What is your take on the currency weakness? Would it continue to be a tailwind for IT and may not be a beneficiary for some sectors and stocks?
Absolutely. The currency weakening is not driven by any weakening in the Indian economy but by the strengthening of the US economy and that augurs well for service sector exports. For the overall exports scenario, it is a very good and given Indias whole demographic advantage in terms of labour, this will give an impetus to export oriented industries in the services and other sectors.
But how much is the market deriving its value from the earnings profile just as of now? Do you think that earnings are good enough to take the markets higher to 12,000 and beyond?
Absolutely. If you look at the earnings, we were doing a dis-aggregation. Overall, the markets earnings are growing at the rate of 8-9%. The main villain of the piece is the banking sector. If you take away the banking sector, the economy EPS growth of the overall market is at 20% plus and this is more sharply visible even as you go down the broader market.
When you think about Nifty, the impact is about 10% higher in terms of earnings. Nifty earnings excluding banks have come at about 26% for this quarter, but in the midcap and the smallcap space, that differential is even more sharp because midcaps are showing only about 11% growth.
If you take off banks, it is showing 39% growth. The smallcaps have actually shown negative earnings growth this season but if you take away again the banking sector, they are showing about 15-16% growth. So, ex banks, the economy is moving along very well. This is why, most of the money is flowing now into good quality stocks where earnings growth visibility is there.
Give us some of the stocks and sectors where you are finding value right now. Where do you think that irrespective of the Nifty run-up and the midcap catch-up already at play, there is still opportunity to buy at current levels?
The current levels for the broader market are very cheap. It is only at the Nifty that a few stocks and a few sectors have run up. If you go down the cap curve, across the range, we are very bullish on the services sector. While manufacturing is showing a pickup, it needs a lot of action on the Make in India front, land reforms, labour reforms to really kick start it. But services sector is something is readily picking up the growth momentum.
Consumption continues to be a strong driver, behind which there is retail credit. At this point in time, if you look for value, as such the discounted stocks are the infra pack, the discounted stocks of the pharma pack, at the lower end of the cap curve but I do not yet think it is time for bottom fishing.
This is the right time to look at what can really play off this growth. While consumption and IT both are growing strongly in terms of their quarterly earnings as well as rupee depreciation for IT, that is helping a lot of related industries to grow as well. We see consumption demand, e-tail, logistics growing very well. Logistics is a largely unorganised sector which is moving into organised space and lots of new listings are coming in. So, we see a lot of value in the transportation and logistics pack.
We also see value in terms of the financial services place because as consumption grows and as Indias wealth grows, we are touching $2,000 per capita income this year, we will see retail explode a bit. On the back of it, retail financing will grow at pretty good rates too. So for us, there is a broad range of stocks across the services play where there is visibility of earnings and good growth prospects.
Incidentally, 38-39% of Indias exports are from the services and here again rupee depreciation helps the services theme. It makes sense to use services as a filter. Over the next 12-18-24 months, it will easily provide both protection from volatility as well as growth opportunities in the market.
Maybe, 24 months down the line, you will see private capex. Already, RBIs report says capacity utilisation is going up from 72% odd four years ago to about 75%. This 3% is a fairly significant move because peak capacity utilisation for the country has been only 81%. So, the move from 75% to 78% could happen over the next 12 to 18 months or 24 months.
After this, we will see private capex picking up and that is when the infra value will kick in. While infra looks very value-driven today, if you have patience for 12-18 months for the whole order book supply to flow through and come into the prices. For me, the other point to note is if you have a three-year outlook, then services is a safer and a better play but if you have a five to seven-year outlook, then infra looks a good value buy. That is the way to look at it in a portfolio.