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An Interview with Savi Jain: On Investing in the Indian Stock Market During COVID

Founder and CEO, Transfin.
Jul 6, 2020 9:24 AM 4 min read
Editorial

We speak with Mr. Savi Jain, co-founder of 2Point2 Capital, a long-only investment firm with over ₹400cr net assets under management deployed in the Indian stock market.

 

A firm believer of the “concentrated value” thesis, Mr. Jain shares his take on the state of Indian equities in post-COVID times, how he views investing at 2Point2, and why select holding companies can make for an interesting investment opportunity.

 

Mr. Jain also emphasises the need to allow short selling as a way to fix the corporate governance issues plaguing India’s capital markets.

 

The regulator is misplaced in its thinking that it is protecting investors by restricting short selling, while it is doing the opposite.

 

Q. Are you in general happy with the Government and RBI’s response to COVID-19 from an equity market standpoint? 

There seems to be a general view that the announced measures were light on actual stimulus thus ignoring immediate demand recovery – would that be a fair characterisation?

Mr. Jain: 

No amount of stimulus is enough for the situation that we are in. Given our fiscal limitations, the Government / RBI has taken a measured approach of providing immediate assistance to the most stressed segments while still leaving room for further measures. 

Since COVID is an evolving situation, the Government / RBI needs to leave some room for future measures. While I would have liked to see more measures to stimulate demand, I am confident that they will come as the country comes out of the lockdown.

 

An Interview with Savi Jain: On Investment Opportunities and the Present State of Indian Equities

 

Q. Stepping out of COVID-19, as a fund manager, what are the most pressing market reforms you would like to see within India’s capital markets? 

Mr. Jain:

Corporate governance is an important issue in India’s capital markets. SEBI does not have the bandwidth to scrutinise the actions of thousands of companies on an ongoing basis.

One way to keep a check on poor corporate governance practices is by allowing short selling. Currently, fewer than 200 stocks (which trade in the F&O segment) can be shorted. This allows several small and mid-sized companies to perpetrate fraud by manipulating their stock prices to stratospheric levels (billion-dollar market caps) and finally dumping them on unsuspecting investors or index funds. 

Short selling acts like a check for prices to remain at fundamental levels as there are active participants on the other side of the trade as well who can both publish research and act on it. 

The regulator is misplaced in its thinking that it is protecting investors by restricting short selling, while it is doing the opposite. 

 

Q. Nifty 50 PE has come back almost to pre-COVID levels – what in your view are the catalysts driving this? 

Mr. Jain: 

Declining interest rates is one important factor. As cost of equity declines meaningfully with declining interest rates, the DCF value of a company goes up dramatically. Increased global liquidity due to Central Bank actions is another important factor. 

Having said that, we believe that many large consumer names are trading at bubble valuations and it is very difficult to make even a double-digit return over the long term on these names.

 

Q. How are you assessing the long-term outlook and impact on your equity exposure? 

Will a “buy the dip” narrative play out well with your investment thesis at 2Point2?  What framework do you use to make exit/switching decisions?   

Mr. Jain: 

We do not get into macro predictions. We have no clue on how markets will behave in the short to medium term. We therefore take a complete bottom-up approach towards investing. 

Whenever we find good companies available at attractive valuations, we buy them. We sell in four conditions – 1) When valuations become exorbitant; 2) When we realise we have made a mistake in our investment thesis; 3) When the position becomes a very large part of our portfolio; 4) A better risk/reward opportunity is available elsewhere.

 

After the changes on dividend taxation made in the last Budget, the attractiveness of investing in holding companies has gone up. The cascading effect of dividend taxation, which was there earlier, does not exist in the new tax regime

 

Q. You hold a considerable Financials portfolio – how are you viewing this space considering there is an expectation of worsening asset quality in the medium term? 

What is a positive takeaway within Financials (if any)? 

Mr. Jain: 

Yes, the Financials space is expected to be hit the most due to COVID. Asset quality across segments such as retail, SMEs, large corporates, MFI etc will  deteriorate in the short to medium term. The larger banks and select NBFCs should benefit from consolidation and come out stronger over the long term.

More than 50% of our financial portfolio is in the gold finance space, which incidentally is expected to do very well. They have a superior asset quality (due to liquid collateral at near 55% LTV), no ALM mismatch (due to shorter duration loans), robust growth outlook (due to robust demand amid restricted lending by other financing companies) and low leverage. 

The stocks of the two largest gold finance companies have done well with both near lifetime highs.

 

Q. Finally, some ideas for long-term value investors. Any high conviction picks/sectors/themes that you might want to share with our readers? 

Mr. Jain: 

One theme that investors can look at is of investing in select holding companies. We talk about this in detail in our Q1 FY2021 investor update. After the changes on dividend taxation made in the last Budget, the attractiveness of investing in holding companies has gone up. The cascading effect of dividend taxation, which was there earlier, does not exist in the new tax regime (if the holding companies pass on the dividends received from the underlying holdings). 

The holding company discounts, however, have not narrowed despite the elimination of this leakage. Some of these holding companies trade at very attractive dividend yields and at discounts ranging between 50-70%.

FIN.

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