Zomato-Paytm deal will be a win-win for both companies: Pankaj Murarka

"There is much more strategic focus. More importantly, there is a very significant discipline in capital allocation in M&M that I am seeing in the last five years which I have not seen in my last 20 years," says Pankaj Murarka, CIO, Renaissance Investment Managers.

Clearly it is a lot of traction that is building up within the broader universe. Is it now the time for stocks within the mid and the smallcap indices to prove their might versus the front liners?
Given the kind of momentum that we are seeing in the markets and the SIP flows are clearly unabating, the underlying economy is still doing very well and fairly resilient, my view is we are unlikely to see any significant capitulation in small and midcaps in the short term.

What probably could happen is we could see stock rotations within sectors, but I think probably looks like we are in for good times and why complain when things are going so good.


What is it that you are making of all the commentary around that we are seeing from M&M, especially from the takeaways of their analyst day. I mean, the stock is at 3000, but our researcher was just telling us that brokerages are now calling it a sell, but still forced to up their price targets because the stock has been relentless and just been moving one way up.
It is actually one of the best performing auto stock in this cycle over the last four years and I must say even we have not captured the entire up move in M&M as we would have liked to be in hindsight and probably I think after the big change with Anish coming and taking over five years back.

There is much more strategic focus. More importantly, there is a very significant discipline in capital allocation in M&M that I am seeing in the last five years which I have not seen in my last 20 years.

I think the group is much more sharply focused and more importantly, they are very clear that all the businesses, the core business, auto business, or the other businesses, be it M&M Financial Services, be it life spaces, in some of these spaces large industry segments, they have businesses which are relatively small and they have a strategic plan that these businesses have to get into leadership positions in those businesses and in the last five years, we have seen that group companies have made significant progress towards that.

My own personal assessment, the M&M Group core auto business and the group companies that I am seeing in the last four or five years is very different than the M&M I have seen in 10 years before that and in that context, I think given that the economy is resilient, across the group the businesses touches across different segments, right from Tech Mahindra in IT to automobiles in SUV and farm equipments which relates to agriculture and then you have financial services and life spaces and so on and so forth, there is tremendous potential for all of these businesses to grow.

Stock might look a bit rich in terms of near-term valuations over the next four or six quarters, but I still think from a medium-term perspective the outlook for the group and business or stocks continues to remain positive.

What the road ahead spells for FMCG because there was that fervour that we witnessed within the space and we attributed it, of course, to the kind of election verdict, the rural push, the fact that there is policy continuity, valuations as well. But how are you looking at the road ahead long-term for FMCG? Is there really an opportunity?
Absolutely. I think we have had a cyclical slowdown in consumption over the last 12 or 15 months and that was partly because of, one, there was a mean reversion to the revenge spending which we saw post-COVID unlocking, where consumers just went on a spending spree kind of a thing and people sort of over-consumed or overbought.
And secondly, we had a failed monsoon last year, which contributed to some degree of rural distress, I must say.

But I think now probably we are looking forward to probably a normal monsoon this year and probably that whole excess spending that happened during the revenge spending period has probably normalised.

So probably my view is that we will see a rebound in consumer spending going into the second half of this year and in the festival season and some of these consumer stocks actually have underperformed the broader market over the last two years and some of these stocks are actually down 30-40% from where they were about a year, year-and-a-half back.

So, my bias, overall consumer remains positive. But within consumers, we are more positively biased towards consumer discretionary than consumer staples because we think the growth rebound in discretionary will be much more sharper versus staples. So, probably we like discretionary more than the staples.

How you are reading into this news, I mean, it is still early stages yet, but the exchange filing from Zomato that they are looking at the movie ticketing business for Paytm.
I think, structurally, the deal to me looks positive or a win-win for both the companies. Usually, you do not get such kind of win-win transaction for both the parties. For Paytm, it makes eminent sense, because they have challenges in their core business. It is better that they focus on their core business and some of these other businesses, which are ancillary.

Probably, one, it will help them release their management bandwidth from some of those businesses and redeploy those bandwidths on their core business.

Secondly, from a financial perspective, it is a loss-making business for them. So, your losses to that extent or cash flows will be preserved and losses will be reduced and you still monetise that business with a good value in that sense from a cash flow perspective or monetisation of the business.

From a Zomato's perspective, I think what has really worked well for them is their core business, food delivery is profitable in generating significant cash and those cash flows are now growing at a very high rate.

Blinkit, there is a very high degree of visibility, will turn cash flow positive probably in another two quarters or three quarters at max, which effectively means Zomato is and will continue to generate significant free cash flows.
For high-growth companies like some of these tech companies with very low capital deployed, once you reach break-even points you start generating a huge amount of cash flows.

For Zomato to buy this business and probably which is insulated to their existing businesses and combine that with their dining business and probably build this into another lever of growth over the next five-seven years again makes a strategic sense because it has close linkages to the existing set of businesses. So, probably I would think if the deal really goes through, it could be a win-win for both of them.


What about the defence companies? I mean, HAL has again got the RFP for procurement of 156 light combat helicopters. So, the stock price action aside, what about the order inflow and the positive news flow?
Well, I think this whole momentum will continue. India has taken a strategic direction where we are the third largest defence spenders in the world after US and China. And 80% of our defence capital spending was actually on imports and we were importing all of these equipments all these years for the last 50-60 years.

Now, after having made this strategic shift, meaning I think one, obviously, it is a very significant order from HAL's perspective. We will see many more such orders for many more such companies. The contribution of private sector to overall India's defence expenditure is still very small. It is a story which is evolving and it has a very long runway to go.

You look at US, some of the defence companies are amongst some of the largest companies in US. When you talk about Rafale, Boeing has a big defence business and so on and so forth. Lockheed Martin, a huge conglomerate.
If we are the third largest defence spenders in the world and our defence spends are only going to increase, then there is no reason that why cannot we create global champions in defence from India, like we have created in some other segments of technology like say we create some of the global champions in IT services from India.

So, there is no reason why we cannot create some global champions from India in defence as well. So, I think the story has a very long runway to go. And while these orders look very large and they are actually large from what we have seen of the sector over the last four-five years, but the point I am trying to make is the sector is still in its infancy and I think it is a very secular thing for the next 20 years.

Because India, given the way world is designed and given the fact that India as a country geographically shares borders with two nuclear powers which no other the country in the world has that kind of a geographic composition, India will continue to spend a significant amount of money on defence. And for all of these companies, I think there is a huge-huge opportunity for probably the next 15-20 years, probably.