Demand environment will change for good if rural India revives: Jinesh Gopani, Axis Mutual Fund
Corporate tax cut could be a game changer over a period of time.
I always thought that markets would trade logical, but the markets are just not reacting to good news?
Till the announcement of the corporate tax rate cut, there was gloom and doom for the economy and with this announcement, the market reacted very positively, Ultimately at the end of the day, it is numbers which decides the fate of the market. In the near term, volatility due to positive or negative news flows stays for a day or two. Unless and until the numbers really surprises us on the upside, it becomes very difficult for markets to just climb everyday. So, to that extent, we are in for a volatile session. Every day, you have one or two positive or negative news across the world and across the domestic market as well. We are in a very tight range as the market continues to be very volatile.
How does one deal with this kind of an environment?
There is no need to deal with it every day. Just stick to the numbers where you want to do investment. See to it that the fundamentals of that company are strong and India being a bottom-up stock pickers’ market, if you really get into 15-20 good names which are delivering even in the 5% GDP growth environment, and have been able to survive the bad phases of their own sector, that is where the flows would come as and when eventually the big flows starts coming from the FII side.
To that extent, there is no need to do everything every day. It is better to be patient rather than reacting to the news flows. Just stick to the thesis or the philosophy of what we have been doing in the investment side and see to it that you do not get into some of the stories where you can end up losing your portfolio itself.
What are the funds are underperforming the respective benchmarks? Lot of three-year SIPs have become negative. Where essentially are returns headed?
We should see this in the context of how the economy has behaved. After demonetisation, we got a lot of flows and a large part of that flow went into midcaps and smallcap schemes. There was hope that the economy would revive at the end of the first term of the BJP government. But unfortunately, the GDP growth has come off from 7.5% to 5% level and the hope of midcaps and smallcaps delivering higher growth rates has just come off. Given the state of affairs at this juncture, there is a clear cut demarcation between men versus boys. Also many companies had taken undue risk in terms of growth which is biting them now.
If you have a philosophy of being in quality stocks, you might be able to navigate the bad phases of the market successfully. They would come out as a winner. In all sectors, you will not get more than four or five names to participate in your portfolio in a big way at this juncture and this is because at 5% GDP growth, there is only a little bit where everyone can get their fair share of volume. What happens is that the leader or the efficient player can grab the market share much better way as compared to the others and this is across the sectors.
Your top three holding are Bajaj Finance, Kotak Mahindra Bank and TCS. There is a D-Mart in your portfolio and also Gruh Finance. Are you sticking to these A quality expensive stocks because that is where you see earnings visibility? Or do you think irrespective of where the economy is headed, your top three, four holdings are unlikely to change?
You should not look at expensiveness just for the sake of valuation perspective. You should see the scalability of the business model and how they have been able to navigate the bad phases of the market and are still continuing to deliver numbers which are much better than the industry averages. If you stick to the names which have been delivering and this is what we have seen in the last two and half, three years, then the quality portfolio has really paid off in terms of not only protecting the capital but protecting the returns itself. So to that extent, so long as the company is delivering earnings growth, ROE or have been able to guide to the market, that is where the flows go.
So do not look at expensiveness just because it is trading at such a high valuation, you should see how they have been able to deliver on a business model.
You know better than me that value is what you get, price is what you pay, the ultimate return of a stock is a function of your entry level and at what price you are buying. If you are buying stocks like Bajaj Finance or a D-Mart or a Kotak Mahindra Bank or HDFC Bank, at historical highs, they would grow but how much of that news is factored in?
Technology disruption is at its peak now and we are seeing that disproportionate profitability, disproportionate market share will be with a few guys. As you have seen even in the NBFC space. the tier-1 has been rock steady, they have been able to get capital well, they have been able to grow well. But tier-2, tier-3, tier-4 NBFCs will have to face slowdown of their business model and may have to change their business model.
Till the time you do not have more names driving growth and ROEs, this trend will continue.
Obviously when macro improves, that is once we go to 7-8% GDP growth, many more such good names will come into play and maybe that would be the time to start reshuffling or change some portfolio strategies. But so long it remains a very difficult world in terms of doing businesses, growing businesses and dislocating your own business model for future growth, it is the case of winner takes it all.
Considering that you are fairly focussed when it comes to some of those consumption stories, I do not see too much of any cyclical counters in your portfolio as of now. When do you see demand growth coming back and an uptick being reflected in earnings?
The corporate tax rate cut announced by the government could be a big game changer -- maybe now, maybe two, three years down the line. This should propel private capex if the government walks the talk. This is the first announcement. They should create an environment which showcases red carpet and not red tape in terms of how they want to bring some of the large enterprises into India. So, it could be a game changer over a period of time.
If that really happens then private capex will come into play in a big way and that is when cyclicals will start showing growth in terms of earnings momentum. We are maybe 12 months away. We will have to really see how the large corporations globally think of India in terms of investment destination and how much money they are ready to pump in over the next three to five years. We also have to see how the government helps them to set up businesses in India. At that level, the cyclicals will become an important part of the portfolio. It is not like we do not have in our portfolio but it is not a larger part of the portfolio as of now.
What do you see leading the recovery? Is it consumption or is it the economy?
India is a domestic consumption driven economy. Consumption has to revive, maybe not now, maybe six months down the line. The rural consumption which has been under pressure for the last two years, should see some signs of momentum once the money comes into the hands of the farmers maybe around December or Jan onwards.
Urban consumption has been growing but maybe a low single digit. Unless and until the demand environment improves, the other things cannot improve because we are a domestic consumption driven economy. Maybe some more stimulus for the short term might help demand revival. I do not know whether it will come or not, but the most important point is the demand revival and demand revival can come only after you create an environment of job creation, job growth and wage growth. So, demand is very important.
There were expectations that the festive season may kickstart things. Do you feel it is too early? How may we see some of that reflected in the next quarterly results?
It is too early to say. I would say the Diwali season would be critical. As of now, it has been okay, I would guess. Some consumer durables are doing well whereas the high-end discretionary -- the auto and other numbers -- have been okay. It is too early to say that the demand has revived, but at least some improvement in sentiment is seen. Hopefully, that should culminate into a demand environment. The most important point is the rural revival. If rural India revives, then demand environment will change for good.