Markets & Mandate: Where to invest in E-M-I basket going forward (2024)

Nilesh Shah, MD & CEO, Envision Capital, says over the next 5 to 10 years, the pecking order in the Energy, Manufacturing, Infra (EMI) space will still be dominated by ABB, Siemens, L&T. These are essentially the companies which essentially are going to be the enablers of the EMI space. I do not think they are going to get bigger and bigger and you are really not seeing new players coming in there and they have the trust of their customers because these are such critical equipment that you are not going to compromise on anybody else and you are essentially going to go for the established players. It is these kinds of companies which will continue to dominate for the foreseeable future.

Shah says: “Within EMI, if I were to use energy as well as infra, Hitachi Energy has been a position that we have now owned for three, three-and-a-half years. In this space, we have been owning KSB, which we have partly exited. We have been owning TD Power. We have been owning Jash Engineering”

We currently are a $4 trillion economy. The financial market is about $4-4.5 trillion. In the journey from $4 to $10 trillion, when it will happen, we do not know. What will happen is what we both know, which is that $5-6 trillion will get created in the next three to five years. Do you agree with me?
Nilesh Shah: Yes, that is right.

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You agree with me. Where do you think 50% of this market cap will get created, that is what we need to figure out for our viewers.
Nilesh Shah: I still think it is going to be companies which essentially are going to adopt technology to grow either their consumer business, to grow their financial business, or grow their manufacturing business. I still believe that technology and digitalisation are going to be the starting point for every and every business. Whether we talk of EMS, semiconductors or anything else, the big wealth creators will have to be the digital champions and the technology champions.

What is the direct proxy for semiconductors in India?
Nilesh Shah: Right now, I do not think there is any direct one. But you never know. I mean, five years back there was probably no EMS company. In five years, we have seen how the EMS space has. We will have to essentially keep our eyes and ears open.

So, what should investors do?
Nilesh Shah: No, say, for example, on the defence side, there are companies that make defence products. Then there are guys who are investing in technology to creating defence-oriented solutions or aerospace-oriented solutions.

BEL is making aircraft. You are saying buy a company which essentially will be helping in running the aircraft radar, the aircraft software, running a simple safety mechanism.
Nilesh Shah: Yes, or even further, let us assume we own MapMyIndia, that is a deep tech company.

What is deep tech?
Nilesh Shah: It essentially is where you are pretty much creating a new technology, which has huge impact or huge implications, which is something where you are creating technology rather than you are just essentially taking somebody else's technology and trying to kind of put your solution or put your product.

This company essentially makes drones, which is now the next big focus area and along with drones, a lot of navigation and geospatial technology and all goes into drones. Out there, for example, a company like that is trying to kind of create solutions which can go into areas of drones and drones, in turn, can get into a wide range of applications. You could call that applications for defence, agriculture, for navigation, for delivery and many other things. A company like that can have huge potential.

So, would you call MapMyIndia as part of the Energy, Manufacturing, Infra (EMI) basket?
Nilesh Shah: I would still call that as part of the digital.

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What is part of EMI India?
Nilesh Shah: Because I do not think they are going to manufacture anything.

So, let us split the theme again…
Nilesh Shah: …and there will be overlaps. It is not that you can, within even EMI, you never know but I would still classify that as more of a digital economy rather than an EMI.

You bet on premiumisation, you bought into liquor companies and own Radico Khaitan, Sula and United Spirits. You think Indians are moving up the value chain and they will consume better liquor. Second, you are of the view that you should bet on the new technology enablers. So, you bought into MapMyIndia, Policybazaar, Zomato. These are pure play because the way you would be shopping and the way you would be consuming products, Angel would be very online. Now comes the EMI part. How are you laying your bets here?
Nilesh Shah: In EMI, so far we have been owning a bunch of capital equipment companies. So, within EMI, if I were to use energy as well as infra, Hitachi Energy has been a position that we have now owned for three, three-and-a-half years.

Why do you own Hitachi? Why do you like it? What is it that you like about Hitachi?
Nilesh Shah: They are probably the only player or the most meaningful player as far as the high voltage transmission of power goes. There is really no company with comparable kind of capabilities and strengths. And the way you are going to see is that you are going to see a huge amount of power which is going to get generated.

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First of all, India is going to need a lot of power, a lot of energy. Energy security is a strategic imperative and a strategic priority rather than anything else. And if you essentially believe India is becoming a manufacturing place, you are going to need so much of power, so much of energy and that energy is required to be transmitted or transported in very simplistic terms. And you are going to see a situation where if you are going to have so much of solar, you are going to have days when so much of solar power will get generated and you are going to have cloudy days on which very little power will get generated and you are going to have rainy days when no power will get generated, how do you manage these fluctuations? For that, you need companies with strong capabilities.
So, why not buy a power generator? They will make electricity.
Nilesh Shah: Yes, they will make electricity but there will be a lot of power generators. There will be many people who can generate power. But not too many people. When did we know in the last five years which has been the new company in transmission technology? I cannot think of any.

So, Hitachi takes power from a utility and supplies it.
Nilesh Shah: Yes, they themselves will not do it. They will do it for somebody who is the carrier. So, if you are a Power Grid Corporation or you are essentially any other transmission company, you will essentially need a player like Hitachi to supply you the transformers and set it. In addition to that, data centres, etc, are going to nead a humongous amount of energy and that is essentially where the potential for a Hitachi Energy comes in.

We are again talking about electrification of railways, the bullet train project. If the first bullet train experience is good, we probably will see many bullet train projects in the country.

Why not Siemens? Why not ABB? Why not a Voltamp Transformers?
Nilesh Shah: ABB does not cater to that segment. ABB India or ABB sold off that business to Hitachi Energy and that is how Hitachi Energy pretty much came into being.

Should ABB be feeling bad now?
Nilesh Shah: No, I do not think so. ABB itself has so much to do. They have so much to do in terms of automation, robotics, all of that. Each of these companies are champions in their own space. It is just that what is it that you like the most or what you believe is an opportunity which offers the best of longevity and the best of scalability and that there is nobody else coming in that segment and once you have that, then you are pretty much like a champion.

When the tech revolution started, it is only the big guys who become bigger. 2010 and 2020, the top name is still TCS. The second name is always an interplay between Wipro or Infosys. But the pecking order just does not change. When this manufacturing boom will unleash itself, in 10 years from now, 5 years from now, these companies will be significantly bigger. Do you think the pecking orders will be dominated by ABB, Siemens, L&T?
Nilesh Shah: I think so. Over the next 5 to 10 years, I do not see this changing quite significantly because these are essentially the companies which essentially are going to be the enablers of the EMI space. It is these companies which will be the enablers. I do not think they are going to get bigger and bigger and you are really not seeing new players coming in there and they have the trust of their customers because these are such critical equipment that you are not going to compromise on anybody else and you are essentially going to go for the established players. It is these kinds of companies which will continue to dominate for the foreseeable future.

There is a lot of excitement and every time we are speaking to great stock pickers like yours, everyone has got an idea and all the ideas are now making sense. There was a time that you would only buy private banks. But it is like a buffet right now and the problem is that you do not know what to choose and that right now is the biggest confusion right now, the options are so many that you are struggling to really zero it down. How are you zeroing it down? How does one really zero it down because you can buy 10, 15, 20 stocks and for the first time the pond sizes become so large that there are 500 stocks to choose from?
Nilesh Shah: This is a direct outcome of the economy doing very well. When the economy does not do well, the so-called defensives do well or when rate of interests are high, capital costs are high, the guys who can raise capital the most efficiently are the champions and therefore that is why I said probably the period 2010 to 2020 squarely belonged to either consumer staple companies or to the private banks. These were the two things.

The rest of the economy was honestly not doing as well. But more phenomena over the last three to four years, we are beginning to see the economy do well and for the first time I think we are seeing a situation where we are able to sustain a higher growth rate with moderate inflation. Earlier, when we used to see seven 7-8% growth, inflation rates used to be 8%, 10%, 12% versus that it is now only 5%. When you have this kind of a scenario, it is both the consumer who is a winner and a producer who is a winner and that essentially has made our, not just growth sustainable, but for people like us as investors the opportunities are more broad-based and that EMI segment and the digital segment probably did not exist five years ago, that is a segment which has come into play and there the choice is so phenomenal.

Apart from Hitachi, do you own anything else in that space?
Nilesh Shah: We have been owning KSB, which we have partly exited. We have been owning TD Power. We have been owning Jash Engineering. So, all different plays. I mean, something is a play on energy, something is a play on the water segment, something is a pump company with essentially opportunities in nuclear power. So, we have been playing a whole basket out there. And then on and off, we have been owning some of the defence companies as well.

We have been having a fair share of the portfolio in that segment. We have been owning some of the auto component companies as well and so there is so much to pick and choose from. I agree with you. I think what we have at least done is we have tweaked a bit and see that instead of owning just a handful of stocks or running a super concentrated portfolio or even a concentrated portfolio, we are running a slightly more diversified portfolio. We no longer are just owning 10 or 15 names. We are probably owning 25, 30, 35 names. So, as to make the most of the emerging opportunities and that I think purely is the outcome of the broad-based economic growth.

What is the tactical part of your portfolio, where you are saying that okay I will take my ones and twos, those cheeky and sneaky signals, but these are tactical calls, I make my 25-30%, I am happy with it. What is that?
Nilesh Shah: Right now I probably think the large private banks are tactical because I still think that they are very large plays now and their ability to grow like north of 20% is surely limited. There is more competition. Other banks have cleaned up the balance sheet or repaired the balance sheet and they now are capital rich. So, they essentially are providing competition plus of course technology and therefore fintechs, etc, all of that specialised lenders are creating a new wave of competition for them.

I probably think right now, it is more like a catch-up trade. They have not done well for the last three years, maybe the next one-two years they might just do well. It is not something on which your expectations are very high. My definition of tactical would be more like that. But the rest of the portfolio that we have is pretty much like where we at least have a 3-5-year perspective on them.

Have you bought anything in the last recent IPOs, any exciting businesses?
Nilesh Shah: IPOs, I do not remember exactly when they would have gone, but I think one of the most recent investments that we have done and we are still doing is a Fino Payment Bank. It is again a good combination, obviously it is more a digital play.

It is not a bank, it is a payment bank.
Nilesh Shh: It is a payment bank.

What do they do?
Nilesh Shah: So, it is the only bank which does not lend.

Then, why is it called a bank?
Nilesh Shah: So, many years ago, just to kind of have financial inclusion, the Reserve Bank of India created a different category of players called payment banks, where they could essentially, as part of financial inclusion, reach out to the last mile at the bottom of the pyramid to essentially get them into the mainstream banking system, where they can go help them open bank accounts, help them transact, help them make bill payments, help them transfer money from the city to the town or to the village, that was essentially the agenda.

Fino Payment Bank has over the last five years or so, essentially has built up a very strong customer base and has built up a very strong technology platform. They have now applied for a small finance bank license. If that goes through, that will help them to essentially also undertake lending activities. But it is going to be more of micro lending or small ticket lending. But with the large customer base and essentially the kind of CASA that they have, it will create a good opportunity for them to increase their engagement with their client segment.

So, it is not beyond a concept stock. It is like a stock which...
Nilesh Shah: Yes, it is at a very important kind of an inflection point. Let me put it this way.

If they get into lending, then things change...
Nilesh Shah: Yes, so it is a business where it has gone through a J-curve, built a solid technology platform, built a good customer base, which is growing and if they get this approval, then obviously they can address even a larger segment with more products and increase the engagement with their clients and become more meaningful and relevant for their clients. So,if that happens, it can end up being an interesting play. It is slightly more long-term. You will necessarily have to take a kind of a five-year view, but it can end up being a very interesting kind of an opportunity.

Let us travel back and travel forward. When you look at 2014 to 2024, what is that one thing which has pleasantly surprised you?
Nilesh Shah: I think clearly the capital goods space. It has pleasantly surprised. Honestly, the kind of wealth capital goods as a space has created is simply mind-blowing. May not have been for the first part of the last 10 years, but certainly in the last five years, the capital goods space has been quite phenomenal and that is also a pleasant surprise and thankfully, we have been able to participate in it also.

Has IT sector disappointed at the same time because AI happened and look where Indian companies are. They have just not changed orbits.
Nilesh Shah: The tier I companies have disappointed, but one should not be too disappointed with them because they have grown and they are a services company. So, to that extent, I think they have essentially played to their potential. But the tier II segment in IT services, I think they have been champions.=

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Markets & Mandate: Where to invest in E-M-I basket going forward (2024)
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