May 22nd, 2021

What key factors are driving India’s attractiveness as an investment destination? How has the ongoing pandemic influenced these factors?

As investors we are enthused by the broad drivers of the India story namely the demographic advantage, the fact that we are close to the $2,000 of per capita income which typically has proven to be an inflection point for many economies, the accelerated financialisation and urbanisation of India. As importantly, over the last 5 years, policy interventions along with the Jio phenomenon have accelerated India’s journey in digitisation and over the next decade and more, we see the internet or digital ecosystem becoming a much larger part of the Indian economy.

Tell us a bit about the “devil’s advocate” program that Bay Capital follows. Can you share a couple of instances where it helped you sidestep regrettable investment decisions?

This is a set up where we try and identify areas of concern or any potential risks to our investment thesis in any business that we are evaluating. While we are building our thesis on the positives, there is also a contra view that starts to get formed to simply highlight the areas that we need to be mindful of as investors.

There have been instances where this programme has enabled us to identify risks and stay away from certain businesses even though optically, they might seem to be a fit in our portfolio.

The last time we went into a 68-day lockdown, our GDP shrank 24%. Are you worried about how the current brutal second wave is going to play out in economic terms over the next 12 months?

No doubt the second wave has been devastating for the country in terms of the lives lost and the healthcare system getting stretched significantly. Even though there is no national lockdown as we witnessed last year, owing to local and state-level restrictions, economic activity is certainly subdued. Unlike last year where the supply side was affected, this time around there is likely to be demand compression given the uncertainties and therefore the economy will face challenges in the near term. That said, we don’t believe that we will be anywhere close to the last year’s number. The economic recovery which had started to take hold in the 3rd quarter of last year is likely to get delayed by a few quarters.

However, we continue to remain optimistic about the long-term prospect of India and believe that the outcomes will be good over a 5 to 7 year investment period.

Global equities are $27 Trillion higher than pre-pandemic levels. Is the world really that much better off? Does the level of froth in the market concern you?

A large part of the rally globally is on account of loose monetary and fiscal conditions across the world. The events of last year have benefitted a certain section of the economy and financial markets disproportionately. In many ways this is a ‘K’ shaped recovery and some of the market gains can be attributed to this.

The surge in liquidity has also led to a sharp spike in the overall savings pool, notably of the US economy, and as things are starting to normalise in the US, this is likely to result in a sharp upswing in consumption. Much of the market activity is reflecting this.

Is it your strategy to be 100% deployed, or do you take cash calls as well? If yes, what’s your cash position right now?

We do not take cash calls and prefer to remain close to fully invested at all times.

What sectors do you see outperforming over the next two to three years?

Our investment philosophy is not predicated on near-term outperformance and therefore we do not rotate in and out of sectors based on our belief of what we think will outperform. There are segments of the market we do not invest in. Our strategy is to identify and own high-quality businesses which are stellar allocators of capital, have impeccable governance standards and have durable competitive advantages which will enable these businesses to compound earnings over a long period of time.

Lastly, what would your broad advice to investors be right now?

Our advice to investors would be to remember that the collective resolve of humankind is unparalleled. Despite the near-term outlook being cloudy in India due to the second wave of the pandemic, we do believe that things will start to improve over the next 6-8 weeks.

As investors, one should have a 5-year view and own businesses which will be beneficiaries of many of the themes that are accelerating as a result of the pandemic.

Moreover, we are likely to see many businesses from the internet or digital space getting listed over the next 12 to 24 months and these will be very interesting businesses to focus on (selectively) and own for a long-term oriented investor.

Excerpts from the interview have been covered here on the Business-world website :-
http://www.businessworld.in/article/We-Continue-To-Remain-Optimistic-About-Long-term-Prospect-Of-India-Siddharth-Mehta-Bay-Capital/22-05-2021-390561/

Posted by Siddharth Mehta, Founder & CIO