Deven Choksey on 2 themes to bet on in a volatile market

Deven Choksey, MD, DRChoksey FinServ Pvt. Ltd, says coming to solar power mini theme, he is extremely bullish about the power generator business, particularly solar and wind. Hydrogen is yet to be seen as it will take three to five years. Choksey is bullish about the EPC and the power generation as well as distribution prospects, but not very confident about the premium valuation which these companies are quoting in the market.

Insurance is another theme Choksey is bullish on and in that, he finds LIC very convincing. They have a higher amount of premium books, a higher value portfolio and a significantly good roadmap of products as well as the distribution reach.

A lot of mini themes keep popping up. For example, EV is a mini theme. Solar is a mini theme. Within the large manufacturing theme, electronic manufacturing is a mini theme. I will start with solar, the most talked about theme right now. A couple of companies have gone public. What is your view on solar?
Deven Choksey: We remain extremely bullish about the prospects of solar. One obvious thing is that the next 10 years are going to be an era full of energy related businesses and the renewable energy-related businesses be it solar, wind, green hydrogen, or even biogas. We believe that each of these fuel sources are likely to create a significantly large amount of buzz in the marketplace. At the same time, they attract a lot of new money into this space and the new capacities are going to come up by one and everybody.

Some of the larger players are going to be dominating this particular space. We remain extremely bullish about the possibilities, particularly the power generator business is remaining absolutely convincing, particularly solar, definitely wind and hydrogen we have yet to see. But it will take three to five years. We remain confident on that aspect. Now, the EPC companies are the beneficiary of this particular implementation of renewables and they should be getting the highest amount of business in the course of time. They are getting top line and even EBITDA growth. The bigger challenge at this point of time is their valuations.

Probably every good story is good at a price and today we are giving them valuations three years, four years in advance. At the same time, we must also remember that some of the larger players like Reliance and Adani, are unfolding their business plans and they have a habit of disrupting the market. So, today, small and mid-sized companies are quoting at a high premium and valuation. We do not know how the businesses are getting unfolded from these two giant groups. In such a situation, if some amount of disruption is taking place, this premium valuation can become a risk and that is what my concern is.

We remain bullish about the EPC prospects, we remain bullish about the power generation prospects, power distribution prospects, but we are not very confident about the premium valuation at which these companies are quoting currently in the market.

An interesting report on life insurance by UBS has come out today. They believe that life insurance companies’ growth has largely been driven by the ULIP segment and now they are expecting the company's new commission payout structures to minimise the impact of the new guidelines. So, they are saying that for the entire sector as a whole, competitive intensity is declining. What are your thoughts?
Deven Choksey: It is time to remain bullish about the prospects of this particular business. A couple of changes that have happened are important to observe. One, the larger part of the policy premium collected is in the area of term insurance, which is fundamentally good because when you link the saving products, you are creating a significantly large amount of liability franchise along with. In the term insurance, that part is taken care of. So, structurally, many of the companies have started focusing more on the term insurance portfolio well.

The likes of HDFC Life and probably LIC have got more saving products along with that at this point of time because of the legacy portfolio. HDFC Life in particular has got a systematic mix of all the products in their product verticals. In the three or four product verticals which they are operating, they are systematically creating that part of it. So, to a greater extent, the risk part is structurally mitigated and that is what we like about their business model.

SBI Life remains very strong on the distribution front, largely because of the bank’s franchises that they are enjoying. But at this point, one company which remains very strong and very convincing is LIC. They have a higher amount of premium books to talk about, a higher value portfolio and the company has got a significantly good roadmap of products and also the distribution reach.

So, one could look at the likes of LIC for investment. Of course, Bajaj Finserv holds the life insurance business and non-life insurance business. At some point of time, if they demerge this business, then probably it is a good case to look at as well from the portfolio point of view.

In fintech or consumer tech space, which stock still offers value and which is the one stock you will not buy irrespective of the price damage?
Deven Choksey: The value proposition is not available. To me the companies are fantastic. I believe Zomato’s business model is really good, their consumer tech platform also is really good. The point out there is that valuation-wise, the market has already discounted the future earnings of at least two to three years at this juncture and that is where probably the discomfort level is that any mistake or any kind of a fallout probably market will not be continuing with the premium valuation and that is a worry.

Otherwise all these companies have really good business models to talk about and we watch them very closely. Paytm has been trying to correct the shortcomings in their business model, but somehow, I think they are still not giving enough confidence that they would sustain on this path. So, one is definitely not very sure about the valuation these companies are commanding now.