Process Valuation What Survives Every Market Cycle Netra Anniversary Edition Dsp Mutual Fund

TITLE: Process, Valuation & What Survives Every Market Cycle | Netra Anniversary Edition | DSP Mutual Fund CHANNEL: DSP Mutual Fund DATE: ---TRANSCRIPT--- [music] Hi, good evening everybody. Uh this is Sahil Kapoor. Welcome to the fifth anniversary edition of DSP Netra. Uh good evening to all of you. So today we are discussing a very special edition of uh DSP Netra. It is the fifth anniversary edition. As I said uh each anniversary edition is a foundation edition which focuses on unchanging parts of investing. Um no market data no charts usually no gan. Uh the attempt in these anniversary edition is to uh write something or build something which is more enduring trying to you know put a foundational series to investments. The theme of this edition is process knowledge.

As you know uh physical things decay whether they are buildings or whether it is data even narratives decay over over time and largely even written words they can also decay with pages and books getting lost in this digital age. It’s it’s going to be very tough to um you know have old things endure. But what we know is that a good process can survive if it is practiced uh transferred and corrected and rebuilt again and again. So process knowledge is that knowhow you know that part of that practice transference of that knowledge which is built over time corrected again and again and practiced over time. So that is why this addition uh when you look at the tech begins with the is grand shrine of Japan. uh this shrine is more than 1,300 years old but as a tradition what you look at the physical structure of the shrine standing today that is not 1300 years old it was built uh maybe within the last 20 years and this structure is rebuilt every 20 years as you know the wood uh used for creating the structure that can change the physical objects can change but the process to build this structure it survives it has survived for more than 1300 years. So it’s a 20 year rebuilding cycle which is the real genius of this shrine.

A young apprentice who builds the shrine sees the process of building of the shrine in his teens or in his 20s. He becomes a skilled practitioner in his 30s or 40s. Then he becomes a master in his 50s or 60s. And by the time that apprentice reaches 70s, he’s become a senior adviser and he’s passing on his knowledge how to build this temple uh to the next generation. This pass on the knowledge. This is how the shrine is built. So the idea behind this grand shrine is not to make the shrine with the most robust steels or stones or cement. It is to make this process of how to make the shrine uh endure over over a period of time. The physical structure of the shrine can get impacted by an earthquake. It can decay over time. But the craftsman uh which built this structure u or the knowhow that will endure over a period of time. This is the principle of anti-fragility in practice that you can see. So this is the also the idea behind the uh fifth anniversary edition of DSP Netra. Uh you know the markets can change uh interest rate earnings valuations all of them can change cycles can progress but the process of knowing how to invest that must survive.

U the only and most simple way of investing is to buy assets below what they are worth. Um according to my understanding this is the only way to invest. All other means whether it is trading momentum following speculation not inherently bad or inferior. Uh there are you know geniuses in those fields as well but those are not investing ideas. Uh investing is very very simple. [clears throat] Investing is that you buy an asset for uh you know less than what it is worth or in other words you buy it below it intrinsic value and then uh you wait for it to rise back to what it is worth and therefore you make a profit. That is the only way to invest and to do that one must know how to value assets because if we do not know how to value assets it’ll be very difficult to uh exercise investing. So this addition is an attempt to preserve the process knowledge uh of investing u and it is you know going to point you in the direction of how to value assets. So today I will cover six areas. First is the universal lens on valuation. Second is equity frameworks. Third debt. Fourth commodities. Fifth currency and finally we’ll touch upon credit. uh the central message of you know today’s discussion is very simple that valuation or valuing asset it is not a prediction mechanism valuation is a disciplined disagreement with price okay we’ll see how we think about these principles and first and foremost as we start with each of these segments I would like to thank all our contributors who agreed to showcase their frameworks and share their insights with our readers. Uh we are very lucky to learn from them. Uh in the process of writing this whole thesis, me and my team learned a great deal from all these masters and uh you can see these 20 contributors, the practitioners who have shared their frameworks and knowhow with us and we think that this is the process knowledge of investing that we’ll chat about as we go along. [clears throat]

So first I will touch upon the most important universal lens u you know which will set the tone uh on uh you know what are the key aspects of what we’re going to talk about u so first and most important asset uh comes from uh the CIO of DPFAS mutual fund Mr. Rajiv Takar his framework is a very good clean starting point. The first question in valuation is not whether the asset is popular, scars, exciting or fashionable. The first question probably should be does it generate cash flow. [clears throat] Uh if the answer is yes then for example in the case of stocks and bonds the answer is very clearly a yes. valuation then ultimately is an exercise of calculation or estimation or calculation and estimation. So the mathematics is not very complicated. If you look at the compound interest formula, it’s a very simple formula. Um if you know the three variables then the fourth one is a logical output. Right? So maybe you need to know the future amount, you need to know the number of years or you need to know the required return. then you can calculate the present value. This is what goes into the formula. But uh there is a basic distinction between bonds and stocks. When you look at bonds, the future is defined. You know what is going to be my maturity? What is going to be my coupon coupon rate and what are the coupons that I’m going to get. So the investor mainly decides the required return future value time and how much you want to invest today all are known in bonds. You only need to know the returns. Bond market is mathematically understandable to a very large extent. In the stock market, the future is unknown. This means we don’t know how much will the company in which we are investing will earn. How much profits will it make? The maturity is also unknown. Means we don’t know how long will profits keep coming. Right? The future cash flow is also unknown. So it’s a uh when you look at stocks and bonds uh a stock is effectively a bond with an unknown coupon and no maturity date. Mathematically they may look simple but in case of stocks the uncertaintity is much higher. So as I said math is simple. The problem of estimation is hard. In case of stocks we need to estimate how much earnings uh will occur over what period of time. So when valuing a bond what we are doing is we are calculating. When we are valuing a business or a stock what we are doing is essentially estimating but also when you value gold or silver or art you don’t have any cash flows. So what you’re trying to do is in this point in time you’re trying to forecast behavior. So gold or art does not produce any cash flow. So you need a very very different lens while valuing some of these assets. And as Rajie mentions that there are two ways to do it. One is to skip it. If you don’t know how to value them, you just skip them and you stick to what you know or you stick within your circle of competence which is valuing stocks and bond. Now this is a uh you know very very useful operate operating framework or opening framework because it stops us from using the same tool on every asset. You can’t use a DCF on stocks and bonds and gold and credits and come up with an answer, right? Because a bond is not a stock. A stock is not gold. All of them are different, right? So, every asset needs its own process. And you know, Mr. Rajie has also added two very important filters. First, he says that all the estimates that we do for example in case of stocks, they should be anchored in reality. Estimating cash flows for a utility company like electricity distribution firm is very different from estimating cash flows for a AI company or a biotech company. High predictability deserves higher confidence. Low predictability needs a bigger margin of safety. Second thing that he mentions is that trees do not grow to the sky which means that you need to keep your expectation and estimates grounded in reality. one of successes uh are not permanent in nature. Uh every movie is not a blockbuster like a Bahubali or a Dhran. So we need to make sure that we are not accounting for one for perpetuity and uh this impermanence of or cyclicality of markets is a very very important uh uh ingredient as we move ahead and therefore every supernormal margin does not deserve a high multiple. And finally uh no formula can protect you against you know bad companies or bad people and that we have to ensure that integrity is maintained at all times. So in totality this starting framework uh puts a base layer. It tells you that cash flows are very important. They come first. Estimating quality is very important. Sanity check you know basing your ideas in reality. uh having an integrity filter uh all of them are very very important. So now with this we’ll now move to equities uh we’ll talk about some of the frameworks. We are not going to cover all of it because as you know it’s a very very long deck. You can actually go back and read the whole deck. So we are going to touch upon a few frameworks. So for equity we’ll talk about price quality and expectations. These are the three things that we’ll try to bucket some of the frameworks. So equities as you know is the most discussed asset class but it also one of the most abused ones. Most investors begin with a multiple. They think about low P or low uh you know price to book value and therefore uh it’s a buy signal or a high P is an avoid signal or a sell signal. We look at 10ear averages 20 year averages but uh this is not enough. This may not be enough just to look at a few numbers because a multiple is not a valuation. A multiple is just a sort of a compressed story. Right? So the question that we should be asking is what must happen for that multiple to make sense. So I will cover three equity frameworks. First one we’ll start with Abishek Sync’s framework. And Abhishek’s framework is built on three solid parameter. Rabbishek Singh is Singh is the fund manager for DSP mutual fund. Uh and when you look at his uh structure it it is built on three solid pillars. What are those pillars? Valuations matter. Nobody knows. Structure beats activity. Each of these are extremely powerful now because the future is uncertain. We should not pretend to know the exact value of a business. Right? So as we said initially that we should know how to value a business that could mean that uh you know we actually know what the exact value is but that’s not true. It’s a moving number. It’s a fuzzy number but we should actually just know maybe the boundaries where are we you know uh we need to know are we in the vicinity of what could be the value of a business and that is why we are trying to calculate it. So instead uh what Abishek says we should understand the business and its sector well enough to know what is a conservative and what is an aggressive estimate and then we build a band around that and that is what I mean by saying that we don’t know the exact number of what should be the valuation right so when you look at the you know chart that he shared at the lower end of the band the price is implying conservative assumptions the assumptions about ROIC earning growth, earnings multiple at the lower end should be low and uh they should be logical. That is where you initiate a buy position. At the upper end, the price is implying aggressive assumptions about growth. You know, there is extrapolation of peak earnings, peak margins, peak ROIC’s and those are extrapolation errors. That is where you should take a more conservative stance by maybe selling out or avoiding some of these names. Right? And in the middle is where you know this framework helps a lot. It tells you to do nothing. You know this is the hardest part. So most investors uh they don’t fail because they do not know enough. They fail because they cannot sit still. Right? They keep on uh acting and they keep on doing something. Abishek’s framework it tells you that inactivity is not laziness. It is actually discipline. uh so as John Milton wrote uh they also serve who only stand and wait. I think this is something which is an important ingredient of this framework that only when extremities arise is where you act decisively at other times you just wait. So the purpose of valuation is not to give us constant activity. The purpose of valuation is to know when activity is justified. This structure improves the odds of getting lucky without needing precise forecasting. You don’t need to be precise. You just need to know where you are um in terms of you know aggressiveness or conservatism. And uh this is I think how a good process works. It uh does not eliminate uncertaintity. It puts you in the right zone when that uncertaintity uncertaintity becomes favorable or it becomes unfavorable.

Second framework that we’ll talk about comes from Harish Krishnan the CIO of equity for Aditya uh Sun Life Mutual Fund and he shares his good to great framework. Now this framework um identifies scarce companies that are difficult to recreate especially in beaten down and complete down down and out sectors. So in most sectors only a few companies are truly great right it’s a sort of a parto principle and as harish has put it great companies are roughly about 5 to 10% or 5 to 10 in 100 good companies are about a fourth of the 100 or maybe 25 to 30% and majority of the companies are just mediocre so maybe twothird of the universe is just mediocre now this is very very important because most companies are not great they do not compound cleanly Over time they are more half a halfazard in nature and most companies do not deserve premium multiples for long period although market gives premium multiples repeatedly to different companies over time. Right? So we need to ensure that we do not extrapolate those premium multiples. Now great companies usually have certain traits and uh now this is a very very important point uh that these traits are inherent business advantages and they are not excelbased back tested optimization factors right we might come up with a you know excel look at all the companies and look for what traits they identified and then say that this is what makes a great company but these are actually inherent business advantages right what are these these type of advantages. Most of these great companies are customer obsessed. They think from first principle. They attract exceptional talent. They use technology. They build scarcity and competitors can discuss them but they are very very hard to replicate. And as Harish writes that the mode that lies between uh knowing and doing, right? Many businesses know what to do but very few are able to act upon it. And the companies which act upon it they become great companies. Now what is the most interesting aspect of this grade to good to great framework that markets do not always reward great companies right the companies which are already great they may not be rewarded at all all times uh from the 2001 to 26 study which is shown in the deck greatness is often priced in right so where does the asymmetry come from it comes from a good company becoming great or a bad company becoming good and a mediocre company becoming investable. So this is the transition which happens which creates opportunities. So the data deck shows that uh these upgrade journeys from let’s say good to great or from mediocre to investable uh they create excess return. So good to great transition has created 18% excess return over a 3-year period. Now this is uh very very fascinating right bad to good 17%. And uh downgrades which were very painful they created negative excess returns or negative returns of minus 10%. Now this tells you that how you know these transitions help. So what uh overall it tells you that market rewards improvement more than the labels. So there has been a mistake over a period of time that u uh translates labels into investing saying that this is a great company therefore it will create great outcomes but that is not true. So we don’t need to ask is this company great? Okay. So what we need to ask is what is changing? Is the company improving? Is it jumping from one profile to the other? Is ROIC rising or falling? Is cash generation becoming more reliable? Um and capital allocation is improving or not? Is the company moving from one bucket to the other? Right? And uh business is uh cannot be valued just by labels but it should be valued or given more preference to with the improvement in process and the market rewards that improvement and that is the framework is all about the good to great framework from Harish Krishna.

So uh next we will discuss a framework which comes from Ramnik Kundra of DSP pension funds and uh this is the third framework that we discuss in terms of equity pricing. Uh and Ramnik says I do not start a valuation to find an answer. I started to find a disagreement with the price. Now now this is very very important because most people they build their models to get a target price. uh but a target price can create false precision. You might actually think that my model is given a target price and the actual market price is below or above it and therefore I’m going to act upon it. Ramnik says a better question to ask is is today’s price already assuming uh you know what should be the business fundamental what what is it pricing it right that that could be a a question that we should ask even if you go in the deck and you look at you know Ron Konar of PPFS and Bhavin Gandhi of DSP mutual fund they’ve also presented their insights on how to evaluate market expectation and what’s priced [clears throat] but coming back to what Ramik says if a stock is expensive it may still be worth buying if the expectations embedded in the price are too low. Now this is very important it gives valuation much more nuanced color. So by conventional methods of let’s say price to earning or price to book a company may appear expensive but if we are able to find out [clears throat] what is the market pricing in they it may not look too expensive and the other side is also extremely critical where Nick says that if a stock is cheap on conventional method it may still be expensive if the price correctly discounts falling profitability. So he he’s working backwards in these examples. So one example that he’s given is of Nvidia. Given today’s market cap, what growth rate must the business deliver to justify the price? So this is where he wants to find out whether the assumptions are reasonable or not. The Nvidia example in the deck, you know, makes this point very very clearly. Uh at the time of writing when this deck was made, Nvidia had a market cap of about $4.5 trillion. free cash flow of about 97 billion and revenues of about 216 billion. So for a 5.4 trillion market cap to make sense, Nvidia free cash flow would need to grow at roughly 18% for 10 years from 97 billion to about 500 billion. Now here the 18% number is uh is uh not an assumption, right? It’s an output of a reverse DCF that Ramnik did and he’s put down his number here. Now this growth may be possible what is the growth 18% over 10 years right but one question that Ramniki asks is is it probable enough and is the return that will occur after this compounding happens is that return possible is there enough margin of safety right now the deck also gives this context it tells you that the total global data center capex today is around 600 billion so the at today’s market price of Nvidia. The market is asking Nvidia to eventually generate more cash than today’s entire global data center economy uh spends in one year. Now this is very exciting. Uh he also gave an example that Apple compounded free cash flow at around 23%. For Nvidia the asking rate is 18% but that was from a much lower base of around $10 billion. In Nvidia’s case it is nearly hundred billion. So the odds are very very high right and this is the power of reverse valuation or you know discounting what the market is discounting as of today. It it doesn’t say whether the company is good or bad. It says the price is asking for a very rosy future. what Ben Graham has said uh you know the glorious future and even the most uh and more useful in the tech is the scenario analysis that he has shown where bull case it shows that even if you compound at 18% for 10 years you still value Nvidia at 5.2 trillion which is still below its current price and when you look at the bare case it’s compounds uh at 8% for 10 years and then you value Nvidia at about 2.4 4 trillion that is a massive 55% downside right and he says that if you want a 30% margin of safety you value it around 2.4 4K [clears throat] right which is massive 50% 57% downside. Now the idea is that he’s not ascribing a target here. What he’s doing a scenario analysis on at what price or at what market cap will it make sense to own this stock and see what under what scenario will it produce the given compounding right 8% 12% or 18%. So the conclusion is not whether Nvidia is good or good or bad. The conclusion is even if you have great companies uh they it can become difficult in they can become difficult investments when price has already consumed the future right or in other words or I will put it in my words that buy at any price is an illogical illusion. Right? This is the essence of equity valuation done through the method of inversion which Ramnik has showcased brilliantly. Um similarly in terms of you know future expectation what the market pricing in Ronuk and Bhavin has given their frameworks which are also uh very very useful. You should go uh through them in the tech. Um so the key point is that we need to learn to value businesses. We need to you know build valuation bands which is what we learned from Abhishek and look for improving quality which is the good to great framework and reverse engineer expectation. These are some of the important ideas uh you know in the equity frameworks and do refer to inputs from tjas sha fmcg punit kurana on how to go about the complete valuation frameworks and uh uh kal sha’s forensic uh accounting on how to identify pitfalls all of them are part of the tech vinit samre has also highlighted how quality growth and valuations play a huge role in how he selects and weighs his businesses. So you can read all of these frameworks. This is the part of the equity main deck. Now I will go to uh the debt frameworks. You know um debt is very different from equity in one sense. You know bonds are uh easier to mathematically calculate. Cash flows are defined, maturity is defined, coupon is defined. The biggest over uh over overarching factor is the interest rate. Right? uh the but bond market valuation is still difficult because this anchor keeps shifting. Now we’ll go to the first framework from Sues Chri where he says that making frameworks is very very important but bonds seldom follow one standardized framework right so sometimes you will say term spreads matter a lot sometimes year real yield will matter there are times when India versus US rate differential will matter at other times we’ll have pop and current account uh you know becoming the mainstay and maybe at some other time RBI liquidity your supply demand dynamics of government borrowing that will dominate everything. So debt valuation is not a single number. You can’t rely on one excel sheet and come out with an output. Uh he says that it’s a framework of macro anchors. So that the deck shows multiple variables. It shows the India 10ear GC yield spread versus overnight rates. the India US spread real rates India’s current account balance India’s basic balance the important point is not only where each data series is today the important point is which of these series is actually driving the market right for example if you identify a steadily compressing current account deficit it may help you identifying a rate rally where you know rates fall rapidly. Maybe we are in one such uh you know place right now where you’ve seen some movement in rates based on how current account is moving. But this framework also has a shelf life. So Suesh writes that you can create a number of these frameworks and uh the key idea is that you uh continuously monitor them for their shelf life right and they will come and go. Uh they will not stay. Every macro framework has a shelf life and uh a debt investor must constantly ask is the framework still alive. Uh has the drivers changed? Is the market responding to inflation, fiscal supply, currency pressure, global yields etc. And the answer to the these questions is not easy. And therefore asking them again and again is very very important. Right? uh um maybe if you look at you know valuations and positioning uh you can see that maybe Indian debt is somewhere uh becoming very very interesting today. uh think about it when uh real yields are high, inflation is controlled and the rupee is not under major BOP stress and that is the time where duration becomes attractive from a framework perspective. But if flows disappear, oil spikes, you know, currency pressure rise, what happened over the last 2 to 3 months, then same duration trade becomes uh a point where you need to reassess, right? So it is not just about yields. There are many other factors which come in uh you know influence the overall market. It is about knowing what yield is compensating you for. Right? So when you look at the current driver of GSAC market uh there seems to be right now they seem to be global flows in RBS ability to handle liquidity. This means keeping a tight track on global flows can help create a better framework for wants at this point in time. So but these frameworks will keep changing as Suesh has pointed out but these are some of the most relevant factors which will help you identify trends in the bond market. Next we’ll go to commodity uh the cycles and uh we’ll talk about uh what do they mean and I have moved commodities and I’m going to talk about them before currencies uh because they act as a useful bridge. They sit between the business cycle, inflation cycles and currency credibility.

uh we will use two frameworks one for normal commodity businesses and then we’ll go to gold and silver. So if you look at uh uh how to value commodity businesses from ionic has shared a framework on memory semiconductors and it begins with a very simple rule that commodities work best when demand is greater than supply and supply cannot catch up soon enough. Now this is sort of a framework where uh huge books are written like capital returns a very very important framework uh and I think this is the heart of commodity investing when it comes to commodity equities or commodity businesses. So in a commodity business the PE or DCF and growth multiples are not the starting point they are the output at most points in time or maybe they at best are certain inputs to your end decision making. So the input or the most important parameter is the supply demand balance. For example, in this case, Ankita has shown the memory cycle, right? Uh memory is a commodity business. RAM, NAND, U high bandwidth memory or HPM all are standardized products. Buyers are relatively undifferiated. Unit pricing power is limited. Uh uh there are a few interchangeable players like Highex or Micron or Samsung. Um if you look at the deck it shows that uh dram uh all of them their inventory days peaked in about 2023 glut and they moved toward leaner conditions in 2025 that suggests that there was a supply discipline by the time we reach 2025 and as you see the price index or HSP uh index shows that HPM uh it decoupled from legacy memory right uh all of them were in recovery gross margins as you can see in the graph they uh troughed or bottomed out in FI23 and they started recovering into FI25 and in FI26 also uh they were recovering. So the demand supply data is especially useful. So if you look at from 24 to 27 uh the deck tells you that demand was exceeding supply across all segments. In case of DRAM, DAND, HPM, HDD, demand was and is still much higher than supply. Now this was a proper commodity uh cycle framework. Some of you might remember that a very similar framework played out in gold mining equities uh just two years ago and we had uh highlighted that in the past issues of uh tspra. In this case uh this framework is not telling you that semis are exciting or AI is big or the stock is cheap. What the framework is telling you is the demand higher than supply. Is it uh becoming difficult for supply to catch up? Are inventories falling? Are prices rising? Is there margin improvement? Is the capital discipline intact? And all these if you get you know take on let’s say seven out of six out of seven it present to you great investment opportunity and it did uh some time back. So u it makes a very crucial practical point that there are only around seven listed names in this space and choosing one of them based on financials, gross margins, inventory days then becomes the key challenge for the analyst. Right? So in cycllical businesses timing is extremely critical. A low valuation plus turning momentum is a great opportunity. high valuations and rolling over of momentum in terms of supply and demand that becomes a big red state. So the rule for uh evaluating commodity businesses is do not value a commodity business like a compounder. You can’t because it is more cyclical and a cheap stock can be expensive at the wrong point in cycle and an average business can be a good investment at the right point in cycle. So this is a important distinction uh for commodity businesses. Now we’ll actually go to commodities uh which is gold and silver and as you know that gold and silver require a very different framework. Many of you who’ve tracked DSP Netra has seen uh how to value gold and silver framework earlier also. And this framework relies on saying that gold is not just a commodity. It is also a monetary asset. So if you go back to Rajie’s first question, it was that uh gold doesn’t generate any cash flow. So we cannot value gold with DCF. So we need some other framework to value it. So this DSPRA framework treats gold as money. Uh the core idea behind this framework is that gold is the ultimate global monetary base. So to find its theoretical value or fair value, the model takes the total money supply and then divides it by the total amount of gold ever mined. Right? So you can look at the data. It uses about 7.1 billion troy ounce as the above uh ground gold and it also then uses the US M2 of about 22.7 trillion as the main monetary base. And why does it take only the United States as the primary base? Because US dollar is the primary reserve currency and most widely accepted tender. If you can um you know you can go and check you take any other currency globally uh it will not be accepted. And why not M3 or any other monetary base? Because they are influenced by credit. We are not trying to find here credit multipliers. We are trying to find here the monetary base. That’s why using M2 is very very important. And then also it also excludes countries which are very large like China, Russia or India. The reason is very simple because their currencies are not universally acceptable. And once you get uh the value of gold in US monetary terms and then you convert it into let’s say a rupee or a Chinese remnim or Russian rubal the inflation factor will automatically account for the monetary debasement in these countries. So though you don’t need to take them again. Why is the euro included? Because euro of course is the second largest reserve currency partly being used as a reserve currency globally. More importantly, the usage of Eurozone monetary reserve or monetary base is a proxy for the Euro dollar market. The Euro dollar market is the amount of dollars which are circulating outside the United States or outside the jurisdiction of the Federal Reserve but they still act as a dollar which is a dollar market. So because it is very difficult to estimate the Euro dollar market uh we’ve taken half of Euro zone reserves. It’s a very very conservative estimate but it gives you a fair idea of how what it should be. Now this is the framework which gives youly at around $43 to $4,500 or so or $4,500 is the fair value. For valuing silver the framework is different. It uses the simple gold silver ratio and it takes 60 as a base ratio. You can alter this ratio. You could say that it is 50 or 60 or 70. It is completely up to you. It’s a subjective argument. But make sure that you are on the side of caution. Right? For silver it is much more logical to become interested when gold silver ratio is 80 or 85 or higher. That is where you will get margin of safety. arguing that silver gold silver ratio will go from 60 to 50. It might go but it will not leave any margin of safety on the table. So for interested buyers I think it will become logical when this ratio goes to 8085. It goes from time to time. If you go to the main tech you’ll also see Kapil Gupta’s framework from NUMA. He also talks about gold uh and values it using USD balance sheet. uh he sees gold as more undervalued. His uh framework shows that gold has much more room to rise. Uh and he argues that there could be much higher prices going ahead and it’s a very very fascinating framework. Uh it’s available in the tech. You can read about it. But the distinction is very clear that gold is valued as money. Silver valued relative to gold because it has become very difficult to find the monetary value of silver. It’s more or less disconnected for the last 60 70 years. Industrial commodities per se they are valued through supply demand cycles not through monetary basis and therefore using ratios between copper and gold becomes meaningless and cash flow generating businesses they are of course valued through future cash flow. So the commodity businesses are very unique. You need to value them both as a uh a commodity and also as a uh cash generating machine. uh but you can’t fit one process to all and that’s why we’ve spoken about this. So [clears throat] last we’ll talk about uh currencies and uh I’m sorry second last then we’ll go to credits. Now uh in terms of currencies uh there is no one single parameter to you know v currencies and we come to Madi Auroras from Madi Aurora’s framework from MK and uh as you see in the deck she begins with a very honest admission that there is no single model that works consistently in FX. uh there are a number of uh models she’s presented PPP interest rate parity rear beer and fear uh indicators balance of payment terms of trade RBS reaction function capital flows all of them are extremely critical uh for instance who would have imagined that four decade low inflation most benign current account deficit and no major increase by July and you will see major rupee weakness that is what has transpired in the last one and a half years because of some extraordinary circumstances. So we’ll some of we’ll see some of the indicators that she’s mentioned. Uh PPP that’s a long-term anchor right. If India inflation averages 6% and US inflation averages 2% uh when then using inflation parity you will see that over a very long period INR should depreciate by around 4% against the dollar. These are inflation differential but um also PPP if you go back to that is not useful for the short-term timing right interest rate parity is useful in liquiditydriven cycles and carry trades but in India it works better as medium-term model not as a short-term model and the forward premium market can be distorted because there are lot of uh activities by the central bank rear is more useful as a valuation gauge and rear adjust currency for trade trade weights and inflation differentials and uh if you look at the tech it shows that India year is currently around 90 it’s near decadal lows and around uh 10year y uh lows also it’s a very important signal it suggests that rupees no longer expenses on expensive on year uh but even here we must be careful right part of rear move can come from lower food inflation which does not necessarily improve competitiveness so our inflation is much lower maybe because just because of food and therefore rear might be misleading and therefore u energy terms of trade uh pressure matter a lot when you you’re looking at rear so then you mix and add beer and fear as more fundamental lenses when you look at beer or be eer it looks at productivity differentials terms of trade and cyclical factors and fer is what currency level is consistent with internal and external balances which is nothing but your balance of payment. So if you put it in layman terms what we are asking is is the rupee overvalued or undervalued versus trading partners. Is inflation helping or hurting? Are real real yields differential supportive? Are terms of trade worsening or improving? Is the BOP under stress? Is RBI likely to resist or allow adjustment? Even if you create a checklist like this, it can become a very very important uh uh you know indicator checklist to help you take better decisions. Uh the conclusion is very very important that FX models they are guidance tools. They are not uh turning machines or turning point machines, right? You can’t pinpoint turns but of course they can give you those fuzzy boundaries of where you are. Are you in a place where you know things can worsen rapidly or they might maybe worsen slowly or might eventually turn right? So they can tell us the riskreward u improvement points but they cannot tell us the exact price or date. Right? So it’s not a one fair value number. It’s a dashboard of pressures. That is what it is. Uh today if you look at rear it’s near decade lows. Boop stress appears manageable. If oil stays contained and flows improve rupee assets they can become very very attractive. So these have practical implications. uh it matters for large cap stocks where valuations are attractive long duration GSAC and also for India allocation. So as you see currency is not just the exchange rate it is actually the balance sheet expression of a country and it can help you take very good timely decisions also. Last we’ll move to the most uh difficult segment which is credit and one of the most important also and uh I’ve kept it deliberately at the end because it’s the most unforgiving asset class. So here we go to Mr. a couple singles uh which who is MD of uh true north uh his framework and uh he says that it’s a asymmetric asset class right if credit is asymmetric the upside is capped and the downside can be permanent and uh there is no multibagger in private credit that can cover a bad loan so the job is not to pick multibaggers or winners the job is to avoid losers that is the primary objective of this asset has uh he says that the first truth in credit is that collateral is not a thesis. It’s a recovery tool. It’s a behavioral deterrent and if the deal needs credit uh the collateral to work from day one then probably underwriting has not been done properly. The second truth that he shares is that enforcement in India is slow and costly and uh so collateral can align the borrower but it does not fully protect the lender. So it’s only one tool in the arsenal. The third truth that he shares is that investor experience portfolios not individual deals. Right? So there is merit in looking at it holistically as a portfolio. The deal may look good but a portfolio can still be badly constructed. So the framework uh that he shares has three plans. Plan A is cash flows. Lend to highquality companies. Keep teners short. Demand regular coupons. Underwrite cash flows uh not asset cover. Plan B is collateral. Uh use it as a recovery tool not as an investment thesis. It’s very very important. Um and plan C is portfolio construction where he says that concentration limit should be applied, sector spread should be applied, there should be tenor discipline, vintage mix and uh more deals rather than fewer deals. So you need to spread your bet significantly. And the deck gives a very useful comparison. International credit funds often run single deal exposure to around 2 to 4%. In India 10 to 15% single deal exposure are still common right so there is uh still wide distribution [clears throat] globally but in India it is more concentrated and he says that there is merit in uh reducing the deal size and looking at it as holistically from a portfolio approach point of view. uh and he says concentration is what kill credit portfolios right uh 12% yield does not protect you from a 15% position going bad so the credit process in short is cash flow first collateral second portfolio construction always and in India he says plan C is not an option it is the strategy where portfolio is extremely critical um so eventually you know valuations in credit is all about survival we need to survive for a very long period of time. So with this I think we’ve come to all the closing on the all five asset classes. Um what uh you know survives through cycles is the process and um as you can see we mentioned the it’s a grand shrine it has survived because there was a process uh investing also survives through the process right in equities the process is to reverse engineer expectation demand high margin of safety in debt it is to know which macro anchor is alive at what point in time and which one is dying in commodities uh it is to separate cash flow create frameworks and in currencies it is a checklist dashboard of um you know factors that can influence and not one number uh predictions. Uh in credit uh it is the process to avoid losers respect asymmetry and build portfolios that can survive mistakes. So across all these frameworks across all managers um the message is very very similar. it is do not worship price, interrogate price, right? Uh do not outsource your judgment to a multiple or a thesis or a narrative. Understand what it is hiding, right? And to some extent many of the practitioners that share their frameworks with us um inherently or to some extent are have some contribuency in them. uh they think differently from uh what the crowds are thinking at at what point in time. The investor’s job is to build a good sound process which can survive the future and the fifth anniversary edition for of DSP Netra is all about this and not just a collection of thoughts. So we’ll um end the call here and u thank you for joining in and we’ll see you next month with fresh insights.

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