City Think Tank Speaks To NDTV Profit
Transcript
00:00Thanks for tuning into this edition of Talking Points, a special Talking Point, because at
00:13the end of the earnings season, as we make it a norm every quarter, we are joined by
00:18the think tank of city research, Surendra Goel, Head of India City Research, as well
00:22as Kunal Shah, Director of India Banks Financials, Arvind Sharma, Director of India Autos and
00:27Transportation, and Saurabh Handa, Director of India Oil and Gas and Telecom.
00:31Gentlemen, all of you, thank you so much.
00:33Absolute delight to have you yet again in our studios.
00:35Really appreciate your time.
00:36Surendra, I read your note.
00:39You mentioned that post the earnings season, while your targets may be 25,000, you remain
00:44a buyer on dips because the upsides are limited.
00:47Did the Q1 earnings season do anything to also reinforce that view?
00:52Yeah.
00:53So see, on the...
00:54So first of all, thanks for having us on the show.
00:57So see, Q1 earnings season, two, three things to highlight.
01:00Firstly, the numbers have come in above our expectation, particularly if you exclude the
01:06oil marketing companies.
01:08Okay.
01:09So the EBITDA numbers are in high single-digit growth year over year, earnings low double-digit.
01:14But both the numbers are slightly above our expectations.
01:17Having said that, on the earnings revision side, the consensus earnings revisions which
01:21have been trending positive for some time now, they have slipped back into kind of flattish
01:26kind of a trajectory.
01:27So no revisions, no upgrades, no downgrades.
01:30So that's where earnings are.
01:33And that's in context of consensus expecting a single-digit kind of earnings growth this
01:38year for Nifty.
01:39Okay.
01:40So that is where we are.
01:42So from a view perspective, it's not really changed as much.
01:47Earnings came in slightly higher.
01:48But as I said, more importantly, the earnings revisions are still on a flattish trajectory.
01:53In the last couple of years, city analysts as well as consensus, the expectation is that
01:57Nifty earnings should grow between 11% to 13% CAGR, somewhere in that range.
02:03And for that, the market trades at roughly 22 times earnings.
02:07So I think that's where we are.
02:09So if you look at the valuations on absolute basis or relative basis, they are on the higher
02:14side.
02:15Particularly if you look at relative to EM, the valuations are greater than two standard
02:19deviation above 10-year mean.
02:22So given that backdrop and the fact that earnings growth is 11% to 13% is what we expect,
02:28we think that one should be kind of buying the dips.
02:31We still like the top-down story.
02:33The macro still looks quite good.
02:35Earnings compounding has been pretty impressive.
02:38So we like it.
02:39But again, given the kind of run-up we have seen over the past one year, I think it's
02:42better to kind of buy any kind of dips.
02:45Just playing the devil's advocate, N Suryendra, and one closer to the Fed rate cycle, we know
02:51since March 2020, it's been the Fed commentary and the tonality which has dictated market
02:56movement more than just core fundamentals.
02:59And two, I mean, India now been trading at a premium to the EM basket for a while.
03:04So I'm just saying it's no longer a surprise.
03:06It's almost become a norm that we'll do that.
03:09Would there be a dip that will be significant enough to give an opportunity, given the context
03:16and given the domestic flows?
03:18So two points there.
03:21Firstly, as you said, from a Fed perspective, the narrative has only improved in the last
03:27few months.
03:28But was India really pricing in any kind of risk?
03:32Because the market has been doing well for years now.
03:34So typically, if there is a pricing of risk, then you could argue that, OK, the risk has
03:38been priced in and now potentially there is upside.
03:41So that was not the case in this backdrop.
03:43Valuations were already kind of have been going up, inching up.
03:46Of course, it's been accompanied by a good macro and strong earnings growth.
03:51I think the only variable which has been very strong and is difficult to call is domestic
03:56flows.
03:57Right.
03:58So in a recent note, we highlighted that if you look at the flows this year or the money
04:01coming into the market, domestic institutional investors have deployed around 32 billion
04:06dollars.
04:07FIs are around just about two billion dollars.
04:10And that domestic institutional investor flow has been very strong.
04:13It's actually accelerated compared to last year.
04:16And if that remains supportive, yes, you could get more upside.
04:21And viewers, I think from a sell-side research perspective, it's good to put out the fact
04:25that the valuations are expensive.
04:27But remember, the targets are still 25,000 for the Nifty for a 12-month period, if I'm
04:31not wrong.
04:32Yes.
04:33OK.
04:34So now let's talk about within the components.
04:35And I'll talk to Surendra about IT in a bit.
04:36But he spoke about oil and gas.
04:38So I'll take that leaf first and go to Saurabh to talk about what do you sense is in store
04:44going ahead?
04:46I believe as your consolidated note states, X, oil and gas, the results were in line.
04:52What happened to oil and gas this quarter?
04:54What happens going ahead?
04:56Because also, I read your note of the positive catalyst watch on BPCL this morning very interestingly.
05:01You guys don't think that Brent deserves to trade above 80.
05:04So therefore, does that have meaningful implications for upstream versus downstream?
05:07Yes.
05:08So if you look at the last quarter, Q1, it was quite subdued for the oil marketing companies,
05:15primarily because oil prices were a bit on the higher side.
05:18Refining margins were quite weak.
05:20And if you recall, there was a fuel price cut that had happened in March.
05:23So that hurt the marketing margins for these companies.
05:26Now, all these factors seem to be reversing.
05:28So you have a situation where crude prices are range-bound with a downward bias.
05:33In fact, overnight, you've seen them again below $80, which is positive for these companies
05:38on the marketing side.
05:40On the refining side, we have seen a little bit of an uptick.
05:43So when you add the two together, refining plus marketing, which is your integrated margin,
05:48those are trending better quarter on quarter.
05:51In fact, on a spot basis, they are actually trending even higher.
05:54So if the current situation sustains, then you could see a situation where 2Q is better
06:00than 1Q, and then 3Q is even better than 2Q.
06:03And the other potential catalyst could be on the LPG side.
06:08So these companies have been losing money on LPG, typically because it's a control product
06:13the government compensates them.
06:15There was nothing which was announced in the budget, but there's a possibility it happens
06:18with the supplementary demand for grants, which could again say happen by the third quarter.
06:24So all in all, things seem to be sort of falling into place for the oil marketing companies
06:30for a bit of a rally from here, and which is what is driving our positive catalyst watch.
06:36Now on crude prices, Citi as a house has been neutralish to bearish, I would say.
06:42Our view is sort of a range bound oil price, yes, there are geopolitical risks, but the
06:47fundamentals are not very supportive.
06:50So our view is after the ongoing summer period, you might actually see, you know, crude potentially
06:56struggling at even $80, which is kind of the situation where we are at now.
07:00And if fuel prices stay stable, then that works for the oil and gas, at least the downstream
07:06companies.
07:07And to your point on upstream, so currently the government has been allowing upstream
07:12companies to realize $75 on a net basis.
07:15So as long as crude is around $75 or above that, then, you know, from an earnings perspective,
07:21I would say the upstream companies are fairly okay.
07:24The risk could happen if crude, say, starts breaching that.
07:27So can we see a situation where crude goes to $70, $65, etc.?
07:31That's when you might actually start then re-looking at earnings for the upstream companies,
07:35but we are not there yet.
07:37But at least in the short term, I would say the OMCs look okay.
07:40BPCL, as you said, we have a positive catalyst watch.
07:42Okay, so between the upstream versus the downstream, you would prefer currently as things stand,
07:49downstream stands a better chance versus upstream in terms of prospective gains?
07:53At least in the short term, yes.
07:55And that's how we are positioning ourselves as well.
07:57So that's why the catalyst watch on BPCL.
08:00I mean, you could see, you know, pretty supportive earnings for this quarter and maybe next quarter
08:04as well.
08:05So yes, for now, we would go with the OMCs.
08:08Okay, okay.
08:09Kunal, to you, and I'm now hearing, and for a while now, you know, fairly contrasting
08:16views on the credit growth opportunity and versus what can actually happen.
08:22Because when you speak to a clutch of alternate offerers, right, you speak to private credit
08:26funds and they say that companies are borrowing from us, banks are not able to lend them or
08:31lending them.
08:32And therefore, the credit growth that used to be the forte of banks in the yesteryears
08:36will probably not be as strong.
08:38I would love to know, how do you think about this?
08:40Because now we are waiting for this elusive big bank credit growth to come in the private
08:46banks isn't quite there.
08:48So since last one and a half years, we have been highlighting that credit growth in India,
08:55it should be maybe over next couple of years should range between 13 to 14 odd percent.
09:01And I think what's really driving down the credit growth was the industry credit or the
09:06corporate credit.
09:07And that's still growing somewhere in mid single digit to maybe a high single digit
09:12kind of a number.
09:13It's moving towards high single digit, but still much below the overall average credit
09:18growth.
09:19Retail has been something which has driven the credit growth.
09:24Of late, we have seen moderation on the unsecured lending post the increase in the risk weights
09:29which have been there.
09:30And if you look at this quarter's earnings, everyone has moderated the pace of unsecured.
09:35So that's something which is cooling off.
09:38Another segment which was growing at a much faster pace, which was banks lending to NBFC,
09:44that is also, it's now growing at maybe almost like five to seven percentage points lower
09:50than what the average has been.
09:52So all of this is really pulling down the credit growth.
09:56And that's where, if we look at the latest numbers, now it's come down to 13 to 14 odd
10:01percent.
10:02And if we adjust for HDFC Limited, then it's closer to 15 odd percent compared to maybe
10:0816 to 17 odd percent, which has been there all through.
10:13So what can actually drive again is the corporate credit.
10:17We need to see the investment activity picking up.
10:19Still, when we look at it on the corporate side, it's largely working capital which has
10:24driven the demand.
10:25It's not more of the investment activity which has maybe driven the corporate credit
10:31as such.
10:32And the other constraint is on the resources front.
10:35So deposit growth has been lagging.
10:37And now we are seeing most of the lenders, they are anchoring their credit growth targets
10:43in terms of how they are able to mobilize the resource.
10:46And it's not only about the availability of the resource, but the cost at which they are
10:50able to raise.
10:51And since there is a clear focus with respect to margin management, I think somewhere we
10:56have seen many of the lenders going relatively slow on the credit side, and more looking
11:02at high yielding, high ROA kind of opportunities, rather than getting into the segments which
11:08are relatively low ROA accretive.
11:11Interesting.
11:12So just one quick follow up there, because I was talking to ABB and they were saying
11:15that HITR2, while the new age sectors had come in and driven CAPEX, they see the turn
11:21of the metals, the cements, maybe not cement as much, but metals and some of the traditional
11:25sectors now starting to get on the CAPEX bandwagon, do you sense that private CAPEX finally makes
11:31a comeback?
11:32Is that the strategy?
11:33So see, there are a couple of things there.
11:34We did put out a couple of notes on this topic.
11:37So firstly, it's a private CAPEX is not really as slow as some people suggest.
11:45There are pockets where it's doing well, however, it's not as broad based as and then what happens
11:50in particularly in this segment, is people tend to compare it to the prior cycle, right,
11:56which was like very kind of prolonged and very strong.
12:00So this is definitely not like that.
12:02This is like more narrower in certain pockets.
12:05And at the overall pace, it's consistent and decent, but it's slower than what, say 2006
12:10to 2010-11 was.
12:12So that's how I would characterize it.
12:14It's there, it's been there, last year was also decent.
12:18But again, it's there in certain segments rather than being very broad based in nature.
12:22So in which case, Kunal, if it's not so broad based, do private banks get the growth that
12:28the market wants them to be?
12:30Or even if they grow at the pace at which they've been growing, would you believe there
12:34could be stock price gains?
12:35What are your favorites?
12:36What's the first amongst equals within the private banking space?
12:39So when we look at it, private banks have continued to outpace the overall industry
12:43credit growth.
12:44And we had seen them gaining the market share at the cost of PSU banks.
12:51But incrementally, when we look at it against the expectation, which would have been there,
12:56say 12-15 months back, we have cut down the growth estimates for a few of the leading
13:02private banks.
13:03If you look at it in terms of the consistent performers, it's like ICICI, which has been
13:08relatively more consistent, and that continues to be our top pick.
13:14So in terms of the preference, we still believe like ICICI can do well on the growth, relatively
13:20better.
13:21And in terms of the preferences, we have HDFC and IndusInd Bank as well, not from the growth
13:26perspective, but overall with respect to where the valuations are.
13:30But sticking to the large banks?
13:31Yeah.
13:32Sticking to the large banks?
13:33Yeah, sticking to the large banks.
13:34Okay, great.
13:35I mean, come in, after four years of very strong growth, and maybe the growth continues
13:41by and large, but there seems to be a change in the texture, if you will, because suddenly
13:45M&M, I mean, just using that as an example, but M&M, the SUV bandwagon was expected to
13:50grow and suddenly I now see that there is conversation around how SUVs could moderate
13:54but tractors could grow well.
13:56For the other car segments as well, Maruti is starting to make a presence.
13:59So let's start off with four-wheelers.
14:01What's your sense about what happens over the course of the next 12 months?
14:05So in the first quarter, the numbers, most of them were pretty strong, and margins were
14:09better than expected.
14:10Okay.
14:11Slightly better, but better so.
14:12But what's happened after the first quarter, especially in July, is clearly the demand
14:18has moderated.
14:20It's manifested in the inventory increase, in some of the price cuts that have happened.
14:26So we believe that over the course of the next six to eight months, we could see a bit
14:31of a moderation in demand.
14:33We are building in almost three to three and a half percent growth for the industry.
14:38And clearly it's much lower than what was last year.
14:41Last year was very strong growth.
14:43I think it's a combination of a bit of a pent-up demand happening.
14:47Secondly, progressively as your order backlog kind of subsides, your wholesale numbers tend
14:53to go down.
14:54Though what we've seen also in July is companies are also cognizant of this fact.
14:58So suddenly in July, you see that retail dispatches are better than wholesale.
15:03So there is an intent to correct inventory.
15:07Has it happened fully?
15:09Probably not.
15:10Probably maybe a couple of more months of that inventory destocking are still expected
15:16to happen over the next couple of months.
15:18But clearly the kind of very strong demand that we saw in FY24 has definitely come off.
15:25And so therefore, are we looking at maybe not as strong a beginning of the festive season
15:31as typically happens because there could well be inventory correction as opposed to sales
15:34happening?
15:35I think that's why they've started early on for the inventory part.
15:40Also what we're very interested to see is festive season is also very important for
15:45the small cars.
15:47And that has been very weak for almost past four or five years.
15:51The last festive season we saw which was good was probably four or five years back.
15:55So what one could see is that makes shift slightly in favor of small cars.
16:00It's too early to call out for that right now.
16:03Still have 40 days remaining for the monsoons.
16:06But we could see that segment getting slightly better than what we've seen over past four
16:10years.
16:11And hence Maruti is the favorite M&M.
16:13You've reduced the price but still comes at whatever number two or number three or thereabouts.
16:16So Maruti is our top pick.
16:17For Mahindra SUVs we are slightly more cautious.
16:21But on tractors again because it's more lever to rural, more lever to monsoons, we are fairly
16:26positive.
16:27From January I remember you distinctly saying that you are not necessarily overweight the
16:31sector because there are headwinds, rightfully so.
16:35The stock since the June lows, particularly post Accenture numbers, I think have given
16:39a bit of a run up.
16:40Best performing index in the last five, six days.
16:43What happens next?
16:44Sure.
16:45So yeah, not since January, like we have been cautious on this space, I think since the
16:49fourth quarter of calendar 21.
16:52So it's been a while since we have been cautious on the space.
16:55Now, what has happened this year so far, if you look at the performance, till I would
17:01say May, sometime around May, the sector was underperforming quite significantly.
17:07And after that it's really caught on, like where it is today, it's broadly in line with
17:11the market, maybe slightly ahead of the market, like after the last couple of days move.
17:16And I think it's part of it is related to the point you made earlier around the US macro
17:22narrative, right, rate cuts, things will possibly have soft landing which has gotten priced
17:28in.
17:30And then that also got aided by commentary from select players around green shoots, particularly
17:36in US banking.
17:38So I think that's been the big driver for the sector so far.
17:42Now, if I kind of go back and see what's happening versus the view which we had put out in January,
17:49like when we had put out the year ahead note, it's kind of very similar, right?
17:53What we were expecting is that FY25 will be a little ahead of FY24 in terms of growth
17:59rates.
18:00If you look at FY24, the sector growth was give or take 3%.
18:05This year we are expecting it to improve by a couple of percentage points.
18:08So it's playing out exactly in line with that.
18:11However, the narrative has changed and there is more optimism.
18:14And I think the domestic flow situation which we discussed has been very buoyant.
18:19And to that extent, I think once the sector started going up, people were underweight
18:24both institutions like on domestic and foreign.
18:28So there was a bit of a catch up trade.
18:29Now, as we go forward from here, I think the pace of recovery is very important.
18:34Because now I think what the stocks are pricing in, right, like irrespective of people have
18:39penciled in those estimates or not, but stocks are pricing in a very decent recovery from
18:43here, right?
18:44And if you really don't get visibility on that, then I think stocks could really cool
18:48off.
18:49But our key concerns still remain around the pace of recovery driven by multiple factors.
18:55One is it's still not a great environment for client's decision making.
19:00Decision making is still challenged.
19:02Secondly, some of the more medium term concerns around global capability centers, those trends
19:07still continue to be pretty buoyant.
19:09Global capability centers are growing at a pretty fast pace.
19:12So in that context, we still think it's a sector where growth is going to be moderate.
19:17In that context, the sector valuations kind of at 40% premium to the broader market do
19:23look high to us.
19:24Okay.
19:25So the pecking order is what?
19:26None of the stocks for now, ER&D, IT services, small, big, you are avoiding all of them?
19:31Yeah.
19:32So we do have relatively a bias towards large cap IT.
19:36Okay.
19:37There we have a couple of stocks which are rated neutrals, not sales, which is Infosys
19:40and HCL Tech.
19:41So that's how the relative positioning within the sector.
19:45And nothing in ER&D either?
19:46Nothing in ER&D.
19:47Again, a lot of it is to do with the growth valuation, right?
19:52So valuations are much higher and growth is kind of starting to cool off.
19:58And the biggest driver for ER&D stocks in the last three, four years has been the auto
20:02segment of the EV segment, where globally you see things starting to cool off, moderate
20:07a little bit.
20:08And I think as that reflects in growth rates, there is a risk to valuations because these
20:12stocks are the most pricey in our IT coverage universe.
20:16Most certainly.
20:17Yeah.
20:18Completely agree.
20:19Okay.
20:20Thanks for that, Surendra.
20:21Saurabh, I'd love to come to on telecom as well.
20:22Now it's a firmly three-player market, if you will, at least in the minds of the investor,
20:25if not actually.
20:27I saw your note, if I'm not wrong, which said that while earnings didn't come in Q1, they'll
20:31start reflecting Q2 onwards.
20:32So are you optimistic or are you neutral?
20:35And why so?
20:36No.
20:37So we are optimistic on the sector.
20:39So yes, the tariff hike played out only from July.
20:43So you'll start seeing the benefit from 2Q and 3Q.
20:46So in some senses, Q1 was sort of a backward-looking quarter.
20:50So you should start seeing sequential revenue and EBITDA improvement in this quarter.
20:55Bharti has remained a key buy for us and it's also been amongst our top large cap picks
21:02in India.
21:03In fact, recently, just to mention Surendra in his strategy note, has also added Indus
21:07Towers to his preferred large cap picks.
21:11So Indus is another stock that we have been quite positive on.
21:15We continue to remain positive.
21:17I would say in the overall sector, the one big trigger on tariff hikes has played out.
21:23Another positive which has played out was monetization of 5G has commenced, something
21:27which I think the street was not very clear how that would happen.
21:31So these are two clear positives.
21:33Now going ahead, I think the focus will be a bit besides the benefit of tariff hikes
21:38on Vodafone Idea recommencing its cap picks and how they managed to execute in this sort
21:43of a three-player market.
21:46Can they stem their subscriber losses, start maybe gaining subscriber share?
21:52And this has obviously implications for Indus as well because as they start expanding their
21:57coverage on 4G, it essentially means more business for Indus because it means more tenancies
22:02for Indus.
22:04And I think one important event also to follow would be on the AGR side.
22:09So there is a pending curative petition in the Supreme Court.
22:15It hasn't yet been listed by the Supreme Court for hearing, so we are awaiting developments
22:20on that.
22:21But that can be quite meaningful because if there is room for maybe the government to
22:27reduce some liability on the AGR side and recompute the dues, then Vodafone Idea is
22:32a clear beneficiary and Indus again becomes an indirect beneficiary.
22:36So overall we are still quite optimistic on the space and we have decent upside on most
22:42of our stocks.
22:43Okay.
22:44Let's see if Kunal, where do you see decent upside?
22:46So I'm giving you a choice between NBFCs or non-lending financials.
22:49We have time for one.
22:50I'll leave the choice to you.
22:52What should we talk about?
22:54So NBFCs is what we can talk about, yeah.
22:58You constructed there?
23:00So it will be bottoms up, I would say, because many of them have been able to hold on to
23:06the growth in particular.
23:08When we look at it, at least there was no moderation on the growth side and it was pretty
23:13much in line or better than the expectations for few of the leading players.
23:18There are some pockets of emerging stress, I would say, like unsecured, but secured lending
23:25is holding on relatively well.
23:28In fact, margins also many of the players have been able to hold on and if there is
23:32a narrative which is setting with respect to the rate cuts or at least the easing of
23:37the wholesale rates, that would tend to benefit NBFCs much earlier compared to that of the
23:42repricing on the deposit side.
23:44So we have seen NBFCs outperforming to an extent that has been re-rating which has happened
23:50in many of the names, but we believe that if they continue to hold on to the asset quality
23:54performance, there is still the scope if growth and margins are largely maintained.
23:58Okay.
23:59Packing order?
24:00So we like Sriram, we like Chola and LTF.
24:04Okay.
24:05Okay.
24:06And Sriram has been a big performer as well, so great, great stuff.
24:10I mentioned transportation, but I really wanted to talk about two wheelers and I don't want
24:14to talk about the new kid on the block, he may not even have coverage there.
24:16But relative to that, because that's so expensive, it brings two wheelers firmly in focus as
24:20we wrap up this conversation.
24:22What's your sense on the two wheeler space?
24:24I think two wheeler demand per se this year, we are building almost 7-8% kind of a growth
24:28YOY.
24:29One thing to note that in passenger vehicles, while we have already crossed the pre-COVID
24:33peaks in FY24 itself, in two years we are yet to reach it.
24:37So there is a bit of a pent up demand.
24:40But again, the competition is very, very high.
24:42And there is a strong crowding that happens in segments, like last year we saw in the
24:47premium segment, everybody launching bikes there.
24:50Now we see the 125cc segment, everybody is launching bikes there or upgrading their variants.
24:55So because of this competition, despite a very strong demand, the pricing is always
25:00constrained.
25:02And that's why we believe that the volume growth would be high, we have a packing order
25:07in terms of the stocks that we would prefer.
25:10We still like Hero a lot, valuations obviously help.
25:14They are also levered more to rural.
25:16So if that uptick happens, again positive for them.
25:20Other part where two wheeler says some of them have a very, very strong exports exposure
25:27and their things have not been as great as we were expecting them to be.
25:32by OEMs, by part makers, every commentary suggests that the expectations of a resurgence
25:39in exports hasn't really been fulfilled.
25:42So we are more positive on domestic, rural things.
25:46So we like Hero.
25:47We also like Ayesha, but Hero would be our preferred pick in the two wheeler space.
25:52And viewers remember that City as a House has moved auto to a neutral rating, if I'm
25:57not wrong, from maybe an earlier bullish stance after a significant outperformance
26:01over the last three years.
26:02But out of time completely, gentlemen, all of you, thank you so much for taking the time
26:06out and being with us.
26:07Really appreciate it.
26:09And viewers, thanks for tuning in to this very special episode of Talking Point.