Your midcap fund has gained very sizable share because of flows as well as the value going up because that space has done very well the last couple of months.How are you assessing the valuation because you guys have done pretty well in that space, is this narrative justified that midcaps have actually run up higher than what the numbers actually support?
Radhika Gupta: Our view on midcap and smallcap has been a little more calibrated than some of the extreme views you have and as you correctly said, we have been running Edelweiss Midcap fund for 15 years now and we consider ourselves mid and smallcap specialists at some level. One is you have to understand that what you classify as midcap in India has a very unique definition. It is a rank based definition, which no part of the world has.
So, midcaps start at the next 100. I mean, it is the next 150 companies and truly most of your market leaders in many segments are midcaps. So, it is not fair to just dismiss the midcap space as a selection of small companies with patchy governance, which is what midcap was to people 15-20 years ago. If you want to play some of the meaningful themes that I believe define India going forward, chemicals, China plus one, capital goods, capital markets, those market leaders are present in the midcap space because largecap space is IT, to some extent energy and BFSI.
So, midcap is a very important segment and at a $3-4 billion minimum market cap, these are not small companies anymore and standards have really improved. Now, am I going out on a limb and saying valuations are cheap? No, they are not cheap. I think six months ago, people had started shutting down midcap funds, smallcap funds, saying valuations are expensive and we said, we are in the midpoint of a valuation cycle but earnings quality continues to improve and I think that has played out really nicely.
Valuations are not cheap today. We are recommending incremental allocations, especially in smallcap through the SIP route or telling people to come in with a longer horizon, do them in multi-cap but you cannot ignore the midcap space. My worry is when people talk about running away from mid and smallcap and just jumping to largecap, I do not think that you capture the Indian opportunity adequately. One of the plays that has worked for us very nicely in the midcap space which has made our fund distinctive, is the whole industrials play.
We have been bullish on the manufacturing side of the Indian economy for the last three-four years and that includes your EMS, your industrials, most of those companies, your capital goods companies and that has worked very well for our fund over the last few years and that position continues to hold.Let us move on and talk about the economy as well. You watch the economy very closely. You travel across the country length and breadth. What is the sense you are getting on the longevity of growth? Professor Krishnamurthy has just tweeted saying that the 7.6% kind of growth which we saw last quarter, after which RBI governor upped their growth guidance here in India, may not be a one off and now we may be entering into a slighter prolonged period of 6-7% to 7% growth. This will get reflected in corporate earnings as well and hence the markets.
Radhika Gupta: I tend to agree. I mean the popular phrase of the year on a lighter note was looking like a wow and I think that perhaps summarises my thoughts on the Indian economy because the Indian economy is firing on multiple angles. One is that at this point of GDP that we are at – $2700– I really believe discretionary consumption is picking up and as you travel the length and breadth of the country including tier II and I also now interact with some amount of tier III India, I think discretionary consumption is picking up. We saw a good Q2, but we are going to see even more powerful Q3 because the festive season showed up in Q3 and this migration from $2,700 to $5,000 is going to see discretionary consumption explored in a very meaningful way. We are already seeing brands that are launching premium products moving towards premiumisation and you are seeing the kind of response and uptick that is happening. We are seeing a revival of the real estate cycle which was in the dumps for a long time and that will have a lot of implications, not just for real estate, but even for things like home building, so that is happening.
We used to be a services-led economy. We are a services giant, but we were an economy running on a single leg called services. I think now we have a second leg called manufacturing. So, we are an economy running on multiple legs. In that sense, you have become a little bit of a stronger economy. These five years of growth are going to be possible because the last five years were spent cleaning up the banking system. So, you also are at a point unlike most of the rest of the world where your banking system is in some of the best health that it could be in. There are multiple things to be excited about from an Indian economy point of view. We are about treading the journey that China did 15 years ago and that is how I look at the next few years.
Talking of China, you also are one of the funds which run a China fund. Are they seeing flows? Does it merit a relook at this time because it is completely bombed out, nobody wants to go to China. Will it be a good time to do a SIP in your China fund?
Radhika Gupta: Unfortunately flows are extremely cyclical. We have had some smart capital. I am not saying China is turning around quickly. But what you see in international funds, especially markets like China, we run a US tech fund. The last one year’s performance is a very powerful figure, people come in then, and I always say come into international funds with a 10-year horizon and remember, it will go through the good and bad.
Now when the Indian economy grows through a tough run or our markets go through a tough run, there is a lot less noise about it. But with China, because you do not understand the market, there is a lot more noise. Structurally, it remains one of the world’s largest economies, and it is available at cheaper valuations. We believe a lot of the bad news has been priced in. But I again give the disclaimer that this is a product for evolved investors, not first-time investors and I have said that for years and years, we have seen some smart capital coming in the last six months.
Let us talk about flows then. If SIP flows are any guide, they appear very healthy, in fact, having upward bias. Do you think momentum in domestic flows will continue and how are the flows in your own funds right now?
Radhika Gupta: Very good. This has been a great year of flows for us, for our funds. I mean, we ended last, we ended March close to one lakh crores, we are sitting on 1.2 plus and growing and equity continuously around Rs 40,000 crore in equity flows. We have got Rs 40,000 crore of equity assets today, we were 1000 crores about five-six years ago. I think it has been a great run. Structurally, we are at a Rs 17,000 crore SIP book and in my view, five years from now, this SIP book size will double. So, India will have an SIP base of Rs 30,000 to 35,000 crore.
People think this is a really large number, but I joined the industry five years ago when the SIP book was Rs 4,000 crore and I can tell you, nobody thought it would be where it is. SIP has become a structural trend in India. There are people who do not understand the word mutual fund, but they know the word SIP, it has almost become a meme and it is not just a tool for people making returns, it is a tool for people to save and the greatest worry in India is always paisa side mein kaise kar le, save kaise kar le, recurring habit, because we are a country of salaried income. I think SIP has solved that problem.
So, in my view, we are going to see a book of Rs 30,000-35,000 crore in five years from now and that, by the way, will also bring tremendous stability to Indian capital markets. I was just looking at an interesting data point. Ten years ago, mutual funds owned 3% of India’s equity market, today we own almost 10%. FIIs are now 15-16%. We ourselves have brought so much stability to capital markets.
One interesting point because this is the first time we are chatting since that development, you became a shark in the Shark Tank. How was the experience overall talking to entrepreneurs at every stage, people with dreams, wanting to scale up business models?
Radhika Gupta: I think it’s phenomenal. I was always excited to do it. But I have been in the India pool and I have always been long on India. But if you want to feel optimistic about where this country is going, there is no better place than the sets of Shark Tank and it is a very gruelling schedule. But what you see is entrepreneurship. You see a lot of the people you talk to, 21, 22, 23, building businesses of Rs 10-20-30-50 crore in revenue.
You see people from tier III towns, tier IV towns. You see mother, daughter, father, sister and you see, by the way, so many new consumption opportunities. Many times as a consumer, you think, this could not be an opportunity but you see that people have tried, they have hustled, they have scaled and they have built a business of some sense. So, I really think that India’s story is about its demographics and its entrepreneurship and in some sense, the experience on Shark Tank combines both the magic of young India and the animal instincts that come with entrepreneurship.
So, honestly, I went hoping to give advice on capital, which I have, but I came back a lot richer in experience and learning from the people I met and as I said, it is the best reason to belong on India.
So, has it got you thinking about your later career also perhaps starting a startup fund or early-stage venture fund?
Radhika Gupta Yes, and finally companies are companies. I hope the greatest thing would be that a company on Shark Tank finally becomes a growth equity company, a late stage private company makes it to the IPO market and one day becomes a small, mid and large. So, I do not know if I need to start a fund. I think finally, we are products of Indian entrepreneurship, even as mutual fund investors, we benefit and we invest in Indian entrepreneurship. The greatest thing would be to see some of these companies build business the right way, build sustainable business models, and then grow to list on our exchanges.
