Markets Wait For US Interest Rate Cues
So the markets at large are now on standby for an interest rate cut by the Federal Reserve in September
On Episode 364 of The Core Report, financial journalist Govindraj Ethiraj talks to Sunil Thakur, Partner at Quadria Capital.
Our Top Reports For Today
SHOW NOTES
(00:00) Stories Of The Day
(01:00) Markets wait for US interest rate cues
(01:50) Top 26 fund houses are sitting on nearly Rs 80,000 crore in cash, up 27 per cent from the previous month
(06:37) India’s import bills rise as the Russian oil honeymoon conclusively ends
(08:31) Why India’s steel industry is headed for more trouble
(09:57) From speciality hospitals to contract manufacturing, why big investments are flowing into Indian healthcare companies
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regards any feedback, you can drop us a message on [email protected].
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Good morning, it's Friday, the 16th of August and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
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Markets Wait for US Interest Rate Cuts
So the markets at large are now on standby for an interest rate cut by the Federal Reserve in September as promised over the last many months.
Back home, on Wednesday, the BSE Sensex and NSE Nifty50, were up with the Sensex rising 150 points to close at 79,105, while the Nifty50 was up barely 5 points to 24,143.
Nothing much to report, basically. Except that it’s not going down.
Top performers in the SEnsex included TCS, HCL Tech and Tech Mahindra where losers included infrastructure stocks like UltraTech Cement, JSW Steel, Tata Steel and Adani Ports. More on steel shortly.
Top Fund Houses Sit On Cash
Deploying funds is never an easy task, even for an institutional investor.
The obvious reason is valuations which are high and accepted as high by most.
Which also means that buying stocks at a time like this is tougher, unless of course you take a call that clearly stretched stocks can go up even further.
But as an institutional investor, you are expected to be more careful than a day trader who borrows funds on an app and in most cases loses money as well.
Cash held by equity mutual fund (MF) schemes jumped up in July amid after-Budget volatility and concerns about elevated valuations.
On the other hand, of course the inflows into mutual funds including via new fund offers continue unabated.
Equity MF schemes of the top 26 fund houses were sitting on nearly Rs 80,000 crore in cash at the end of July 2024, up 27 per cent from the June-end tally of Rs 62,700 crore, according to a Motilal Oswal report, quoted by Business Standard.
Thanks to which, the aggregate proportion of cash in these schemes rose to a 15-month high of 5.4 per cent. In June, cash accounted for 4.6 per cent of the portfolios.
So what are the valuations looking like ?
As of August 14, the Nifty 50 was trading at a 12-month forward price-to-earnings (P/E) ratio of 20.2x compared to its five-year average of 19.3x.
The P/E ratio of the Nifty Midcap 100 stood at 32.9x, vis-à-vis a five-year average of 24.3x. The Nifty Smallcap 100 was trading at a P/E of 20.6x compared to the five-year average of 17.2x.
“In P/E terms, the Nifty 50 is trading at an 89 per cent premium to the MSCI Emerging Markets Index, above its historical average of 50 per cent,” Tata MF said in a note.
According to the Motilal Oswal report, Parag Parikh Financial Advisory Services (PPFAS) MF had the highest cash holding at 16.1 per cent.
Meanwhile, if you were looking for benchmarks, then Warren Buffet is a good one. And as it happens, Parag Parikh, the late founder of PPFAS was a disciple of Warren Buffet.
Not that the latest numbers are influenced by Warren Buffet but his Berkshire Hathaway has raised its cash position relative to total assets in the June quarter to 25 percent, a level last seen in 2005.
Berkshire's holdings in cash and cash equivalents reached a record $276.9 billion at the end of June following a recent selling spree in Apple and BofA shares, MC summed up.
Oil And Supplies
Oil prices have slipped after gaining last week following a Government report in the United States showed a surprising build for US crude stockpiles, Bloomberg reported.
Brent crude is a shade above $80.
The unexpected increase in oil inventories may depress prices “over the short run,” analysts told Bloomberg saying the expected geopolitical risk will probably return to the fore in coming days.
US inflation data released Wednesday was broadly in line with expectations, keeping the Federal Reserve on track to lower interest rates next month.
There are global projections to watch though, and principal of them are from the International Energy Agency and the OPEC, whose forecasts vary at times.
The International Energy Agency flagged a global surplus in the fourth quarter if OPEC proceeds with plans to restore production in October.
The Organization of the Petroleum Exporting Countries had also trimmed forecasts for worldwide demand this year and next, citing downward revisions for China’s outlook.
All eyes are now on Iran and if it will launch a retaliatory strike on Israel.
The US said that the probability of an attack has increased and that it could come as soon as this week.
Gold Prices
Meanwhile, gold prices rose on Thursday, a day after U.S. inflation data suggested the Federal Reserve might reduce interest rates next month though the extent of cuts remains uncertain, Reuters reported, adding spot gold was up 0.5% at $2,458.74 per ounce just $25 shy of the record high of $2,483.60 scaled last month.
India’s Import Bill Is Rising
India’s overall exports rose by around 4.1% in April to July for the last four months compared to a decline of 13.1% in the previous year.
Notably, textile exports also picked pace and are likely to witness further growth in the coming days as some political unrest in Bangladesh may lead to some shift, a report from BOB Research says.
The worry has been somewhat here.
Imports on a cumulative basis have picked up at a faster pace than exports by 7.6% versus a decline of 13.7, seen last year.
The increase in turn is due to oil imports to US$ 65.3bn compared to US$ 53.7bn in the corresponding period of previous year.
Moreover, during the same period, international oil prices have risen by 8.2%.
And as we have been pointing out in The Core Report in recent months, the massive Russian oil discounts are also disappearing.
BOB Research says that for the three months from April to June this year, the unit value of India’s oil import from Russia is at US$ 609.3/ tonnes which is higher than US$ 478.9/tonnes seen in the same period of previous year.
Amazingly, it is now cheaper to import oil from Iraq at this point than from Russia.
This has some interesting consequences or at least should have, including of how we deal with Russia in coming months, at least on this aspect.
More on that soon.
Why India’s Steel Industry Is Headed For More Trouble
India’s steel industry has been loudly complaining of low cost imports from China and even Vietnam.
Indian steel company CEOs have said that the Chinese factories were focussed more on keeping factories running than making profits.
Well, they, I think, Tata Steel specifically, were right.
Bloomberg is reporting that the Chinese steel industry crisis, according to industry players there, is more serious than the downturns of 2008 and 2015.
The crisis will likely be “longer, colder and more difficult to endure than we expected,” Hu Wangming, chairman of China Baowu Steel Group Corp., told the company’s half-year meeting, according to a statement. Baowu produces some 7% of the world’s steel.
China’s steel woes are linked to the property downturn there, apart from weaker factory activity leading in turn to falling prices.
It’s increasingly unprofitable to make steel, putting mills under pressure to cut production. Meanwhile, exports are on course to top 100 million tons, the most since 2016.
Meanwhile, iron ore prices which go to make steel are also falling, now back below back below $100 a ton.
Prices have fallen more than 30% this year.
India’s HealthCare Sector Is Seeing Investments
India’s healthcare sector, a relatively newer investment avenue for private equity is seeing considerable action.
And in an increasing sign of the maturity of the space, is seeing sharper and focussed investments, for example in speciality hospitals.
One private equity player is Quadria Capital, an independent healthcare focussed private equity firm with assets under management exceeding US$ 3.5 billion and investments in 18 companies across the Asia-Pacific region.
It was founded by Abrar Mir, a former Religare Capital Markets and Bank of America Merrill Lynch IB Group executive and Dr Amit Varma, a doctor, physician who earlier worked with Fortis on the business side.
Quadria has said it will deploy close to $1 billion or over Rs 8,000 crore in investments in the next two to three years.
Quadria is specifically interested in single specialty clinics, diagnostic companies, nutraceuticals, and contract manufacturing.
I reached out to Sunil Thakur, Partner at Quadria Capital which invests across Asia.
I began by asking Thakur what kind of investments they were looking at.
INTERVIEW TRANSCRIPT
Sunil Thakur: Well, quite a bit of this has changed in the last decade, or probably a little more than a decade. First and foremost, the scale of opportunity itself has grown multifold. Second, I think there has been a significant progress in institutionalizing the entire tech especially when I talk about healthcare services may need to do with hospitals and diagnostics. Thirdly, is the pool of capital that we are now seeing coming into markets like India, both from private entrepreneur side as well as from private equity side. And as you would know, significant part of investment that is required in countries like India come from the private sector. And lastly, the market has matured quite a bit, both in terms of investing as well as in terms of providing avenues for exits across public markets, across M&A, cross traditional sponsor sales, and then when you layer it with, you know, very progressive policy, including how government is coming behind to support healthcare consumption through financing, as well, as, you know, setting up the right infrastructure on the Primary Care side, so all of it sort of are now coming together to provide a very conducive environment, both from a demand side as well as from a supply side. And that is what has changed significantly the last 10 to 15 years.
Govindraj Ethiraj: Right. So I understand you're managing over $3 billion of assets, and you're looking to deploy another billion dollars in the next couple of years, or other two and a half years. Broad sense on where this could go?
Sunil Thakur: We typically mirror the market structure. So in a country like India, if I talk about 60, 65% is on the services side, which is mainly hospitals from primary, secondary, tertiary care hospitals, and then about 20% in Palma, and then you have diagnostics, medical devices, and then associated healthcare services. So that's going to be the broad sort of deployment, but the way we bucket this, and if I have to share some percentages with you, roughly around 35-40% would go into the healthcare delivery services. About 30 odd percent will go into Pharma. About, you know, 10-15% in devices and so and the balance in associated healthcare services. And associated healthcare services for us would include retail, consumer healthcare, Allied services like health insurance and stuff.
Govindraj Ethiraj: And if you were to look at your investments so far, including some that you're exiting, where would you say your returns have been the highest?
Sunil Thakur: Well, I would say it's been secular. It's been sort of similar, if I talk about the big buckets and the big buckets, you know, if I you have to keep it simple, healthcare services and pharma. So both of them have given us great returns. I think you have to choose some specific segments within hospitals and pharma. Single specialty has been a big winner for us when it comes to healthcare services. We have invested in hospital teams like HCG, AIG, and now I have investments in nephroplus, maxivision. These are all single specialties. And then when it comes to pharma, again, it's about specialty pharma that we've invested in have had some success there, as well as the upstream pharma, which is manufacturing, contract manufacturing. So we were invested in Concord biotech, which we took public last year, and then we were invested in a covid light sciences, which is India's largest contract manufacturing company, which we took it just about 10 days back and had great success. And there are few others in the portfolio which we believe and hope will make a similar success for us.
Govindraj Ethiraj: Right. So, what is the success of single specialty hospitals? Like you mentioned the dialysis high hospitals, and then you said HCG, which I think is cancer. What does that reflect about the structure of India's health economy?
Sunil Thakur: Oh well, I would say very progressive. Because as markets evolve and mature, you know, the sector or the segments get federated, which means that various components of disease and clinical therapy starts to come out of hospitals and go very deep in terms of providing specialized services. And what it does is basically any form of specialization would galvanize deep capabilities on the supply side, as well as bring, you know, significant demand for those specific segments. So if I talk about oncology Specialty hospital or a gastroenterology hospital or specialty hospital, you will start to see the supply side in terms of getting good clinicians who want to specialize in that particular vertical come together as part of that organization, because they get to specialize in Super specialize in different components of that, you know, one particular disease segment, and that gives the capability, and then also sort of creates the ecosystem to attract patients who are specifically looking for that clinical or therapy for that particular disease. But that itself is the big reason why single speciality start to succeed, especially in markets that evolve and mature,
Govindraj Ethiraj: Right. So as you look ahead, Sunil, so though in the last decade, things have matured as an industry has become more institutionalized and open to private equity and external capital, it's still, let's say, lack. In other industries. So when you look ahead, what is it? Can you say or highlight one thing that you feel the industry still lacks, which make you know, which is a sort of barrier to, let's say, investors like you, and what is the one thing that's working as you look for some of these opportunities to invest.
Sunil Thakur: See, if I look at the opportunity, because that's the reason why we are here and we are here to invest. The opportunity set is huge, and I guess the challenges in front of the opportunity is minuscule. That's the way we look at it, possibly looking at it from a very optimistic lens. But opportunity is huge in terms of the need for capital, and it comes because of the gap in demand and supply. Demand, as you would know, we're talking about a population of 1.4 billion, huge disease burden, aging population, affluence, awareness, all of that creates a secular trend where we believe that this demand is for the next few decades, whereas the supply, you know, we are highly under penetrated and highly under indexed in terms of the basic infrastructure that we have for healthcare and that sort of, you know, throws up the demand, especially in a country like India. I think the challenges that we face are sort of similar to some of these adjacent industries. Mainly it comes from the paucity of good talent and the size of the talent pool, both in terms of clinician, in terms of nurses, in terms of other specialists who are required to support the organization, or, you know, the sector. Second is, you know, again, bulk of it has got to do with projects. You got to put up hospitals and physical infrastructure, the speed of project execution, because you need multiple stakeholders to come together to successfully put together a project. That has been bit of a stumbling block. But again, things are improving quite a bit. And then when it comes to segments like pharma, where outsourcing is a big, big model, big opportunity there again, you know, getting the confidence of international large farmers to outsource large part of their value chain to countries like India, just the way it has happened in China. So it's improving. We are getting larger projects, but I think it will take some time before we get to the level or closer to, you know, where to where China is. And lastly, it's, it's about policy. So policy, again, has been very progressive. But again, you know, for any private entrepreneur, you know, they always believe that something better can always happen. So those are the four things I would say, you know, remains a challenge.
Govindraj Ethiraj: So as you look ahead at your pipeline of investments, what are the prominent ones? I mean, maybe without naming names, but in at least the areas that you see coming to fruition in the next six months to a year
Sunil Thakur: We are evaluating quite a few deals, but none which is at a very advanced stage. We just concluded two deals from our new fund, which is maxivision, India's third largest Eye care chain and nephroplus which is the Asia largest dialysis chain. We are looking at opportunities across gain single specialty. We're looking at specialty Pharma. We're looking at some pharma services, models and medical devices. So these are few areas where we are seeking out to invest in companies,
Govindraj Ethiraj: Right Sunil, thank you so much for joining me.
Sunil Thakur: Thanks Govind, it's good talking to you.
