Despite a lot of negative news flows, Indian markets are still in the green. What explains this kind of price action?
The positivity is explained by the underlying recovery. Look at the data — whether it is cement production or auto sales, everything is positive. Hopefully, that will translate into quarterly earnings. That is what the investors are hoping for and that is why India has done reasonably well in last couple of months.
How do you think the Q4 earnings will set the trend for FY19? Would earnings finally rise?
That is really the expectation. We believe that private sector banks, particularly those with focus on consumer financing will continue to do well. The auto sector is expecting bumper numbers.
In cement, you may see EBITDA margins getting impacted but a look at these companies will give good visibility on volume growth revival.
In industrials, watch the order books. Channel checks suggest that order book build-up has been fairly good and that is what the market is buying into from a forward looking perspective.
From a negative side gain, clearly crude is a concern. The uncertainty on elections next year is something weighing on markets mind and more importantly from a global EM perspective, China is a big concern.
Crude prices have again spiralled up all the way to $73. There are talks about crude price going up to $80-100. Do you think that is going to create problems for the economy?
Crude basically causes problems for the economy. Economy was nearly half the current size in 2007 and crude was at least 50% higher at $120 per barrel. Here the numbers are much lower. What has happened is over the years government has not really cut the excise duties. They have actually increased the excise duties on gasoline, diesel etc.
Should you see revenue collection pick up from GST, from e-way bill implementation? The way this plays out, the government keeps the retail prices at a similar level but it allows the government a chance to cut duties on these petroleum products and that should be okay for the economy.
I do not think that is really an issue from India perspective. There are two big issues. Again, the tax collection is not picking up, markets not getting confidence on the government being able to meet the fiscal deficit target. Finally, trade deficit is showing a higher levels or vulnerability. But, it is still not really at a 2.5% or a 3% level which really makes people very worried.
A lot of global investors are invested in Indian private banks and there are concerns over leadership, management or even book quality. Would you be relooking your entire investment thesis for Indian corporate private banks?
What happens is investors are going to vote with their feet. The experience is not the best in class. I am sure we have not really heard the last word on that. Obviously activism is going to be lot more higher on whether the management needs to be voted back again in most of these banks.
Have you reduced your exposure to some of the private corporate banks?
Our exposure over there is of deep value and so one is willing to go through a period of underperformance. One hopes shareholder activism gets a lot more pronounced in coming quarters here.
As an investor, are you comfortable buying into Titan, Jubilant Foodworks or HUL? These have been expensive stocks over the last two years. A lot of these consumer stocks is currently owned not by domestic investors but by foreign investors?
We have liked the stories in the past. About a year or two back, we were saying that these leading consumer franchises would be a big beneficiary of uptick in discretionary consumption because of market share gains. We have seen that play out. While the valuations do not give comfort to add at these levels, but one can continue to hold on to existing holdings with the logic that these stocks will go through a period of time correction over one or two years and that the earnings will catch up. Valuations limit the margin of safety at this point of time.
What about IT because besides consumption, that has been the other strong leg that has really aided the kind of recovery that we have seen from the February-March flows. Do you think cross currency tailwind is going to aid IT stocks for some more time to come?
In a year of moderate returns which is 5-10%, IT may not be underperformer because the dollar revenue growth for most of these companies would be around 6% to 9% and rupee deprecation clearly helps in terms of the margins etc. But should a recovery be strong in the economy, then IT is going to be a laggard in the economy.
The bet on housing finance is big. Which way are you evaluating this opportunity set?
Housing has been the most affordable in last 20 years. We are seeing signs of bottoming in the sector. India is one of the few markets where property prices have not gone anywhere for last four-five years. In most markets in the region, the prices would be up at least 30-40% while the incomes have grown locally.
Clearly, attractiveness of the sector is there and post RERA, we have seen big boys gain market share at the cost of smaller fringe players whose cost of capital has gone up significantly.
From a five-seven year perspective, the sector is extremely promising. In other markets like China, property developers would be at least 5% to 8% of benchmark and in India they form a fractional amount.
If you look for value from a five-seven year perspective, property is one sector. The other is selective insurance pick, which can be meaningfully larger in due course.
Property brings me to the other segment that you are bullish on — affordable housing. Given how large the umbrella is for everything from HFCs to some of the property developers, tiles and paints. What within the affordable housing segment or umbrella do you like?
We have seen some good start on affordable housing but there has not been any meaningful large numbers to move the needle here.
If you want to play this theme from a longer term perspective, paints look interesting, though near term, the stocks may languish because raw material prices are going up and they started with extremely high margins but that is there.
Consumer appliances again looks interesting from a three-four year perspective. Valuations is the issue from six to nine months here also. Cement is one sector which has not really participated.
If you believe that housing has picked up, most of these names are trading at close to replacement cost EV per tonne of anywhere between 140 and 160. With limestone cost going up, the replacement cost is moving higher. One would look at select laggards which can do well over 12 months and from three-five year perspective, paints, household appliances look interesting.
Classic long-term investors say they do not like metal stocks as they are too cyclical. They prefer compounding businesses. But if China maintains discipline, it means commodity prices will not come down in a hurry. What is your view?
Clearly, the big change has been China. We were initially sceptical in 2016 when China talked about supply side reforms. But under the new leadership, they have gone about implementing it very seriously and that is where you are not seeing significant additions of capacity. You see significant capacity closures around Beijing area in the Hebei region for steel, aluminium, etc, during the winter months and again the key data to watch is net steel exports out of China. The number which used to be 70-80 million tonne, is below 50-60 million tonnes or around 50-60 million tonnes and that is a positive.
Globally, you are seeing a pickup in demand. In that backdrop, metals from next six-nine months, offer an attractive risk reward. Some of these metal companies in India are benefitting as they are getting assets from the bankrupt companies where with the spend of 10%, production can be commercialised in the next three to six months. That is an added positive for some of the names.
Are you a contra buyer in pharma because the bad news seems to be receding?
I will wait for some more time before initiating positions in the pharmaceutical sector because the big trend in pharma sector is biosimilars and there are a lot of these good smart companies. They could significantly up the spends for the next big wave of growth opportunity in biosimilars between 2020 and 2030. So, despite pressure being low, what you are going to see is margins being low for next three-four years as these companies invest in future businesses.
Where I would be contra buyer in next one or two quarters would be telecom. Clearly, we have seen market share being consolidated between the top three and as Idea-Voda goes on with the merger and fortifies the balance sheet, we will see some easing in the competition over there. I think there is a money making opportunity for long-term investors.
That is really surprising. Just this morning there were reports that Bharti is again trying to fight back and lure their customer base. A stiff competition from Jio continues and they have announced that 30 GB free data for users upgrading to 4G. So, why telecom, why not aviation?
It is an interesting space. The only issue there is India is a high growth market but the supply side response also comes from other players and that impacts pricing.
For last six months, that has not been the case and this is where we have seen the tick pricing been good and that is reflected in performance of the key players.
A good way to play the travel and tourism stories would be the likes of OTAs, the online travel agents. We have MakeMyTrip in India. This space will become meaningfully larger over next five-seven years.
Listed travel companies in India is a great theme but I can only think of maybe two or three travel companies — Thomas Cook which is an investment company, Cox & Kings where you will not buy it because of debt, you only left with Mahindra Holiday. I also like travel as a theme but there are a lack of ideas?
We have the option of buying into ADRs and that is where some of these companies are listed. The other way is to play aviation as a theme. I get what you are saying but what happens is when a sector does well, you have new IPOs and that is where you get interesting opportunities.
What is your India positioning in comparison with other emerging markets? Is it time to go underweight on a India and perhaps revisit Russia and Brazil? Or would you not like to reduce your India weightage?
We are still in the later camp that says earnings recovery is going to be strong with normal GDP pick up. The tax collections are going to improve, some of these GST, e-way bill issues will be solved. I am sure it is a smart regime. They will get over this and once you see tax collection pickup, then you will see pragmatism come in terms of retail fuel prices also.
Consumers are taking a lot of the tax and some of these oil products have too much tax. If they cut it, people will get some comfort. One thing to watch very closely for India is the trade deficit. The exports have not picked up one needs to see serious initiative from the government on import primarily towards electronics and an export boost.