Expect a lot of reforms over the next 2-3 months: Gurmeet Chadha
My view is that monetary policy will continue to be accommodative and a rate cut can still happen.
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We are looking at PSUs through two approaches; one is taking the fund route. We have identified some mutual funds and a couple of ETFs, one of which is the CPSE ETF which has a basket where we have a combination of the names you pointed out which will be up for divestment. We should remember that there are good success stories whether it is Hindustan Zinc or Axis becoming UTI and Maruti there are a lot of value unlocking stories where strategic divestment has led to win-win. So that is one approach of doing it.
We have also made a portfolio which we call it as a special situation portfolio, which allows a small exposure for clients who can take high levels of risk. Here we have built a portfolio of beaten down pharma names, beaten down banking names, Bharti Airtel, some of the PSUs which are up for divestment, a lot of utilities which you are getting them t 6-7-8 PE and the dividend yield is also 7-8 PE, giving you some kind of a margin of safety. I think that could outperform. There are a couple of PSU equity funds which have a basket of them and they add some good names like IRCTC and SBI Life, GAIL and Gujarat Gas.
So, we are taking two approaches here. We are avoiding giving individual stock calls because we do not know what will go first and probably tactical and exit would be even more important. We are preferring the fund route and a basket route rather than playing them individually.
On financial space
I would not really chase the tier II, tier III PSU banks. As I said, there are enough opportunities still with the top run private banks. They will be steady. One can even look at Axis Bank right now after the fund raise. At Rs 700 level, it is a good price point to accumulate it over a long period. The retail business is shaping up well. Their focus on fee income is very encouraging and as far as asset quality is concerned, the worst is behind us.
Some of the financials look very good. Some NBFCs, where there is more perception risk rather than actual risk, look good. Something like Chola, an NBFC with good parentage like L&T Finance or some of the others look good. Even Edelweiss at sub Rs 100, has already had a sharp run up and the financials look good. I am still positive on the life insurance theme. That is a multi-year growth story with the private players continuing to gain market share.
The focus on non-participative and guaranteed income plans, continues to see a lot of traction. The bank assurance tie-ups are really doing very well for both HDFC and SBI. We continue to see the number of policies as well as the average ticket size going up. Also the quality of profit is a lesser share of investment income, lesser share of surrender value and the core profit picking up is a very healthy sign. Insurance is a very long gestation business. One should start getting into the green and you can sustain double digit growth in premiums.
There is a long road to profits scaling up 3x, 4x, 5x over the medium term. That looks good. Other than that, I like the city gas distribution space. That is another very long-term secular theme to look at.
On earnings season
One should not look at PAT and EPS numbers right now because of the corporate tax impact both ways. The banks have actually written off some of the due benefits in future and there are some places where profitability has got a boost. I think PBT is a better measure.
Our assessment is that the turnaround in the economy will happen much quickly than what the Street expects and markets are never wrong. One lesson I have learnt is that if markets are going up, obviously there is global liquidity and there is a risk on trade on EM which has been an enabler. I do not dispute that but the rebound in growth will happen a little more quickly. I am probably a lone voice here but it will much more quickly than what the Street expects.
Liquidity will be favourable and reform announcements will be made to keep the markets steady in the near term.
So it is going to be a steady grind and not a very slow grind because in consumption space, the sentiment plays a big role and there is a lot of deferment which happens and we saw that in the Diwali season when you get a good price points there is some bit of positive filters, you see a bit of a rebound, we saw that with auto numbers in October in that part.
You will see a lot of reforms being announced over the next two, three months. The government is really running out of fiscal space. You will see tinkering with taxation and I am including the Budget. I am giving a three-month view. You will see big ticket divestments and the Emerging Market liquidity will remain and within EMs, we are seeing money moving out from the LatAm. The Argentina Peso, Brazilian Peso, the Brazilian yield are all under pressure. Mind you, we are growing low but we are still growing. So the liquidity will be favourable and reform announcements will be made to keep the markets steady in the near term.
On telecom stocks
I am positive on Bharti and I have been maintaining some position on Bharti at a personal level as well with added disclosure. My premise is that we would not see a monopoly or duopoly kind of scenario. If you look at Bharti numbers in particular and if you remove the one-off due to AGR dues, the quarter was quite impressive.
The Indian mobility business showed 5% improvement. Bharti has a good spectrum bank in terms of the areas and circles it caters to. It had defended market share much better than Voda-Idea and BSNL.
My sense is if the government can fix up a floor on pricing and competitive intensity comes down, the impact on ARPU would be humongous. We in fact did a maths that if per GB, the prices go up by 10 to 20 bps, the profitability of industry can go up by Rs 600-1200 crore. Over the next three years, if the ARPU can improve by 20-30-40% in a two-three player industry, then you are looking at value growth after volume growth comes back.
I think it will evolve into a much bigger play. Obviously Reliance will have the upper hand because it will be a combination of content, commerce and communication and not just pure data and voice play. But at sub Rs 400, Bharti makes a good case for high risk high return trade off.
On market triggers
My sense is that fiscal response is due. It can come any time. It is very difficult to place whether it is going to come every Friday evening. It is very difficult to second guess the government on that, but if you look at the broad macro numbers, your food inflation is up and your core manufacturing inflation is down and if you do more cuts, you probably can feed into food inflation. If some of it can feed into currency, then you can get into some amount of trouble.
My view is that monetary policy will continue to be accommodative and a rate cut can still happen. The heavy lifting has to be done on the fiscal front. I do not think there is a choice there. So, I expect a fiscal side response pretty soon. It could be through some tinkering of taxes, it could be some motor scrappage policy and sector specific response. You will see a lot of them. I cannot a put a needle on when it will happen.
Secondly, the best way to meet the fiscal stress is through the capital market route and that makes me think that maybe some tinkering with LTCG and DDT can happen. A lot of reforms will come in and we should watch out for China because China has not really reflated. In the emerging markets basket, if you can get a bit of liquidity chasing China and China reflates, that could be good news for the EM pack as a whole.