Prashant Jain in areas that may be reclassified and earnings growth expected in the future (2023)

Prashant jainist, Founder,3P Investment Managers, says India's GDP gains are almost back at 4.5% to 5%, whether it's in banks, raw materials, capitalization. companies; Consumer, IT, Pharmaceuticals, Chemicals, Metals, Utilities, almost everyone earns decent money. I would argue that there are very few places where margins or profits can grow faster than revenue growth. So 12-14%profit increaseseems to be feasible, no more than that, unlessIndiagrowth rates are increasing.

What do you think is about to be reclassified? Whether it will happen this quarter or the next, nobody knows. But do you think there is significant room to reassess this business or sector?
One area that was also downgraded, but could still see room for downgrade, is the energy sector. Let's go back two years and ESG was a very lively topic. People thought you could go from conventional to new energy overnight, and we've discussed this many times. This was not a very realistic view. But people have come to this view that mainstream power is here to stay, and across the world we're seeing what's happening in the space of power.

Even in India, coal or electricity shortages are in the headlines and there have been some reports recently that we are likely to announce some new conventional power plants. India's per capita energy consumption is extremely low and energy is a growing business in India. Furthermore, for some of the incumbents, their quasi-dominant status gives them a significant advantage when it comes to borrowing. Whether conventional or renewable energy, the cost of borrowing is the largest delta between two companies.

Therefore, widening spreads globally, including in India to some extent, has increased this competitive advantage. These utility companies are not yet listed as growth companies. There is still room for reclassification to be done there. But overall, in my opinion, there's not a lot of room in this market to go up multiples in a lot of places.

Which means, if you think markets will grow in line with earnings estimates, what are your earnings growth assumptions for the next two to three years?


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Our profits rebounded strongly. India's yields to GDP fell below 1.5% two years ago and this was due to non-performing assets, low commodity prices and weak capital. What we lost in five or seven years, we recovered in two years. Today, our GDP gains are almost back to 4.5% to 5%, whether in banking, commodities, capitalization. companies; Consumer, IT, Pharmaceuticals, Chemicals, Metals, Utilities, almost everyone earns decent money. I would argue that there are very few places where margins or profits can grow faster than revenue growth. So earnings growth of 12% to 14% looks sustainable unless India's growth rates pick up.

So a 12-13% or 12-15% compound return for equities as an asset class over three to five years should be a reasonable expectation?

Yes, 12% is very realistic. It could also be a little more. What is fascinating is that real growth in India has averaged around 6% over the past two decades. This could move to 7-8% because what happened, India gained competitiveness in the manufacturing sector. indian salaryinflationin Asia, it was one of the lowest in the last 10 years.

We didn't do well with construction. See Vietnam, Indonesia. Their wages were less than half those in India 10 years ago. Today they are a little higher. So, due to the fact that we have not gone well in manufacturing, we have gained competitiveness due to the lowest manufacturing wages and, in addition to that, the large global companies want to eliminate the risk that their supply chain depends too much on a single soil Country. And also for geopolitical reasons, after Ukraine, India is a favorite destination.

So the era of manufacturing in India is finally upon us and manufacturing is a much bigger opportunity than services. Only 0.5% of global manufacturing exports, only 0.5% is 4% of India's GDP, which is about the same size as India's software exports. India's growth rate is 6% in the current decade and in the next decade we should be able to grow 7-8% and if that happens then of course there is a little more room for equities to grow.

As of 2019, the word e-manufacturing is used. Nobody ever thought that India could be a net exporter of cell phones, but they foresaw it, and today we are a net exporter of cell phones. Defense and railroads are government-supported manufactured goods. We are trying to create a moat by putting import duties and incentivizing them with PLI schemes. But the real test of the pudding would be when we exported to the world. In what manufacturing categories do you think we can be the factory of the world?

We have a very big opportunity because we have land, labor, energy, technical skills, a caring government, entrepreneurs, and except in the electronics space where we haven't created an ecosystem yet and we're essentially assemblers now. But in addition, our ecosystem is also quite developed, be it textiles, engineering products, chemicals or pharmaceuticals. In cars, see what Mr. Bhargava said recently. He said that a new factory will be dedicated to export.

We've been pretty good on two wheels. So in all areas of manufacturing in general, except electronics, we have reasonable capabilities and we should do pretty well and we're moving in that direction. In electronics, we need government support because we don't have scale, we don't have experience, and we don't have an ecosystem. Now, we are starting with the final product. We assemble the parts.

We will gradually work backwards as more and more capital enters this space, whether driven by local entrepreneurs or global companies. And the government is also very interested in developing that ecosystem, but I think outside of that space, we're doing reasonably well today. And in this area we have a lot of work to do.

Let me try to break your thoughts into categories. cyclical, structural and value. I think banks would qualify as a structural part of your portfolio. You've always had banks. Let's understand the circular part. Prashant Jain is known to buy fashion stocks. He didn't shy away from buying declining computer products or pharmaceuticals when they were out of fashion. What is the bet of the cycle in your portfolio and where do you think this opportunity is?
This is a unique market, and in my career spanning more than three decades, there have been a few sectors or others that have consistently offered good value and where money can be made not just through growth, but through numerous emerging businesses.


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