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Stock Market Outlook: Structural Demand for AI or ML in 20 Year Bull Run: Rahul Bhasin

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“Developments in quantum computing will revolutionize the way everything works, but at a very base level, the drivers of artificial intelligence and the way they will change and work with businesses that have the potential to adopt those technologies in manufacturing etc. Foresight is a huge disruptive opportunity. Too many older leaders may have challenges to their profit pools and their ecosystems, but it offers a great opportunity for someone who is paying attention, says Rahul Bhasinmanaging partner, Baring Private Equity

The bulls are back, the smile is back. How are you investing in this volatile and haphazard world? Six weeks ago everyone was talking about inflation. Now everyone is worried about recession?
The kind of monetization that the world has seen for the past 14 years, one should worry about inflation as we have raised money stocks to that extent for almost 12 years. It is also happening that the central banks were increasing the reserve requirements of the banks and hence the broad money was not moving at a great pace, but nothing like this happened during the covid monetization.

So there are internal inflation, inflationary pressures around the world, which suggest to me that if that happens we still have a lot of opportunities in all real assets and plays related to real assets. Now everyone is talking about bearish and hence we are talking about sudden selloff in commodity prices and supposedly the multi-year bull run in commodities has ended in 18 months! I really don’t think so.

I think the expectation is that the economy will slow down, demand will ease, but if one looks a little deeper into the whole commodity cycle, one will see that because of the concerns and key points related to ESG, despite the fact that In the manufacture of some of these commodities, there has been no capital expenditure in about 12-14 years.

What happens in common goods is that if you don’t incur capital expenditures, the yield from your current mines or your current oil wells, etc., keeps on declining. So as soon as economies start to normalize again, we will have shortages and will probably end up with another bull run in that whole ecosystem. In that context, it is not surprising that India has by far been the best performing stock among large companies.

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Yes, it has been there and I am wondering whether the list of recommended PSUs in your portfolio stops there or are there more names?
We do not invest in PSUs. The return our investor base is looking for is much higher than the market. That’s why we usually don’t invest in PSUs. I personally believe that if you were an investor in the public markets, the public sector undertakings that have been so hated are actually undervalued. But if you’re asking me whether we as a firm do this, no, we don’t.

You have always loved IT and invested there. The world is divided as to where IT is heading. Can we write off IT or can we say that behind IT is the best profit and revaluation?
There are two ways to view it. Let’s look at it from the point of view of a short term investor or mutual fund manager who has to manage the NAV for the next 12 months. In the 2018 odd, PE multiples of the entire IT sector were written off and then we had a revaluation and then we had COVID. So there was a much more serious reappraisal. So the price income multiples increased by about three to four times in that period.

Now all of a sudden, we’re talking about a possible US recession. Generally whenever the US economy slows, as a genetically high beta demand item, IT demand slows, even though there is no evidence of a slowdown at this time.

I think people are now suddenly revaluing IT stocks and the multipliers are coming down. But if you step back and look at it from any kind of structural perspective, what industry is redefining every other industry is really IT. One can break it down into further subsets and say that artificial intelligence or robotic process automation or cyber security type businesses are becoming more and more important and we cannot do without them to run any type of business. I think there will be structural demand for these things in the bull run of 20 years.

Another important pocket we’ve discussed in the past is the EV. What does that end of the market look like now?
We always go through periods of excitement and to give you a parallel, we have to look at the 1919 US market for automobiles. There were 20,000 companies. In 1954, there were three companies. Not that automobile sales have slowed at any point. We can see something similar in the EV space and what is very clear is that a lot of people in the IC engine space will get hurt.

Is this adoption going to happen overnight? I don’t think so. I think it will take maybe five-ten years except in the two wheeler sector but it is very clear in which direction this whole industry is going now. Between the actual manufacturers of two-wheelers and four-wheelers, it’s not very clear who will win or who won’t, but if you really get into the supply chains of these businesses, they’re pretty much consolidated and they’re pretty predictable. provide more opportunities for investment return. We’ve invested in some recycled lithium-ion batteries and they grow in double digits month after month. It’s all about whether you can execute fast enough, there’s no shortage of demand.

Investor or not, I’m sure you’re monitoring all developments with at least one change in commentary. I don’t think he had much choice. Are you finding value now after massive revamp and course correction from management?
When the IPO came, everyone asked me whether we would invest and I said that when we did our NAV, we found that our own calculations were much lower than the IPO price. All I can tell you is that in this current downturn, the valuation we came up with with Zomato has almost come down to that valuation, but again I would consider fair value.

We generally consider generating alpha at more than 1500 basis points a year and therefore we cannot invest and expect to generate it for a fair value in the public markets. So, it’s not for us from our fund management perspective. But I think Zomato is a real business. It generates real value. Overall proposition for hyper local The value proposition for hyper local solutions is a good proposition. If boards and management focus on ensuring that they generate and protect profit pools, it could be a valuable franchise.

I think it’s starting to move in that direction, but as an investor, usually I want to see it consolidate because often I see a lot of businesses, especially young and new age businesses. Along with, benefits are also an attitude and a culture and that needs to be included.

As far as profitability is concerned, many of these Zomato-led companies have now come out with timelines. This is the first time that Zomato has given the second quarter of the next financial year. There is less trading activity in the private markets. Is this something you are looking for? A whole host of new-age tech companies were about to descend on Dalal Street. Would private investors also want to exit?
One of the areas I worry about in terms of valuation is probably the fintech space as the whole ecosystem is acquiring customers but hasn’t found ways to build a profit pool yet. This is the type of place that I worry about might have too high pricing.

The other thing that usually happens is that this whole distribution, distribution, solutions like this have been in the hype for a long time. But the amazing thing about investing is that you have had almost zero cost of capital for this ecosystem since 2008 and it has created so much disruption in a wide variety of spaces that there is clearly no end to the opportunity.

If you put aside the two or three parts that make up the news headlines every day, there are a lot of opportunities and we’ve been investing in lately. One of the latest investments we’ve made was in a company that is using space technology. They had to build intellectual property into edge computing to be able to transfer data from satellites to the ground and then use AI models to capture and consolidate other data and then build financial insights out of it. Had to use an analytical framework to sell.

They are able to substitute something that banks and financial institutions did with an 85% gross margin at an 85% lower cost. This is the kind of business that really excites us and the company name is Satsur but there is no end to the opportunity.

If you look at all the developments in quantum computing. It will revolutionize the way everything works but at a very base level, the drivers of artificial intelligence and the way they will and change businesses and work with businesses that have the foresight to adopt those technologies in manufacturing etc. There is a huge disruptive opportunity out there which suggests that many of the older leaders may have challenges to their profit pool and their ecosystem, but it does provide a great opportunity for someone who is paying attention. Used to be.

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