Is ESG investing overdone? What should you do with ITC, NTPC & Coal India?

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So as far as commodities are concerned, the Tata Group companies have done very well in the last few years but maybe they will continue to do well for some time though the bull run in commodities is probably coming to an end, says Milind Karmarkar, Fund Manager, Dalal & Broacha Portfolio Managers.

You have always asked to watch out for Tata Group of companies. They are in the process of getting rerated and those stocks have got rerated. What is the way forward?

Whether it is Tata Consumer, Trent, Titan or Tata Motors — all Tata Group companies benefit from rising per capita income which has been my theme for a very long period of time and continues to be that. I think Tata Group overall should continue to do very well though besides these, they also have Tata Steel, Tata Chemicals and of course TCS. So as far as commodities are concerned, they have done very well in the last few years but maybe they will continue to do well for some time but the bull run in commodities is probably coming to an end, but otherwise I expect the rest of the pack in the Tata Group to do very well.

Why do you think the bull run in commodities is coming to an end? The big picture is that because of ESG constraints, there would be constraints on how much China can expand and how much other companies can expand, which means supply will always be less.

The bull run will come to an end. Commodity prices which had moved up significantly may not move up much from these levels because historically, first commodities go up, then commodities come down, commodified products go up, the commodified products come down and industrial products go up. When I am saying come down, they probably stagnated in the industrial products. In between, sectors like hotels and everything are going up. The same thing is being repeated right now.

Across the board, commodity consumers have reported a drop in margins. They are feeling the heat of high commodity prices. Do you think one should use the downturn to look at the other side of the equation? If commodity prices remain flat, is it a good time to buy into commodity consumers because the top line is not a problem, it is only at the margin level where they are getting squeezed?

I completely agree with you because as commodity prices stagnate, users of commodities will definitely benefit and one should look at that.

For the longest time like you referred in your opening remark that you have been a big votary of per capita income. But for the first time serious per capita income is getting created because jobs are getting created, the corporate balance sheet recession is getting over. IT companies are hiring. What will be the first beneficiary of this entire job creation boom which is creating the wealth effect?

We also had a stagnating real estate market over a longer period of time. As commodity prices stabilise and as interest rates have come down quite a bit, I am not saying they will remain at this level, they will start going up from this level. But even if that happens, they are still significantly lower than what they were earlier. So, I do see some kind of traction coming in. It has already started coming in real estate which could be a big beneficiary.

Apart from that, all the other consumption stocks or consumption sectors — whether it is retail or FMCG, the growth will probably be lower as compared to the other sectors. But otherwise, most of the other sectors in consumption will do well because another thing which typically happens is that affordability goes up as per capita income goes up.

Everyone says that oil has the capacity to derail the economy. If I go back to 2002-2003, $450 was the income and oil was $30. So per capita income was 15 times the price of a barrel of oil. Today the per capita income is 24 times the price of a barrel of oil. As the per capita income goes up, affordability also goes up and that drives consumption and the economy as well.

Are you a big votary of these new themes – EV, climate change, fintech?

When it comes to fintech, yes I am. When it comes to EVs, that is the way to go but having said that, especially for EVs, they will be replacing ICE and most of the companies which are getting into EVs are already ICE vehicle manufacturing companies. For them, the growth will come out of a slightly higher priced vehicle but in terms of volumes, I do not see a significant jump immediately.

It will happen over a period of time. When it comes to climate change, the other day someone asked me why don’t you focus only on ESG investing? My answer was simple; I said that do you want to earn more money or do you want to be socially more conscious, especially when you are investing? Obviously his answer was to earn more money and so I said you got your answer. So ESG, yes, one should be conscious of the environment but I do not think ESG will be a theme over a longer period of time to grow and make more money in the stock markets.

If your view is that ESG investing is overdone and other non ESG stocks are getting a step motherly treatment, is it time to buy an ITC, NTPC, Coal India?

I focus on growth because ultimately it is growth which drives the overall economy and the markets. That is the reason why I will focus more on companies which can show higher growth because of rising per capita income. Power demand could go up significantly. Now, will the future production in electricity be driven by renewable energy or will it be driven by thermal energy? I believe that it will be driven by renewable energy and that is why over a longer period of time, companies which are producers of commodities which used to drive thermal electricity may not grow that much.

My focus would probably be on those companies which will benefit out of rising per capita demand of power rather than going in for power producers alone.

Companies like Nykaa and Zomato are also a play on consumer and growth, high growth companies and are completely consumer focussed. Nykaa is a play on per capita as well as grooming habits; Zomato a play on food as well as our growing habits where Indians are going to be dining in more rather than going out. How does that fit in for somebody who focuses on growth and believes in consumer businesses?

They could be interesting but at the same time, I also look at companies where there could be free cash flows, maybe not immediately, but over a slightly longer period and that is the key. The answer to that is that if I am looking at a particular company and do not foresee a significant free cash flow coming in the next eight, 10 years, then I may not invest in that company even if it is in fashion.

For example, in the US during the internet boom, Amazon was trading at $100 and then when the internet boom got over, it collapsed to about $20 and for it to go above $100 took almost 10-11 years. So I will be quite careful while investing in these companies, especially at high valuations.

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