In Conversation With Jefferies' Mahesh Nandurkar
Transcript
00:00Thanks for tuning in to Talking Point, I'm your host Neeraj Shah and it's a flat day
00:16for the markets now or flattened out a little bit, 0.22%, I mean marginally off from the
00:22levels that we were trading at, but the Sensex clearly flattened out and by the way the culprit
00:27or the lack of it maybe, but the culprit seems to be Nifty Bank which is very, very flat
00:34because Nifty IT is doing the hard work today, again 0.41% higher for the Nifty IT.
00:39Remember this is the best performing index in Friday session 2, it was the best performing
00:43index for the week and I think it's starting off well today.
00:46So if you look at the 7-day chart of either the Nifty IT for a week about 5% and some
00:51of the large constituents from a TCS to Infosys, I presume all of those should be showing some
00:59upsides.
01:00There is sporadic gains today for companies in the hospitality space for example, so if
01:05you look at Chalet Hotels, BLS International, GMR Airports, everything regard, I mean a
01:10lot of businesses connected to travel and tourism, Chalet has come off a little bit,
01:14but GMR and some of the others still okay, though you would argue that most of these
01:19businesses seem like they have come off from the highs of the day.
01:24So that's one piece to monitor in the session.
01:29Then the capital market related plays, so 361 did okay or is doing okay even now.
01:35I believe Angel One started off well, so that's the other one to keep in mind and there is
01:41some strength in specific names like for example, NBCC on the Concall has spoken very strongly
01:49about what they will do over the course of the next 12 to 24 months and I think that
01:53is leading the stock materially higher in the session today, so watch out for that one.
01:58Triveni Engineering and I think sugar stocks have been on a bit of a roll ever since this
02:02whole thing about ethanol policy change has come about, so that is doing okay.
02:09So that's a few things that you are going to keep in mind.
02:13The other stock that is in focus today is Sriram Finance because a clutch of brokerages
02:17are very constructive there and I will get in my colleague Harsh for a very quick perspective
02:21on what HSBC for example is saying about Sriram Finance, Harsh good morning.
02:26Good morning Neeraj, as you rightly said very constructive when it comes to Sriram Finance
02:31and nifty-fifty company, 20% plus upside from here, 12-month price target of course, so
02:38a very interesting play of sorts.
02:41First off what they are suggesting is the 2012 to 22 period, lots of hiccups but now
02:46that is firmly behind Sriram Finance, they have come off from some of those wars that
02:52they faced and they have overcome that speed bump of sorts, so that's one piece.
02:58The second piece is growth has been extremely strong, the merger between Sriram City as
03:05well as Sriram Transport has materially impacted the numbers overall and now there is a larger
03:11focus with regard to where growth is clearly well above growth guidance at least for Q1
03:17FY25 Sriram Finance.
03:20Now just in terms of how operationally it is shaping up, there is a positive as well
03:24out there, what they are suggesting is operational efficiencies will kick in, what you will start
03:30to see is as growth comes in unsecured lending hasn't been a large focus and therefore credit
03:36costs will be limited and that is the other positive with regard to asset quality as well.
03:43Last off just with regard to ROAs expected to be around 3.5%, ROEs expected to be around
03:50the 17% kind of mark and they are valuing this at 2.1 times price to book FY26, so despite
03:57the 21% upside FY26 valuations don't look very expensive.
04:04Thanks Neeraj, always a pleasure talking to you.
04:11Thank you Mahesh. How constructive or not constructive are you considering that we have
04:34ended an earning season which was ho-hum if you will, but there is a large macro event
04:39on the anvil in terms of the Fed move.
04:43Absolutely. I think there are a lot of macro events that have happened recently and could
04:53be a few more later part of this current calendar year and clearly in the context of where we
05:03have come in terms of the market movement over the last one and a half years, last two
05:06years or so, which we have been very strong for Indian markets and rightly so in my view
05:14given the pace of the economic growth, the relative strength of the economy and on top
05:20of that the strong domestic inflows that we are seeing into the markets. In fact the pace
05:29of the domestic flows is really the key driving factor that we have seen that has kept the
05:35markets at a higher level. If you look at the current calendar year, we are looking
05:40at almost seven to eight billion dollars a month. That's the extent of inflows that we
05:47are seeing from various domestic sources. Clearly a very, very high number in my view.
05:54So keeping all these things in the context of high valuation, very, very strong domestic
06:01flows that we have seen in the last seven, eight months of this current calendar year
06:05and the expected changes in the global macro so to speak, I would say that the risk reward
06:15at least from a short term perspective, let's say from the next two to three quarter perspective
06:20doesn't appear that attractive. The long term is obviously looking quite good.
06:26Mahesh, even if the Fed moves and sounds dovish about policy, you don't think that will be
06:34enough for equities to stay benign or constructive? They may not really rally too much, but you
06:42don't think even then it will be good enough?
06:45Yeah, see the thing is, what we have seen, we have seen what happened to the global markets
06:53and Indian markets over the last two years, during which the Fed has increased the interest
07:00rate by almost 500 basis points. If you go by the traditional models, a 500 basis point
07:11increase in the risk free rate in the US would have impacted the US equity and the global
07:18equity quite negatively, but that did not happen. So I'm not so sure that we can really
07:23take a leaf out of the history book and say that if the Fed is going to cut rates, that
07:29will be benign for the markets. I don't think we are clearly following the copy book style
07:36response from the equity markets to the potential actions on the interest rate side that have
07:42been taken by policymakers. So I would therefore say that from the next two to three quarters
07:49point of view, yes, Fed is definitely one, but then we also saw just a few weeks back
07:55what happened to the Japanese market. Although it was a one day phenomenon and a large part
08:01of the fall has already been recovered, but that just goes to show the vulnerability of
08:08equity markets to some of the macro developments and therefore we should not be ignoring those.
08:23The argument from a longer term perspective that you made is interesting. If I look at
08:28it from a perspective of the lens of sectors that have rallied and haven't, and then juxtapose
08:35it with the kind of commentary that the companies have given from within that sector, where
08:42is it that you find within that landscape risk reward to be balanced? Because the problem
08:48seems to be that where growth seems near certain or possible, the pricing in is happening very,
08:56very swiftly.
08:58True, absolutely. The markets have been moving very, very rapidly as you rightly pointed
09:05out. There is hardly any time gap between an event happening, between a company surprising
09:11and the stock prices reacting in a very meaningful way. So from that point of view, I would say
09:17that the market is really priced to perfection and several sectors and several stocks are
09:23priced for that perfection. So that's my whole point. One of the earliest statistics that
09:30I mentioned of around $7 to $8 billion per month of domestic inflows. And when I say
09:37this number, I'm including not just the flows coming in from the equity mutual fund, which
09:43includes SIP and non-SIP portion, but also the single stock purchases by individuals,
09:49also by the insurance companies. And mind you, this number of $7 to $8 billion a month
09:54annualizes to almost $90 billion a year. That's roughly 25% of the annual financial
10:04savings of households on a gross basis. One third, you know, on a net basis. Now these
10:09numbers are actually comparable to what we see in developed world. 25 to 30% of savings
10:15going into equities is something that we see in developed markets. And to that extent,
10:23I believe at least a part of the domestic inflow that we've been seeing appears unsustainable
10:29to me. And now what can bring it down to more sustainable levels? I mean, you know, there
10:35can be various events that one can think about, whether it is US recession, whether it is
10:42a possibility of some shocks coming maybe from Japan or maybe some geopolitical events.
10:49You know, there could be some tax related changes and so on. So, as I said, it's very
10:53difficult to pinpoint what exactly might happen. But I would say that, you know, from a near
11:01term perspective, I see the risk that the domestic inflows might come down, might slow
11:09down from the current levels. And while there will probably be some compensating factors
11:15coming in from the foreign flows, because those have been very weak, you know, in general,
11:20the last sort of like seven, eight months or even last 12 months or so. So that can
11:26be some compensating factor. But net is that, you know, maybe we have to undergo some kind
11:31of a time correction, if not actually some kind of a market correction. But yes, you
11:37know, after we go through with that near term adjustments, I think the long term appears
11:41to be quite attractive.
11:42Got it. Okay, Mahesh, stay on. We need to take a quick break, a quick commercial break.
11:48We back from the break and talking about some of the interesting pockets. I mean, as you've
11:53seen, IT continues to buzz. As you can see, some of the new age businesses, Ola Electric
11:58on a circuit yet again, Zomato up in trade. So some of the new age business is doing very
12:02well. And Jeffries sees limited room for upsides in IT services at least. So we try and talk
12:08to Mahesh about some of these nitty gritties of within this whole index benchmarks. From
12:16amongst themes and sectors, I was looking at some of the research that you guys have
12:22published recently, right? And amongst the things that were done last week was this whole
12:27note wherein on IT, but it is talking about how there's limited scope for a positive surprise.
12:32You prefer TCS enforcers and maybe some of the larger ones. Now, why is that the case?
12:38Is it because the US economy is not necessarily firing on all cylinders? Or is it because
12:44you believe that the surprise is also a factor of the price move that goes behind a stock
12:50and some of these stocks have moved from the June lows?
12:53Yeah, true. So as we discussed earlier, the results coming in from the IT services companies
13:01for the June quarter were maybe a tad better, not a whole lot. And that kind of, you know,
13:10that level of positive excitement got priced in into the stocks very, very quickly, maybe,
13:16you know, just like a few days time. But, you know, if one takes a step back and, you know,
13:22move away from these recent moves that we've seen, you know, in the stocks and the results.
13:28But by and large, what we're clearly looking at is the scenario where the possibility
13:35of a US economic slowdown is now more today as compared to what it was three months back
13:41or six months back. And that's why, you know, there is this chatter about the rate cuts in the US.
13:48So, you know, I, you know, see that there is some element of excitement around the IT services
13:54sector due to rate cuts. But what I would say is that one needs to go one level deeper and see
14:01what is the reason why these rate cuts are being talked about, you know, at a sort of, you know,
14:08much more higher probability today. And the reason is that of an economic slowdown or a possibility
14:14of or a higher possibility of, you know, US recession. And those things are definitely not,
14:22you know, that positive, you know, a thing from the demand perspective. So that is, you know,
14:27clearly, you know, one thing to keep in mind. Secondly, now, when we talk about the rate cuts,
14:33it usually impacts the, you know, the financials and the banks, you know, in the US in a negative
14:40way because of the margin pressure, et cetera. And BFSI segment is one of the large, you know,
14:48is one of the last sectors in terms of the demand contribution to Indian IT services.
14:52So from both these standpoint, we don't really see any big reason to be too excited about.
15:00Yes, the IT services sector looks like a defensive sector. It is one of the sectors
15:06that hasn't really done that well in the last, say, 8 to 12 months or so. And there is that
15:12element of sector rotation that will probably be, you know, playing out. And to our mind,
15:18it has already played out to some extent. So beyond that, we don't really see any big
15:24fundamental reason to be too bullish on IT services here. Okay. What about some of the,
15:31I mean, not IT services, but tech-related businesses? I mean, Ola Electric's debut or
15:36other performance post-debut stuff that dreams are made of. Zomato continues to see some record
15:41performance for Blinkit and some of the others. And a lot of these tech-related businesses,
15:45right? PB Fintech. So I'm just using this as an example for viewers to understand.
15:48But Mahesh, I'm just trying to understand from you that new age tech or tech usage or companies
15:56which use tech to build B2C businesses, how do you see some of those? Because the market is now
16:03pricing them very, very strongly and very, very richly.
16:06Yeah, that is true. But, you know, we clearly like some of the stocks in this space, this e-commerce,
16:12this tech-enabled sectors, you know, that you spoke about in the food delivery, the quick
16:17commerce-related businesses, because these are, you know, ultimately the new segments,
16:22sort of relative new segments, you know, on the markets. And, you know, in general, you know,
16:27what I would say is that from the broader market perspective, the sectors that have done well
16:34over the last 10 years or so, you know, need not be the ones that would, you know, do better over
16:42the next five to 10 years. Some of these new emerging sectors, be it this tech-enabled,
16:47the e-commerce sectors that you spoke about, or even some of the green energy or energy-related
16:54sectors, which haven't really done that well in the last 10 years. But I think some of those
17:00stocks have done pretty well in the last one or two years or so. And I'm going to come back to,
17:05you know, our favorite theme that we have spoken about, which is the investment cycle,
17:09which is not just real estate, but other capital goods, infra, and so on. So, these are some of
17:14the sectors that have already done well, you know, on the markets in the last, say, one to two years
17:19or so. And maybe they are in for a breather. But if you were to ignore that near-term, say,
17:27six months to 12 months kind of a period, and if you focus on, let's say, three to five-year period,
17:32I still believe that, you know, there's e-commerce-related, there's energy-related,
17:36real estate and investment cycle-related stocks and sectors that will probably do much better
17:41than the market from a longer-term perspective. From a near-term perspective, yes, I do see
17:45headwinds and a risk of underperformance there. Got it. Mahesh, one final question. And
17:53I wanted to talk about financials at length, but there's a paucity of time. So, I'm going to focus
18:00on one particular subset of financials, non-lending financials, which is insurance.
18:05Now, past history would suggest that these stocks, if you look at it on a CAGR basis since listing,
18:11haven't really, I mean, yes, they've generated wealth, but not really created
18:16such high wealth that it deserved the kind of investments. Now, maybe
18:19the street was not quite adept at valuing these companies, has now grown adept, what have you.
18:24I would love to understand, how do you think of life insurance or general insurance
18:28as a pocket where you may or may not want to invest in?
18:33No, insurance is definitely a sector that, you know, we quite like. You know, the non-lending
18:38financial, you know, overall space looks attractive, but even within that, insurance
18:43definitely looks attractive. But the other part of the NLF or the non-lending financials is
18:49the capital market-related plays. Once again, the capital market-related plays, you know, have
18:54done quite well in the last 12 months or so. And I do see some risk of underperformance going ahead
19:00into the next 6 to 12 months. But beyond that, the capital market plays should, you know, pick
19:05up once again. But in the interim, we definitely believe that life insurance, you know, particularly
19:11as a sector, that should do well over the next 6 to 12 months. And I believe the sector rotation,
19:20which is also playing out to some extent, you know, should play out in favor of the insurance
19:26sector here. So, yeah, we are overweight on the insurance sector.
19:30Okay, overweight on the sector. And just extend that conversation, Mahesh, general insurance,
19:36because that seems to be a consensus. Life insurance, at least there are some people who
19:41are, some who are not. In general insurance, almost everybody seems to be constructive.
19:44So, is this a multi-year theme? And should people investing in this really invest with
19:48a long-term view in mind, general insurance stocks? I think both general insurance and
19:53life insurance appear to be attractive long-term themes for sure. You know, there is no doubt in my
19:59mind. And, you know, in terms of the penetration levels, both sectors are at a low level at this
20:05point in time. And clearly the financialization of savings, you know, slowly, you know, the
20:12households are moving away from the attraction of gold and looking at, you know, the other,
20:18you know, financial, you know, investments. And, you know, clearly, you know, especially after
20:23COVID, you know, the life and the general insurance segments have, you know, become
20:29a greater part of an average, you know, individual's portfolio. And I, yeah, I definitely
20:36see a much, much better long-term potential for both these sub-sectors within insurance.
20:41Got it. Mahesh Nandrukar, such a pleasure talking to you. Thanks for taking the time out. And,
20:46you know, this is somewhere around Independence Day. Hopefully, we hopefully talk once more
20:51around the festive season ahead of Diwali or around that, but thanks so much for joining in today.
20:56Thank you so much for having me here. Thanks a lot.
20:57A pleasure is ours. Well, that's the view from Jeffrey's and on a note that it's been a sobering
21:03morning because it seemed primed for an uptick. Somehow it's flattened out completely, courtesy
21:09banks, which are dragging the indices slightly lower, but no alarm bells, just that the broader
21:14markets too are seeing a clutch of stocks, which are correcting quite a bit. Vigard is down, for
21:19example, 7%, Hinzink, Sulks, another 4.5% down for that one. Kalyan Jewelers down about 3%.
21:26Jupiter Wagons is down about 2.5% lower. There's Carborundum, Shaffler, Data Patterns,
21:32a clutch of stocks which are looking slightly wobbly. But with that, it's a wrap on this
21:41leg of Talking Point. Thanks so much for tuning in to the episode.