HDFC Bank's Puri legacy hard to match; India an expensive market: Shankar Sharma

From HDFC Bank’s journey since its initial public offering (IPO) in the 1990s to the outlook for Indian equities, Dubai-based Shankar Sharma, founder of GQuant Investech, spoke with Puneet Wadhwa over Google Meet. In a wide-ranging conversation, Sharma discussed the challenges of succession at founder-led banks, his continued preference for mid- and small-cap stocks, why he believes FII flows have little bearing on market direction, the risks surrounding SIP-led investing.
Edited excerpts: You were a part of the First Global team had given a Buy rating to HDFC Bank’s stock post initial public offer (IPO) in the 1990s. From then to now, how do you interpret the bank’s corporate journey? Aditya Puri was an entrepreneur. He was a professional manager, but he started the bank.

He was the creator, the founder and the entrepreneur behind it. Any successor was always going to face a huge uphill battle to match Aditya’s record. I have no comment on Shashidhar Jagdishan himself because I do not know him. But filling Aditya’s shoes was always going to be a big ask for practically anybody.
Founder-led institutions go through the challenges that arise after a visionary founder leaves. Contrast HDFC Bank's show that with banks such as ICICI Bank or State Bank of India (SBI), which have never really been founder-led. They have traditionally been run by professionals, non-founder managements.

They may not have delivered the spectacular numbers of HDFC Bank at their peak, but they have been steadier players. Once the founder has gone, these banks have actually done better because they had the depth of bench strength and a clear succession process.
Succession keeps happening as a matter of routine. In a founder-led institution, there is often no real question of succession as long as the founder is around. That is the contrast I am drawing between banks that had founders and those that never did.

So, would it be fair to say that the era of founder-led companies in India may be coming to an end, and markets are increasingly rewarding professionally managed companies? I don't think we can say that at all. In the case of the banks we are talking about, it is showing that once the original founder leaves, it becomes a very difficult challenge to find somebody of similar calibre.
For non-founder-led banks, it is easier because they never had a visionary founder. They have had a process in place for years. They know people will come up through the funnel, get selected and take over. That said, one cannot generalise this to corporate India as a whole.

In fact, I would say the professional-management model, even in the West, has been replaced by founder-led models in technology. Almost every major technology company is founder-led, with perhaps Microsoft being one exception that comes to mind. The real issue is that HDFC Bank was led by founder(s) and are is struggling to find people of equal calibre.
Non-founder banks have had a steady succession process, and that legacy is now proving to be an advantage. There was a time when HDFC Bank consistently delivered 25-30 per cent growth in key operational metrics. Do you think it will be challenging for the bank—or any bank—to return to that kind of performance, given the way the macro environment is shaping up?

So, my counterfactual question is: if Aditya were still there, would he be able to do it today? My sense is that perhaps not close to that number, but he would definitely do better than practically anybody else around. I don't think he is going to come back and run the bank—that is another discussion.
But management matters a heck of a lot. There is no question about it. Founder management matters because founders know every single part of the giant machine called a bank. Aditya was a very hands-on manager. Those small things can matter a lot when you are running a company.

That fire in the belly comes when you are a founder. A professional manager is never going to do something like that because he has a limited tenure—maybe three years, maybe 10 years. A professional manager may be reluctant to do anything remotely risky because the upside is limited but the downside is unlimited.
Turning to the markets, is it time to revisit your call on the mid- and small-caps? No, not at all. I think that is the only space in India where you can make money. I have been negative on the Indian market for more than two years. In July 2024, I said I did not see the Nifty giving significant returns for the next four to five years, whether in rupee or US dollar terms.

I was very clear that the market had peaked in terms of its return potential. I call it my “lake of returns” theory. So far, the Nifty is down and has delivered negative returns both in rupee and US dollar terms, with the decline in dollar terms being quite significant.
Small-caps, meanwhile, are roughly flat in rupee terms over two years. So, at least small-caps have done better relative to large-caps. Over the last three or four months, particularly since March, small-caps have done amazingly well. That was exactly when I said, on March 11, that I thought small-caps would be the place to make money.

Since then, many stocks—particularly those that are more technology-oriented, whether consumer technology or companies serving data centres and the AI boom—have done phenomenally well. I remain very clear that this is where investors are going to make money.
The rest of the market is likely to be very average. Even today, while the broader market is down sharply, many small-cap, technology-related companies are doing pretty well. That remains the play. And I don't think this is going to be a three-month theme.

What is one widely held belief about the Indian stock market today that you think is completely wrong? The belief that FII inflows will change the direction of the market. This is just like any other old wives’ tale. It is not grounded in anything other than nonsense.
Buying always equals selling. For somebody to buy, somebody has to sell. FIIs have been selling over the last couple of years. Obviously, somebody had to buy what they were selling, and that has been mutual fund inflows. Mutual fund inflows have provided an easy exit for FIIs.

The belief that FII inflows will benefit the market and that the market will turn if they come back is simply not supported by any correlation statistics. What about systematic investment plans (SIPs)? Are they creating a false sense of security among Indian households that wealth can simply be built over time?
Absolutely, 100 per cent. SIPs have been marketed as a product that can deliver 12 per cent, 14 per cent and other such fantastical figures. These claims are made by people who have a vested interest in saying so. The (Hindi) word I use for that is 'swarth', which means self-interest.

Those who have a 'swarth' will obviously say what benefits them. You have to ask people who don't have a 'swarth' in the outcome. I don't have a 'swarth' in saying whether people should buy mutual funds or not. I am a global investor and look at it from a neutral standpoint because I have options to invest across the world.
When you manage or advise only local money, you are more likely to say something that directly benefits your own interest. People with “skin in the game”—or, as I would put it, swarth in the game—have made SIPs look like a very predictable product where you invest and get 12 per cent or 14 per cent.

I have a significant problem with that line of marketing. The “Mutual Funds Sahi Hai” campaign has also helped reinforce this perception, using celebrities and other promotional tools, which I find a bit over the top. Equities are hardly predictable.
They are highly risky. There is nothing certain about what will happen between today and tomorrow, next year or even three, four or five years from now. But the risks have been papered over while the returns have been magnified. People have been led to believe that they will make a lot of money by investing in equities, whereas the evidence is very patchy.

But doesn't the widespread adoption of SIPs democratise investing? The value of the game itself gets reduced when it becomes so widespread. Any game, for it to work well, needs a limited number of players. When you have millions of investors, the value per investor decreases.
That is simply how the game works. Everybody cannot become rich. Returns are finite. Just because five million people are playing the game instead of five or 10 people does not mean the returns themselves change. Returns remain what they are. But now those returns are being divided among millions of people instead of a much smaller number.

The SIP and mutual fund marketing has been very good. They have done very well for themselves, and I have no problem with that. Anybody running that business would do the same. But if you step back and look at it from a top-down perspective, the risks have been kept largely silent.
They have been economical with the truth. That is why people are now beginning to ask whether it was worth it and whether it was the right thing for them. My belief has always been that equities are a rich country's product. They are not meant for low- and middle-income countries because equities are a risk product.

When you don't have much income, you cannot put more than a small amount into a risky product like equities. Where do you find value in the market right now, in India and abroad? There is no value in India. It is a 100 per cent expensive market. In India, value is always a trap.
The way we used to define value was a 5-P/E stock, a 7-P/E stock or an 8-P/E stock—something that looked very cheap. But the way we defined it in the 1990s was that the P/E ratio was effectively the number of years a company was likely to remain in business.

A 5PE stock would survive for five years; a 7PE stock would survive for seven years! India is a very smart market. Nothing is cheap without a damn good reason. Value is not where you make money in India. It never has been. You have to buy momentum. Momentum is in technology, and I don't see that slowing down because I believe the AI infrastructure boom is going to last for a while.
It is not like the broadband boom of 2000. I think this is more durable. There is growing concern that AI-related capital expenditure in the US is getting out of control. Do you see parallels with the 2000 technology bubble? Obviously, anything can collapse.

There is no question about that. But you have to keep one thing in mind. The hyperscalers—there are six, seven or eight major companies that are essentially driving the entire capex cycle—are, almost without exception, led by people who have seen the 2000 technology bust.
Excluding companies such as OpenAI and Anthropic, the others have been around for 30, 35 or 40 years in the technology business. Their founders or senior management were around during the 2000 bust. They saw what it caused. AI CapEx boom is here to stay.

If you look at the returns and the IRRs, you are talking about businesses generating 18 per cent, 19 per cent, 20 per cent or 21 per cent internal rate of return (IRR). And AI is already embedded in our lives. Within two years, it is difficult to imagine a business that can function without it.
It is like the internet on steroids. The demand potential of AI will keep expanding. The people driving this are among the best management teams in the world, and the return potential is around 20 per cent IRR on average. If you are borrowing at 7-8 per cent in the US and investing at 20 per cent, the value creation on capital is unbelievable.

If the management teams doing this know what they are doing, as I believe they do, this can continue for several years. That means companies supplying hardware, infrastructure and the plumbing to these hyperscalers should do well. The hyperscalers are taking the market risk because they have to lease out the capacity.
But if I am supplying a connector, a cable, an air-conditioning system or power equipment, my business is effectively assured. You can see that in the order books of many Indian companies supplying the hyperscalers. Whether it is servers, connectors, optical-fibre cables or other data-centre infrastructure, much of this plumbing is sold out for the next two years.

So, I am very optimistic about this part of the market globally and, therefore, about the Indian companies supplying this boom. That is why, when I say small-caps are good, I am making a distinction. I am not saying every small-cap is good. But the companies supplying the new-age AI capex boom could do very well.