Talking Point | With #RBI's MPC just around the corner and #oil prices on the rise, #AvendusSpark's Ganeshram Jayaraman shares his views on market and impact on earnings. #BQLive
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00:00 Mr. Jayaraman, thank you very much for joining us on BQ Prime.
00:09 You know, we're going through a lot of volatility with respect to commodities, and then we had,
00:16 you know, you have consumption issues which are coming in.
00:19 My first question to you is primarily on the consumption trend.
00:24 How do you see the consumption trend in the last six months because we have crossed two
00:30 quarters?
00:31 And do you see a pickup happening in the second half?
00:33 Morning, good speaking to you.
00:37 Consumption is a challenge.
00:38 We have been facing now for three quarters of data, maybe, you know, the current quarter
00:46 beginning October is a critical quarter, the festive season will give us a sense of how
00:50 it's shaping up, but consumption has been slowing down and that's one of our key concerns.
00:57 And when you slice and dice into the kind of consumption, moderating impact that we
01:02 see, I think it's a little cause for concern in the sense there is a challenge on mass
01:10 consumption across categories, be it staples, be it automobiles, be it consumer durables,
01:17 be it e-commerce, or various categories of discretionary consumption, including QSRs
01:23 or others, we are seeing volume growth moderate.
01:27 And that is a concern that we have.
01:30 Pricing had gone up in the 12 months before this.
01:34 So we did see, you know, companies benefit from the raw material prices, which eased
01:41 up in the first six, nine months of the financial year or the last six, nine months.
01:46 But whether that sustains, whether that continues to give you earnings growth as we go into
01:54 next calendar is a question.
01:56 So consumption is something that we are quite watchful about and watching data points, which
02:03 give us more confidence.
02:05 And so far, we are not able to see data points contributing to pick up.
02:11 You know, it's interesting, because we have a case where, you know, consumption is, you
02:18 know, sluggish in that nature.
02:21 But we also have a case where we have started seeing private capex coming up in the last
02:27 two quarters, two or three quarters.
02:29 Now, if consumption is not going to be sustained going forward, the private capex which has
02:35 been put in place or which is in motion, do you see some kind of a slowdown happening
02:40 in the private capex?
02:43 So no, actually, that's where the picture is completely dichotomous, because private
02:48 capex, we think, has started picking up and we think it will further pick up over the
02:54 next 12-18 months.
02:56 When we see corporate balance sheets, when we see the kind of capex being planned, which
03:02 is very import substitution in nature, not just domestic demand driven.
03:08 The MNC led capex, which is due to both the PLI as well as the whole China plus one angle,
03:16 the MNC's moment confidence on India.
03:18 So combination of all these things, private sector capex specifically should, in fact,
03:25 pick up post elections quite significantly, meaningful.
03:29 What we think can moderate or flatten out beyond the current year, beyond elections,
03:36 is government capex, which we think can step back vis-a-vis the last two, three years where
03:44 government's fiscal spend was a big impulse into the economy, that's likely to flatten
03:51 out.
03:52 So if consumption slows down, and if exports, including IT sector exports are weak or flatten
04:01 in that trajectory, and if government capex also flattens out, the key driver of the economy
04:09 of earnings growth is the investment cycle, especially private sector investment cycle.
04:14 And that's something that we are watching pretty closely.
04:18 And that to me is the most important driver of earnings growth or broader economic activity
04:26 or going in the next 18 months.
04:28 So what you're saying is basically that private capex that we have seen reviving is primarily
04:33 because for exports or import substitution, which is coming into play, and not the organic
04:40 demand, which may come in because of the consumption theory, which is based out, is it?
04:47 It's both, but all I'm saying is it's not dependent only on domestic demand.
04:52 It has legs beyond domestic demand.
04:54 So in other words, what I'm saying is, even if domestic demand consumption were to moderate,
05:02 our census management will still want to expand capacity looking into the future in the sense,
05:10 because it is import substitution and potential for exports adding to domestic demand, which
05:17 gives them confidence to expand their capacities.
05:22 So within the private capex space, which are the sectors that you see where you've seen
05:27 the maximum amount of capex coming in?
05:30 Renewables for sure, steel very likely, even alternate energy.
05:38 We think post elections, you'll see a lot of progress on that.
05:43 These are the more capital intensive sectors, maybe some extent cement as well.
05:48 So cement, steel, renewables, and the whole alternate energy, that's one area where that's
05:58 the larger segments.
06:00 Apart from this, the sectors such as the whole electronics, which is where the import substitution
06:09 is going to be very, very critical, or maybe beyond the next 18 months into segments like
06:15 semiconductors and others, but electronics in general is where we continue to see very
06:22 strong capex momentum.
06:25 Those are not very capital intensive, but they have pretty high asset turns.
06:30 So their impact on revenues will be quite high, but they are not very high upfront investment
06:36 sectors.
06:37 If you look at some of the traditional sectors which are contributing in the banking and
06:45 financial space, what is your view there given the kind of interest rate cycle that we are
06:49 at now?
06:51 And we've seen some outperformance coming in banks in the last one or two years, but
06:55 it's been a little quiet in the last couple of quarters for banking.
07:01 But how do you see the banking space turning out?
07:05 Because if the capex cycle is going to come up, you'll have to have more credit growth
07:10 coming in, and will that be a good driver for banking sector?
07:17 So banks are a sector we remain positive about.
07:21 Apart from industrials, these are the top two sectors where our positive stance is currently
07:29 there.
07:30 Specifically on banks, we think credit growth will remain healthy.
07:35 There will be some bit of margin compression, which is happening for the last quarter or
07:40 maybe two quarters, but we think that trend can sustain.
07:45 But it's not going to be very worrisome.
07:47 We don't see credit costs spike.
07:53 So the broader point is banks have well provisioned income statements, maybe over provisioned income
08:00 statements and over capitalized balance sheets.
08:04 So return on assets and return on equity both have potential for healthy trajectory over
08:11 the next 24 to 36 months.
08:13 So our confidence remains on various kinds of banks in that both PSU, large private,
08:21 mid-cap private banks, various kinds of banks remain in our top picks.
08:29 What about housing finance companies?
08:30 Because that's something which has been some of the mid-cap housing finance companies are
08:35 something which have been moving around.
08:38 What's your view on that?
08:39 We are not as positive on NBFCs as we are on banks.
08:43 We think the AAA NBFCs can benefit, but the others can see cost of funds impacting margins.
08:54 And our view on the macro is also that if oil remains around 90 and if exports are going
09:04 to decline, the second half and FY25 current account deficit will be putting the whole
09:10 banking sector liquidity to risk.
09:12 How the central bank wakes up and reacts to it on the currency front, on interest rate
09:17 front, we are not very positive on the broader macro.
09:22 So more caution on NBFCs, but we think that environment is actually good for bank margins.
09:31 On that point, how do you think the central bank is going to do tomorrow when it meets
09:35 the monetary policy?
09:38 I'm not very good at predicting this, but generally, I will expect no rate hikes, but
09:44 a kind of cautious tone suggesting that inflation is still a challenge and the rupee pressures
09:52 could be keeping them wide even at night.
09:57 So the tone of their commentary will make markets not get too confident on the outlook.
10:06 But no rate hikes.
10:07 Do you think the RBI will moderate the growth rate as well, given the kind of kind of...
10:14 We think so.
10:16 Okay.
10:17 Coming to the IT sector, because you've been talking about IT as well, how do you see this
10:23 entire thing panning out?
10:25 Because at one point in time, it was the most overweight for many, but in the last two years,
10:29 people have been neutral to underweight.
10:32 We've seen the maximum outflows of foreign money going from this sector, $15 billion
10:37 in the last two years or three years, which has flown out of it.
10:41 How do you see IT coming in?
10:43 And is there a way to re-look at IT from a point of view of the kind of margins they
10:49 are sitting on or the growth rate they are going to look at going forward?
10:54 No.
10:55 We remain cautious on IT.
10:57 We have been cautious on IT for more than two years now, and we remain so.
11:03 It's a large underweight recommendation from us on the sector, and we hold on to that view.
11:08 We think the constant currency growth will moderate.
11:12 There are some signs of pricing pressure, which has started more recently.
11:16 We are keeping a watch on that.
11:18 The silver lining is on the rupee for them.
11:21 If the rupee depreciates, it could offset some of these top line related pressures.
11:27 But in the way we've always seen, the rupee is a reason number five.
11:32 It is never reason one, two, three, four.
11:35 And our concerns are one, two, three, four look a little negative.
11:41 So we remain cautious on IT.
11:44 Interesting.
11:45 I was looking at one of your reports, and it mentioned that while personal loan growth
11:51 has been healthy, personal consumption has been weak.
11:56 How do you bring both of them together and give us a sense of what exactly is happening?
12:01 That's a puzzle.
12:03 I mean, I've never seen 28-30% unsecured personal loan growth or most categories of
12:13 retail loans growing, not on a low base, but on actually a pretty good base, it's growing
12:18 reasonably high.
12:20 With that base, what we should have not seen is the slowing down of household consumption
12:28 across categories, which I mentioned.
12:30 So where is the money going?
12:32 Is it going into servicing debt?
12:35 That's the question that we are asking.
12:37 Is it also finding its way indirectly into markets through retail flows?
12:47 That's another question that we don't have answers, but we are watching and we are trying
12:51 to assess if that is indeed the case.
12:54 But long story short, this dichotomy between credit growth on retail loans across categories
13:01 and the overall consumption moderation is something that we need to be very much watchful
13:09 about.
13:10 Your assumption on whether this unsecured loans which have been taken is flowing into
13:15 the markets is a very big red flag, right?
13:18 Because the moment returns start going negative, you're going to have a bigger issue with respect
13:23 to unsecured loans if this fund is actually going into markets.
13:27 I don't have data to say that it is indeed going.
13:31 But I am trying to assess if that is potentially, you know, anecdotally, is it happening or
13:37 not we need to assess.
13:39 But basic question is if credit growth into retail loans are good, but retail consumption
13:45 isn't picking up, where is the money going?
13:49 And retail household savings is also coming down.
13:53 So that's net saving, net outliability.
13:57 So it's a point.
13:59 And there is no way you can put a finger there and say, okay, what is the issue?
14:04 Is it a fact that they are looking at more discretionary spends using unsecured loans?
14:12 So we need to see, I know that something for sure about 20, maybe 25% of unsecured personal
14:19 loans are going into travel and tourism.
14:23 And that we are seeing in hotel occupancy or airports or flight or occupancy or thereabouts.
14:30 We are for sure seeing on about a fourth to a fifth of the unsecured personal loans.
14:37 But in absolute terms, over the last 12 months, unsecured personal loans grew about 2.75 lakh
14:44 crores from just banks.
14:46 Then how much from NBFCs, I don't have accurate data, but from banks alone, it's 2.15 lakh
14:52 crores.
14:53 So pretty large number on credit growth without commensurate pickup in demand in other categories.
15:01 Mike, next one was on the CAPEX cycle.
15:06 You briefly spoke about the fact that the public sector's CAPEX may slow down post FY24
15:14 because there may not be enough room with the government.
15:17 Do you see the private sector CAPEX, which is now picking up or catching momentum, able
15:23 to replace the public sector CAPEX and hence the investment cycle continues?
15:28 We think so because when we read up the study, the BSE 500 companies balance sheets, the
15:36 kind of cash flows they generate available for CAPEX, the kind of CAPEX that they have
15:44 been doing, we think there is room for companies to grow their CAPEX and that will be a driver.
15:53 And then the unlisted MNCs, you just see the number of global CEOs who have come to India
16:01 just in the last three months.
16:03 Unless they have some plans to expand quite aggressively in India, why will they come?
16:08 And we are watching it on the ground as well.
16:12 We are looking at India for expanding, be it for selling here or as a source of export
16:23 services and merchandise.
16:25 Keep that in mind.
16:26 The capitals, the global capability centers of some of the largest banks or even others
16:33 are now so high that the employee base in India is possibly more than almost a fifth
16:40 of their global employee base.
16:42 That's on services.
16:43 And then the manufacturing side, the B-line, which we are seeing, especially on electronics
16:48 and even some semiconductors, we are seeing some early signs, it will take time, but we
16:54 are seeing some pretty good progress on this front.
16:58 So the sector where we have our most confidence going into the medium term, next 18 odd months,
17:06 there is actually clearly private sector CapEx.
17:12 You're betting big on private sector CapEx, but private sector consumption is not picking
17:16 up.
17:17 Do you think at some point in time, it will be converging towards a particular growth
17:22 rate, both of them, with either the consumption has to go up to meet the private sector CapEx
17:28 or the private sector CapEx has to moderate itself to meet the consumption?
17:34 So do you think that will happen sooner?
17:39 So it will take time.
17:40 We think it will take about 18 months, typically for the current momentum on planned CapEx,
17:47 which will reflect in, it's reflecting currently in order books into project sanctions or approvals,
17:57 say by environmental clearances, or these are all lead indicators, right?
18:01 For them to actually translate into actual spend on the ground, credit growth to happen,
18:08 that spend converting into hiring and wages, that higher wages and hiring converting into
18:14 consumption, it is an 18-month plus cycle.
18:18 It takes time, okay?
18:20 It doesn't happen seamlessly.
18:22 So yeah, your point is right, that if the CapEx cycle happens, it will lead to eventually
18:28 consumption to pick up, but it's not going to happen overnight.
18:34 My next question is basically that if these are the setups which are there in macro level,
18:41 how do you filter it down to a micro and is there specific things that you're chasing?
18:47 And within that, how do you see the nifty earnings playing out?
18:52 So as I said, right, if consumption is going to continue slowing down, if exports remain
19:00 maybe flat at best, or maybe double digit or maybe single high single digits, year on
19:06 year decline, and going into next year, if the government CapEx is going to be flatter
19:12 in on trajectory, then we need to be a little watchful of broader level earnings growth
19:18 expectations, and if the macro on the current account and liquidity and all these, you need
19:25 to keep that into consideration and not be uber bullish, expecting 20% earnings growth,
19:32 okay, we will see downgrade.
19:33 So what in other words we are saying is, when we are recommending stocks, when we are telling
19:38 investors to buy, we will urge them to say, build some room for error, build some margin
19:44 of safety, some safety net in terms of earnings expectations in terms of valuations expectations.
19:52 What kind of managements do well, when the tailwinds are lesser, we need to keep in mind
19:58 many managements do well when there are very strong tailwinds, but very few do well when
20:05 those tailwinds stop.
20:06 So in other words, what we are saying is, managements who have a track record of delivering
20:12 performance across cycles, we need to start looking at them, they are actually underperformed
20:18 in the last 12-18 months, many of them across sectors, some in banks, some in consumers,
20:24 some in industrial cement, or even pharma.
20:28 So start looking at the managements who have a track record of performing across cycles,
20:34 and that's one.
20:35 Second is, as I said, sectors with tailwinds, which is basically the industrials and some
20:42 banks.
20:43 So I would have also said, which we were saying maybe three months back, six months back,
20:49 that sectors which have underperformed, if there are the best companies in them, like
20:55 in life insurance, or it could be in two wheelers, it could be in even in some pharma, but last
21:02 three, four months, even they have rallied.
21:04 So the pockets of underperforming sectors are now almost non-existent.
21:11 So that leaves you with option to go for the quality managements and sectors with tailwinds,
21:18 which is industrials and some banks.
21:20 That's where our recommended set of stocks to clients, our top picks are veering towards.
21:27 And how do you, what was the kind of nifty earnings growth that you penciled in the beginning
21:32 of April?
21:33 And what is it now, given the fact that you have all those, you know, headwinds coming
21:39 in or, you know, as you mentioned, the 1, 2, 3, 4 is looking very bad, the fifth one
21:45 is not so bad, but how the 1, 2, 3, 4 factors which you have spoken about, you know, impact
21:52 the earnings growth?
21:54 So ex-financials, it should be about early teens, including financials, it should be
22:01 late teens.
22:02 But financials have a lag impact of some of these macro plays into earnings with six,
22:08 nine month lag.
22:09 So next year, we are still looking at early teens earnings growth with some risk on downgrades.
22:15 It's actually not FY24 earnings that we are worried about, it's FY25 earnings, which means
22:22 the multiples is something that we need to watch and FY25 earnings.
22:29 What clearly comes out is that, you know, financials, banks and financials are something
22:33 going to be a safe haven going into FY25 as well, right?
22:38 Should so.
22:39 And, and so, you know, they will, many will be betting big on the banking side and maybe
22:45 consumption and other sectors may take a backseat and some downgrades may happen in other sectors.
22:52 Very likely, especially in, yeah, especially in exports and consuming sectors and consumer
22:59 related sectors, we should see some downgrades.
23:01 But industrials can continue to show pretty strong order book or lead indicators to earnings
23:10 growth momentum.
23:11 Because industries have been showing good order book growth.
23:15 Now, it's growing to two, three years order book, which is especially in defense sector,
23:19 which is the only challenge on that is the Jan, Feb, March is usually the quarter where
23:28 the highest order book momentum is demonstrated.
23:32 In the current financial year, it will be the quarter lead up to elections.
23:36 So many will defer their order books into a wait, just wait and watch till elections
23:42 mode.
23:43 So we might see a year on year decline in order books in the in that quarter.
23:49 And that can kind of give us some jitters.
23:52 The quarter may be slow on order book booking, basically.
23:59 That's what you're saying.
24:00 Yeah.
24:01 Ganesh Ram, Jayaraman, thank you very much for joining us on BQ prime and talking to
24:06 us.
24:07 That was Ganesh Ram Jayaraman, Managing Director and Head of Institutional Equities at EventDesk
24:13 Path, giving us a perspective from macro and micro levels.
24:17 Thank you for watching BQ prime.
24:18 Thank you.
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