Incremental flows to go into real estate, corporate banks and telecom: Rahul Chadha, Mirae Asset
- By March, auto cycle to go bottoms up and see revival.
- Investment cycle to revive on basis of housing boost.
- Consumption not to pick up before March 2020.
We have got the latest testimony coming in from Powell indicating that rate cuts really are around the corner. I guess the debate will now shift to the quantum. What is your perspective on how that may play out and the likely impact?
Monetary policy from Fed perspective is going to be fairly benign and we heard again Chairman Powell’s testimony last night and one of the key factors -- despite the strong US job reports -- was the trade war led uncertainty which has led to investments being put on hold globally and it is highly likely that you will have easy monetary policy from the US. ECB is back to large scale QE, BoJ is doing the same and so monetary policy is going to be benign worldwide. It is more a question of where growth bottoms, particularly for a country like India and when do we see recovery happening.
What is the big concern? Given what we have heard in the Budget, not everyone quite enthused with the measures taken to stimulate growth, at least on the monetary side. What was your key takeaway?
If you look at the budget and the Economic Survey, there are a couple of clear positives. The big issue with India has been the high cost of capital. The government has committed to reduce that that happens through encouraging FDI by kind of getting more portfolio flows also. Some of the government borrowings done outside means you have less of a crowding out effect in the local bond markets. All these are positive from a medium-term perspective. From a near term, there is a slowdown in the economy and with government not giving any kind of consumption handouts which are good from a medium term the slowdown gets a bit more pronounced.
The way it plays out is markets may be lacklustre, some of these consumption names which have done well for the last five-seven years would take a breather and go through a bit of a price and a time correction. As government’s investments spends pick up as the big boost comes on the housing front, we should see the investment cycle revive.
We have seen a slowdown in consumption. We had has not seen such a slowdown across the board. Does this tell you that it may just last longer before you see a pick up?
Clearly there is going to be a slowdown but historically what we have seen is that a couple of things are necessary for an economy or a country to come out of the slowdown; one is monetary easing and that is going to happen. RBI has done three rate cuts in a row and two or three more coming over next 12 months. That will provide support to growth and if we look over the last three-four years, a lot of these consumption was front-ended as a result of easy availability of consumer finance. So having exhausted that route, the consumer goes in a shell for two-three years and after that you will have a natural resumption of consumption demand.
It is probably safe to say that we saw the first signs of the slowdown in August-September of 2018 and it would not be before March of 2020 that you will see consumption pickup. In the interim, it is the investment-led demand which has to improve things. From that perspective, the negative in the budget was the surcharge on the super rich. On one hand, the government is appreciating the support of high tax payers and this is what they get in return?
The government has got to realise that today, unlike 20 years ago, there are lots of European countries which are offering residencies or passports for 500,000 to a million euros. The rich have an option. The Korean government made this mistake two years back and went the socialist way increasing minimum wages and private investment just went on a hold. Now, after going through the pain of two years, the government is reversing everything. You do not want the government to make that same mistake in India and learn the hard way over two years.
Outside that, attracting FDI is a positive. Again whatever they are doing on portfolio front is clearly positive.
How you have read into announcements made by the budget on the infrastructure space in particular? Do you believe that some of the steps that have been taken in order to bolster the sector is likely to lead to a long-term upmove?
First and foremost let us look at this the very fact that government is not giving large-scale consumption stimulus means the fiscal deficit does not balloon with the infrastructure improvement which has happened over the last couple of years along with digitisation. What we will see is growth with high productivity improvement. That means inflation remains low. Dollar which has appreciated against the rupee by nearly 70-75% from March 08, remains stable or rupee does not depreciate to historical levels. That makes India an attractive institution in today’s world, when close to $13 trillion of global debt is giving negative yield.
That is where it lays the foundation from a long-term capital attraction and we need to see specific actions -- like a focus on railways. We have seen metros get phenomenal response across cities and we need to do it almost on war footing, because we are late in this by about 10 years. High speed corridors need to be built up. Infrastructure is the key thing and that is where the bandwidth is limited at the central level.
First signs of indication in terms of a slowdown came in from auto. Of course auto is a part of consumption, but it is also very cyclical. Do you think the first signs of pick up will also come from auto or will it be from FMCG companies?
It depends on the extent of slowdown we have in autos. If the monthly volumes are falling by 40-50%, obviously the cut is lot more sharper and two-three years later by the time people realised that these vehicles need to be replaced, people get used to the higher costs because of BS-VI, because of the five-year insurance.
I am sure demand revival would happen over there. Coming to the EV policy, we see a large-scale shift emulating China. Maybe we are a bit out of touch with reality. Why I say that is because, when you see utilities like NTPC, the biggest pain point they have is the receivables from SOEs. We are still grappling with 24x7 electricity and SOEs are paying for that. If we do EVs large scale, that will put more pressure on SOEs. I am not sure whether this is the right time to focus on EVs because what happens is investment spends from auto sectors would come to a standstill over next two-three years. That is where the private sector investment would get impacted in the economy also.
With rates coming down, would auto or some of the cyclical and consumption industry benefit much more or much faster?
What happens is with rates coming down, the biggest beneficiary would be real estate. This is a sector which has not done anything for the last five years. Affordability is the best. So, real estate benefits the most and some of the investment-led demand proxies would benefit and by March as the auto cycle goes bottoms up, we should see revival in demand for autos also.
Let us talk about financials. Do you feel earnings may benefit any move to support the sector? How would that play out and in terms of risk reward ratio, whether you see that improving?
You have to split financials into two parts. One is the consumer proxies which are some of the retail banks which had a fairly high amount of business coming from consumption loans, call it the retail banks, NBFCs, etc. Valuations were high again. This is where you will see slowdown and because these names are well owned, when these correct a bit, they go through a 12-month period of not doing anything.
On the other hand, while corporate banks have taken a lot of asset quality pain over the last four-five years, we are seeing some revival in demand and they have got favourable LDR ratios also, the corporate banks should benefit. Outside, again the banks insurance looks attractive. We have been increasing our weight in this space over the last six to nine months. What happens is as the free float increases in insurance sectors, these names would find way to the benchmarks and that is where global money would get even more interested. So insurance, particularly the life insurance are the names which we like both from a country and a regional portfolio perspective.
How would you look at the financial space because earlier it was only PSU and private banks but now it is PSU, private banks, fund-based private banks, large corporate banks, large retail banks, insurance, MF. How would you diversify your portfolio within so many sub-sectors?
It depends on whether it is a very long tail portfolio or a concentrated portfolio. What we are doing here is basically allow exposure to some of the life insurance companies, some of the corporate banks and a few retail banks which we have held from the past.
We are more than happy and because some of these -- either the corporate banks or retail banks have subsidiaries which are into asset management, we covered for that.
Coming to the corporate governance concerns raised with regards to IndiGo by one of the promoters, how would that impact perception? Fundamentally, it is a very sound company but that’s a huge issue nonetheless?
Absolutely, again without commenting on an individual stock, what I will say here is it is always painful to see companies promoted by technocrats, by people with Ivy League background, go through all these issues and Indigo is one example but we have seen a number of other companies in healthcare etc. India is a market where investors have assumed that corporate governance standards would be much higher than the rest of the Asian region.
Clearly it somewhere impacts the perception but it is good that the red flags being raised by one of the promoters rather than a hedge fund like what happens in Hong Kong where you have a short seller reports highlighting all these issues there.
Given the softening rate environment that we are anticipating or any other factors that you are tracking, would you expect things to remain range bound?
We will be looking to deploy those incremental flows in rate sensitives like real estate, part of corporate banks. Telecom looks attractive. One gets the sense that with the kind of debt Jio has and the pressure on Reliance core business, consolidation in the telecom market is likely and the pricing could get more rational over the next 12-18 months.
It appears the 5G pricing is going to be super expensive again. Pressure is on the telecom giants as was highlighted in the Budget this time. Bharti maybe forming a base, sure, but still struggling with current scenario and Idea has also been lagging. Is it just the Jio effect that you are factoring in or is there more that makes you so bullish on telecom?
This is a sector where historically we have seen pricing come down sharply. There is no issue on demand momentum, data volumes are growing exponentially. Even if we bake in 30-40% data growth, if the pricing corrects only by about 10-15%, that is a significant revenue growth for the overall portfolio. You will then see the operating leverage play out.
The story you want to play is with the leader in the industry which has strong balance sheets and that is where that traction is. 5G capex is at least two or three years away. We are not even seeing big markets like China, Korea do large sale 5G implementation. For India, it is more of a 2021-2022 story.
What are some of midcap names on the back of some consolidation or acquisitions in the broader sense?
We are very selective there. We like hospitals again. These are good businesses they have been underperforming for the last three to four years and now we see some of these new hospitals are breaking even. We are seeing higher occupancy for the new hospitals and that is where operating leverage is going to play out. So hospitals is something we like and some select construction names here and there.
It is not expansionary Budget this time. Rates would be down and real estate will benefit. Do you think that will also benefit a lot of infrastructure and could things be a little better at least in the large ones?
If you take two, three-year view, as demand picks up, we will see some of these operating leverage pick up and then what market trades is the relative growth momentum.
With growth slowing down in IT with a large base effect and slowing of the US economy, valuations not being cheap over there, consumer names at expensive side of valuations going through this period of time correction, everything else in the market which shows an uptick in growth would attract more flows so I think that is where some of these infrastructure names would also benefit.
But within infra what would you make in terms of your check list?
The problem is there is a handful of companies to play. You can look at the leaders. Something like a Larsen over there or one or two smaller niche construction companies and then one has to go to cement companies.
Cement would become a natural kind of a proxy to play the infrastructure growth in the portfolios. The other issue one has in markets that if you look at most of these groups which came in 90s and 2000s, they are nowhere to be seen. That is really the problem and that would be the key challenge for India over the next three, four years. If you want to revive the investment demand, do we have the companies which can capitalise on that?