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https://www.moneycontrol.com/news/business/markets/pain-indeednear-term-due-to-demonetisation-says-nikhil-vora-929631.html

The former MD and Head of Research at IDFC Securities Nikhil Vora has evolved a strategic roadmap for companies like HUL, Aditya Birla Group, Marico, Godrej etc, and he is one who has been voted as Asia’s Best Analyst by the Wall Street Journal. In an interview to CNBC-TV18, Nikhil Vora, Founder & CEO of Sixth Sense Ventures spoke about various stocks and sectors and also shared his readings and outlook on demonetisation. He further added that there will certainly be pain in near-term due to demonetisation. He said that a ‘surprise’ move was needed for this kind of measure.

Below is the verbatim transcript of Nikhil Vora’s interview to Latha Venkatesh, Sonia Shenoy & Anuj Singhal.

Latha: This is obviously an unprecedented event. You cannot even call it a once in a century kind of thing because such a complex economy with largest population, so much of currency usage. This has never been attempted. How would you trace the impact on demonetisation on the economy – one-quarter pain, two-quarter pain, one-year pain?

A: It is important and you guys have done enough and more in the last few days. In any changeover that one is looking at, that changeover has to be drastic and dramatic for it to be impactful. It requires no saying that there is pain for almost everyone. While it supposedly brings about a level playing field for the common guy, the fact is that the common guy was actually benefitting the most because of this black economy or the so-called unaccounted economy in the market. So there will be pain in the next couple of quarters or more. However, we also have this entire thing about – you did not develop the electric bulb by making candles better. You could not have done that. So, you have to create a level playing field. And as economies grow, it has to become cashless. It is an irony that in India context, we have lived with this over the last few decades and no one has really batted an eyelid because frankly, everyone has been participating in it. You, me, everyone has some form of unaccounted money, not necessarily illegal money. So there is pain, there is this transitionary impact which happens, but we have seen that in the Indian context, transitionary impacts are also something which Indian consumers are very adapt to change. It has happened before, not to the magnitude as what we are at today. So, look at how demat took off and the transition was frankly very smooth. Look at how airline ticketing really started to shape up. One may call it to be mid-premia phenomena and not really mass phenomena, but this will also go. I know of more than enough instances of how businesses are down by 90 percent and so on, possibly more. And I do not think that will change in the next month or so. But the fact is that people crib if they have to stand in a queue for a movie ticket. They have not done it for such a huge impact in their own life and these are daily wagers and so on. So, it is a brilliant impact. It is showing up on the conviction of most ordinary citizens of the country and at some stage, you have to give in to something which is for the larger good for which it is very welcome.

Anuj: Your conviction was always there. You were one of the first investors in Paytm and that is what we have been told. But, are there enough companies in the industry, in the economy to play this demonetisation? That is something that our viewers would want to know from you.

A: The narrow objective is obviously what you were looking at which is what businesses and stocks to buy into and stuff. What will be important is to really look at really good business, a very big market and a really smart product. If you get these three things right, you have got your businesses right. In the Indian context, again, my sense is that most large players have their own inability to change course, because you are large, you are successful by default, you cannot change course. So you have to look at challengers who can actually unsettle the leaders and there will be a lot of challengers that will emerge from this space. So, like you rightly said, Paytm is obviously one play and obviously, I am biased and I am an investor, but the fact is that leadership role changes every decade. We have seen that historically and I do not think we are going to see any change as we move forward. Maybe that decade will actually shorten further as we move forward. You will get businesses which will become a lot more relevant. I could name a few. A lot of them will be in the private space as we speak right now, but I surely think if one wants to call the demise of leaders, you could not get a better time than this right now. The leadership role, the values for the leaders that we have historically paid, that will all change over a period of time. In the next couple of years, maybe sooner, you will have a lot of new-age businesses which will be a lot more relevant for the next five-ten years which will evolve. The most critical aspect will be know your customer (KYC), so if companies know their customers well enough, they are the businesses which will be a lot more relevant over a period.

Sonia: You were really ahead of the curve with Paytm. What a bull’s-eye that was. Now, Paytm is recording five million transactions a day because of this demonetisation. If you had to pick the next big theme, maybe not in the listed space, even in the unlisted market, what do you see as a trend?

A: There is one clear direction that I see. If we look at the last decade in India, there are actually only four brands which have evolved in India and that is reality and it is ironic. You could call Paper Boat as a brand which has evolved, Fogg deodorants which is again one of my investee companies, you could call Go as another one and Patanjali. I frankly cannot think of a fifth brand which has evolved in India. Everything else which has evolved is a platform. So, Paytm is a platform, so is Flipkart and so on, but all other brands that we think today are platforms and not really product brands. So, it is going to be a lot more difficult to identify spaces which will create brands unless they are disrupters in their own spaces. So, if there are large spaces and companies and players are adapt to changing course of these businesses then they will be able to create brands. What spaces to really look at, anything to do with mobile payments, one of it is Paytm, those could be very relevant businesses as we move. Dairy companies. The big theme also as we evolved is unorganised to organised, regional to national and unbranded to branded, so with goods and services tax (GST) also hopefully coming in now. You will start to see a lot of those spaces evolve. So, dairy companies which have historically been very regional strongholds, those could become very large. So, I just think that incrementally investors will need to be a lot more careful than what historically we have been. It is going to be a challenge to really get winners out of the 5,000 odd listed businesses that we have today.

Latha: I want to go back to the first thing that you said. We have managed dematerialisation of shares brilliantly, we have managed prior digitisation, but though they were high end, as you said airline ticketing. Why Paytm? Paytm could be destabilised by the unified payment interface, by the MPIN. Are you seeing that level of Mobile Banking Pin (MPIN) usage, mobile to mobile messaging of money to become the basis of payment in society and if that were to happen, what would you buy, if at all, in the listed stock or in any space?

A: Like we just said, the changeovers are very drastic. You have to really invest in businesses which are up for disruption and who understand disruption in their own businesses to change course. I have said this earlier also that every business has a life cycle. Non-banking finance companies (NBFC) had a life cycle in the 1990s. They almost died. There are possibly 4-5 which are really relevant today because fundamentally, they were intermediary in a space where the raw material was capital which fundamentally meant that only banks should survive. And I have said this before, IDFC was also lucky to be in that space at some point of time. They had to convert into a bank, which they have done. Banks, today, not necessarily in the next year or so, but over a period of time, will be a struggling spot. So, payment gateways become relevant. Who knows what the next stage is. But today, in the next 4-5 years, there seems to be very visible business to be betting ourselves on. I just think that it is important that we somewhere demystify this entire premia that we have historically paid for large scale businesses because large scale businesses, by its own nature are not as fleet footed as they used to be earlier. Earlier, the biggest trend that they had was they had their distribution power and that ensured that no other player could actually compete with them. Today, distribution means nothing. There are multiple methods of distribution which is available and which will mean that challengers will have a lot more capability than historic to compete.

Sonia: In fact, I wanted to ask you about this same conversation that we had about three years ago on the alcohol space. I remember you used track United Spirits very closely and you did mention that United Spirits profits will double over the next three years. But since then, Diageo has come into the fray, things have not really panned out as well, so many regulatory earnings. How did you read into that?

A: I agree. I think we have made a mess out of what our numbers should have been and we have never been great at predicting near-term numbers. But specifically in the case of Diageo, their integration did not really happen at all. So, beyond the regulatory and state issues that we keep grappling with, they could not really get their hands together between Diageo India and the United Spirits operation. Second, they have made just the biggest mess of a diligence that one can ever think of. There were enough grey shades which were known to almost everyone in this country. I am surprised someone who bought just the disproportionate stake into that business did not realise what is behind it. It was up in the air for everyone to realise it. Maybe we gave them a better sense of judgement that they have done all that to take I forward. I still refuse to believe that a business where you continue to hold 60 percent market share in this country and you cannot be profitable, it is just insane. It is just not practical. Pernod Ricard has a much smaller stake in India.

Sonia: So you write off that story?

A: No, you do not write off. Obviously, large businesses or relevant global businesses have their own learning curves and they eventually get it right.

Latha: Do tell us how much more of a downside you see in the market and all the big brands you are talking about are not in the listed space – Patanjali, Paper Boat and Go. So, in the listed space, how would you participate in the eventual upturn which should come after this cleansing?

A: What I can say for sure is that if I just look at something which has been very close to me, is the consumer space, I can tell you for sure that someone like GlaxoSmithKline (GSK) is almost shut down their Horlicks plant. Someone like Reckitt Benckiser is losing Rs 10 crore per day today. Someone like Hindustan Unilever or Emami, obviously which are seasonal plays are losing out on their best season, winter. Someone like Lever is obviously struggling with the large packs that they have and so on. So, the entire consumer businesses today, this quarter is almost a write off if one really looks at that. As far as markets are concerned, my sense in that also is that investors adjust themselves, so you will also have the same quality of investors to come in to bet for a larger good. So, there will be players who will be willing to bet for the next couple of years and more who will start to participate a lot more actively. And the near-term guys really move out and withdraw themselves which is perfectly how market behaviour should be. Listed space, precisely why we have set up a venture fund, there is just so much of value in private because early stage entrepreneurs are the one who will challenge the leaders and they are almost always in the private domain. So, we really focus there.

Anuj: Since you track media as well. Media is also changing, a lot of digital consumption. Even our channel for example, now gets consumed on Facebook and Twitter a lot more. Any particular niches in that area, listed or unlisted?

A: Personally, I have always like PVR amongst all the players which are there. I have struggled with your own business, Network 18 group for a lot reasons beyond content. You have always been brilliant at content and quite poor in corporate governance, sorry for this. PVR is very interesting. They do not control the content, but they control the distribution and that is way powerful. And it is the distribution which very rarely can be replicated. So, I would continue to remain fairly positive there.