grow faster in this phase, what would they be? Or sectors that can grow faster in this phase where most earnings are under stress and valuations are obviously high?

I mean, if you step aside beyond the consumption sector, there's only sectors which are growing very, very fast. So, the entire manufacturing space, for example, will continue at a very, very fast pace for a decent period of time, I would say. For the simple reason, India is not manufacturing all the items it consumes.

So, over time, a lot more of those items will be produced in India. If you look at a simple thing like mobile phone, for example, as of now, we are still in the last mile stage of production of mobile phones. I mean, we are still importing most of the components from foreign states and assembling it over here.

So, technically, we are making mobile phones in India and we are exporting also mobile phones, but the components we are still importing. So, over time, as the ecosystem starts developing, it will start seeing more and more components getting manufactured in India also, all the way to the chip state. And a lot of companies are focused on that.

So, the entire manufacturing space will probably continue to grow very, very fast. And I'm including things like the entire electronic chain, solar PV modules, cells, and all the back-end products over there, all the batteries, et cetera. So, a lot of new sectors, you will see very, very strong growth.

Even in the consumption part, you are seeing decent growth in the high income household consumption. So, anything to do with, let's say, hospitality, hotels, et cetera, travel, doing very, very well. Healthcare services, again, doing very well.

I mean, for the simple reason, the penetration of quality healthcare services is still very, very low in India. So, that will continue to grow. As income levels continue to rise.

So, there are enough number of growth opportunities. So, that is not an issue at all in the country. There are enough and more growth opportunities available for companies and several sectors which continue to grow at very, very fast rates.

And just to come back to the valuations question for a moment, you're saying that in cases like hospitality, travel, healthcare, or electronics, you're not seeing so much of a valuation stress?

The valuations are high over there, but the growth runway is very, very long over there. So, I'm less worried about the valuations over there. So, if your company is trading at 70, 80p, it may look optically high, but it will bring at 30, 40%.

You can make some case over there, which depends on how long it goes. But if your company is growing at, sorry, if your company is trading at 50p, which is part of the case for many of the consumer staple companies, or even some of the restitution companies, and the growth rate is low single digit, it becomes impossible to justify that valuation. It makes no sense.

I mean, mathematically, it's impossible. Unless and until you assume a cost of equity, which is sub 5%, there's no way you can justify a 50p for a company which is growing at 2, 3%. Absolutely doesn't make any sense.

It's simple. The math is, if you take cost of equity at 11%, even if you take 5, 6% growth, let's say for the sake of arguments, it's just growth. So, that means let's say it's a 5%.

So, what about 5% at 20%? That's 20p. So, that should be the P of the company.

Somewhere about 20p for a company which is less than possibly 11% and going at 6%. But the market is happy to give 50% for even growth rate, which honestly doesn't make any sense. So, unless and until the market is very convinced that eventually the growth rate will go back to much higher levels.

But the science is not there to be honest with you. And as we have written the report also, a few years is good enough. By this time, I think people should start recognising the fact that the fundamental changes are put over here, and at least take cognisance of that.

Living in this hope that at some point in time, you'll see a recovery in volumes and top line and bottom line growth, I think is being a bit unrealistic, I would say.

So, when it comes to stock picking, and I guess we're venturing into more fundamental, maybe Benjamin Graham territory. But one of the things that investors are talking about, including institutional in India, have tended to, or the approaches they've tended to use is to buy stocks or companies which are fundamentally good. And when they say good, I guess there's a lot of, they're more intangible, perhaps than tangible.

So, it could be governance, the quality of management, the consistency over time. So, again, many multinationals fit into this, maybe an HDFC bank fits into this. So, and on the other hand, they may not for prolonged periods of time, demonstrate growth in top line or bottom line.

So, would they be part of your portfolio today, or would you have a different view?

See, things have to keep in mind is the fact that I don't want to take anything from Benjamin Graham or anybody. But the context is very different now. 30, 40 years back, you could sit back and look at a company and say, this sector will continue to grow.

I have the best company over here, so I'm fine. The problem is, what we are seeing is that every sector, you're seeing so many changes now. It is becoming very hard to have this, I would say, buy and hold strategy for a very long period of time.

Because you are seeing structural, massive structural changes in sectors, you had no idea about five years back. Suddenly, a lot more disruption is coming forward. So, obviously, it makes the task of investing a lot harder.

What you can hope for is that the companies that are good as of now will be in a position to navigate those challenges. But then you can't make that assumption forever. Given the fact that changes are happening at a very rapid pace, you have to be confident about the fact that your chosen set of companies will be in a position to navigate the changes.

So, that means constant monitoring. You can't have that, okay, I bought a stock and I will stay for the next 10 years, it will be fine. In 10 years, the whole industry will be going forward.

Given the way that things are changing these days, who knows what's going to happen to the investing industry, for example, the way it's taking shape. It could be machines investing and machines giving recommendations, you and I will all become irrelevant. Who knows, man, the way things are changing so rapidly.

The only thing I can hope for is that you are fast enough to stay ahead of the changes, that's all you can hope for.

Yeah, I'm reminded, I mean, what you've seen in literally in recent weeks, from the Chinese car companies, I mean, it's essentially mobile phone makers or battery companies, just a year or a couple of years ago, and who are essentially, you know, overturning the entire automobile market, global automobile market, and they could do more if they were maybe allowed into markets that they're currently not allowed into, including the United States.

Absolutely. It's amazing the way things are changing. It's going to be a lot more fun, that much I can assure you. It's challenging, but fun.

So to come back to where we are right now, we've entered the Q1 earning season, and for the last, again, 12 months or so, we've been hoping that every subsequent quarter, we'll see an uptake and things will start improving, because to your point earlier, we are in the middle of a more cyclical downturn rather than a structural one. So are you seeing those signs now? I mean, as we are here in the month of July 2025?

Not in, I would say, the consumer space. It still looks like a fairly challenged situation out there. Only in the rural part, we're starting to see some recovery.

See, the hope is that Govind, in between a combination of the income tax cut, which was done by the government budget, 1 lakh crores of benefit given to income tax payers, two decent off-seasons, which has already resulted in some revival in the rural economy, 100 basis point rate cut by the RBI, and lower inflation. Hopefully, some combination of this should result in some recovery in consumption. But what we need is definitely a situation where more jobs start getting created and more jobs, let's say, reasonably, I think, which can be in manufacturing and high-end services, not in agri and low-income services.

So that structural force is still some way, I would say. You could see some recovery based on the fact of those four facts, which I highlighted. And in the second half of next year, assuming the pay condition gets implemented, you will probably see some increase in the spending capacity of the government-related households also.

So hopefully, some recovery in consumption as we go forward, and then structural forces hopefully take shape here. My worry is in the short term is you're going to see a slowdown in the investment part. And that's been one of the biggest drivers of the Indian economy in the last four years.

And within investment, you look at it in two drivers, which is government spending and household spending, which have been the – not private, household, which have been the big drivers here. Now, if you look at the government's own numbers, I'm talking about the central government over here, you have seen a flattening of the government's capex numbers, by the way, especially for some of the big core infrastructure sectors like railway and road. We are not seeing any growth now in 26 billion numbers if you compare to 25 numbers.

I think there's zero and 5% decline for the two sectors. And what about growth? You are seeing an overall 7% growth for central government capex.

That is also coming in sectors which I don't think the government will be able to spend money towards with India. So that is one problem. We are going to start seeing some slowdown in government expenditure.

And the real issue problem over there is that I don't think the central government can incrementally spend a lot more money in railways and road. That's a separate point of discussion. But I think we are picking out over there in terms of the possibility to spend over there, I would say.

It may sound like a strange argument, but I think highway network in India is largely built. We can still add to it, but the pace of new highway addition will slow down dramatically. Railways also have seen a lot more, lot of, you know, development which are done in the last 10 years or so.

And upgradation.

Yeah, all that is done in my view. So unless and until we plan a big, you know, high-speed railway network, I think railway expenditure also is going down. So that is one issue.

And state government, unfortunately, do not have the money to spend. You know, most of them are running at 3% state fiscal deficit to state GDP. Of course, they can only grow in line with normal GDP at best here.

And if you look at the other item, which is household capex, you had a very nice residential relationship cycle starting from 2020 to now. It's still continuing, but it looks like there could be some slowdown over there. It's still not visible.

But, you know, the worry which I have is affordability, which had improved dramatically between 2014 and 2022, because real estate prices hadn't really gone anywhere in the last, in that period, between 14 and 22. Pretty much across the six major metropolitan markets, if you leave aside Hyderabad, prices are pretty much flat here. In nominal terms, which means the real-term prices have gone down, incomes have still been growing.

My worry is in the last 20, 18 months, we have seen very steep increases in prices in most of the metropolitan markets, barring Bombay. So, that result in affordability again getting hit, and maybe some slowdown in essential real estate going forward. So far, we're not seeing any signs of it, but keep an eye on that one.

So, we have a situation where consumption may start picking up a little bit, as we discussed based on the four or five factors that we discussed. But at the same time, this year onwards, you could possibly see some slowdown. Which means it is very unlikely we'll see a big acceleration in GDP growth.

So, what's the 6.5% last year? We're looking at 6.2% this year.

And if I were to come back to, we talked about two aspects of expenditure or spending, you talked about government spending or public spending, and you talked about household. And let me sort of quickly ask you about private capex as well, which of course has been steady to stagnant in recent years. There was a time, and I'm sure that it maybe still is, depending on which example, that a company says, okay, I'm going to expand capacity, I'm going to go into a new market, or I'm going to acquire, and the stock market rewards that, because that's a sign of growth.

And we haven't really seen that, at least as that as an element of excitement or interest in a stock. How are you seeing this as a signal? Or the fact that there is no real signal or there are not enough signals of growth and capital growth and capital expansion?

I should have addressed that. As a private spending, we are not seeing any signs of any real acceleration over there. And if you look at the data over here, between 19 and 24, that's the last data which we have from the RBI, private corporations spending as opposed to GDP, which was 11.6% of GDP in 2019 has gone down to 11.2%, which means it's going at lower than normal GDP growth rates. Compared to that, if you look at common spending between the public sector and government, that number has gone from 7.3% to 7.9%. So clearly, you're seeing a big acceleration over there. And particularly between 21 and 24, the number has gone from 6.8 to 7.9%. Massive acceleration as you can imagine. And the same thing is true for the household part also.

10.8% to 20.8% in the last three years, which means they're going much faster than normal GDP growth rates. So coming back to the private sector, the challenge over there is that, to be honest with you, there are far fewer sectors which the private sector is keen to invest in now compared to, let's say, 20 years back. If you look at 20 years back, you had several sectors which had been opened up for private sector investment, whether it was roads, whether it was upstream oil and gas, electricity.

Electricity Act of 2003, if you recollect, and so on and so forth. And between 2004 and 2008, if I remember correctly, private capex as opposed to GDP used to be less than 6%. That went up to 14%, by the way, in a matter of four years.

And then it eventually tapered down to 11%, 12%. It's been stuck in that bando forever. At that time, the private sector was very keen to invest in five broad areas, and the portrait is very humongous at the time.

You had the entire electrification part, that is, at that time it was coal-based electricity generation. The entire metal mining sector, remember, you had a massive global commodity cycle linked to growth in China. Then oil and gas.

Reliance was investing in a big way in that sector. Roads and telecom. Remember, at one point in time, you had 12, 14 telecom companies.

If you fast forward to now, we have a situation where the private sector seems to be keen currently to invest only in electrification, which continues. So now we have solar, wind, renewable electricity generation, and all the ancillary industries, the solar-powered cells, all that stuff. So thankfully, a lot of progress over there that continues.

And beyond that, we are seeing some investment in metal mining. At this point in time, or at least it looks like to me, even in the future, very unlikely the private sector will be going to be setting up a new refinery or investing upstream in a big way. Very, very unlikely.

Roads are largely done, as we discussed. And telecom, you have effectively three players now. And what an idea, not even a position to invest aggressively.

And also the 5G CapEx is largely done over there. So that will also start to slow down. So that is the whole issue over here, which in some ways the market is not recognising that the private sector has far fewer opportunities to invest in compared to what we used to have earlier.

The five big core infrastructures have reduced, in my view, too, currently. And that may be the case. Where the private sector can do more investment is more in manufacturing.

But honestly, manufacturing, the way India is doing it currently, which is still last-minute assembly work, does not require a lot of CapEx. The effort to ensure manufacturing is something like seven on an average, if you look at across various sectors of manufacturing. So only when we get into the component in the upstream stage of manufacturing, and hopefully you're seeing a lot of progress over there, that is when maybe you start seeing big private sector CapEx eventually coming through.

But if you continue with last-minute assembly work, I don't think you're going to see any big pickup in private sector CapEx now. So that's the challenge over here. Number one, the opportunities for the private sector to invest in have rendered significantly.

And number two, again, which is something not discussed that often, is the number of risk-takers in the economy has also declined dramatically. And you have so many more companies in the past who were willing to invest in the core infrastructure sector. And obviously, a lot of companies over-invested, over-stressed the balance sheets, eventually went bankrupt.

But the assets did get created, whether it is in power sector or in steel. We have so many companies at one point in time, coal-based thermal plants, steel plants, and whatnot, but eventually they went bankrupt. But the assets are there, now owned by the larger entities now.

So that is our problem over here. Fewer opportunities, fewer risk-takers, it looks like to me, in the private sector.

And I must, at a later point, draw you back into a conversation, which is, I think, very interesting and fundamental. I have the number of big risk-takers in India reduced, and why so, and whether that can change. But that's a different conversation.

So we're sort of running out of time. So let me ask you one or two quick questions, Sanjeev. So if you were to construct a portfolio in these times, keeping in mind everything that we've discussed, what would you or how would you do so? And I'm obviously mean sectorally.

Sure. So you start with the process of elimination, because everything is expensive at this point in time. I would say fairly valued to expensive.

So you start with the sectors which you clearly want to avoid. So most of the consumption, I would avoid, given the fact that they're trading at very, very high multiples in the context of growth and the medium-term issues. I mean, I have no issues about, let's say, one or two years.

But if I'm clearly not looking at growth even two or five years down the line, then you have a real problem. I am paying 50p in that case, right? So that is zero in the model portfolio, which we have.

IT continues to contribute, given the headwind which the sector is facing. Not that the growth opportunity is not there in the medium-term, but in the short-term, at least, you're not seeing a lot of, I would say, headwind in the form of the customers of IT services companies not in a position to decide on it, given all the uncertainty linked to global geopolitics and tariff issues and whatnot. So those are the two sectors which we are extremely light on.

Other than that, cement, et cetera, small sectors, I really don't understand the valuation of those sectors, so that goes on. So where we have some constructive view, one is the entire financial services space. The sector has done well over the last 12-18 months.

There are some short-term headwinds in the form of new compression for banks, which is very well known. That's a quality issue, looks like, under control. Multiples look fair, so I am not making a case for editing in the multiples over there.

You will probably not see a lot of growth in earnings this year, that is FY2026. But the book will still come forward with what are the ROEs of the banks and BFCs, and most of them are doing, let's say, the PSG banks are doing between 10% ROE, the private sector banks are between 14% to 15%, and BFCs are slightly higher. So hopefully book compounds, the multiple stays where it is, the price of a particular remains where it is.

So you make some money on the compounding in the book itself. So that looks fine to me. Healthcare services, broadly speaking, again, sector which we like.

So domestic pharma is something which we like because most of the companies are delivering, you know, I think, a legit, loadable, legit kind of growth rates. Multiples are high, but I think I can live with that problem in the context of what I am seeing otherwise in the market. Healthcare services, which is hospital, diagnostics, we actually like the sector a lot.

Yeah, maybe balance should go up, you know, over there, but these companies are delivering fantastic growth, and I think they are going to go at very, very high rates for a long period of time. So that we are okay with. And then you have to be, you know, picky a few stocks in there, depending on their growth profiles.

So we like some of the high-end, especially, you know, consumption sectors. For example, we have some stocks, for example, Zomato or Indigo, which are playing at the very high-income household, you know, consumption, long-run way of growth. And at least the market structure there look reasonably safe in the sense, you know, you have two players in the food delivery market, you have especially the two players in the, in the civil aviation segment.

So long-run possibility, a larger possibility, long-run way of growth, concentrated market already looks fine to me. And then we have Reliance, Markey, et cetera, which are more players of telecom, expecting at some point in time. Good defensives also, I would say.

So that's about it, you know, in terms of how we have constructed the portfolio and where we are constructed on and where we, what we don't like currently.

It's interesting you mentioned, since, just since you mentioned it again, you mentioned Zomato and Indigo. So one is very profitable and the other is very loss-making. So how does that square up?

The thing is, the food delivery business is doing, you know, pretty well, right? You know, you're still seeing 70-80% revenue growth over there and the runway of growth is pretty, pretty strong over there. The loss-making part is more coming from the quick commerce business, you know.

So yeah, there is a lot of competition, hyper-competition, clearly, you know, at this point in time. You have three pure quick commerce companies, you know, and then you have the arms of your modern retailing companies also all slugging it out. So it is possible that, you know, the losses could sustain over here for a longer period of time, depending on the competitive intensity.

But I think, you know, that the business model is great, I think, I'm honestly surprised by the way this quick commerce has caught up in India. I was thinking, you know, why would anybody pay extra to buy, you know, let's say, long lead items, which will sit in your pantry for a long period of time. But Indians seem to be paying, you know, for just the convenience, you know, of having, you know, good delivered at home.

It's pretty amazing, you know, and the trend should likely continue, you know, penetration levels of quick commerce are very, very low. So at some point in time, you know, the business will become profitable, hopefully, but even just because the market itself, you know, becoming much larger in the next three to five years time, you look at the growth rate, they're all doing 100% plus kind of growth rate. So over time, you know, what you will start seeing is the job, you know, working in the right direction, revenues keep going up on a, you know, per unit, let's say, even if it remains the same, revenue is going up, per unit cost starting to come down, which means the profitability driver starts becoming better over time.

So that's what we are looking at, you know, currently, obviously, the unit cost does not work. But as volumes keep on increasing, unit cost will start coming down, and hopefully the commerce will become a lot better.

Sanjeev, before we go, let me ask you, slightly, maybe, I don't know, abstract question. So in all the years that you've been in the market, what would you say was the most exciting phase? Or are we still in one?

Different levels of excitement, different types of excitement, I would say. I don't know, I mean, you know, see, these days, I don't focus that much on my strategy part anyway, since I focus more on running the business. But yeah, I mean, I would say different levels of excitement at different times.

But see, a lot of things are happening now, you know, and looking at 30 years of being in this market now, when I started, I used to be fairly simple, you know, job, you know, companies were relatively simple, sectors were less complex, pace of change was glacial, etc. You know, nowadays, things have become a lot more complex. You know, the pace of change is very, very high, as we're discussing across sectors, you're seeing so much disruption, who knows whether the industry is relevant, companies are relevant, you know, so that bit is also exciting.

The pace of change itself is, you know, humongous, I would say. So that way, you have to be a lot more sharper now, you know, be very, very cognisant of all the changes that are taking place around you and be adept to, you know, to adapt to the changes. Otherwise, you are toast, you know, in this market.

Sanjeev, it's been a real pleasure speaking with you. Thank you so much for joining me.

My pleasure. Thank you.