Financials set to outperform IT giants in coming years: Manish Chokhani

"The capital market leaders will continue to do well, but this 25-30% type compounding in AUMs it is a cycle, so when the markets will correct people will go back to banks and maybe two-three years later they will come back to capital market stocks and so on," says Manish Chokhani, Director, Enam Holdings.

So, one is banks and financials, but the bigger question that everyone is now also pondering about is what to avoid, when the market does come out of this abyss are you going to see newer sectors emerge as leaders and what will continue to remain under performers?
Manish Chokhani: Actually if you look out two years from now, I do not think people have realised, for example ICICI Bank will cross the earnings number of Infosys.

The SBI and HDFC Bank will be approaching the profit numbers of Reliance. So, the absolute number of money which is going to be made by financials, which people will then wake up to and see the rate of changes in favour of financials as opposed to erstwhile leaders of IT which currently will have a good time because of all this mess going on in AI, people will need them.

But when you are looking at terminal values, these are businesses which are going to be beneficiaries of AI by applying them into their businesses, they will start saving their costs and the fact is that the market is going to consolidate into the better and better and better well-run financials, so I do not think people have as yet realised the mega theme which is playing out in financials because we got sidetracked by the fact that three-four of these good companies went nowhere for four years, but the time for leadership to re-emerge back with the well-run financials is very much here.

The capital market leaders will continue to do well, but this 25-30% type compounding in AUMs it is a cycle, so when the markets will correct people will go back to banks and maybe two-three years later they will come back to capital market stocks and so on.

But within this overarching theme I do not think people as yet have enough financials in their portfolio because largely it has been sold down by the foreign investors looking at what has been happening to interest rates in America.

And if and when that money does come back, which I think is a matter of time, the biggest beneficiary of inflows in India is going to be financials. So, I cannot stress that enough. It is the cheapest and the best sector to own in India and a beneficiary of all the trends which are coming including artificial intelligence.


When you say banks, is it a basket? I mean, do you look at the smaller PSBs as well or do you restrict yourself to the largecaps and the financials from within the largecaps that you just talked about?
Manish Chokhani: No, personally for me, look, it is my own money, I do not manage public money, so I have the ability to say I can sit on things which I want to own forever and be like a partner in that business with maybe it is a 1%, 2% of that company, but yet it is helpful to think in that terms and it is going to get increasingly differentiated that people who are able to attract deposits because of trust, people who have better technology because of the apps and other services that they are putting out and people who are able to give you quality of service.

I am not just saying it will be the Bajajs and the Kotaks and the HDFCs and ICICIs, but there are even smaller banks which are starting with that advantage of being tech enabled and I have named some of them in the past and I am hesitant to do it in this market especially given the froth which is still there in the mid and small ones.

But long-term wealth creation is not going to happen unfortunately in public sector. It will happen in private sector, not that some of the public sector are not well run, but over time as the leadership of the bank changes and the ethos of the bank may change, it is very hard to take a five-year call on some of these. So, you can create some of the PSUs but I do not think you can be a very-very long-term owner in.

I will pick it up from our last conversation which was before Diwali and before Diwali there was I would not use the word sugar rush or gold rush, I would use the word mad rush because there was a mad rush in AI dominated companies, there was a mad rush in manufacturing, there was a mad rush in solar, wind, clean and green. So, let us take these themes one by one. Who will be the eventual winner of AI three years out?
Manish Chokhani: In AI, I think of it the way it happened with the internet that we are not really players in the making of the AI, just like we were not makers of the internet, but we were big beneficiaries of it.

And as an example, like an internet what happened is that people who were using the internet for example, I was running a brokerage and an investment bank at that time and it made my distribution cost to go global basically negligible and that gave a big fillip to our business over there.

The same thing happens with AI that this entire middle layer of management which is sitting taking data from the bottom of the pyramid and transferring it to the top of the pyramid the entire middle layer of lot of companies can vanish and that is why I say for example one of the biggest employers in our country is the service sector where the entire middle management layer of financials of even the IT companies will tend to actually get obsolete and just make these companies a lot more efficient. If you turn for example to the second theme which you talked about in terms of renewable, I do think that is a very-very long-term powerful theme which is still running.

Valuations in some cases are not sustainable, but the theme itself is very-very powerful, that we will have to invest a lot more into our own energy security and whether it is wind or it is solar or it is nuclear, anyone who is playing into that including the transmission players there is very-very long room for years ahead for money to be made over there.

I would just watch out for valuation because again like people take the 10-year story and then they pay up for the 10th year immediately, that is really what one has to be cautious against because as an investor the only thing in your hand is the price you pay at entry.

After that everything is in the hand of Mr Trump and the market cycle and the politicians, so it is best to be a bit cautious when you are buying and then be optimistic in whatever you are owning and see how high the market can take it and when it takes it to an excess, you trim like everyone did last year and create some cash and wait for the next cycle.

I am talking about this entire excitement which happened in solar companies, wind companies. Is there merit in betting on energy transition because that is one big theme which is very popular with lot of savvy market investors. What is your understanding and where is that theme headed?
Manish Chokhani: No, it is a very-very powerful mega theme and we have to create hundreds of gigawatts of power over there and it is not going to happen with the traditional power and as our country progresses there will be a J-curve of energy consumption because as you get richer, you do not just go and buy a car and you do not just go and buy a mobile phone, you end up consuming a lot of energy as well.

And we have not invested in energy really after the blow up of 2007-08 when all these power companies went downhill. So that power shortage in India and the demand for power in India is a long-term trend and within that that you want to be a lot more green and clean is something inevitable.

All I am saying is that we may have paid up a lot in advance for some of these companies, like I heard you talking about the whole EV story before our show started.

Now EV is a trend which is going to come but who is going to be the winner and what price you have paid for it is something when you look across the world, you see the devastation in valuation which has happened over there.

So, while the BYD may be one big winner, it is not like Tesla which was considered to be the big winner is coming out in better light against a BYD and then there are players like Xiaomi and all who have come out, which have completely blown even the minds of for example the CEO of Ford Motor to say that this is the car I want to drive and I cannot get myself to stop driving it.

So, while trends are very-very powerful, all I am saying is we look at trends and then we look at valuations and I am again saying if the company is going to be growing so powerfully, does it get to a five multiple five years out. If it is not, that means I am paying a bit too much for it too much in advance.