Motherson Sumi’s QIP has opened today. What are your thoughts? Just two days ago, we received a profit warning from BMW, followed by another one from Porsche. JLR also mentioned that July will be tough for them. Does it make sense to invest in Motherson Sumi, given that the global tailwind has now turned into a headwind for luxury automakers, which is a core segment for Motherson Sumi?
Deven Choksey: Yes, it’s going to be a challenging environment for auto ancillary companies. While the slowdown has started to affect them, it’s not too significant yet. They are still fulfilling their order books, including those in the Indian market, where we’ve seen a slight decrease in passenger vehicle demand over the last couple of months. The same applies to global markets, where the situation is also becoming more challenging. Auto ancillary companies are likely to face tough times ahead. One saving grace is that raw material prices are decreasing. So, on one hand, if input costs are going down and demand isn’t dropping too drastically, there’s a chance to maintain margins and profits at the bottom line. This is the silver lining for most auto ancillary companies right now. However, if the situation improves, these companies could see upward momentum. As I see it, for this financial year, the next couple of quarters will be difficult for the majority of auto ancillary companies. But this could be a good time for investors with a long-term view to add these stocks to their portfolios. Investors who can look beyond the next two quarters might find opportunities here. It’s a challenge we’ll need to accept.Which stocks have you held for 15 years or more?
Deven Choksey: We’ve held stocks from the entire TVS Group for over 30 years. The Bajaj Group has been in our portfolio for over 40 years, and Reliance has been part of our portfolio for more than 25 years. We hold these companies because their businesses have shown steady growth. We’re not looking for exceptional returns like the 30% compounded growth rates we saw with HDFC and Bajaj Finance in their early years, though Bajaj Finance continues to grow at that rate in some cases.
The southern-based companies grow at a slower rate, between 15% to 20%, but that’s still a healthy growth rate. What’s important is how these companies reinvest their free cash flow into building future capacities and sustaining their growth. We focus on companies that compound their balance sheets by continuously investing in their future. We particularly like companies that use their free cash flow to expand, without repeatedly coming back to shareholders for more capital. This discipline is what we value in these types of businesses.
We’ve been talking about Ola Electric and what the brokerage community says about them. They’re building a two-wheeler platform based on an electric theme, and it’s seen as a tech company. How would you view Ola Electric’s journey and its potential impact on other players?
Deven Choksey: That’s a great point. Having studied Tesla for the last 12-15 years, I’ve seen how it evolved from a car company to a platform provider. Today, Tesla earns more from selling software-based solutions than from car sales. Similarly, many automotive companies are now focusing on technology to make vehicles safer and more convenient to drive. Companies like Ola, Bajaj, and even Minda Corp, which supplies technology solutions to OEMs, are moving in this direction. We believe that providing convenience to drivers is critical for success in the industry. In the two-wheeler space, companies like Ola, Bajaj, TVS, and Hero are all following this path, while in the four-wheeler space, most car manufacturers are adopting a similar approach. Over time, the software aspect of these businesses, which isn’t currently factored into valuations, will start gaining recognition. Additionally, the “rent-a-battery” model, which is being adopted by companies like MG for electric vehicles, is a significant disruption. Bajaj Finance is already financing batteries in this model. This space is going to be very interesting, and many companies are likely to show a better picture moving forward.
Can you give us a stock idea for the next 5, 7, or 10 years? It may not compound as fast as Sundram Fasteners or TVS, but something you’d buy and hold for the long term.
Deven Choksey: We currently favor companies like Tata Technology. During the COVID-19 period, we picked up companies like Tata Elxsi, and we believe that holding onto these for the next five years or more could offer great opportunities. Tata Technology is available at a premium valuation, so it might not deliver immediate gains. However, the business model is solid, covering everything from design to distribution in the automotive vertical, and they’re also expanding into the aviation vertical, which currently accounts for 16% of their revenue and is expected to grow to 35% in the next 2-3 years. These companies offer deep value from an investment perspective, although they are not cheap. It’s a game of patience—you may have to wait a little longer in the beginning, but the rewards will come later. So, we like investing in such companies. That said, this is not a recommendation—investors should do their own research before making any decisions.
