In the next two to three years, what could be the high growth potential sectors? Would it continue to be the platform companies?
Hiren Ved: Yes, I mean I think there is a structural shift that is happening right. So, what happened is that post demonetisation (DeMon) and GST, we saw consolidation. So, the more organised, the big brands became bigger, the bigger companies became even bigger, but then came the platforms and we are now seeing fragmentation again.

So, there are smaller brands in food, cosmetics which are challenging the bigger players. So, we had consolidation and now again fragmentation because tech platforms are enabling it. So that is where the challenge is and therefore, I believe that tech driven financial services or tech driven consumption is where growth is likely to be. These guys are very innovative. Once the platform has been built, they are doing food delivery, quick commerce and creating businesses. They are creating an entertainment business on the same platform.

So, there is a little bit more innovation. We have been all saying that India’s tech stack is great, but this is really the benefit that we are seeing of the tech stack which has enabled first generation entrepreneurs to come and build phenomenal businesses. But it takes time, they make mistakes, they burn a lot of money to acquire customers. Now a few of them have come to a stage where they have achieved scale. They have 250-300 million customers. They have 50-70-80 million customers who are paying and that is where the real growth is going to be.

In many industries, a lot of business models are changing. I remember very clearly Uday bhai (Uday Kotak) saying a couple of years ago that all the banks missed the UPI story because everybody thought there is no money in UPI, why should I spend money creating and adding customers on UPI. But now people realise that UPI was just a hook. You go on the platform, you transact, you pay your bills, you buy stuff and because you are on the platform and the customer is sticky because it is like a utility, you keep going back.

Then you can cross sell other financial services to that platform. So, what we are seeing in the last three-four years is that while the traditional mindsets organise, big brands, deep distribution, all that is getting disrupted at a very fast pace. The Levers and the ITCs and the Maricos of the world spent decades building deep distribution. Today, a D2C brand can hire a third-party logistics guy, advertise on any platform and get going. So, a lot of businesses are getting disrupted and the old order is likely to change, but it takes time and the way it manifests is that sometimes those stocks just do not do anything for years together. There is a very steady derating that happens. For us it is very clear where the growth is and where the consumer is going. If the consumer markets on the whole are growing in single digits but somebody is able to capture 25-30% growth, then the value is going to be created there. Obviously, these companies also need to make cash flows and all of them are now focusing on profitability and cash flows. So, that is where the growth is going to be.

That means you will buy Honasa?
Hiren Ved: No.

But they are doing exactly what you wanted…?
Hiren Ved: But again, just because you are a platform does not mean that you will do well. Platform is just a euphemism of saying that these business models are now trying to disrupt, but you still need to execute well.

Would you find a winner in the consumer space? Ten years ago it appeared that Patanjali was going to eat into HUL’s market share. But today HUL has added a Patanjali turnover in five years. India’s number one FMCG company is still HUL. ITC has caught up. Britannia is still there. So, while there are a lot of great small D2D brands, they have not really managed to make a mark. So, could that be the challenge for the FMCG space?
Hiren Ved: Look,, Bharat is still where there are 400-500 million customers. So, I am not saying that these companies will become irrelevant. I just believe that in this cycle there is a lot of disruption. They have a growth challenge. Their starting valuations were high. There was a time when Lever used to compound at 25% a year. They were making acquisitions like TOMCO. They were acquiring brands. But those were the times when they were able to eke out strong compounding growth.

Today, they are still great companies. But unfortunately, the consumers have shifted. Now, you have achieved penetration in soaps and detergents and so on and so forth. So, it is not that these companies will become irrelevant. It is just that post COVID, the consumer at the bottom end has really lost purchasing power and it is taking time for him to rebuild. Also, the consumer’s preferences are changing. They are now spending less on food and more on consumer discretionary stuff. Now, the question is who is able to capture that client more efficiently.

The Finance Minister mentioned somewhere that for the first time, the Indian basket is 50% lower in food. Earlier, the average Indian spend of the basket was 50% on food. Now, for the first time, it has gone below 50% and they are happy about it. It is actually true.
Hiren Ved: Yes, because as incomes grow, you move beyond the necessity to the next big thing that you want to do. You asked about where the growth could be. Today itself, in ET there is a lead article about the government wanting to incentivise component manufacturing. EMS is a big growth area. I know stocks have done phenomenally well. But this reminds me of how IT services grew. Every small, big, medium-sized IT services company grew because the opportunity was so big.

Manufacturing is a large opportunity within which, in the power T&D or electronic manufacturing segment, the largest company is Dixon which is a $2 billion company. If it is a $70-80 billion opportunity, I am sure there will be few companies that will become $4-5-6 billion companies.

Again, one needs to be careful about what valuations you pay. But I just feel that growth is emerging in completely new areas. It is not where we used to traditionally look at and that is both interesting and challenging. But then what happens also is that there are areas that you ignore for a long period of time. Expectations are very low. These companies are still high quality companies and they do better than expectations and then incrementally you could have a short burst of medium term where these companies can do well.

But the key is to create a portfolio where a large part is in structural themes and then you also play some of those areas where the businesses are great, but there is so much of pessimism priced into those businesses that at some point in time they become very attractive to own.

Sure, the EMS theme is very secular. How do you decide that you want to pick up let us say a Dixon and not Kaynes or Amber because Dixon has become 3X last year. Even Trent, which is one of your holdings, has become 3X. How do you decide to sell that or diversify into other names?
Hiren Ved: It would take a couple of hours to answer that question. But again, taking the analogy, when you have a large opportunity, there are several ways to play it. Sometimes you buy an entire basket and the whole basket will do well. I remember during the tech boom, you bought Wipro, TCS. At that time, it used to be called Mphasis BFL PSI Data Systems, Visualsoft. Everything did well.

Over time you get to differentiate because you start looking not just at simple growth, you start looking at many more metrics. And then you start seeing okay I mean why should Dixon trade at the multiple that it is trading because it has the best working capital management than any other EMS company. But then you start segmenting. You said okay, if I want to play EMS in consumer, I will play Dixon. But if I want to play EMS in industrials, then I would buy Kaynes or Syrma or something else.

So, as you get more insights into the business, eventually you will find that returns start to disperse and the better execution guys get far better returns. It happened in NBFCs. Why did Bajaj do better than somebody else? There are many other NBFCs which tried to do what Bajaj was trying to do but failed. I do not want to name, but there was one great NBFC which tried to do what Bajaj was trying to do and they stumbled.

So, it is really about execution, execution, execution. The opportunity is big. There will be 10 EMS companies who will try to grow because the opportunity is there for everybody to grow. But which are those two-three who will execute the hell out of that opportunity with the best margins, the best return on capital, the most disciplined capital allocation. That is where the big money is. This is age old.

Why is it that Trent outdid everybody else because they just executed so well on that opportunity. I am saying that beyond just identifying the opportunity, you have to look, go down and open your balance sheets and look at how each management team is executing. Generally, the market is very smart.

If you make a table of 10 companies, you will have the highest to the lowest PE. Broadly speaking, the markets figured out who are the very good performers because they eventually get a higher PE multiple and what people try to do is as they consider one very costly, they buy the cheaper one. It is true, but very seldom do we see the cheap guy becoming number one. Sometimes it happens, but usually the best guy continues to execute well.

Again, there is no one single answer because every sector has different dynamics, but broadly first catch the big trend. If you cannot differentiate between A, B, and C, you just buy the whole basket. Over time you learn much deeper about the sector and you start differentiating. These are the two-three horses that I want to back if I want to play this secular theme.

Across your portfolio, which are those two-three horses, where you are convinced about the valuation that they are trading?
Hiren Ved: Unfortunately, I cannot comment on single names.

For the declared portfolio.
Hiren Ved: Yes, I mean, so, we do have exposure to Dixon. But it is not something that we bought now. We have been invested post COVID, so it has really done well for us. I do believe that just like Dixon on the industrial side, Kaynes is probably showing those colours where they seem to be getting their act together fairly well. CG Power has done well, but we do not own it. We do own Trent. Again, it is something that we want for 12 years. So, do not blame me for buying today at current valuations.

So, in consumers, Trent, United Spirits, Varun Beverages, Zomato, are our big bets on the consumer side. In manufacturing, we own Dixon. We own all the capital goods guys, ABB, Siemens, Hitachi, GE, the entire value chain across power and cap goods. We own that. Among platforms, we own MCX which has done fairly well. So, Paytm is another one that we own.

You have not bought the new fancy solar names or the so-called energy transition stocks, the green and clean names?
Hiren Ved: We have played the energy transition story through the capital goods companies. They all feed into multiple sectors. When you are buying a Hitachi or a GE or an ABB, you get to play several end user industries including renewables. So, there are several ways to skin the same cat. I mean, you just have to figure out your most efficient way to do it.