‘We will See a Pe­riod of Strong Earn­ings Growth’

The Economic Times - - Money -

banks are not com­pa­ra­ble to the best in the pri­vate sec­tor but they are sus­tain­able busi­nesses nev­er­the­less.

Sev­eral pub­lic banks are im­prov­ing and chang­ing. Some will get merged. The real is­sue here is as­set-qual­ity pain which is, to a large ex­tent, a cycli­cal is­sue and it should pass in my opin­ion. In 2001, we were in a very sim­i­lar sit­u­a­tion. State banks’ gross NPAs were close to 15%. To­day they are lower than that. Steel in­dus­try was in a mess then be­cause cus­toms du­ties in In­dia had been brought down from 100% to 20% when the econ­omy opened up in 1992. There was no capex. If you bought these banks then they went up nearly 10 times in the next eight years from the bot­tom. I am not say­ing they will go up again 10 times but di­rec­tion­ally, we are in a very sim­i­lar sit­u­a­tion.

Fi­nally, bank­ing and NBFCs is not a busi­ness where mar­ket share is very im­por­tant. Bank­ing is a busi­ness of sen­si­ble un­der­writ­ing, lower cost of fund­ing and low op­er­at­ing cost. There are sev­eral banks and NBFCs even in the pri­vate sec­tor that are very small but they are do­ing well.

One sec­tor that no­body talks about and it is sup­posed to be very cru­cial for econ­omy, jobs and all, is real es­tate. De­mand has been weak, PE money has been com­ing, but there have been mixed sig­nals... That’s a valid point and that is one seg­ment of the econ­omy which is quite weak and the rea­son for that is sim­ple. In 2005, the rental yield in Mumbai was 9-10%. The mort­gage yield then was 8-9%. So your EMI was equal to your rent. So houses were very af­ford­able. To­day if you look at Mumbai, the rental yield is 2% and the mort­gage yield is 8.5%. So your EMI is three to four times that of rent. It is very dif­fi­cult for a mid­dle class per­son to buy a house. A sim­i­lar sit­u­a­tion is there in most ci­ties in the coun­try. And that is why the real es­tate sec­tor is weak. That’s the rea­son the gov­ern­ment has in­ter­vened by bring­ing in the in­ter­est sub­ven­tion, both for mid­dle class and lower class. It is ba­si­cally to bridge the gap be­tween EMI and rent. So in my opin­ion, one will see pick up in af­ford­able hous­ing seg­ment be­cause the in­ter­ven­tion makes it af­ford­able for the cus­tomer.

Do you think young cus­tomers are now com­ing back to buy­ing houses? In the af­ford­able seg­ment with the sub­sidy from the gov­ern­ment, ac­tiv­ity is pick­ing up. We can see it in the dis­burse­ments in this space. It will hap­pen be­cause the la­tent de­mand in In­dia is mas­sive. The bot­tle­neck is af­ford­abil­ity, but once you say I give you so much sub­sidy, the gap is bridged and you will see de­mand. It’s a pe­cu­liar po­si­tion be­cause the prop­erty rates are not com­ing down... They are com­ing down slowly. Rates not go­ing up for five years is also com­ing down. Time cor­rec­tion is sig­nif­i­cant. In real es­tate, prices are very sticky be­cause you look at your so­ci­ety if a house sells for ₹ 3 crore, the next seller wants to sell for more than that, he will wait for five years and not worry about the in­ter­est loss. But now he is un­will­ing to ac­cept a lower price. So, that’s how we are. There­fore, prices fall in real es­tate very slowly.

What does the cur­rent re­tail in­vestor be­hav­iour tell about the mar­ket? You have seen so many cy­cles. You nor­mally see a rush al­ways at the end of every cy­cle, is it dif­fer­ent this time? I think what you said is cor­rect di­rec­tion­ally but it is wrong to say this is the end in my opin­ion. If you look at the flows — the in­dus­try is get­ting ₹ 15,000 crore a month that is $2.5 bil- lion a month it is $25-30 bil­lion a year, it is large com­pared to the past. But it is nearly 1% of In­dia’s GDP and 5% of house­hold sav­ings. If you look at pre­vi­ous cy­cles, the peak was hit when mul­ti­ples in the mar­ket were 25-30 times and the flows to eq­ui­ties were near 10% of our house­hold sav­ings. I think that cy­cle will re­peat even­tu­ally. Such cy­cles have been re­peated glob­ally. But I don’t think we are near that sit­u­a­tion. In fact in the long run, one can ar­gue that al­lo­ca­tion to eq­ui­ties should even­tu­ally move above 10% of sav­ings as has hap­pened in sev­eral de­vel­oped mar­kets.


Where are you in­vest­ing your in­cre­men­tal money? You will agree that val­u­a­tions might not be ex­pen­sive but cer­tainly they are not cheap ei­ther... I have a dif­fer­ent view. Let’s look at mar­kets fac­tu­ally. We are in Au­gust 2017. In three months, mar­kets will fo­cus on March 2019, and mar­kets are trad­ing near 16 times March 2019, which is rea­son­able.

Be­sides, now, where are the max­i­mum down­grades tak­ing place? It is in pharma, FMCG. It is not in banks or me­tals com­pa­nies. Earn­ings com­po­si­tion and growth is un­der­go­ing a tran­si­tion. It was banks and me­tals which were lead­ing the down­grades ear­lier and now they are lead­ing the up­grades and down­grades are hap­pen­ing in FMCG and pharma.

Let’s fo­cus on the Nifty as that is where bulk of the mar­ket cap is; bar­ring FMCG and may be pharma there are hardly sec­tors where think mul­ti­ples are ma­te­ri­ally rich in my opin­ion. It is in­cor­rect to look at 10 or 20 iso­lated com­pa­nies that are at high mul­ti­ples and form a view that mar­kets are ex­pen­sive. In­stead, we should pon­der which are the sec­tors other than FMCG and pharma in Nifty, where mul­ti­ples should fall by 20% . Why I’m say­ing 20% be­cause 10% is judg­men­tal in stock mar­kets. And I feel such sec­tors are very few!

Pri­vate banks? These are ex­pen­sive, but that’s the way they have traded for a long time. This seg­ment also rep­re­sents one of the best qual­ity and grow­ing sec­tors. Be­sides, this is one sec­tor where al­most ev­ery­one is pos­i­tive. I am not im­ply­ing that a 10% or so cor­rec­tion can­not be ex­pe­ri­enced but one needs to dif­fer­en­ti­ate be­tween a mod­er­ate cor­rec­tion and sig­nif­i­cant over­val­u­a­tion.

Is there a sort of a bub­ble build­ing up in these NBFCs mainly hous­ing fi­nance busi­nesses? There is an ex­cess in my opin­ion in sev­eral NBFCs. But this is not ap­pli­ca­ble to Nifty as these com­pa­nies are not in Nifty.

What’s the fu­ture of heavy-en­gi­neer­ing com­pa­nies? I think we are mov­ing to­wards a pe­riod of ro­bust growth in in­fras­truc­ture/cap­i­tal ex­pen­di­ture. How­ever, we have to be pa­tient as in the real world — un­like the fi­nan­cial world — things take time to change. Roads, rail­ways, power, T&D, ports, air­ports and ur­ban in­fras­truc­ture, met­ros — all these have very good pipe­lines. The Uttar Pradesh gov­ern­ment say­ing it will give 24×7 power by De­cem­ber 2018 to ev­ery­one means a lot. It means that the de­bate has shifted from free power to qual­ity of power. Other states will have to do the same. That means mas­sive in­vest­ments.

Do you think earn­ings growth can go back to the mid-teens kind of growth rate? De­spite the weak earn­ings growth, for one rea­son or an­other, I feel we are en­ter­ing a pe­riod of strong earn­ings growth over next few years. Ear­lier the pain was in bank­ing and me­tals and now it has shifted to pharma, FMCG and IT (what a role re­ver­sal! ) I feel growth will be ro­bust 2018-19 on­wards.

How dif­fi­cult it is to gen­er­ate al­pha in these mar­kets? To­day, even in de­vel­oped mar­kets there are talks of mov­ing into pas­sive fund as­set man­age­ment. We need to un­der­stand how al­pha is gen­er­ated in mar­kets. Let us say all of us in this room rep­re­sent 100 % of the mar­ket. If the mar­ket cap­i­tal­i­sa­tion of In­dia is ₹ 100 and all of us in this room own In­dia’s mar­ket cap­i­tal­i­sa­tion. So if one per­son in the room earns more than the in­dex it means some­one else in the room has made be­low av­er­age re­turns. The sum to­tal of mar­ket re­turns is what the mar­ket gen­er­ates. Al­pha means some­one has to gen­er­ate neg­a­tive al­pha also.

In the US, mu­tual funds own roughly 40% of the mar­ket. An ad­di­tional 2030% of the mar­ket might be owned by pro­mot­ers. Mu­tual funds are thus a very large part of float­ing mar­ket cap­i­tal­i­sa­tion and it is there­fore dif­fi­cult for 40% of the mar­ket to out­per­form. But in In­dia mu­tual funds own only nearly 5% of the mar­ket cap­i­tal­i­sa­tion and nearly 10% of float­ing cap­i­tal­i­sa­tion. Thus it is easier for mu­tual funds to gen­er­ate al­pha but even­tu­ally a time will come when al­pha gen­er­a­tion will be­come pro­gres­sively dif­fi­cult.

I think this year though is chal­leng­ing. this is so be­cause large cap com­pa­nies are do­ing well and sec­tors that were un­der­per­form­ing ear­lier are do­ing well and vice versa.

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