[Siddhartha Ahluwalia] (0:00 – 0:05)

Every time you visit a bank branch, you say you don’t want to come back because there’s so much shelling.

 

[Deepak Shenoy] (0:05 – 0:17)

There’s a cartoon about this. A guy is taking a gun and he says, I only want to deposit my money and no other products. I don’t want to take money, I want to give you money, but only money.

 

[Siddhartha Ahluwalia] (0:18 – 0:18)

I don’t want to buy anything else.

 

[Deepak Shenoy] (0:19 – 0:21)

So it has become like that.

 

[Siddhartha Ahluwalia] (0:21 – 0:23)

 

Why are the public sector banks doing well?

 

[Deepak Shenoy] (0:23 – 0:26)

 

Very good question.

Two or three reasons.

 

[Siddhartha Ahluwalia] (0:26 – 0:34)

Do you feel the entire stock market is overvalued right now?

 

According to you, what happened to Paytm?

 

[Deepak Shenoy] (0:34 – 1:22)

 

In many public sector banks, the KYC situation is so bad. If they went down the same route, they would have to shut down the public sector bank tomorrow.

 

They didn’t do it there, they did it here. Primarily because Paytm, Payments Bank may be small. Nobody cares.

 

In the Yes Bank case, RBI gave instructions to go to court. The court should decide within 15 days what should happen.

 

Who are you to tell me what to do in 15 days? So RBI had to issue a clarification, remove that notification set. We request the Supreme Court to please do this as soon as possible.

 

Rakesh himself was also a trader and an investor. He was a person who used to love to go short on the market. He invested in Meta Finance.

 

I think we make a legend out of his long positions, but I think his legendary thing was also cutting positions and going short. He was amazing in that.

 

[Siddhartha Ahluwalia] (1:22 – 1:27)

I don’t care if startups are going IPO or OYO is going IPO. Is it a good trend that people are washing their hands in Baithi Ganga?

 

[Deepak Shenoy] (1:28 – 1:30)

Then those hands are for Baithi Ganga only.

 

[Siddhartha Ahluwalia] (1:36 – 1:55)

Welcome Deepak. This is our third episode with you. So glad to have you back on The Neon Show.

 

And today we are going to discuss a lot of Geopolitics. Because, you know, finance combined with geopolitics is one of your favorite things, right?

According to you, what happened to Paytm vs RBI?

 

[Deepak Shenoy] (1:55 – 1:57)

 

I can’t comment on Paytm.

 

[Siddhartha Ahluwalia] (1:57 – 2:04)

 

Not on Paytm, but just on why is RBI tightening on FinTech’s in general?

 

[Deepak Shenoy] (2:04 – 4:33)

 

So it appears like it’s tightening on Fintechs in general. I agree with that. And I also think that their actions are a little too strong and harsh because they generally give time.

 

They give more time for… So even in recent cases, they have given people time for… Even in some of the other cases, they’ve given some time.

 

In many public sector banks, the KYC situation is so bad that if they went down the same route, they would have to shut down the public sector bank tomorrow. But they didn’t do it there, they did it here. The answer is primarily because Paytm Payments Bank may be small.

 

Who will be affected? Nobody cares. Whereas the public sector bank is relatively big.

 

The rural will be affected, the farmer will be affected. We won’t do it. This situation is not right.

 

It should be a common kind of approach to everything. Give time and make it a transition. If you have a problem with a bank, have someone take it over.

 

You used to do this earlier. That there will be continuity. Now you have said that no, it will be closed.

 

It’s fast, close it. How did this happen? You tell someone else to take over.

 

Remove the promoter. And you make someone else take over. You tell him to do the KYC himself.

 

Or you close your own account whose KYC has not been done. Now that was better as an approach. I don’t think I like this approach of saying that close it.

 

You are Fintech, I don’t care. If you were a public sector bank, maybe we would have given you time. This thing is not right.

 

I think that is also another bad thing that RBI is going into. Which will not hold it good in the longer term. It will take some effort by everybody involved.

 

To put a little pressure on you will treat everyone equally. In terms of how the regulatory actions are. At least in a framework.

 

You won’t say that this guy wears a T-shirt. Let’s cut him off. Why is he not wearing a suit with us?

 

That egoistic behavior. Have we come back to the license rule? You were saying that the license rule has been removed.

 

You need a license for everything. You need a license to speak. You need a license to work.

 

You need a license to take a payment from someone in Fintech. You need a license to give someone a payment. It should not be that because of this license.

 

You twist someone’s arm and say that I will stop your business tomorrow. That used to happen before. That is why we removed the license.

 

Now we are coming back into it.

 

[Siddhartha Ahluwalia] (4:34 – 4:40)

Where do you mean we are coming back? Isn’t the government noticing it? The regulatory step took us many years back.

 

[Deepak Shenoy] (4:41 – 5:28)

Governments in general like licenses because there is power in it. Governments like power.

 

The removal of the license was at gunpoint. We were so eager to do something. Let’s remove it.

 

But inherently the government doesn’t like it. All the governments were like how is he doing it without a license? Now you have said that you will do something cool on social media.

 

You need a license for that too. Maybe that will happen one day. And then there will be a case in the Supreme Court.

 

Who told you that someone needs a license? It is a fundamental right. You can’t get a license for it.

 

For instance, if I have a right to speech. They can put a reasonable restriction. But that reasonable restriction cannot be that I need a license to speak.

 

[Siddhartha Ahluwalia] (5:28 – 5:30)

 

But can Fintechs go to the Supreme Court against RBI?

 

[Deepak Shenoy] (5:30 – 6:07)

 

Of course. Why can’t they go?

 

They can go if they want to go. But the fear right now is that they will go but in the end what do you do?

 

At some point somebody has to go to the Supreme Court. RBI has been told by the Supreme Court once. In the Yes Bank case for instance.

 

There was an issue of 81 bonds in the Yes Bank case. RBI put a circuit that please go to the court. And the court should decide within 15 days what should happen.

 

The court called the RBI. Who are you to tell me that I will file a case in 15 days? Who gave you the authority to tell the Supreme Court?

 

[Siddhartha Ahluwalia] (6:07 – 6:08)

You are above the Supreme Court.

 

[Deepak Shenoy] (6:09 – 11:21)

So the RBI had to issue a clarification. Remove that notification and say. We request the Supreme Court to please do this as soon as possible.

 

Now that is the constitution. That is upholding the constitution. There is a Supreme Court.

 

You cannot. Not that it is right all the time but at least there is a decorum of saying that you are not the only God.

 

There is one above that. So RBI gives a notification. There is always a higher court.

 

Now whether you will win at the higher court or not we don’t know. The answer to that is only findable if you go to the Supreme Court.

 

Today there is no abhi Kotak. Why did he go to the Supreme Court? And he won.

 

He went to the Supreme Court because he said I have talked to you a lot. You are not listening to me.

 

There was a case on his promoter ownership. He said. They said, why do you have 26%? Or whatever it is. You should reduce it to 26%. And he said, I have this ownership. I am not… I am willing to give away my voting rights. But let me keep 40%. You know. They said, no, you cannot do that.

 

You have to. Otherwise we will do this. So then they talked. Then he said, I am going to the Supreme Court and he went. Now Uday Kotak is Uday Kotak.

 

So you have the power of the institution and the man who built a lot of it when he did that. The Supreme Court said in the end what he is saying is justified. You should not just behave in haste. They told the RBI to backtrack. RBI did. Eventually of course RBI got its way back in another way. Because in India institutions have memory. They have ego. Ego also but there Kotak displayed a point where he said. The first time a regulated entity went to court and won. Now in other cases also. RBI may find that some entities. If you push them against the wall they might come back and say, you cannot do this. Like it is possible in other regulators also. Some regulators said you cannot speak like this. You cannot speak openly. You know at some level if this goes to the Supreme Court, the Supreme Court will ask regulators.

 

Who told you that you can restrict what one person says who is not either who is even registered with you or who is not registered with you. You cannot tell people what they can or cannot say. Unless you say that. You cannot tell a lie.

 

All that is fine. But you say that no one can say this about this. Like I cannot say what my past performance is?

 

What will I say to someone? That I am a good man. I cannot say this because of my past performance.

 

But you have to be very solid. Reason why. So the Supreme Court will ask.

 

Why do you have this rule? And this is it. Not infringing on the freedom of speech.

 

Then there will be a problem. Where the regulator comes and says we have said this in our rules.

 

We do not feel this is a good thing. The Supreme Court will say fine you do not feel.

 

But I feel they might come back.

 

This is necessary… I think this undoing of this license thing will happen only when people are pushed to a corner. And therefore the regulators also go lax.

 

They make big rules but usually their implementation happens slowly.

 

And they only find them. Hardcore criminals. You take action against it.

 

So a hardcore criminal is so hardcore. Even if he goes to the Supreme Court. The Supreme Court will say who is this? You spread so much filth. Why should I listen to you?

 

Versus if you go against a well-established entity. Then they have the power to go to court and talk. But this will change.

 

One day the regulators will go after the wrong person. And that wrong person. The wrong person means.

 

They are after an honest person. And that honest person will say, look, it is not like that.

 

We have remedies. This is a natural part of growing up. We give institutions too much power.

 

The institution misuse those powers. We take the power back. By Supreme Court or something like that.

 

Sometimes the Supreme Court itself, I think, has too much power. Then you know like for instance. One Supreme. One high court judge said why are we charged a fee at toll gates? We should be given free access. There should be a ride only.

 

Lane only likes high court judges. The Supreme Court said, are you mad?

 

You have to pay no fee. Whatever it is, it is different.

 

But separate lanes for you. This is not your father’s kingdom. So the Supreme Court said that.

 

If the Supreme Court says it. Then you have to go back to the Supreme Court. With another bench.

 

And say that look. That bench was wrong. Please correct it.

 

This is the only way the system evolves. And we are.

 

What do you say? We are a nascent community. We are early.

 

Such judgments should come over time. These judgments will get stronger and stronger. And stronger. And we will get better but till that time, we will have to suffer.

 

[Siddhartha Ahluwalia] (11:21 – 11:24)

 

What is happening in banking stocks and the banking sector in India?

 

[Deepak Shenoy] (11:27 – 12:03)

I think the problem is with understanding banking stocks is a very complex piece.

 

And usually when the West looks at an emerging market economy, they look at the banks as the barometer for the economy. Economy is doing well. Banks will do well.

 

Economy is not doing well. Banks will not do well. Banks have been the primary investment vehicles for foreign investors. For the longest time. So for instance. More than 75% I think HDFC bank is owned by foreign investors. More than 50-60% or more than that probably. ICICI bank is owned by foreign investors.

 

[Siddhartha Ahluwalia] (12:03 – 12:07)

 

And we say that Paytm is a Chinese company.

 

[Deepak Shenoy] (12:07 – 12:09)

Yes, so people don’t know that.

 

[Siddhartha Ahluwalia] (12:09 – 12:11)

HDFC is 75% owned by foreign investors.

 

[Deepak Shenoy] (12:11 – 12:26)

In fact. To the point where. They were FDI limits on what you know people could own. An HDFC bank.

 

And HDFC bank should always come close to those limits.

 

So HDFC banks. ADR. In the US. Used to trade at a premium.

 

[Siddhartha Ahluwalia] (12:26 – 12:27)

 

What is ADR?

 

[Deepak Shenoy] (12:27 – 13:28)

 

ADR is the American depository receipts.

 

America may. Equivalent to. Effectively a share.

 

One share. Or two shares of It’s called HDB. The symbol that used to trade at a premium to India. Because when you cannot come to India, you take a share.

 

That created a wave because ICICI also has an ADR. But ICICI does not have the same issues with limits so that tends to be a little bit closer. So you have a situation right now where the banks have been the barometer of the economy for foreign investors. So far.

 

But Foreign investors are less relevant to India’s investing philosophies.

 

Or investing. Growth. While they continue.

 

To own. There are two things. That is happening.

 

They are less relevant because last month in January 2024 they sold roughly twenty five thousand crores worth of stocks.

 

[Siddhartha Ahluwalia] (13:28 – 13:30)

 

Just in banking. Or overall.

 

[Deepak Shenoy] (13:30 – 13:34)

 

No. Overall.

 

[Deepak Shenoy] (13:30 – 13:33)

Okay. But you can assume. That’s because they’re mostly invested in banking. They sold a lot in banking.

 

[Siddhartha Ahluwalia] (13:34 – 13:36)

Fifty percent would be banks. At least.

 

[Deepak Shenoy] (13:36 – 13:37)

Yeah. Significant percentages.

 

[Siddhartha Ahluwalia] (13:36 – 13:47)

I assume out of that fifty percent Top four banks. HDFC. ICICI.

 

Kotak. And maybe one more. Would constitute.

 

Eighty percent. Like Pareto’s principle.

 

[Deepak Shenoy] (13:48 – 15:38)

Yes. By the. For the most part.

 

But they also have ownerships in HD. IDFC.

 

They have ownerships in some of the smaller banks like maybe even a federal. This thing. They also have ownerships.

 

In some ownerships. In public sector banks. As well.

 

SBI included. The government owns only fifty percent. The remaining.

 

There’s a good chunk. It’s owned by Foreign investors.

 

Now. What has happened. Is also because of index funds. Now. Because these banks are relatively expensive. In weightage. So thirty Forty percent of the weightage Of Nifty Is the banks.

 

Yeah. Therefore, Any foreign investor.

 

Looking to invest in indexes. Kind of an approach. In India.

 

I’m always going to choose. Forty. Forty percent of that is banking. You know. Index and because they’ve been so interested. Banks have done relatively well compared to the rest of the economy. Now they are uninterested. Banks are not doing so well.

 

Also, there are headwinds in the banking business itself. So. HDFC bank For instance. Had a merger with HDFC. Because of that.

 

No one is able to understand. What is happening? And no one is able to understand. I mean they are able to understand but nobody knows how long it will take to resolve the situation.

 

In general there are lots of issues. Their net interest margins have compressed quite substantially. Their cost will probably remain high until they figure out how to remove the redundancy. With HDFC there are a lot of you know there are a lot of cultural differences between the two teams.

 

So while they resolve that… They will not be able to grow.

 

So much. And they have shown. Last two quarters.

 

And strangely. HDFC is usually very upright. And You know. Forthright. About Everything. Yes, there’s a problem. Problem. But wait, we will solve it in 2-3 quarters.

 

This is one of the few times. When you are seeing. HDFC is saying.

 

No. No. Everything is fine.

 

[Siddhartha Ahluwalia] (15:39 – 15:41)

But. We all can see the problem

 

[Deepak Shenoy] (15:41 – 16:40)

We are seeing. No. Everything is not fine. You are not growing. But you are saying. You are growing by 50%. In the last year your HDFC was not a merger.

 

Now your HDFC is a merger. If we bring it all together then

 

It is only a growth of 5 to 10%. So why don’t you say it is only a 5-10% growth? What’s the point? I can do the Math in Excel and say you are not growing.

 

So. It is a very uncharacteristic move for an HDFC bank. And I am not saying this. Critically. Or saying this thing. We have a small position. As a disclosure very very small. So. But one of these. On HDFC bank. A while back. In fact, that time we had said, Look , there is a fight in HDFC bank. LIC is fine. LIC has a different approach to things. We bought a much larger percentage of LIC. That way situations are different. But. the issue with HDFC bank is about the merger. That merger dynamics. It is always a big thing. Two big entities merge.

 

[Siddhartha Ahluwalia] (16:40 – 16:43)

So. Why did they merge at all?

 

[Deepak Shenoy] (16:41 – 16:52)

I think the merger.

 

20 years. People have been discussing it. That you people have.

 

A different bank. And different. Housing finance company.

 

Why? And that too. The housing finance company is a parent of the bank.

 

[Siddhartha Ahluwalia] (16:53 – 16:53)

Yeah.

 

[Deepak Shenoy] (16:53 – 16:59)

Usually. The bank creates a housing finance company.

 

Subsidiary. That is fine. Because then you are buying the bank.

 

[Siddhartha Ahluwalia] (16:59 – 16:59)

So.

 

[Deepak Shenoy] (17:00 – 17:13)

You get a subsidiary. But PNB is there. And PNB housing finance is there. Separate. LIC is there. LIC housing finance is there. Separate company. LIC is not a bank. But say Canfin. Canfin Homes is a subsidiary of Canara bank.

 

[Siddhartha Ahluwalia] (17:13 – 17:13)

Yeah.

 

[Deepak Shenoy] (17:13 – 17:35)

And so you typically have that.

 

As a structure. And the reason for NBFCs to exist has always been regulatory arbitrage. That the rules that apply to banks do not apply to housing finance companies. Nahi lagu hoti hain. In a certain broad context of the world. So earlier the rules were much more lax. NPA recognition was different.

 

[Siddhartha Ahluwalia] (17:35 – 17:36)

 

What is NPA?

 

[Deepak Shenoy] (17:36 – 17:40)

 

NPA is Non performing Asset.

 

Matlab. Loan and all Fight ho gaya.

 

That way. And they were.

 

[Siddhartha Ahluwalia] (17:41 – 17:49)

So. They were both Different parameters.

 

Bank. And. Housing.

 

Well. For example, I think in banks, NPAs. Two. Three percent is high.

 

[Deepak Shenoy] (17:49 – 19:00)

As in not about percentage.

 

But when. For instance, If you’re ninety days past due that would be a qualification for a bank to say Ki dekho, you’re an NPA. In a housing finance company.

 

It was slightly. Stretch. Beyond that.

 

Now. Also, They’ve given something called ECL. Expected credit losses. So.

 

NBFCs are required. To recognize what it is. But at least in that context you are seeing that NBFCs are not necessarily you know they’re not getting the same. Regulatory treatment. As banks.

 

Over time though. RBI said that your setup is different. NBFC and Banks are different. However, as you grow, HDFC was larger than about I think other than the top three banks, was larger than everybody else. When you grow so large, Then I will regulate you like a bank. So. I will ask you to keep some capital handy In case. If someone does anything, you have deposits. I know. They are not callable deposits. But in case they are called or people need to know get rid of them you have an issue with.

 

[Siddhartha Ahluwalia] (19:01 – 19:01)

 

You don’t have a bank.

 

[Deepak Shenoy] (19:01 – 19:28)

 

You don’t have a bank. Not a bank. Well it’s like you are not able to refinance your bonds.

 

Then what will you do? And for that issue we want you to keep let’s say 10 or 15 percent capital. Against that you need a slightly higher capital adequacy ratio.

 

In case, you have a certain size. You have certain loans. So for instance HDFC as a NBFC could lend to land. It was one of the largest lenders to land. Banks cannot lend to land.

 

[Siddhartha Ahluwalia] (19:28 – 19:28)

 

Can you simplify it?

 

[Deepak Shenoy] (19:28 – 21:18)

 

Suppose you do not have a house. Builders want to buy a land parcel of 200 crore or more. On this land, in future, not sure when he will make an apartment. So, he goes to the bank. They will say, you are buying land, but you do not have any concrete plan for it. You are saying in the next 10 years, you will probably make an apartment on it.

 

Bank cannot lend to that. So, you can take a personal loan but you won’t be able to get a personal loan worth 200 crore. So, we cannot lend. So, we will lend against a built house or built apartment building for which you have ownership. HDFC could. So, HDFC people went and said, we want to buy land. So, let’s buy land. So, now all this has been transferred to HDFC bank. So, HDFC bank can have that as their, but they cannot incrementally lend to more land right. So, where will they go to buy land? They can only go to a bunch of other places or create bonds in the market and so on. But there also banks somehow participate to this some kind of quasi lending in a way, but in that sense that HDFC was a ready and available lender and not there, they have to go to now, the next biggest with maybe Bajaj finance, not many people have the heft of HDFC and therefore, that business area of HDFC Bank becomes unviable for them to get bank loan because you cannot do it. If I have a builder contact me on that land.

 

So, what happens also is that you give the builder a loan to buy the land. So when that builder builds an apartment on that he comes to you only and asks you to finance it. You finance one part and the rest my customers will keep paying. So, now your building and land loan can be paid for simultaneously.

 

[Siddhartha Ahluwalia] (21:18 – 21:19)

 

Which is great!

 

[Deepak Shenoy] (21:19 – 23:16)

 

But now without the land, they will use the same technology with somebody else right. They will say we will take a loan from Bajaj finance for land, then they will tell Bajaj Finance to finance their house too. And tell Bajaj Finance to keep banks out until my loan is cleared, I don’t want to share it. So, one thing would be that that would be a concern in general the NBFC and bank differential is primarily a regulatory arbiter now, Till Aditya Puri was there and Deepak Parekh was strong, there was a fairly well understood thing ki dekho we won’t merge. Deepak Parekh said at some point ki dekho we don’t want, ki bank, bank may for instance if I have a deposit of 100 rupees, I have to put 40 rupees to priority sector, I have to put 22 rupees to SLR, CRR. So basically my lending is constricted ki yaar main ghar ko, matlab lending nahi kar sakte hain, Aggar 40 rupee yahan laga lo 30 yahan laga lo. Phir mai kaha hi. I can lend only Rs.50 if the deposit is Rs.100. And HDFC was lending to relatively expensive properties also. So they were talking about Rs.1.5-2 crores, Rs.4 crores, those kinds of apartments as well. So there they would get more freedom that you can do more with this. Whereas if it goes to HDFC bank-level, like if you are not taking Rs.100 in deposit, then 3…some percentages to go here. Now what has happened is because of this merger, RBI has told them, they could take a merger, you get one or two years to solve this. But over after two years, I want still 40% to be of the whole deposit book or the liability book to be still priority sector, which means that

 

[Siddhartha Ahluwalia] (23:16 – 23:17)

What is the priority sector?

 

[Deepak Shenoy] (23:17 – 23:57)

 

Priority sector being the RBI has a bunch of industries. So for instance, houses whose cost is less than 25 lakhs in non-urban, non-metro, less than 50 lakhs in metro, I think. Then there are about 7 sectors, agriculture, SME, some parts of microfinance, mostly, most parts of microfinance, but you know, they have to be designated as such.

 

These are all priority sector loans. You have to have 40%. So if you do not do it, that money has to be given to NABARD.

 

NABARD gives you 6%, 6 points.

 

[Siddhartha Ahluwalia] (23:57 – 23:59)

 

And for our listeners, what is NABARD?

 

[Deepak Shenoy] (23:59 – 24:43)

 

NABARD is the National Bank for Agriculture and Rural Development. So NABARD says it is ok you did not do it.

 

So, it so happens that banks have a lot of priority sector loans, then they would say that mine is more than 40%. So, if any of you need, take it from me. Bandhan Bank was a microfinance institution. So almost all his loans were microfinance.

 

So, they came and said, I have 80%. You take 40% from me, because I have to do only 40%. So the other banks used to buy from them. Now, what happens in buy is that if I am making 12%, I will sell at 8%.

 

So I make a very big profit on selling down the MFI loan portfolio. So this was a good business model to have.

 

[Siddhartha Ahluwalia] (24:43 – 24:49)

 

To give just to your, let’s say, your incoming interest to other banks for 4% interest without serving it.

 

[Deepak Shenoy] (24:49 – 26:47)

So it’s complex.

 

What happens is, I create the loan, you are paying me 12% interest or 14%, whatever it is. Now I, when I sell the loan to you, the liability is yours. If default happens, you have to bear it.

 

Lekin agar 8% pe kharid rahe ho, usually aap kehate ho ki, yaar meko, ek kaam karo, do cheez kar sakte ho, yaar toh meko saare loans aise bhejtu, is called a direct assignment. Direct assignment is, I assign to you, whatever interest I get, I give to you, minus servicing cost. And you pay me a one-time fee.

 

So agar 100 crore ka loan hai, loan book hai, and I say ki dekho theek hai, meko bechna hai. And you say ki meko kharidna hai. Main kehta hoon, meko 120 crore do aap.

 

Lekin jo interest aayega, I will pay you. Now what will happen is, I have a 12% let’s say interest rate. Wo 12% pe, mere 100 crore pe, 12 crore per year aate rahenge.

 

Main wo 12 crore aapko transfer kar dunga, minus maybe half a crore for my, you know, 0.5% for my charge, whatever. So you get 11.5 crores every year. Apne 11.5 crores kamaana hai on a 120 crore investment. Lekin jab aapka principal repayment hoga, 100 crores hoga, 120 nahi aayega. Toh aap 20 crore waha bhi gawaoge. So your net interest earning that you will make on an XRR basis will be substantially less than 12%, maybe 10, maybe 9.

 

So that is the concept of saying, I will sell you a loan at 9% versus yield is 12. So the yield of the loan is usually lower than, because aap desperate ho, aapko priority sector toh lena hi hai. So in that context, I create that as a, you know, this thing.

 

And the thing about banking is it’s such a complex beast because so many moving parts that banks make, usually make money from everything. Aap kisi ko pay karte ho, toh credit card ke fees se kamaa lete hain. Kisi ko aap, ab NEFT se toh nahi kama sakte hain.

 

[Siddhartha Ahluwalia] (26:47 – 26:52)

Every fintech startup in India wants to become a bank and RBI is not allowed to do that.

 

[Deepak Shenoy] (26:52 – 28:07)

Actually for good reason, because I think banks need it, because banks have a very specific ownership criteria. Aap kisi bank ka 10% se zyada, you cannot have external, any person cannot own more than 10%. Now a promoter can own maybe 24, in fact it’s weird.

 

First you have to own 40%, at least 40%. So you can own 100% of the bank. But then within five years, you have to go IPO.

 

In that five year time frame, there’s one rule that says you cannot own more than 40%. And another rule that says you cannot own less than 40%. One comes after 3 years and the other comes after 5.

 

So for that one, two years, you have to have exactly 40%. Then that one rule falls off. Then you can reduce.

 

If you want to retain it, then you have to get RBI permission. And then RBI will say ki, jab tak aap nichi nahi karoge, main aapko branch banane ka permission nahi dunga. So this rule exists.

 

So they have to bring it down. Kotak had an issue. Kotak, they said ki, aap nahi kar sakte.

 

Kotak went to court. Kotak karne, aap kaise kar raha ho. Har ek bank ka alag rule hai.

 

Toh RBI ne ka, haan, har ek bank ka alag rule hai. Unko jab license diya gaya tha, license ki rules hi alag hai. Aap original license ki rules hi follow karoge.

 

Then the court said ki, dekho aisa toh nahi hai.

[Siddhartha Ahluwalia] (28:08 – 28:17)

Such a complex world. It’s important for people to understand it, because everybody is saying buy bank stocks. Somebody is saying don’t buy bank stocks.

 

Par what’s happening in the bank, you must know.

 

[Deepak Shenoy] (28:17 – 28:24)

Nahi, there’s no need for it. In fact, all this only nerds like us see. Honestly, banking business.

 

[Siddhartha Ahluwalia] (28:24 – 28:32)

But coming back to, again, right, the macro question, how is the banking sector doing at the moment? And you said ki, these are the reasons.

 

[Deepak Shenoy] (28:32 – 28:40)

Yeah, there are issues. Right now, the banking stocks are not in favour at the FII level, because they are, I think, exiting stocks in India.

 

[Siddhartha Ahluwalia] (28:40 – 28:49)

Which is why the money from the foreign investors, the investors .. They are not favouring banks also. And that’s why the Indian economy, as you said, 40% of it is banks.

 

[Deepak Shenoy] (28:49 – 29:05)

Not the economy, the index. Index. In The Indian economy, the bank is a relatively smaller portion of the overall scheme of things.

 

There may be 12% at max. And this is banks plus NBFCs put together is about 12% of the economy. But the index is overrepresented.

 

[Siddhartha Ahluwalia] (29:06 – 29:11)

And why is the index not actually representing a large part of the economy?

 

[Deepak Shenoy] (29:11 – 29:17)

Because you have 50 stocks. Now what will you do? One day the value of the stock market is high.

 

[Siddhartha Ahluwalia] (29:17 – 29:24)

Then RBI should not allow it, right? The merger, because the index would be more hedged on HDFC.

 

[Deepak Shenoy] (29:24 – 30:00)

They were both in the Index. So, even when you merged, the index did not change. So what was 6% and 7% has become 13%.

 

That’s fine. So now what will happen is because the other stocks have run up, the 13% will become 11%. And gradually fall.

 

So if you’re over indexed on banks, your issue is that the Nifty will then respond more to how the banks perform. And banks have been having issues. So at one layer, HDFC has issues.

 

HDFC is the biggest stock. The second bit will be on net interest margins, which are generally coming down now.

 

[Siddhartha Ahluwalia] (30:00 – 30:01)

 

Can you simplify what it means?

 

[Deepak Shenoy] (30:01 – 32:27)

 

Net interest margin is if I lend at 12% That means you took a loan of 12% But it’s a weighted average of all my loans And if I borrow at 8% My NIM is 4% So my net FD rates average is 8% And lending is at 12% So I make 4% This is not always true usually Borrowing rates are much lower Because in CASA CASA is called Current Account Saving Account In current account there is 0% interest and 4% savings So if your deposit is mostly in CASA Your deposit book will get indexed on a weighted average basis That only 50% of your FD is at 8% And the rest is at 0% or 4% So if you weigh the average weight It will be 6% And on this side You must have given some housing loans And in housing loans you only charge 8.5% Whereas On other loans 10, 12, 14 So if you take a weighted average It comes to 10% Now 4% is NIM NIM is one way for the bank to earn money That is the core banking concept Lending, borrowing But then your processing fee, late payment fee Credit card fee, whatever it is So fees typically form another big Component of a Banking business So the more the fee income More foreign investors love the stock That man He doesn’t want to mess with the interest rate He just wants to earn money Whatever the interest rate is He will earn his money So you sell ULIP, earn fees commission. So all of these structures form the Core earning of a bank Now what’s happening here is NIMs are collapsing Because your interest rates Have increased And the rules that have been applied to banks over the last few years That if you are giving Floating rate loans So please link those floating rates to something that’s a 3 month TBL or something like that Or repo rate So when the repo rate increases The company increases the Loan rates that it passes on to customers But your deposits in the past Were at a low rate They haven’t repriced yet Because people haven’t withdrawn money Why don’t they withdraw? Because when you withdraw, you bear a fine.

 

[Siddhartha Ahluwalia] (32:27 – 32:36)

0.5% transaction fees are levied.

 

[Deepak Shenoy] (32:29 – 32:36)

And they call it Early repayment charge Or whatever it is prepayment.

 

[Siddhartha Ahluwalia] (32:36 – 33:14)

I remember I went to ICICI bank recently And I had a very small FD And they requested me To increase the FD to 5% And increase it to 7% But I said I’ll have to give 0.5% And continuous push Because now The incentive in the banking industry Is at an individual level For branch managers For agents For reps Is highly linked on how many transactions They do So every time you visit a bank branch You say you don’t want to come back. Because There is so much shilling happening.

 

[Deepak Shenoy] (33:15 – 34:26)

I think there is a cartoon About this There is a guy The cartoon is like this He is taking a gun To a bank And he says I only want to deposit my money And no other products That is his threat I don’t want to take money I want to give you money I just want to give you money I don’t want to buy anything else So it has become like that See I’ll tell you what happens The problem is You have opened a branch You have hired a branch manager He has a salary What will he do?

 

A person needs cash. He is going to the ATM. He has to book a deposit. He is booking online. Most of the work is happening online. There is a teller. There is a cash machine. There is a counting in the morning and evening There is a separate cost. Electricity cost Maintenance You have to keep a security guard So you have this cost of a branch How will you take it out? So, you tell every person in the bank Including the teller, You tell anyone You will get something done from customers.

[Siddhartha Ahluwalia] (34:26 – 34:28)

 

They want investment, but they don’t understand what investment is.

 

[Deepak Shenoy] (34:28 – 38:00)

 

Now in RBI Actually It had to be stopped. Why do you miss selling so much?

 

Because You will go to a widow Who is 70 years old You will send her insurance. That is also not right But the manager says I have a target. Target doesn’t mean In a way I would say This is akin to a fraud That you gave wrong information to someone. Because a 70 year old person Does not need insurance. You just stuck it. You told someone it is a fixed deposit as the name of the insurance company resembles the name of your bank.

 

So, you said it is a fixed deposit. You sold it.

 

In Yes Bank Some bankers told their customers This is a bond of the bank. There is no problem with it. But it was an 81 bond. When there was a trouble in Yes Bank Then 80 bonds were written on to 0. So you didn’t get interest or principal. Now people are like You told me it is a bond. It is like a fixed deposit. They said it was not a fixed deposit Because you were getting 9% and in a fixed deposit you were getting 7%. Here 9 is extra risk.

 

This is a problem Because they should have explained it in the beginning. There was such a big problem in Yes Bank. People in the finance industry were not able to understand Why there was such a big write off. When they said You will get 0. How can you get 0 It is written in the bond It should not even be called a bond In fact RBI calls it an 81 instrument It doesn’t call it a bond But let us say you call it a bond If you read the prospectus Of that bond It is clearly written If the bank is in trouble We can cancel this bond At 0.

 

If you don’t read Is it your fault? Or the guy who sells you. Now the banker will say You should have read it. But I say we have an inherent trust in Banks. You have a responsibility To say If something happens The person who you are talking to Has not got as much information as you And this information asymmetry Should not be exploited If I know more about the market And I tell someone To come The market will always go up by 3 years Because if I look at the past data It is 95% up But according to me it is wrong Because I can’t guarantee anyone The second thing is I know that in 5% cases The market goes down And if I don’t say this to the customer In fact, don’t even say That in 3 years it may go up In between Your 30% can go down Or 40% or 50% 80. . Anything can happen So if you put 100 If you see 50 rupees In your app Then you will feel That my money is lost And I am telling you That you If I don’t tell you this Then it is my fault, not your. Because I can say That you should have seen the market. The stock market goes up and down.

 

But I feel that is a little unfair Because I have more information than you So before I sell you that information I should tell you about the consequences

 

[Siddhartha Ahluwalia] (38:01 – 38:08)

Coming back to the macro question, the banking sector as you said Is not doing well because of these few reasons, right?

 

[Deepak Shenoy] (38:08 – 39:07)

 

Or rather it has headwinds versus everything else. So there are these issues.

 

One is that the macro I think plays In the favor of banks longer term But the bank’s valuations Are not good in a way. So if you keep the valuations high.

 

Like for instance the HDFC bank was trading At 35 times earnings Now it is trading at 20 times earnings It was trading at 4 times book. Now it is trading at 2.5 times book 2.5 times book is also a lot. Because SBI is trading at 1.5 times book. And some public sector banks are trading At 1 time book. Now these public sector banks were trading At 0.5 times book. So they have gone up. HDFC has gone down. So the gap in valuations has come down. I don’t think this is an unnatural thing. This is natural. The problem we see is When we see an index, we say the bank index went down. Why did it go down? Because it was over indexed on private sector banks. If you see public sector banks They are doing very well.

[Siddhartha Ahluwalia] (39:07 – 39:10)

Why are public sector banks doing well?

 

[Deepak Shenoy] (39:12 – 40:07)

 

2-3 reasons.

 

I think that is a very good question

 

One of the reasons is a little bit of ….

 

Let me tell you the bad reasons first And the good reasons later

 

The bad reasons are Over optimism

 

I say over optimism because We haven’t seen how this whole thing pans out What has happened in the last 5 years We have had public sector banks merge with each other The weaker banks merged with slightly stronger banks They were given time And over that time They have fixed their issues There was a the over optimism has come That public sector banks are doing well This and that Over optimism is a bad idea People have bought just because of this over optimism That tends to be a bit of a nightmare Because operationally while it looks good There are things that the banks have done in the past Which there is no reason they cannot do in the future Bad lending

 

[Siddhartha Ahluwalia] (40:07 – 40:44)

I remember almost 6-7 years ago It was prevalent in the market That the Indian banking sector might collapse because of bad lending. Right

And there were many cases back to back What Yes bank did What ICICI bank did in the Videocon Case And people didn’t know that such cases exist anymore. Was it a tip of an iceberg or not What happened with Even public sector banks Of Nirav Modi So bad lending I think Was at its peak Like 2014 kind of time frame

 

[Deepak Shenoy] (40:44 – 40:52)

I think even before that See from 1990s Indian lending has been It’s a terrible concept

 

[Siddhartha Ahluwalia] (40:53 – 40:54)

But business has done well

 

[Deepak Shenoy] (40:55 – 42:48)

No.

So I will tell you What has really happened. If there was an investor Who took a loan After taking the loan Let’s say the loan went bad . Now usually what happens I have a company Loan is a liability It’s what is called a higher liability than Equity.

 

Equity is the lowest one. So my shares I have 50% shares Public has 50% shares I have taken a loan of 100 crores from the bank. I couldn’t give up. So the bank should say, How much can you give? I can give 30 crores. Ok let’s do this You give 30 crores. The 70 crores that I have lost I will take the equivalent shares of Banks. And the equivalent shares are 40%.

So all of you have been diluted, The 100%.

Before you were 50-50 Now you are becoming 30-30 and 40.

Now I have become bigger than the promoter. So now The company is rising again. I will earn from the increase in the share price There are many problems. The promoter says I have become smaller. You have become bigger. There was another rule of the RBI. A bank cannot own more than 10% of a company. So the bank says I want to take 40%. But I don’t have it so I can’t take it. But there were structures. You take 10% In shares and rest on convertible warrants. You convert it Slowly later. You convert it. But nobody took this. Nobody asked the bank. So the industrialist says I can’t repay the loan. You give 30 crores and the rest 70 crores is forgiven. And therefore the bank does not have any equity, not even 10%.

 

[Siddhartha Ahluwalia] (42:49 – 42:50)

And this is depositor’s money

 

[Deepak Shenoy] (42:51 – 42:56)

Effectively our money because Eventually the government has to put the money back In the banks. So, the taxpayer.

 

[Siddhartha Ahluwalia] (42:57 – 43:01)

And mostly now the government has been printing money To put money Back in the system

 

[Deepak Shenoy] (43:02 – 43:59)

Well, not the government. RBI.

 

RBI does not print money For the government to put money Government borrows money From the banks To effectively put money back Borrow money from banks, borrow money from you and me In different ways, PPF is effectively government borrowing. NSC is government borrowing. All of this borrowing from us to repay the banks. And also it pays off Through the taxpayer money. But I feel This was a terrible idea. People are happy. Why should I give back the loan? Even if I have the money I will siphon it off. I won’t take it back. So we will talk a little. One or two suitcases will be exchanged Now this happened in one case In Bhushan Steel. Bhushansteel had a 36000 crore loan. So The promoter got caught In one case where there was apparent exchange of money Something like that

 

[Siddhartha Ahluwalia] (43:59 – 44:02)

A lot of it happened right Videocon ICICI

 

[Deepak Shenoy] (44:03 – 44:42)

Videocon ICICI I don’t know what the case is exactly about But I know that There was talk about that And that was a quid pro quo But I don’t know what the scene there is Exactly But in Bhushan Steel there was an article that they caught. They said The amount that was actually caught Was very small But the question really was That this happens Then the government had created a law In 2014,15,16. That time. If the company can’t pay back, we will create a bankruptcy court. Earlier used to go and say Negotiate and reduce the amount.

 

[Siddhartha Ahluwalia] (44:42 – 44:43)

Which is NCLT

 

[Deepak Shenoy] (44:43 – 46:10)

NCLT.

No, No.

Earlier it was called DRT Debt Recovery Tribunal Used to do that or used to straight away go to the banks And negotiate one on one settlement Then they created NCLT.

 

In NCLT RBI made a rule That if No one is paying you back You have to do this in NCLT You have to take the case to NCLT What happens in NCLT .. Instantly the management is thrown out And a person called a Resolution Professional comes, Takes over the company, Now the Cheque Signing Authority is a Resolution Professional, Which means anything Can only go through them, It cannot go through the original promoters.

 

Now the original promoters Remember 20-30 years they have been sitting that if there is no loan then what will happen And they were shocked That we have been thrown out of the company.

 

One we have thrown out And you will sign the check. What will happen to the rest? What will happen becomes a learning lesson. Over the next 4 years They figured out that the company will go From us. We cannot bid for this Because the rule is that if you are a promoter Then you cannot bid for your company. So people who are running Essar Steel were very unhappy about this. Why can’t you bid? We can only bid. You are giving us a 40% discount to another fellow, Aslar Mittal. So I will also give 40%. You give me 40%. They said there is a rule that you cannot bid.

 

[Siddhartha Ahluwalia] (46:11 – 46:13)

You are talking about Aslar Mittal, Lakshmi Nivas Mittal

 

[Deepak Shenoy] (46:13 – 47:20)

Aslar Mittal bought this Essar Steel I think If I remember right that was the scene So there was a lot of drama around this But eventually everybody got the message That NCLT is a very serious business The company will go from us And nothing will be left And the shareholders also got to know That if the company is sinking .. Earlier if the company was sinking And someone said there is a settlement They used to say buy the company’s shares Now that the settlement is done It will go up. Now the new set of rules Say that NCLT has gone. That the company can write off the equity to zero. So Bhushan Steel became Not zero but it became 75% owned by Tata So existing shareholders got diluted By one third So the 300-400 rupees share Settled at 36 rupees And it was merged into Tata Steel. Then there was I think JSW Ispat. JSW bought Monnet Ispat. Monnet Ispat also was 90% 99%

 

[Siddhartha Ahluwalia] (47:20 – 47:24)

It would have very strong bidding? All conglomerates would come to bid

 

[Deepak Shenoy] (47:25 – 48:17)

They came to bid But some of the loans were so high. Bhushan was good because it was a good company and people bid for it. But in other cases They bid only 30-40% of the overall outstanding In many cases where Reliance had bid in two cases Both the cases they took 30-40% And then They said that the company’s shares are zero. Reliance bought Syntex. Syntex had a Bunch of shares outstanding It was traded in the market It was running at 10-9-10 rupees. People were saying that Reliance has come. Now the company is safe. But Reliance said that the share is zero. DHFL went and it went bust. It was resolved, Piramal bought it and Piramal said that the share is zero. I will not do anything with the share. The rest is mine. The assets are mine but the share is zero Because that asset will not cover your loan.

 

For those assets

 

[Siddhartha Ahluwalia] (48:17 – 48:23)

But the new company Which is overtaking us also guarantees That we will pay the loan like Tata guaranteed or Aslam guaranteed.

 

[Deepak Shenoy] (48:24 – 48:42)

Yes but not all of it They will only say There is a bidding There is a lending of 50,000 crores I will do only 45,000 crores You will have to take a loss of 5,000 crores This is a clear thing Now this was bad The earlier situation was bad But this was better in the sense Banks’ losses are crystallized.

 

[Siddhartha Ahluwalia] (48:42 – 48:45)

 

The promoter knows the company will go from his hands.

 

[Deepak Shenoy] (48:45 – 49:11)

 

Yes. Because Maybe about 10-15 cases happened like this. The whole of corporate India Started to get up . What is happening? So The people who used to default After taking the loan That has reduced So the loan book of the public sector banks Which was filled with people like this There is immediate threat That if you don’t give I will go to the NCLT.

 

[Siddhartha Ahluwalia] (49:11 – 49:13)

And how fast the resolution happens

 

[Deepak Shenoy] (49:13 – 50:38)

 

So it can take 3 years, 4 years It can take 6 months also depending on the situation. Mostly what happens That I took the company NCLT Like you are a defaulter I am a bank I took you to NCLT You said what sir You are removing me from my company for 100 crores I will give you back I said no First you give Then I will take the case from NCLT So you Find from somewhere and take 100 crores And give me my loan back So I am happy I don’t care where you took the loan from So you are ahead But you can’t take a loan from any other bank Because I am in NCLT So maybe you From where you siphoned You will give me I don’t care The company is yours But give me my money back This was a good development. People started Reducing the default And the defaulters also started coming back They said let’s do something So this has Changed for public sector banks. Public sector banks had This problem, this problem no longer occurs But This behavior started coming back. People say In NCLT even if we go the promoter has siphoned everything. We won’t get anything. It’s a loan of 1000 crores. The buyer will give 20 crores.

 

[Siddhartha Ahluwalia] (50:38 – 50:40)

 

The difference can’t be this much, right?

 

[Deepak Shenoy] (50:40 – 50:41)

 

Why not?

There is nothing in the company.

 

[Siddhartha Ahluwalia] (50: 42 – 50:44)

 

The promoter has siphoned everything

 

[Deepak Shenoy] (50:40 – 51:48)

 

Whatever could be. He spent it.. He made a house for himself. In his name. Then what will you do? You will go against him in a fraud case But it will take 10-15 years. You have lost 20 crores 98% Then they go back to the promoter Either we will take NCLT. Now the promoter has also found out You won’t get anything in NCLT. You tell Okay, let’s settle for 600 crores. So 400 crores This guy got happy. This is wrong. The 400 crores you are taking Loss You take equity. Take his shares. Who told you to do a one-time settlement for free? But people have started doing it. This is wrong. It can go back To that old format. Let’s ditch NCLT. Let’s settle here. This thing is very wrong. According to me, the RBI should come very strongly. Why didn’t you take equity? Explain to me. If you have forgiven 400 crores Keep 40% in the company.

 

[Siddhartha Ahluwalia] (51: 48 – 51:51)

 

Keep the founder, keep the promoter, and take equity

 

[Deepak Shenoy] (51:51 – 53:47)

 

Yes, keep the founder. Tell him to continue. But you take 40% equity. Say that I will sell only then I will sell my shares But only when. Now this happens in other places. Every other country it happens. Why do they not do it in India? Other countries also have Very open banking system But in such cases, you can go and Sue the bank. Why didn’t you take equity? In India you cannot do this. I think that is just terribly unfair As a shareholder of a bank Bank should always take equity Even 1 rupee of a loan I forgave even 1 rupee I want equity against it If equity is not of 1 rupee Even of 20 paise.

There is some chance of recovery I will hold these shares I had to forgive I will keep it for 5 years You make the company big Then I will sell. This has happened in Yes Bank. When Yes Bank went down They said all the banks should take equity. SBI owns 49%. Rest all the banks have taken Those who had Yes Bank’s shares They Now own 100% of the company Now they own only 5% or 10% . 90% dilution That means The share’s price used to be 300 rupees Its equivalent Is 30 rupees today Because the market cap is the same At 90% dilution. So This is a good thing. Kotak took the bank’s shares. When the bank’s shares were 12 rupees or 10 rupees I don’t remember the price. But when it was 18 rupees Kotak sold it So Kotak made money. I rescued it so I will make money. So Kotak didn’t forgive the loan. The loans were between other people But they rescued the bank at 10 rupees and got 18. But I think the same thing should happen When a bank lets a company

 

[Siddhartha Ahluwalia] (53:47 – 53:50)

And Rana Kapoor is in jail, The promoter of Yes Bank

 

[Deepak Shenoy] (53:52 – 58:12)

Yes.

So, that’s a different problem Because there he was going to go anyway. In banking You don’t need NCLT. RBI can straight away cancel. You cannot be a part of the board. And that is fine.

 

But The issue now has become That the banking system Has started to go back. So you should be careful. We talk about how good public sector banks are. One situation which had made them better, The signs of it Becoming worse are back. So You should not give such a high valuation that this situation occurs.

 

Some public sector banks are actually quite good. So another thing happened. Because of the merger A lot of the operational efficiencies changed. Now your bank was also there. Mine was also there. Now we will merge and do one branch. So that way you consolidated Branch banking And the government created this thing. They recapitalized the banks also. We took your share They gave the bank Government bonds And from that government bonds The bank got recapitalized.

 

So the equity went up. Equity is a liability and Bonds are an asset for the bank. So the equity went up. It Balanced. But what happened because of this The banks became inherently stronger. So now public sector banks are doing well Some of the macro factors work in their favor. Because if you are doing good And you have a reach. And if people are borrowing in rural India And giving money back Then you will make money. And that is happening. However Some part of that also changed In the last quarter. Profitability has come down. And the interest margins Have come down. The fees in public sector banks were any way not so high. So that structure has changed. So you are getting some kind of Balancing act. So I think Stock markets are very happy But there will be some At some point Some correction of this. It may happen 30% from here or something. But banks are no longer The indicators Of the economy in India As far as I know. So your macro system Which used to say put money in Banks. If economy is doing well, banks will do well. Now they are saying India has matured. The corporate says I don’t want to borrow from banks. I want to borrow from the bond market. In the bond market, Yields are low. And I don’t take loans directly from banks So mutual funds come In. In a way the banks lending book has got fragmented. Now the banks deposit book Has also got fragmented Because companies are saying Why should I keep money in QASA. I will put it in liquid fund Whenever I need money I will take it out from the liquid fund. Fantastic! So it becomes a payment mechanism For me to do this.

So the Lower Deposits And therefore banks have to pay higher deposit rates. Lower lending Because of Fragmentation of the corporate lending book. Means that banks have said Let’s take retail loans Let’s do personal loans, unsecured, Credit card, etc. Now there is also an over index. So RBI got worried That you reduce one thing And increase another. So I will stop that. So now RBI is trying to force down The lending growth of personal unsecured loans .

That was The one good thing I mean one good thing for banks. Though it’s not great for the system. But it’s a good thing for banks. But that has come now. So now you are going to see some pressure on all sorts of fronts. So the macro picture does not look so. This is my assessment. I own banks. But I think the banks I own are good. But I think relatively speaking Banks have gone through the trouble Six months earlier or six years earlier. They are in better shape than the banks That are going through the situation now. And public sector banks I will always be saying it is cyclable. It’s a good cycle, but a bad cycle will come. And at that time You will have to react differently.

 

[Siddhartha Ahluwalia] (58:12 – 58:20)

Yes. And right now Prime Minister Modi On a overall theme In few days said Buy PSU stocks

 

[Deepak Shenoy] (58:23 – 58:27)

So I think He is not a registered stock market analyst. So I should not

 

[Siddhartha Ahluwalia] (58:27 – 58:30)

He is an influencer. The largest influencer in the country.

 

[Deepak Shenoy] (58:30 – 58:34)

We cannot comment about that Because everyone has an opinion I cannot say

 

[Siddhartha Ahluwalia] (58:34 – 58:40)

Let’s talk about the Fundamental of PSU stocks

 

[Deepak Shenoy] (58:40 – 59:02)

 

PSU stocks yes

Fundamental wise PSU stocks have changed from Two perspectives Increase in allocation to railways and defense. In the last two or three years I have given them a big jump. Now I own a bunch of railways and defense PSUs. Okay I think it’s fine because you are actually getting a business, some of these businesses are inherently insanely profitable.

 

[Siddhartha Ahluwalia] (59:02 – 59:03)

 

Like? Example?

 

[Deepak Shenoy] (59:40 – 1:04:28)

 

I won’t take exact stock examples here, but you will get stocks where relatively speaking their working capital cycle is negative, which means they get money in advance and then they do their work.

There are some shipbuilding companies who are like that. There are port companies whose economics have changed because the government has focused more on port modernization. There are other companies where, because of the restructuring of say, transmission assets versus the things or the companies on the power transmission networks, the power generation networks, who have benefited from another piece of rule change that happened five or six years ago.

 

If you were to finance a power project, the problem would be that the power producer might not be able to do it. Something will happen. The cost of raw material will increase. Or the transmission line will not be ready. Or the transmission line will say that they need a unit of 4 rupees per unit, whatever it is, a unit of 40 rupees per unit, which I had kept 20% in economics. Or the end buyer will say that I had asked for 6 rupees per unit but now the market is running at 4 rupees and I will give 4 rupees. Because of all this, the power financing companies were getting like the bankrupt, including the bank

 

So, there was a regulator for the power sector and they said, let’s not do this, it’s a crazy thing, that you tell everyone that I won’t do this and that, you contract a tripartite, transmission guy, finance guy, or not even tripartite, multiparty basically, or buyer, the seller, the producer of the power, the transmission line, the financier of the asset, so all of these guys get a guarantee that this power will definitely be there and the state governments agreed, they created another program that said, you reduce your loan from the distribution companies, state companies, electricity companies and transfer those assets to, transfer some of those loans to the government itself, instead of being a DISCOM loan, distribution company loan, let it be a government loan, state government loan, so that was Uday’s scheme, so the Uday bonds are still trading, by the way, of lot of states, now, because these things improved, over time, the distribution companies started paying and now you can buy power in 15-minute increments, means, for 15 minutes, I need this much gigawatts, this much megawatts, etc., you can buy it in, its price per unit will be this, there is a site called vidyutpravah.in, there are a couple of other sites also, they tell you, what is the bidding rate now. So because of this change in this power financing companies, the power generating companies and the distribution companies have, not the state DISCOMs, but the transmission companies have a massive benefit, because earlier, you know, I did not have any, this thing, now I am getting a much better, so it has taken 5 or 6 years and based on this, what has happened is, the Central Electricity Commission has said, that a little 0.1% of every contract, or something like that, will be taken out and will be put in a pool, that by chance, if someone defaults tomorrow, then we will pay from this pool, DISCOM says, I will not pay, so it becomes like an insurance pool, that insurance pool has reached 3-5 thousand crores, something like that, so it is a fairly good, as to now, if you look at a 500 crore, you know, a project, then you say, pool has 500 crore. So, it is more surety for all parties working on the project.

 

This is a very good development. Now, here nothing bad is happening per se. So, I feel here, that some of the revaluations that have happened of these companies are more or less in line.

 

So, power finance corporation, again, we own some of that, so that is, was trading at 2 times earnings, now it is trading at 8 times earnings, no, 4x, so 2 has become 8, but it is not necessarily overvalued even now, you have improved the economics. You are reducing my default. You are reducing my cash flow. I mean, making it proper. so why should I pay you such a small multiple, I will pay you a higher multiple of that.

 

So, that way, things have changed, and then now, there is a focus on renewable, it will be 6 lakh crore or 10 lakh crore, that is, the PSU, so, look at the PSU financing companies, the PSU defence companies, the PSU railway companies, the PSU banks, so, each of them has some headwind, sorry, tailwind behind it, and therefore, I think, some of the revaluation has happened. But there are headwinds also, PSU banks are more visible, but not so much visible than the others. Because if the government continues to build its defence capabilities. And what happened in defence? They said, Indian companies should manufacture, not foreign companies. So, earlier what used to happen was if you have to buy something, you have to go to a foreign company. Then, ministry ko, they would get flight, defence people would get to fly to that foreign country. So, it would be a good holiday.

aur wo kya hai, itne saare leena hai, kuchh jo bhi, le lete hain.

 

[Siddhartha Ahluwalia] (1:04:28 – 1:04:32)

We will go to 10 locations. There will be 10 holidays, but we will buy from 1 place.

 

[Deepak Shenoy] (1:04:32 – 1:06:42)

 

The issue with that was, we cannot tell if it was the best. Now they are saying, why don’t you manufacture these things yourself? They told Mahindra the guns we bought the, Bofors guns, for instance, and the howitzers and all that, their bullets, they called something, I forget what it’s called, ammunition, something it’s called, that was, some part of it was manufactured abroad, we used to import the bullets, why you doing that, why don’t we make it here, so that stuff started to be made here. In Ukraine this became a bigger deal, because of how America sequestered the assets of Russia. India will say that if we had a fight with someone like Pakistan, the US can say that you won’t get the bullets and the country that sold us the gun will say that don’t send it. So we should be doing it locally. So that doing it locally happened and they went to the defense PSU and said you manufacture this you take over their contract we will give you the contract, you will do the partnership with someone you do it, we will not do it so we will tell you the specification, you bring it you guys champion the project this is very interesting because now you get some of these shipyard companies building the ships themselves instead of us importing till killing somebody else your ship so shipyard companies go and partner with some foreign player but they say that you will give us the technology and then they manufacture the ship. This is interesting because although it takes a year, year and a half to manufacture a ship, it’s maybe two years, your economics are a little bit better because you’re dealing directly with the government rather than saying that this is my agent. This continues to be a good thing for some of the people, but not all PSUs are good because some PSUs will not get the chance to do anything. You know, some HMD, for instance. There were issues, companies were not doing it. Air India, finally they sold it.

 

[Siddhartha Ahluwalia] (1:06:42 – 1:06:47)

 

Air India, even after getting acquired by Tata, I think the standard of quality hasn’t come up.

 

[Deepak Shenoy] (1:06:47 – 1:07:57)

 

See, Tata is a PSU, for the most part. This guy is trying to change, Chandra is trying to change the attitude. Things have developed much better in some of the Tata companies, but for the most part, Tata’s have a generational legacy inside some of these companies.

 

they will not go and change anything. You cannot imagine that tomorrow Tata will go in and fire half the Air India people and say, look, you are not working, I will hire others who have to work and I will fire you. This is not in Tata’s culture, sir. If you consider some of the other guys, they will do it. They will not give you, you are not working. But because of that, the change in Air India will be very gradual and it will take a lot of time. and it will take a lot of complaints also. How are you? So over a long period of time, I expect that Air India will change. Though to be fair, It’s only been two years. Yeah, Tata thinks in terms of decades. So you should also expect that change will happen in decades.

[Siddhartha Ahluwalia] (1:07:57 – 1:08:06)

 

Got It. And do you feel the entire Indian stock market is a very generic term but is overvalued right now?

 

[Deepak Shenoy] (1:08:07 – 1:08:08)

 

On what basis?

 

[Siddhartha Ahluwalia] (1:08:09 – 1:08:12)

 

On just earnings to multiple…

 

[Deepak Shenoy] (1:08:12 – 1:08:40)

 

So earnings multiple basis is about 24.5-25 times. It has been 28. Yeah. It has been much more for a longer time. There are at least, the market’s been here about 30% of the time. Maybe marginally overvalued compared to the past, but there have been so many instances in the past when it was 25 times earnings and still has done very well in the next one, two, three years. And I’m talking very well as in if you earn 25% in 3 years.

 

[Siddhartha Ahluwalia] (1:08:40 – 1:08:42)

 

Then effectively you are getting FD rate

 

[Deepak Shenoy] (1:08:42 – 1:09:23)

 

If I’m saying that you are doing good, then you are earning more than FD so the market as a whole has earned more than inflation in a 3 year period even when the starting PE was 25 at the past so is that over valuation.

 

I would say, in fact, the graph of this is so spread out because even at 35 times earnings, there have been enough times where the market is on really well. For instance, COVID was 30 plus times earnings at some point, earnings crashed. But from there, the market did really well, right? So this multiple of earnings is not even an indicator of overvaluation.

 

[Siddhartha Ahluwalia] (1:09:23 – 1:09:26)

 

What in your sense is an indicator of overvaluation?

 

[Deepak Shenoy] (1:09:26 – 1:09:43)

 

I think overvaluation is largely about understanding liquidity patterns. If liquidity patterns are flowing into the market and creating a lot of [inaudible] in a lot of companies, maybe not the market level PE ratio, but some PE ratios of some companies may be unjustifiably high.

 

[Siddhartha Ahluwalia] (1:09:43 – 1:09:44)

 

Example?

 

[Deepak Shenoy] (1:09:45 – 1:09:56)

 

Today, for instance, I think MNC valuations are unjustifiably high. I think you should not pay 80 times earnings for Nestle. You just shouldn’t. It’s a company that will grow at max five or 6%.

 

[Siddhartha Ahluwalia] (1:09:57 – 1:09:57)

 

For example, Unilever.

 

[Deepak Shenoy] (1:09:57 – 1:10:05)

 

Unilever also similarly won’t grow that much, but you’re giving it 60 times earnings 70 times earnings. Why?

 

[Siddhartha Ahluwalia] (1:10:05 – 1:10:07)

 

We are also giving Titan the same kind of earnings.

 

[Deepak Shenoy] (1:10:07 – 1:11:40)

 

Titan at least has some growth. That means you can grow by 20%. Titan is also overvalued in that sense That you are giving a very high multiple to a company that grows in trend. Trend has growth. Trend has 35% growth So you can actually say that if you are in 35% growth

50 times or 60 times, over time it will come down to 20 times because you know the valuation is such and therefore you can expect that there will be some growth. But without growth you are giving when you give extremely high valuation then you are getting this thing. But MNCs have been, FMCG, FMC, MNCs have been overvalued for nearly 8-9 years. So how will that reverse happen? It will only fall. Now what has happened in the last 3 years is very informative. They haven’t gone up, everything else has gone up. So in that sense people think that if they don’t go up, they won’t fall down. I say, when they fall, everyone falls. You just had a little equalization, a little. You were at 100 times, now you are at 80 times. You should give 25 times or 30 times. So you should actually be falling 30, 40, 50% just to come to an equalization in terms of your normalized long-term growth plus your high ROC.

 

I would say that is the key part of the picture. But the same thing is also there in some small caps where you’re getting 400 times and it’s 500 times. But they don’t have the earnings to carry. There’s a lot of froth, a lot of fraud, a lot of misrepresentation.

 

[Siddhartha Ahluwalia] (1:11:40 – 1:12:00)

 

I think small caps have the highest amount of froth right now. There are a few reasons, in my opinion, you can elaborate on. One is the ease of listing on the SME exchange. Because the SME exchange doesn’t have that many regulations. No one is watching. Right? SO, I can tomorrow list the podcast itself on SME exchange.

 

[Deepak Shenoy] (1:12:00 – 1:15:18)

 

That’s a micro cap. So it’s a while they call it SME. It’s actually micro caps. There are 60 people who have 5 crore revenue who have gone IPO and all that. That was the best part. PP water balls. He told a water puri guy that we will get your IPO done and he named his company PP water balls and sold it. And everybody made money except the shareholders. So. That is okay. That is fraud or rather not fraud, misrepresentation. Over selling froth. Not froth also. You should represent a company properly. And if you don’t represent a company properly when you do this thing then. There was a company two years back. I forget the name of the company. After the IPO they had a party. In march of some year, I think in 2022 or something a letter came to the exchange. Look, I am the only person I am related to the promoter nephew. I am 24 years old. I am the only person in the board of directors who has contact with nobody else I can write to. I went to the factory. Factory was closed. It had nothing. There used to be a semiconductor or something, whatever they talked about but nothing was there. So technically this company has nothing happening. I will try and figure out what’s happening. I am 24 years old. I don’t know much. Now there is a company owned by some famous investors also. They talked to the promoters and they did their diligence and all and bought it. But it turned out to be a complete fraud. The company went to zero because there was nothing left in the company. But that also happens. So that happens in over enthusiastic times and maybe today also a lot is happening. But small caps, when I say small caps today, but the actual definition of what SEBI or AMFI does is between 17000 crores and 40,000 crores, roughly or 30,000 crores. So because of that, your small cap companies are relatively highly valued in terms of actual market cap. A lot of small cap companies have actually done very well in terms of earnings growth. So you say that small cap companies are overvalued in that sense, but tell you this, before COVID 2019, their P ratio for the small caps, which is small caps being the 250th stock, so first 100 is large caps, 101 to 250 is mid caps, 251 to 500 is small caps, after that micro caps. 251 to 500 we said that you should add earnings to all such companies and add market cap, so multiple comes, and do it for 2019, like for the companies at that time which had market cap 251-500, so multiple that time vs now, means their valuations have gone up 3x their earnings have gone up 3x. That means from 2019 to now which is roughly 5 years 3 and a half, 4 and a half years your earnings has grown exactly as much as valuations so why would you think they are overvalued because they have gone up 3x in 5 years you are saying 3x is fine but their earnings also have grown are they bad? I don’t know if all of them are bad.

 

[Siddhartha Ahluwalia] (1:15:18 – 1:15:19)

 

And what about micro caps?

 

[Deepak Shenoy] (1:15:19 – 1:15:55)

 

micro caps are always going to be some fault because they are overvalued right now some of them are I don’t know about all of them. But micro caps do have a lot of drop in the sense a lot of companies are. Like some used to be 100/200 crores, but then became 4000 crores. Some of them are justified, because they have changed, there are some companies in EV and all that stuff, but some of them are just like, you know, the promoter has kept the share, so people are cycling and moving it up, but that is a natural consequence of any market, whatever you do, there is always a froth.

 

[Siddhartha Ahluwalia] (1:15:55 – 1:16:11)

 

And what about in your opinion, for example, Startups going IPO, some companies like OYO going IPO, is it a good trend? Because it is like people are washing their hands in the behti ganga.

 

[Deepak Shenoy] (1:16:11 – 1:20:26)

 

So, the thing is that You can only wash your hands in the behti Ganga. If you don’t have water, you can’t wash your hands. Then you will only go IPO when you think the market will pay. The goods will come in the market only when the customers are ready to pay. If my clothes cost 50 rupees, I will sell it for 30 rupees. I think it is 50 rupees. I will sell it for 50 rupees. Or I will sell it for 100 rupees. If the customer gives me Rs.200 a day, I will make more clothes and sell them. But it doesn’t happen now. It definitely happens that you analyze it. If you like it, take it, if not, don’t take it. There are people in our stock market who will come and say I took it, my listing day is three times, I am happy I left. These are the ones. They are the hardcore speculators. We should not pay too much attention to them. If their money is lost, I don’t care. They are not investing in the stock market to make long term money. They are not here to support a company. You are doing your gambling. You lost in gambling. Take it as a casino and leave. I don’t care. Now the question is whether long term investors are getting wrong information from companies. That will be wrong. Then I would say. But if a company like OYO wants to go IPO and you buy it.

 

Why would you blame OYO for going IPO? You are buying it, you liked it, that’s why you bought the company, if there is something wrong in it, then you say, otherwise you are saying by quick force that you will buy OYO only, there is an Indian hotel, Oberoi hotel, there are so many hotel companies, why are you not buying them?

 

You will go and buy OYO, then you will say that the price of OYO has fallen, so my money is lost or whatever it is, but your money is lost, when you make a profit, you make it.

 

Now see, there is one thing, Mamaearth got an IPO. So much knowledge was spread on Twitter. This mutual fund subscribed to this, sell this to the mutual fund because it’s cheap. He’s investing in startups. I’m not commenting on this. These are very interesting and important people also have said this. I said, not important, but well, sorry. There are many people who have said this. Now see, Mamaearth’s price is much higher than the IPO price, no one comes and says sorry, no one, I advised you to sell it, sell it, now they are advising on something else, you are advising on your right foot, whatever, so the issue that people have with IPOs, I think is, they do not understand that no one is forcing you to subscribe to the IPO, no one is telling you that if you subscribe to the IPO, you will make a lot of money, who is saying this, the same person is telling you, who applies in the IPO, apply in the IPO, and sell it on the day of the IPO, there are many such people, now that is addiction, if you do addiction, then you will also be the victim, at some point you will be the victim, and sometimes you will feel high, that is the nature of the game, I don’t think we should say that if a startup like OYO is doing IPO, it is bad, we should be more discerning as a society, and say that if I don’t like it, then I will not buy it, I have other companies to buy, everything that is new, you have to buy it, what is this. Earlier it used to happen that second hand cars, they would be bad, people used to buy new cars, now the cars that are 10 years old, are so well made, that you can buy them, it is perfectly fine, in a stock market it is the opposite, the company that is 10 years old, is actually better than IPO, what do you know about IPO, let it run for 3-4 years, then buy it.

 

[Siddhartha Ahluwalia] (1:20:26 – 1:20:29)

 

nobody is pointing a gun at your head that buy it today

 

[Deepak Shenoy] (1:20:29 – 1:20:35)

 

this is the same thing, you bought an under construction property, then you complained that the builder bought it late, why did you buy an under construction property?

 

[Siddhartha Ahluwalia] (1:20:35 – 1:20:37)

 

That’s the right comparison.

 

[Deepak Shenoy] (1:20:37 – 1:20:46)

 

Correct. if you buy an under construction property, at one time you will cry, and when you cry, it is your fault, of course, the builder can say that I tried,

 

[Siddhartha Ahluwalia] (1:20:46 – 1:20:50)

 

Under construction properties are a gamble, whether it will be made or not.

 

[Deepak Shenoy] (1:20:50 – 1:24:11)

Yes. And usually it’s okay as a gamble. Because people make it. But my point over this is, you had the option of buying a full house. Only you have to pay more. If you are waiting for 4 years, earn some more. Then in 4 years, you will get that much money. Usually, that is the scene. But people don’t take it. How can I give so much money at one time? I will make it by giving EMI.

 

So, stay at home and give this EMI. Then, you know, why do you… Let us say, I have seen this myself with under construction properties. I think the same thing with stocks. If you are taking someone without any track record, public track record, then you are buying on hope. And when you are buying on hope, hope can be destroyed or positive. And many times people make lots of money. Now people are saying Zomato. We have bought a little bit.

But if I bought Zomato at IPO, then you’ll say, boss, this was overvalued. No, no, it was 70 before. I bought it after the IPO for 100 rupees. It went to 140. I became a genius. Now 140 fell to 40 rupees. I got ruined. Now it’s 160. So I’m a genius again. What is this? I mean, if someone wanted to invest, then he didn’t think that Zomato was 2-3…

 

I invested and got out because I said I don’t like this Blinkit. So now they have shown Blinkit, I still don’t like it. But in Zomato, the amount of cash that is 10-12 thousand crores is the amount of interest that is earned on that cash. That is how the losses of Blinkit are removed. So I said ok bro, you play with the cash. I am interested in your core business which is this thing. So whatever Blinkit makes, I don’t care. You might even turn it around, but I think it is a waste of your business.

 

But if it becomes your only business, I have a problem, but otherwise I am fine, you have done the rest of the work properly, so that is my thinking, other people may think differently, why is … nobody forced me to buy, nobody forced me to sell, nobody forced me to buy again, I did it on my own, so if I have a loss, I am responsible. I won’t tell anyone, he told me to buy Zomato, I don’t tell anyone to buy Zomato, I say, I bought, it is your wish if you want to buy. So I won’t tell anyone, because I am not in the business of advising people, what they should buy, I am in the business, we have a business that actually does research on a company, and we put recommendations on buy and sell, those are, there is a research recommendation, there will be a note against it, our customers will get it and so on, but when we talk about, mostly when we talk, I say, I have it. Should you buy it, that is the answer to that, and I think everybody should look at it like that only, that I will tell you to buy a mobile phone, you won’t buy it just like that. You will analyze it a little, you will watch YouTube videos, this versus that, now every mobile phone, with every other mobile phone, there is a video comparison, from unboxing, I don’t know what all,

 

[Siddhartha Ahluwalia] (1:24:11 – 1:24:19)

but if 10 people, whom I know, will say to buy a mobile phone, I am not saying that it is their fault, it is still my fault.

 

[Deepak Shenoy] (1:24:19 – 1:24:33)

 

Correct. You will actually go to your friend and say, what is this rubbish phone? But he will say, no mine is working absolutely fine. What’s the problem with yours? No, no. I wanted to play a high speed game. You didn’t say so. I don’t play high speed games. Whatever, it is not working, whatever. So this concept … and I am telling you, when my father passed away, there was a situation where, somebody said, one day he called me, your father told us to buy this share. Now I cannot, I don’t know this person, and he is telling me, so I have to believe, I said, it is ok. So he said, there was a loss in the share. So I said, now what? he said usually in our business, we have to pay for the loss.

 

My father told you only one share in life. Even if he told you, I don’t have any idea. But only one share? No, no, there are many. So, you lost the rest of the share. No, no, there was a good profit. We used to listen to it.

So, give us the profit na?

 

[Siddhartha Ahluwalia] (1:24:33 – 1:24:35)

 

I will give you the loss.

 

[Deepak Shenoy] (1:24:35 – 1:28:37)

 

no, that profit is ours, I said, then loss is also yours. People don’t understand this. I was 24 at that time, and I didn’t know of this concept, I said, profit is yours, but the loss is ours, I don’t know a damn thing about the stock market, and a little bit, but I feel, that the sense of entitlement in India, is too much, in everything, if our IPO goes, the company should go up or down, who told you this, which person says, it is your right, that it will only go up. I think that, if we get rid of that, half the discussions on Twitter will be over. So this is that … this is also why I tell people, when you are doing an IPO, please, consider that, people love you, if your share price is low, and people hate you, if your share price is high, because if it goes down from high, people remember. If it goes up from low, even if it goes down from low, still they love you. So I tell people, undervalue your stock at IPO, what difference does it make, you will lose a little, and over time, you don’t have to sell just once, you will sell a little in IPO, you will sell the rest later, so when you sell later, you will get a better value, people will respect you, that you did an IPO on low, so many people don’t understand this, I think it won’t come, because it is a game of ego. If my IPO is Rs.100, and his IPO is Rs.200, why should I reduce it, or rather, if it is Rs.20, why should I give Rs.18, it is like, in India, people love discounts. No matter how rich you are, if you are giving a diamond worth Rs.50 lacs, say 10% discount, why would a person, who is paying Rs.50 lacs, have a problem with paying something, like needing a Rs.5 lacs discount, on a diamond, but of course, he likes a discount, everybody loves discounts, so India is almost exclusively, happy about, I mean not exclusively, I think every country, people are happy about discounts, but I am saying, there is no difference between the rich and the poor, and therefore, this idea, because of this idea, that discounts should be a given, we also have this funda, that, we should always make money in IPOs, I don’t know how that translation has come, that only money should be made in IPOs. This part, I never understood, that’s why I keep wondering, whether when you say, is it a good thing that, I think, it is a good thing that they go IPO, but is it a good thing that you buy the stock, I don’t know. That is

 

[Siddhartha Ahluwalia] (1:28:37 – 1:28:40)

you buy the stock at the IPO. If you buy the stock after five years.

 

[Deepak Shenoy] (1:28:42 – 1:31:01)

things would have changed, I don’t even know, OYO might be a fantastic company, I haven’t seen the prospectus yet, maybe there will be a later prospectus whenever it comes, but I know that there are lots of companies, that want to go IPO, and some of them are probably brilliant businesses, I will give you an example, the company we bought one, I won’t name it, actually we are buying a lot of companies, so we continue to this thing, but at IPO, it was valued at X, see IRCTC, it was valued at Rs.300 per share at IPO, so people bought it, then it went to Rs.900, listing base was Rs.600, very soon it became Rs.900, I saw the financials of it, something has changed, and that something was so big, I said Rs.900 is also cheap, so we bought it, then it went from Rs.900 to Rs.6000, then it went from Rs.6000 to Rs.4500, I sold it because I said, it was already overvalued, I will not sell for overvaluation, because my funda is has stocks, which are overvalued can get even more overvalued, so there shouldn’t be only overvaluation, this should be a fundamentalism, something came fundamentally, that brought down the value of IRCTC, and that is why I sold it, but from Rs.900 to Rs.4500, still a 5X return, maybe in a year or a year and a half. There is no fear. But you may look at me and say, Sir you could have taken it for 300 rupees in the IPO? Maybe I could have taken it. But what is the benefit of it? I didn’t know anything about the company.

After the IPO, when they started making the releases is when I started to realize that the real potential of the stock was. And the same thing happened with LIC.

 

Again, we have a big position in LIC. And we saw the revelations that came in the prospectus. We saw the stock fall.

 

We said it’s interesting. Should I be unhappy about LIC falling after the IPO? I don’t care.

 

Even if I had taken it, maybe I would have taken a small position at IPO. We can’t touch IPOs as a PMS. But when the stock falls and comes back up, that is when you get opportunities. And sometimes the stock keeps going up, even then there are opportunities.

 

So, there is no reason why you should say that there are no opportunities in IPOs. OYO may be a great stock at some price. Or it may be a horrible stock at any price.

 

So, I don’t know what the answer to that is right now.

[Siddhartha Ahluwalia] (1:31:02 – 1:31:11)

 

And last time in a podcast, we discussed about Jio and Jio financials ranked 7th in the most active stocks in India.

 

Is it still that?

 

[Deepak Shenoy] (1:31:11 – 1:33:04)

 

Okay. I don’t know.

 

I guess we own the company because we got it as a part of a demerger. So, we have kept it. But we have not added to the position because the company has not started operations yet in any meaningful way.

 

The money that it earns now, it earns only on interest. It has a cash balance. Cash is 10,000, 12,000 crores, 15,000 crores I think.

 

And they earn some interest on that and that is their earning. Now, the company that is earning money on interest, on its cash balance, I will not give it a value of 1.5 lakh crores. Something will happen.

 

The answer to the question of something that will happen has not come yet. So, I am happy to say that. I will give you 3-4 years.

 

I will keep a small position. You show me. If you are doing well, I will take more.

 

But why this is a 7th rated stock, I have no idea. I don’t know if other people are asking these questions or not asking these questions. But I think they have their own mechanism for valuing it.

 

It is not just owned by me. It is owned by institutions. It is owned by hedge funds, mutual funds, foreign institutions.

 

So, at some level, they have more answers to the questions that I have, that I don’t have answers to. So, maybe they bought it because of that. All I know is that I know that it has done well even from the demerger time frame.

 

It has made your total Reliance, because we invested in Reliance maybe 3-4 years ago roughly. And that investment now includes the Jio-financial. So, if there is a reliance of Rs.2,800 and Jio-financial of Rs.200, I look at it as I want a return of Rs.3,000. That’s the way I think about it. Until Jio-financial becomes an independently operating entity and I can analyze it properly, to me, it is just like my extra return.

[Siddhartha Ahluwalia] (1:33:05 – 1:33:11)

Understood. And Yes Bank, Vodafone and Dish TV make up the, right now, among the topmost active stocks.

 

[Deepak Shenoy] (1:33:11 – 1:33:12)

 

Really?

 

[Siddhartha Ahluwalia] (1:33:12 – 1:33:12)

 

Yea, yea!

 

[Deepak Shenoy] (1:33:12 – 1:33:14)

Oh my God!

 

Dish TV?

 

[Siddhartha Ahluwalia] (1:33:14 – 1:33:14)

Yes.

 

[Deepak Shenoy] (1:33:15 – 1:35:40)

Of all things, my God! Okay, I have no idea. I don’t know how much of the delivery volumes these are.

 

Lot of intraday happens. Speculators playing on it and all that. Vodafone is probably because…

 

Vodafone is technically bankrupt right now. Its equity is negative. I don’t have any equity.

 

And technically, I have so much debt. And most of the debt is to the government. The government already owns 33%.

 

So, anything more, it will become a PSU by definition, I think, at 51%. But effectively, what Vodafone is, is now going to be earning almost everything it earns and has to pay the government a substantial amount of it. It has lost market share.

 

It has eroded this thing. But it survives because there is a Billa name behind it. But Billa is not putting more money behind the stock.

 

Neither is Vodafone. So, at some point, I feel that there is a problem in this company. Unless things change.

 

Now, people may know more than me. That’s why they are buying the stock. I have no idea.

 

But I feel that that is just pure speculation. I don’t see any concrete reason to buy it. Dish TV is similar.

 

I don’t see why that would survive as a company. Maybe it will. Maybe I am wrong here.

 

Again, we don’t own anything in these two stocks. What was the problem? Yes, bank.

 

Yes, bank. I told you. Yes, the bank issue was 300 rupees.

 

Now it is 30 rupees. Same valuation. Right.

 

So, there is a lot of speculation. It is a phenomenally well technologized bank. It is also now stable because there is no problem, as much problem in asset quality and so on.

 

So, that way, it is a stable stock. With it, if you are thinking that 30 rupees will become 300, at 300 it will be valued at more than Reliance Industries. So, I think, you know, I think so at least.

 

And I would say that that should not, because you should analyze it a little more. But, you know, there is one thing, when people are digging for gold, and you know there is no gold there. Let us say.

 

Already you think there is no gold there. Will you go and tell them that there is no gold here? Stop digging.

 

If you are doing it, then let it be. If you have been put in a notice board publicly, there is no gold here. So, people still look and say, this is a lie.

 

[Siddhartha Ahluwalia] (1:35:41 – 1:35:42)

This is gold here. This is a notice.

 

[Deepak Shenoy] (1:35:43 – 1:37:17)

This is a note. Same happened in DHL. In the DHL resolution plan, it was clearly written that this share is going to become zero.

 

We also wrote a post that this share is going to be zero. Please do not take it. It was on the upper circuit for four days.

 

On the fourth day, after the upper circuit, the news came that it is going to be zero. That is an official information. Before that, it was unofficial, but people knew about it.

 

And I wrote a post also. People were abusing me. ‘What do you know?’

 

Look, it will be on the upper circuit. I said, brother, he is saying that it is going to be zero. What should I say?

 

If the share is on the upper circuit, it is not my fault. I will only say that please you. Then, and I was doing it as more of public service than I was for anything else.

 

Because I was like, this is a little dangerous skill. Because if we do not stop such things as a market player, then people will stop trusting the market. So, we said, look, at least we are telling you.

 

So, we said this and then yet people bought and then it went to zero. And then people said, yes, it is still zero. It was written.

 

It was written. And okay, at Rs. 34, maybe your loss was too much.

 

But the loss was Rs. 34. You could have sold it.

 

It was on the upper circuit. You could have sold it anytime. But then it went to zero.

 

Now, I would say this phenomenon of, you know, people buying or digging into such stocks, many such stocks, and some of them may be great. Suzlon, for instance, has actually turned around. Yes Bank has turned around.

 

But expecting that, that turnaround means my original price will go back, that may be a little.

 

[Siddhartha Ahluwalia] (1:37:18 – 1:37:20)

 

Yes Bank, I think we took Rs. 4 or something, maybe.

 

[Deepak Shenoy] (1:37:20 – 1:38:00)

 

I think so. I don’t know. I don’t know how much it went to.

 

I was, I mean, it’s all fine because every stock will have its lows at some point. I can also say that Bajaj Finance at one time was 1/100th the value of what it is today. Effectively, it was at Rs.60. Now it is at Rs. 6,000.

 

But it was not that it went from a bad time. Though, honestly, there was a bad time for it. It was lending primarily to autos, Bajaj three wheelers.

 

There was a lot of fighting there. Payment to payment. Its NPS was very high.

 

From there, it became this behaviour which calls you on Sunday evening.

 

[Siddhartha Ahluwalia] (1:38:01 – 1:38:02)

 

So, what a transition.

 

[Deepak Shenoy] (1:38:02 – 1:39:56)

 

What a transition, right?

 

And it is now valued at Rs. 6,900 crores. And whatever happens, that telephone call will keep coming.

 

And people will keep taking loans. And I don’t know, whatever it is, it will keep happening. And that, I think, according to me, is how the stock has done really well.

 

If you would have bought at Rs. 60. The one who would have bought Yes Bank at Rs.4. Maybe, it would have been at Rs. 8.

 

It would have been at Rs. 10. It would have been at Rs.15. Maybe, he would have sold it at Rs. 20.

 

Now, it is at 5. Now, looking at Rs. 30, he is saying, Brother, I had bought it at Rs.4. Why did I sell it at Rs. 20?

 

Now, the problem is that this happens. Next, He says, I will take it at Rs.30. Now, it will be at Rs. 60. It will be at Rs. 100. Because someone must be saying, Look, you sold it at Rs.20. Did you consider yourself to be a great scholar? Now, it has gone from Rs.20 to Rs. 30. Now, from Rs.20 to Rs. 30, it is a 50% return, which is very good. Now, that is where this problem of doubting yourself comes. And overconfidence also comes. You didn’t know why you bought it at Rs. 4. You said, it is Rs. 4. It is a good bank.

 

Let’s buy it. It is cheap. Let’s buy it.

 

So, you bought it at Rs. 20. You didn’t know why you bought it at Rs.20. But, it was made. You thought I bought it cheap. And, I am the one who is a great scholar. You sold it at Rs. 20. You thought I made a good profit. Now, it will not go up. Now, it is at Rs.30. You again doubted yourself. How did it go from Rs.20 to Rs. 30? And, why didn’t I recognize it? So, you took the same stop. This is called a revenge trade. You buy the stock on revenge. Now, when it goes from Rs. 30 to Rs. 40, it will go from Rs.30 to Rs. 50. So, I will learn from it.

 

then I will be gyaani again. So this ego na ki main hi hoon types. That is big. This. You only learn when you get beat in the head with the market.

 

[Siddhartha Ahluwalia] (1:39:56 – 1:40:03)

I think you have said this correctly in many places. Compounding only happens when you are not looking at it.

 

[Deepak Shenoy] (1:40:03 – 1:41:10)

Market goes up when you sleep. We have written this in the book also. I had it in my office as a poster.

 

The market makes money when you sleep. Sometimes you have to sleep through markets. You do not look.

 

Sleep through the years. Years. And that year, I will tell you that this saying is not as valid because the market plunged, you must sleep. You should also sleep because the market surged because when the market rises, you think you must sell. It went from 60 to 6000. The person who bought at 60, will buy more at 200? But he should buy it. Should he buy more at 400? But again, he should. Because today it is 6000. You will look back and say why didn’t I buy more? But at 400, it will be on your mind to sell the stock. But if you were sleeping and woke up now, you would be like, Hello, it is 6000. Very good. You know MRF was 1000 rupees one day. Now it is 1,60,000 rupees.

 

So somebody has made a lot of money in that time frame. But any time he had looked in the middle he would have been like let me sell it.

 

[Siddhartha Ahluwalia] (1:41:10 – 1:41:21)

I remember one of your stories where you said a 24 year old came to you and said, he has 200 MRF shares that his grandfather bought.

 

[Deepak Shenoy] (1:41:21 – 1:43:39)

Not me. It was on TV. There was a segment on TV where he had come to the TV.

 

Dada ji ne 200 rupay 200 share hain… Which is over 3.2 crores today. But he didn’t know.

 

I am sure he knew, but was trying to show off on TV. But whatever it is. Because one can easily see MRF share price. But this is also a truth that some people do not know the value of. For instance, someone told me my father has some Reliance shares from 1987. They are paper shares. What would be its value? I said one minute brother. Reliance underwent multiple de-merger, merger, this thing, that thing happened. So, you calculate it. I don’t know. Maybe value has increased a lot or maybe it has fallen.

 

And you should get this checked with them. So now he has undertaken. It’s been one a while for him to understand what has happened.

 

Kyunki Reliance ka, I think there was a merger with some companies and then there was a de-merger in 2005. There was a bonus, a bunch of bonus issues. And recently, too, two years ago there was a bonus issue.

 

Demerger of Jio Finance. Earlier there was a demerger of Reliance Capital wala thing and Reliance Energy, Reliance RNRL kuch tha. Then all of these companies, by the time he gets and dissolves all this, it will take him a long time.

 

But the fact that he had 10 shares that time, probably means he has maybe 500 shares. I don’t know. Just saying.

 

500 shares of a company whose value is about Rs. 3000 is Rs. 15 lakh.

 

But agar wo kehta hai, main baad 10 hi share hai. Aur 30,000 ka value dekhta hai, yaar sirf 30,000 ka value kya fayda. You have to go and check if ki actually values kya hai.

 

It may be much more than you think. It may be much less than you think. The way you, like MRF.

 

MRF toh saaf pata tha bonus bonus kuch hua nahi hai. Toh 200 share hai, 200 into share price. Agar baaki mein, agar koi aata mere paas, that I think would have been interesting.

 

The thing is, there was a very interesting thing: when the best portfolio, performing portfolios, somebody had summoned hundreds and hundreds of portfolios. He said, the best performing portfolios of those people who were dead. And people did not know who they were.

 

[Siddhartha Ahluwalia] (1:43:39 – 1:43:40)

They are the real Warren Buffett.

 

[Deepak Shenoy] (1:43:41 – 1:47:26)

Yes, because they had died and their family didn’t know. They got to know much later and then they cashed it. That is when, you know, people have made the most money.

 

So strange, no? Because we think we must see the market daily. We also do it. We see it every day. We analyze it every day. Bank is going up. Macro is in tension. NBFC is in regulation. Leave it. See it after 5 years. Then you will be like, what was this NBFC regulation? I don’t know. I should have taken the bank. Do anything. It happened in between. Still I can’t earn money. This is the real market. The rest of the things we do is entertainment. The real market is, you keep your mouth shut and you do your thing very silently. So, a lot of my talking, when I talk about the market, is irrelevant.

 

It is more, you know, it should not even be taken into consideration, even by me. So, I have an investment in me and I have a talking to me. Sometimes the two of them don’t mix.

 

The one who talks a lot, wants to take action by keeping his words in mind. That is the problem. Talk, Twitter, do whatever you want to talk about.

 

But when you take action, carefully, as an investor you take your action, sometimes you have to take action because things have changed. When things have changed, you should take action. Things have changed in the right direction. The IRCTC thing. When we sold what it is now, of course it has done a 1-5 bonus and all that stuff. The price is probably not much different. Maybe it has done 2x, FD level returns. Maybe it has done a little more returns in comparison with what it was then. But maybe it was still a good hold from then to now. I can say that. But I just didn’t, I knew that there were better opportunities.

 

So, I wanted to make those decisions on those things. But I also say that, if you look at IRCTC stock every day, and you look at the news every day, you will feel that you should sell something or you should buy something else. I think that is where you have to become a better investor by, and I am also a victim of it because I also look at the news all the time, it’s very difficult to not get, FED increased interest rate something should be done what will you do if FED increases interest rate it will have some effect but you have to figure out if that actually hurts your companies or not, that is the work now just because FED increased interest rate you should be selling your shares sounds like an easy action to take FED increased interest rate, now market is going to be divided this is where you get into predictive territory predictive territory is dangerous because nobody could predict. 3 months back somebody came to me and said is the market overvalued? I said I don’t know. He said why? I said how do I know the market is overvalued? Do you think the market will fall from here or not? You are not asking me whether the market is overvalued. You are saying whether the market will fall from here or not? The answer to that is I don’t know. It could be overvalued and still go up another 30%. It could be undervalued and fall another 40%. Nobody knows anything. And therefore you should respect the market. Respect that whatever is there is there. From there, the market is up 26% in 3 months roughly, I mean in our portfolios. So is it that we were right, the market was wrong or whatever it was and things like that. I don’t think so. I think the answer is you can’t predict. Even today if you ask me this, I have unfortunately the same answer. I am like a broken record. I don’t know. Difficult thing for investors because you’re supposed to know. Yeah. But I think I don’t know what should be the default answer.

 

After I don’t know there is a BUT …

 

[Siddhartha Ahluwalia] (1:47:26 – 1:47:29)

 

Because people give you money, they expect that you have all the answers.

 

[Deepak Shenoy] (1:47:29 – 1:48:50)

 

Yeah, that is true. Though we try to tell them that we don’t have. And sometimes they will say, no, give our money back. We don’t want to. What does this mean? You don’t know. And some other people are like, yes, he doesn’t know. But by and large, this guy gets his head together and the team gets their head together and gets it right over a long period of time. And that is the only way you can invest in markets. I think it’s the same for mutual funds.

You will say that I took this fund 3 years ago and it is not doing anything. And I will be looking at you and say, was your investment period 3 years? No, it was 3 years. I will say, okay, if it was 3 years then take the action. If it was 5 years and 10 years then why do you want to take action now? Whatever he is doing, maybe it will take longer for him to evolve this. Business cycles in India last between 3 and 5 years. So you have to give at least a fund manager a business cycle to perform.

Right and market goes up, goes down, then goes up, then goes down. You want the guy to live through those cycles. Only then can he perform. If you don’t give, then the fund manager gets to perform every year. I mean, at that level, you’re trading, not investing. So, I mean, when I say that, I mean, you’re doing things that are more short-term in nature for a business that is almost by definition long-term in nature.

 

[Siddhartha Ahluwalia] (1:48:51 – 1:48:55)

 

And that’s why it’s always. The safe advice is always buy large caps.

 

[Deepak Shenoy] (1:48:57 – 1:50:18)

 

That’s again a very bad conclusion I would say. And I’m sorry about using that language but there are no big shakes about large caps or small caps. Every large cap was at some point a small cap. And they all come up from there. It’s like saying that Deepak Shenoi is nothing. What can he even do? And saying that if they don’t work in big banks, why should I give them money?

 

We have seen time and time again, it is the people from outside, people from the small side, who come and beat in the market. How is Zomato or Swiggy so big today in the restaurant market? There were so many companies.

 

Tata didn’t make their Zomato or Swiggy. They made them separately. Who were they? They don’t even run restaurants. They don’t know how to make food. They deliver food.

 

and they don’t even do it themselves, they make others do it. What is it? People with technology… Well, at some level, we have to assume that changes will come. And this buying only of large caps sounds to me like a recipe for mediocre returns. Over time, you have to take some risks. And…Large caps are not less risky than small caps.

[Siddhartha Ahluwalia] (1:50:19- 1:50:23)

 

Rakesh Jhunjhunwala made his all wealth through one stock, Titan, which was a micro cap.

 

[Deepak Shenoy] (1:50:23 – 1:51:28)

 

At the time. I don’t know about all the wealth. A lot of things about Rakesh Jhunjhunwala are perhaps missed. Maybe because of the legendary nature of it. It’s like saying that Warren Buffett has always held stocks for the long term. No. His average holding period was what, six months or something like that. Because the positions that didn’t work out, he used to cut them off. But he used to make statements that we should buy stocks only for the long term.

 

So you understand that he used to buy stock only for the long term. That’s a wrong assumption because he’s actually buying. So you should see what people do not say. Rakesh himself was also a trader and an investor. He used to have short positions for the longest time. He was a person who loved to go short on the market before in the Harshad Mehta time and all that stuff. After that, he continued to retain his interest in the short side of the market. But he made a lot of bets on the long side of the market. So he made a lot of money.

 

I think we make a legend out of his long positions, but I think his legendary thing was also cutting positions and going short. He was amazing in that. And we don’t give him enough respect for that.

 

[Siddhartha Ahluwalia] (1:51:28- 1:51:29)

 

any examples of that?

 

[Deepak Shenoy] (1:51:29 – 1:55:38)

 

I can’t say much of his public information, but basically there have been enough times when he could switch positions like this. He could say that I am long so much, cut this and go short. He would do this without any fear of what people will think. That kind of thing, I think we should respect that more. He is doing his own money, it’s not our money, it’s not public money that he is doing. He is doing his own money and over a period of time he has built this magnificent thing. I think that’s a good thing. I don’t think we should deny him that. So to think, I should think like Rakesh Junjwala, then go ahead and think like Rakesh Junjwala. You don’t think that I should buy one Titan. No! He has done a lot of work. He has done a lot of work. He has done Gone Short, he has made money in the short, he has done Badla, he has done Futures, he has done Options. Maybe not options, I don’t know about options. But I know that he is used to having future positions. I know that this is a more complex being than saying that he made money from Titan. And I know that simplifying Rakesh Jhunjhunwala into one titan is probably one of the mistakes of our generation. And we should perhaps not make those mistakes. We should learn from him in terms of attitude and action. When you’re a trader, you take the trader-like action. When you are an investor, you take the investor role action.

 

You will buy a loop in, you will go and question management as an investor. But you will trade some future, index future and you will trade index future without being mercilessly going short at some point, mercilessly going long also at another point. There is no, that is dhanda.

 

So you are doing your job. And the even better thing for Rakesh was he refused to take other people’s money. And very, very, it’s like a, you know, I supremely respect Zerodha for this.

 

They did not take any VC money. They did not take third party money. They built their business where it is.

 

And if they were to go IPO today, man, they would be takers for it. But they don’t want to IPO either right now. But I mean, that is, they haven’t stated an intention to go IPO.

 

But one day, I hope they will. And I hope we all get a chance to participate in that business. But he built this business without, without relying on external capital.

 

And I must say, I, you know, I really respect them for it. I respect Rakesh for doing what he did, for having only one customer, which is his wife. And, you know, as much as I say this, I think, you know, very powerful people who did it versus a lot of others.

 

I mean, it’s not like they’re worse off. I’m just saying that when you have to answer to other people, your behavior changes.

 

I am managing other people’s money. If I buy a stock, the customer has the right to call up and ask why are you buying it? I don’t like this stock. I can choose to say, no, look, I’m buying it. If you don’t want to buy it, you can take your money back. Or I can say, let’s do this. Let’s not take it into account in the sense of this thing. But that is not right. Because I am supposed to be making that decision. I should actually be telling that. If I do all of these things, I’m still answerable. So I won’t buy some of these stocks. People will say, Deepak you said on TV that this stock is not good, why did you buy it? You know, so I say, dude I have a right, I reserve the right to change my mind. But sometimes because I have to say that, I will say, I told you on TV that I am not buying this stock, I don’t like this stock. Even though it has fallen 40% from there, and I should be buying, I mean because maybe at some price, many companies are very attractive.

 

If you drop it in a way, and then there is the fundamentally, it’s good. I might want to buy that stock. But then you have this anarchy method.

 

[Siddhartha Ahluwalia] (1:55:38 – 1:55:40)

You can’t contradict yourself.

 

[Deepak Shenoy] (1:55:40 – 1:55:51)

And that feeling, Rakesh was very good at that. He’s like, I don’t care. I said anything on TV, I’ll open my position. You won’t know why you care about what my position is.

[Siddhartha Ahluwalia] (1:55:53 – 1:56:02)

 

So thank you so much, Deepak. It’s been such an amazing conversation. And believe me, right, I’m just 25% covered.

 

Remaining 75% next time.

 

[Deepak Shenoy] (1:56:03 – 1:56:24)

I can’t see, but my God. Okay. You had, dude, this is like an essay.

 

We’ll spend the rest of the year talking about this. But some of the rest, I didn’t want to answer only, but whatever. It’s better than the Red Bomb.

 

Nice Nice.

 

Interesting.

 

Good.

 

All the best Man.

 

[Siddhartha Ahluwalia] (1:56:24 – 1:56:25)

 

Thank you so much.

 

[Deepak Shenoy] (1:56:25 – 1:56:28)

 

Very nice.

 

Thank you. Thanks for having me.

 

[Siddhartha Ahluwalia] (1:56:28 – 1:56:30)

Thanks for having such a deep conversation.