Play the capex themes 3 ways: Nilesh Shah | Economic Times

This is the time to own some of the platform companies on a very selective basis and and monitoring them on a regular basis, says Nilesh Shah, MD & CEO, Envision Capital. There is a concept of betting on the new wave which is that you can make a basket of five, six, seven companies which offer you a play on a space -- be it clean energy or ethanol, hydrogen or platform. Does it make sense to buy 5-7 companies which directly or indirectly are platform companies and sit on it for the next three-five years? It could be Bajaj Finance, it could be an Angel, it could be Nykaa when it lists, it could be an IndiaMART?Oh absolutely. That is the way forward because these are essentially businesses which in a way demonstrated a particular tract record. They have demonstrated that they can scale up. They can size up and increasingly they will become hugely relevant to a very large mass of the consumption basket in India. When I say consumption, it is not just buying consumer goods but buying experiences or buying fintechs and all of that. Clearly it does make sense and of course the valuation range varies. One will have to take a bit of a leap of faith over say a five-year period but the kind of growth they will exhibit will more than take care of the kind of heavy valuations that they currently enjoy. We have seen this in the market over the last five, ten years that as business demonstrates scale, the ones which are more expensive gets even more expensive as long as growth sustains. This is the time to own some of these platforms on a very selective basis and then, keep monitoring them on a regular basis. What have you done with your old holdings like Cipla, Thomas Cook, ICICI Lombard, Radico Khaitan. Have you locked gains and sold the old holdings or expanded the breadth of your portfolio?We have expanded the breadth of the portfolio and we continue to own the majority of these names and we like them. Cipla continues to be a leader in the respiratory space and has been making inroads into the US generics market. We continue to own ICICI Lombard General Insurance. It continues to be a leader and continues to have a high single digit market share of India’s general and health insurance space. It is an extremely capital efficient player and is still able to deliver growth in line with the industry and at times even ahead of the industry. We continue to own Radico Khaitan which again is a strong play in the consumer space. It is a challenger and continues to generate cash flows which it is using to repay debt and lighten up the balance sheet. We still believe the valuations are attractive and over the next several years, several hundred millions of young Indians will get into the eligible age for consuming alcoholic beverages and so the runway of growth for a business like that is very good. We have exited Thomas Cook because there are relatively better opportunities to participate in the hospitality and travel space. So we are continuing to own a majority of our positions given that we are medium to long term investors. We have made some changes to the portfolio and the portfolio has become a lot more broad-based as we believe that the current times are about a broad-based economic growth rather than just one or two pockets of growth as was the case a few years back. We are seeing a lot of companies get into this capex mode. How would you play that?Private capex is picking up quite significantly. We have seen several players going out and announcing capex plans. The order books have continued to grow. Capex can be played in three different ways. One is to buy into the equipment players -- the product companies and a couple of names are ABB Hitachi Power Products or Triveni Turbines, both of which we own. The second way to play it through components or consumables which is essentially the wires and cable space and there we own Polycab and we continue to believe that their prospects look good on better construction activity in general. The third way to play it, of course, is through the EPC, the project guys. That is the space we have been avoiding because that space is the most vulnerable. It is out and out B2B business by and large driven through tenders where companies have to participate in tenders and the lowest cost player inevitably gets the contract and they are vulnerable to payment delays which puts pressures on cash flows. In the process, one becomes relatively capital inefficient. We have been participating in the capex space by owning product companies and the consumable companies, We have been avoiding the EPC players so far.