What is your take on the escalation between Iran and Israel and now the US entering and how do you believe that the markets will trade on this?
Rahul Chadha: Markets will watch how the situation evolves. So, would we see other oil infrastructure facilities in the Middle East, GCC region getting attacked as a retaliatory measure? Would we see other powers being drawn into the conflict? We have seen some statements from Russia. China has been here, but do we see the traditional supporters for Iran get drawn into the conflict? If it remains a bilateral conflict or three-party conflict between US, Israel, and Iran, I think that should calm markets. If there are a couple of retaliatory attacks from Iran on Israel and things quieten post that, then it should calm the market.
Now, it comes back to that other point which is if crude prices go up, it is bad news for India. But is it different this time?
Rahul Chadha: Yes, absolutely. The volatility of the markets have reduced because globally the risks most global economies have is the high fiscal deficits they are running, the high debt to GDP. But India has very strong macroeconomic factors. On oil also, let us consider that temporarily the Strait of Hormuz is closed, and oil goes to above $100 a barrel, then always the US can release oil from some of the strategic oil reserves.
So, it is going to be a temporary conflict of a couple of weeks; it is not going to be a prolonged conflict like what we saw in Gaza, so that is the base case scenario. And coming back to our talk on India, India still remains one of the few economies which is continuing to grow at 6% real GDP, 8% to 9% nominal GDP. We have seen huge interest in the market. A serious push back is the valuation. So, on any pullback in the market, 10-15% people will take it as an opportunity to add to the exposure.
Does that mean the valuation concerns are still there and you are not adding on to any of the positions because of late there has been a lot of sector churning in the markets? A couple of sectors seem to be making a bit of a comeback. The autos participated. The banking and the financials are doing well. Are there any pockets where valuation comfort is still there?
Rahul Chadha: Yes, we continue to like the discretionary consumption part in India and the rally which we saw from March onwards was an anticipation of rate cuts that happened. Recovery is a bit slow and that is why we will see pullbacks and use those pullbacks to add to discretionary consumption plays.
These are your B2C consumer platforms, the quick commerce platforms, and some of these personal consumption platforms, travel, hotels look attractive. Some of the infra also looks attractive. These names got hammered on the back of government capex coming down. But from the last 15 years, we have not seen significant investment, particularly in India’s power infrastructure, and so that is an attractive story. Outside that, hospitals and real estates are themes which we like. They have done very well between 2020 and 2024. They may take a temporary breather, but these are strong medium-term themes to play in India.When we spoke to you last time, you were long financials, long hospitals, and bullish on digital. Digital you have already mentioned, but I want to understand hospitals. It is a very unique space. Here competition is intensifying, return ratios are not expensive and stocks are expensive.
Rahul Chadha: If you look at the space, most of these hospitals are undergoing brownfield expansions. Patient intakes are growing between 8% and 10%. The procedure prices are up 4-5% and revenue growth is about 15%. Leave aside this quarter which has been soft, revenue growth is 15%. Over a medium-term, they should be able to maintain their margin. If we look five years out, how many sectors are there which are unimpacted by digital disruption which can give huge growth rates and have a huge unmet demand, with the kind of incidents we have for the chronic diseases in India whether it is diabetes, cardiovascular and with the aging population, sedentary lifestyles, there is a huge headroom for growth for these sectors? We have not yet fully explored the potential of medical tourism here.