Motilal Oswal Private Wealth calls 2024 a 'walk the talk' year for investors.
Niraj Shah in conversation with their 'A' team Ashish Shanker and Nitin Shanbag on Alpha Strategist.
Niraj Shah in conversation with their 'A' team Ashish Shanker and Nitin Shanbag on Alpha Strategist.
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00:00 Well, thanks for tuning into this conversation of the Alpha Strategist.
00:12 It's a monthly product that the Motilal Oswald Wealth Team comes out with and the men involved
00:17 in the product, Ashish Shankar and Nitin Shanbhag join me right now to talk about this month's
00:22 issue and they're calling it walking the talk after calling 2024 as the year of the all-rounder
00:29 where you need all the asset classes.
00:31 I presume, gentlemen, thanks for joining and I presume that what you're trying to say in
00:35 this note is that the belief around the year of the all-rounder and the good times continuing
00:41 have gotten emboldened or gotten verified, if you will, by what the finance minister
00:47 has done in the union budget.
00:50 How important is that for the investing implications for the year at large?
00:54 Hi, Neeraj, thanks very much, it's always a pleasure to be on your show and talking
01:00 to your viewers.
01:01 So you're right, as you know, we set the tone for the calendar year in January and clearly
01:09 our view was that all asset classes are looking fine and this is a year where we are advising
01:16 investors not to go overboard on their asset allocation on any single asset class.
01:21 So if you have a certain asset allocation mix which is working for you, just stick to
01:26 that because whether it's gold, fixed income or equities, all of them look reasonably attractive
01:32 and balanced as far as their own valuations are concerned.
01:36 February, the Alpha Strategies note was centered around the budget because that was the big
01:42 development, the interim budget.
01:44 Now it is titled walking the talk and as the name suggests, we believe that the government
01:50 has basically stuck to the core principle of fiscal consolidation and this is really,
01:57 really refreshing because we are going into an election season and generally there are
02:01 expectations built before the election budget that there will be freebies, there will be
02:07 giveaways, there will be incremental allocation to welfare schemes.
02:11 As opposed to that, this government has really been very clinical about the budget.
02:16 What they have done is they have given a clear path on fiscal consolidation over the next
02:21 couple of years.
02:22 If you recollect, post-COVID, we were comfortable with a slightly higher deficit because you
02:29 had to do a little more on the welfare side, the economy slowed down, the tax to GDP collections
02:35 came down.
02:36 But over the last couple of years, we have had a reasonably good recovery and now the
02:40 government has again put the economy on a path of fiscal consolidation.
02:46 We believe, and the other big thing, Neeraj, is that if you look at the quality of expenditure,
02:52 that is improved again.
02:54 What we are seeing is higher allocation towards capital expenditure, lower budgets to revenue
03:00 expenditure.
03:01 So essentially, this government is saying, hey, we are going to keep the budget deficits
03:06 tight, we are going to spend more on CapEx, which will spur future growth for the country.
03:14 This is a big signal, especially to foreign investors, and it is a big signal from an
03:22 economy point of view, because a better fiscal deficit means better currency stability in
03:29 the future.
03:30 As you know, most foreign investors, when they come to India through the direct route
03:34 or through the capital market route, they like continuity in policy, they like a stable
03:39 currency, and they like the fact that the government is essentially walking the talk.
03:45 So we believe it's a good interim budget.
03:48 Of course, we have to remember that it's an interim budget and there will be another budget
03:51 post the elections.
03:53 But the signaling is extremely strong, and they have kept the currency in mind, and they
03:59 have kept the fact that as a country, we continue to require a lot of foreign capital in the
04:03 future to build out some of the infrastructure that we are trying to build.
04:08 So it augurs pretty well for fixed income markets, because this ensures that there is
04:12 no crowding out in the debt market from a government point of view.
04:16 Hopefully, we will see a lot of FDI money coming into fixed income as well as we get
04:20 included in some of the global bond indices.
04:24 From an equity standpoint, it gives continuity on the policy front.
04:29 So all in all, good budget, and we are happy that the government has walked the talk when
04:35 it comes to the overall measures.
04:37 Yeah, Nitin, you are out and out in numbers, man.
04:42 And forgive me for bracketing you that way, but it just stands out when you talk.
04:45 So I'm trying to understand what numbers stood out for you.
04:47 Now the budget is long digested, right?
04:49 So everybody's bored of it if we talk about the budget.
04:52 But I'm sure you have a data point or two which could be so interesting.
04:55 So Ashish has laid the context beautifully.
04:58 Now supplement this with maybe a number or two which stood out.
05:01 Sure.
05:02 So talking about fiscal deficit itself, we are talking about 5.8% for this year, coming
05:08 down to 5.1%, which is rather significant.
05:12 But the path towards fiscal consolidation then lays down a 4.5% number for FY26, which
05:19 looks aggressive, but the fact that they did not do much as far as populism was concerned
05:24 is a big merit.
05:26 Now translate this into borrowing programs and tax collections.
05:32 The tax collections through GST alone have risen rather dramatically over the last couple
05:37 of years.
05:38 FY22, the average monthly collections were about 1.2 lakh crores, which have increased
05:44 to about 1.5 lakh crores in 2023, FY23, and which will close in our, possibly around 1.7
05:55 lakh crores by the end of FY24.
05:57 That's a monthly number, right?
05:59 So that's rather significant.
06:01 What this has done is it has allowed the government to borrow less from the market.
06:05 So last year they were talking about borrowing 15 lakh crores.
06:09 FY25, they are looking to borrow just about 14 lakh crores.
06:13 Now couple all of this with whatever Ashish was mentioning in terms of potential inclusion
06:19 in not just the JP Morgan index, but other global bond indexes as well, because now Bloomberg
06:25 is also talking about, or rather having a serious conversation about adding the Indian
06:30 government bonds into their bond index.
06:32 The 10-year G-Sec in India has come off from about 7.4% down to about 7.45% as we speak
06:41 today.
06:43 And this is a rather dramatic year drop without actually the RBI doing anything as far as
06:50 interest rates are concerned.
06:51 So already investors who invested, as far as our advice that we've been giving since
06:57 October on the 10-year G-Sec, they are sitting on a capital gain of 1.5% to 2% in absolute
07:03 return in addition to the coupon that they would receive on a year-on-year basis.
07:08 So we are rather happy that things have kind of played out the way they have.
07:13 And it still merits allocation to the long-term G-Sec.
07:19 You would need to calibrate your fixed income allocation as we've been advising over the
07:24 last few months.
07:25 I think some of the other things that you could do is get into multi-asset solutions.
07:31 Some of those multi-asset solutions that operate as fixed income alternatives will actually
07:37 give you full indexation benefits if you invest anywhere from now till the end of March and
07:42 hold them beyond March of 2027.
07:46 So automatically most of the yield, which today powers between 7.5% to 8%, will come
07:51 to you almost tax-free.
07:52 These are some of the ways that I can articulate in terms of numbers on how you can construct
07:58 fixed income portfolios at this stage.
08:02 Thanks for that.
08:03 And some interesting observations from both Ashish and Nitin on the things.
08:09 One is that there is something for both equities and debt for the year at large, which is what
08:15 was kind of exemplified before the budget speech as well and after the budget speech
08:18 more so.
08:20 Some interesting ideas out there for benefits from an investor's perspective, especially
08:26 on the debt side simply because the time period is such that we are on 22nd of February, so
08:32 it's about 30 or 38 odd days that you have in hand that you can get an indexation benefit
08:38 for the whole year if you choose to invest currently.
08:41 So keep an eye out for that.
08:45 Ashish, the point most misunderstood by a lot of people was the CapEx number, which
08:53 as a percentage has gone down but as an absolute obviously has moved up.
08:57 Now, there is a lot of conversation around how for 11 months of the year, because one
09:04 month might be gone in Acharya Sahita, this is a good enough number.
09:07 I would love to draw your attention or tell us how you think about it from an investing
09:11 angle, this whole CapEx plan, because I saw this chart on your screen wherein you've
09:16 mapped out obviously the central government CapEx as a percentage of GDP, but also the
09:19 capital allocation of the different sectors.
09:22 I would love to know if you've done some work around what teams benefit out of doing
09:29 CapEx in the way the government is doing.
09:31 Right.
09:32 To just share some perspective, you know, if you look at the budget allocations, the
09:37 growth in CapEx over last year is about 16%.
09:40 So this is the second consecutive year where capital expenditure is growing at double digits
09:44 for the budget allocations, whereas revenue expenditure is a low single digit.
09:49 Right.
09:50 Now, the other framework to look at, and this is a framework we look at, you know, from
09:54 an investment point of view regularly, is which consumer is going to spend over the
09:59 next two to three years.
10:00 Right.
10:01 Government is a consumer, there are private companies who are consumers, and there is
10:05 households who are consumers.
10:06 Today, the two consumers who are spending or who have actually laid down the budget
10:11 to spend a lot, one is government.
10:12 Okay, now let's look at government.
10:14 Like you mentioned, government is basically going to spend on defense, they are going
10:18 to spend on railways, and they're going to spend on overall infra, whether it is roads,
10:23 ports.
10:24 So a lot of the companies which are government facing B2G, you can see this in their order
10:28 books, right?
10:29 Order books are building up as a percentage of the sales.
10:33 So we are essentially bullish on themes related to defense, related to railways, and related
10:39 to overall infra spends from the government point of view.
10:42 However, I would also like to mention at this point that the other consumer who's spending
10:47 from a CapEx point of view is the Indian household.
10:52 The main expenditure from a CapEx point of view for Indian household is real estate.
10:56 And that is evidenced from the bookings that you see real estate developers getting.
11:01 I mean, if you see the quarterly numbers, which we are through, right, real estate companies
11:05 are on a tear.
11:06 I mean, any project that they launch is getting sold out like hotcakes, especially in the
11:11 mid to high end segment, right, which basically tells you that there is a wealth effect.
11:17 And from an affordability point of view, as well as from a lending point of view, things
11:22 are very, very attractive for the consumer who's buying real estate.
11:26 So these are two areas which are doing extremely well.
11:31 Now it is a matter of time where companies will also start doing CapEx because as we
11:36 speak, the capacity utilization number is I think close to 74-75% if I'm not mistaken.
11:44 So at the most, you know, optimum CapEx, optimum utilization, which we consider closer to 80%
11:51 is about six months to nine months away.
11:54 So we are already seeing a lot of companies, at least when we talk to them in their management
11:58 calls, etc., laying out plans for future CapEx.
12:01 So I think by the end of this calendar year, you'll have all cylinders fine.
12:06 I mean, from a capital expenditure point of view.
12:10 So anything related to the investment economy is looking pretty, pretty, pretty good.
12:16 Just to mention on the earning season, because that's another topic of discussion today,
12:21 we are behind the quarterly earning season.
12:25 At the end of this, the broad numbers look pretty good.
12:28 I mean, you've seen a 17% earnings growth, YOY.
12:33 We will end up this financial year at 20% YOY growth.
12:38 This will be the fourth year of double digit earnings growth for companies at Nifty as
12:44 well as in our coverage universe.
12:47 And you're looking at 14% next year.
12:49 So even from a fundamental corporate part of your things are looking fine and maybe
12:52 Nitin can expand on it.
12:54 Yeah, I mean, think about it this year, you would end at somewhere around six and a half
12:58 lakh crores as far as total profitability of the Nifty 50 companies are concerned, which
13:03 is expected to grow to about 10 lakh crores in a couple of years.
13:08 And the key sectors which are likely to drive it as Ashish mentioned are some of these old
13:13 economy sectors, auto and of course, BFSI as well.
13:19 BFSI has done well.
13:20 I think the difference now is between the private and some of the large PSU companies
13:26 that are there.
13:27 But I think the entire pack is running and in many ways, this reminds us of the period
13:32 between 2003 to 2007.
13:34 The fundamentals are extremely strong.
13:38 In fact, the run rate in terms of earnings growth is rivaling the 2003 to 2007 and in
13:44 some cases even exceeding that number.
13:47 And that gives a lot of cushion to valuation.
13:50 So while a lot of chatter is on the fact that markets are on a tear or valuations in some
13:55 pockets looks fairly exorbitant.
13:58 But I think the earnings growth is quite up there in terms of providing the valuation
14:02 push.
14:03 And then a question on equity side because I noticed this interesting statistic that
14:09 you put out, right, that since the lows of calendar year '23, the kind of gains that
14:14 have happened at the broader end of the spectrum have far outstripped and we know this, but
14:18 just when it comes in form of numbers, it kind of makes you stand up and take notice.
14:22 So part one is the difference in returns that's happening.
14:26 Part two, I'm borrowing from the previous answer that both of you gave, that in some
14:30 cases these might be justified because earnings growth will make up for it.
14:35 So now I'm just trying to narrow this down a bit.
14:37 We haven't done this before, but if I were to narrow it down to the small cap universe
14:41 or the mid and small cap universe and ask you that based on your study, where is it
14:45 wherein the gains have far outstripped the category or the nifty as the case may be,
14:51 but where by virtue of earnings growth the numbers could be justified?
14:55 Sure, so maybe I'll just take on that question.
15:00 Now in the last year, as you mentioned, the mid and small caps have returned in terms
15:05 of the total market cap.
15:06 So we are talking about mid caps, which is the 101st to the 250th company and the 251st
15:13 to the 500th company.
15:14 If you look at their cumulative market cap, that has expanded in the last year or so between
15:21 40% to close to 65% which in most circumstances looks fairly exorbitant.
15:29 But now let's put this in context of the earnings that these categories have seen, especially
15:35 over the last two to three years.
15:37 The mid cap earnings have grown in the vicinity of 25 to 30% and the small cap companies have
15:42 grown in the vicinity of 35 to 40% and this is nearly at an index level.
15:48 So some of the underlying companies have obviously grown at a much, much faster pace.
15:52 And if you remember, Neeraj, even last time we had discussed this, that there is actually
15:58 no point merely looking at the headline index.
16:01 You have to focus on quality companies because not all those companies are extremely high
16:06 up there in terms of ROE or ROCE profiles.
16:09 But when we narrow it down to quality, whether it is within the PSU sector or whether it's
16:16 private or any of these other sectors in a diversified basket, if you are getting good
16:21 quality companies, they will command a premium, but the earnings growth is providing a great
16:27 tailwind.
16:28 So we believe that while the markets might have rallied quite a bit even in that segment,
16:34 and now let me give you one more context in terms of the price to earnings multiple.
16:39 If you look at the headline earnings, the headline indices for mid cap, the long term
16:45 10 year average is about 20 times.
16:47 Currently, the one year over PE is about 26 to 27 times.
16:52 If you look at the small cap index, the long term 10 year average of PE is about 16 times.
16:57 Currently, it's trading at about 21 times.
16:59 So these valuations are relatively higher as compared to the Nifty.
17:04 The Nifty is at its long term average of about 20 times.
17:08 So hence, there is a lot of articles around the mid and small cap space.
17:15 We believe that one has to be very, very bottom up in that segment.
17:20 If one wants to take an incremental allocation to mid and small caps, it will be preferable
17:25 to do it in a staggered manner over the next, let's say, 6 to 12 months.
17:29 Having said that, on the large cap side or even multi cap strategies, we continue to
17:34 be extremely constructive and we are asking investors to invest lump sum even at current
17:39 levels.
17:40 Lump sum even at current levels is what is actually also based on the sensitivity analysis
17:52 or the expensive zone, etc. that you guys have.
17:57 That's not too negative currently for this kind of investing as well, right, Ashish?
18:01 Because I was looking at the three zones that you typically put out and we are not currently
18:06 in a major fragile zone with accidents waiting to happen.
18:10 Not at all, because if you look at the temperature gauge, which is what we publish every month,
18:16 we are close to 140, 115 and this is basically reflective of the Nifty valuations.
18:20 And remember that we are past the Q3 earnings and we are actually into the Q4 season, right?
18:30 So the Q4 earnings will only get updated sometime probably in June of this year.
18:37 The earnings will get done by April.
18:40 So actually if you adjust it for that, my sense is that you will be below 110 because
18:45 you are looking at 1000 EPS for the Nifty by the end of this financial year.
18:51 So actually the Nifty doesn't look really expensive, it looks reasonably valued and
18:57 hence what we are telling investors is that large caps you could go lump sum and small
19:03 caps you can do staggered.
19:04 And just to answer your question on which zone is looking a little rich in terms of
19:10 valuations, actually if you look at everything collectively, the mid-cap zone is really a
19:16 little expensive compared to the small cap or the large cap.
19:20 But as long as earnings, I mean, they continue to deliver on earnings, I can tell you that
19:26 valuations will continue to look this way.
19:29 Although there will be pockets of exuberance for some time.
19:34 I mean, like in a bull run you do get these anomalies and these anomalies can last for
19:40 longer than you think.
19:41 Yeah, yeah, yeah.
19:42 This is the solvent, I know.
19:43 Okay, we have lost 60 seconds but just one quick question, Ashish, before we wrap this
19:46 up.
19:47 You made this point in your previous notes, three years of double digit returns, possibly
19:51 a fourth year double digit return.
19:52 We were talking to the Citi team earlier, who were saying that even FY25 earnings according
19:57 to their coverage universe have actually gotten an upgrade at the end of quarter three.
20:01 I'm inclined to check with you, in your case, is earnings momentum looking better for FY25
20:08 as well after Q3?
20:09 Quick 60 seconds.
20:10 It's looking solid and stronger, let me put it that way, because the high earnings growth
20:16 phase, I think, is behind us.
20:19 Post COVID, the base was extremely low.
20:22 A lot of sectors had not done too well for a long period of time.
20:26 We saw very, very high earnings growth for the last three years.
20:30 Now you're moderating it to maybe 13%, 14%, 15% kind of growth.
20:36 So the high earnings growth is behind us.
20:39 Now you're looking at slightly moderate earnings growth, but with much stronger visibility
20:43 because the economy and the corporates are in a much stronger mood.
20:47 Credibility, viewers, and that always demands a premium on the political side and on the
20:52 earnings side.
20:53 Walking the Talk is the title for this month's Alpha Strategist.
20:57 Gentlemen, thanks for walking the talk with us on the show as well.
21:00 Looking forward to talk to you next month.
21:02 Thank you very much.
21:03 Always a pleasure.
21:04 Likewise.
21:05 And viewers, thanks for tuning in.
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