Manish Bhandari, CEO and Principal Portfolio Manager of Vallum Capital, doesn't look for "surprises" when he invests. He looks for stocks with the lowest downside risk. In other words, he looks for the best of ideas but not to hit the ball out of the stadium.
He looks for companies that have reasonable growth from a valuation point of view - 15% to 20% volume growth rate, and fallen angels. This would be a company that has done well at some point in time and there is a possibility of a comeback.
Here are some interesting perspectives.
We import technology. We are technology consumers.
We live in a globalized world where few issues converge together - artificial intelligence, robotics, sensor technology, IoTs…
Disruption was always a technology world. But now, when you have this convergence of technology, disruption is far, far more powerful. The live example is the retail in U.S. – disruption by Amazon, the whole value is shifted from one side to other side.
Indian corporates have not invested in research and development. If you're living in a globalized world where the trade to GDP ratio is close to 50% - the technology is getting imported. When you import a product, you import a technology, assuming from a theory of competitive advantage, that someone has produced this product at a higher technological cost curve. So, you're importing technology.
Indian corporates have not been actual innovators or disruptors in the marketplace. We are technology consumers, not innovators.
We failed to innovate, which means the pocket of opportunities gets narrower in India.
What do I mean by the MNC-ization of India? You travel by Uber. You use an iPhone and a Dell laptop. You keep in touch over WhatsApp. Your luggage is Samsonite.
Many of these MNCs are not listed in India. So, traditionally, what you could land up with is lot of lemons in India. We failed to innovate. We have not invested in R&D. So the pocket of opportunities would get narrower in India.
Look at the period from 2002 to 2016, where we had a big boom in mobile telecommunication. Yet, as of today (2017), 60% of India's mobile market share is among the Chinese companies. Nokia, which was a global leader, has been displaced. Why did India not produce mobiles? We don't produce, we import, we consume. Look at the solar boom. We imported the solar panels. We are talking about electric vehicles. Are we producing the battery in India? No. We don't have a battery technology. We are looking at importing it.
I was studying the compressor industry, and I figured that the global leader or the most technologically-advanced company I would like to own, is no more listed in India. It used to be listed in India, it's not listed anymore.
Society has to produce a lot more value, you have to move at the pace at of globalization. Only ageing comes free of cost.
A sector that I’m particularly scared of that will be decimated by technology, which is not recognized by the market today, is textiles, where we have a very low value addition and a lot of stakes.
There is a robotic facility up in the U.S. All along it was made in China and sold in the U.S. What you have now is made in the U.S. for the U.S. At this robotic facility, Adidas produces a T-shirt for $0.33. This robotic piece can produce 8,00,000 T-shirts a day. Now multiply that by 21 robots.
Leaving out the 50-100 companies, what we are talking about 125 crore population to be fed and lifted back from a poverty line to the consuming class. When I see those kinds of big land shift changes, I am a worried man.
Let me give an example. From 2000 to 2017, the last industry we heard of some critical size was Infotech which produced lot of jobs together and auto ancillary and pharmaceutical to some extent. Look at China. They have produced solar panels, industrial robots, electric batteries……
There was a study done in Germany, which says that among the top 15 industrial robot companies in the world, 10 or 12 are from Germany. These industrial robots did not take away jobs but produced jobs because they are consumers of technology as well as producers of technology.
India needs to do a lot, lot more to produce world-class companies with world-class competitive advantages.
If electric vehicles are the certainty of the day, it will be extremely challenging for the industry, including the auto ancillary industry.
Maruti has a 50% market share. With the emergence of electric vehicles and self-driving vehicles, can the whole auto industry change in the next 10 years?
There were regulatory changes globally. The industry in electric vehicles was supported by governments, even in China. So, would the government have enough resources to feed subvention cost? No. If you look at the way the cost of batteries would go down over a period of time, look at the cost curve, the answer is yes, definitely. Maruti would have far more chances than many other industries towards this and a lot of – maybe a few new companies may come up in the process.
As Ramesh Damani mentioned, Maruti should probably think of themselves as not being in the auto industry but the transportation industry, and then they would move ahead to electric vehicles.
The case I am making is that till you produce – when you live in a globalized world until you produce a global scale technology, a global scale research and development, a global scale size and a competitive advantage, it's real difficult to pull it off.
Of course, we have long way before we get hit on by electric vehicles (this was said in 2016). Before that, there are government subsidies etc that get involved in the process. Government regulation could change. Maybe they will force a lot of companies to manufacture battery here. Maybe a lot of things will happen in the developed world.
When selecting a stock, you have to see where the value is sitting.
Whenever you dissect a stock, you have to see where the value is sitting. There are various ways to look at the stock and maybe you need to look where the value is sitting in the desegregated chain.
Probably, the value of a footwear company sits in distribution, not manufacturing.
India is a large market. You have a low price point footwear. It's very difficult for any of the companies to get in so easily. But yes, if you're looking at the top end, yeah, definitely. If you're selling footwear in a mall, whether that will compete with Nike and Adidas is something you need to see. So, segmentation is very equally important when you're looking at the aggregate value chain.
I have been using Airbnb for the last seven years; abroad and in India. I've used Airbnb in India, outside India. When you use Airbnb, which is a private residence, you don’t use the institutional white bed sheet, but a printed one. So, Airbnb is on its course to sell, maybe close 750 million room nights in the next year or so (this was said in 2016). This is a private company, so numbers are very hazy to guess, but that's what the broad numbers are. So, you have this replenishment of the bed sheets, which has gone into the system.
I realized that Indian companies have got a moat in terms of selling the bed sheets to the U.S. markets, predominantly cotton bed sheets. I was never impressed by the PSF bed sheets but by the cotton chain of India. The market share of Indian companies in the U.S. should be close to 55%. What also happened was that China vacated the low-end space and they never had a huge competitive advantage. Then the whole market share was up for the Indian companies to grab and the whole Indian – the foundation of the Indian textile home bed sheet industry came up, say, in a significant way.
Manish Bandhari presented these views at the Morningstar Investment Conference in 2017.
This year, veteran investors will present their stock picking strategy at the 9th Morningstar Investment Conference to be held on September 17-18, at Hotel Sahara Star, Mumbai.
Registration
Speakers and Agenda