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Markets see expensive uptrend as people search for safety: Vishal Kampani

Stocks that are very liquid, which can grow at 10-20% are trading at 40 to 50 PE.

, ET Now|
Updated: Nov 08, 2019, 04.38 PM IST
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THE ECONOMIC TIMES
Vishal Kampani2-1200
The valuation is in favour of some of the smaller and midcap companies; it is not in favour of the larger companies, says Vishal Kampani, Group MD, JM Financial. Excerpts from an interview with ETNOW.

Is there a disconnect between the market and the economy or is it something which market is sensing which lies ahead?
I would like to begin by saying that markets are always forward looking and there is always a hope and expectation built into stock prices. The government is doing a lot in terms of the economy. You are right that there is a disconnect between where the market valuations are and where the economic reality in India today is.

But with all the steps being taken by the government and if you see some of the micro data which is coming out, whether it is real estate sales or consumption figures of last two months, everything is pointing towards a change in confidence. I do not expect things to turn very quickly but over the next six months to a year, we will see a positive turn and the markets are pointing in that direction.

How do you rate the midcaps and largecaps in terms of valuations? Also, what is the feedback you get from your clients regarding the appetite over here?
India is seeing an expensive uptrend and people want to buy very safe names and safe stocks. You are not only seeing that in the equity markets, you are also seeing that in the credit markets today. There is a clear expensive uptrend. People are finding safety on the bond side, you are seeing a lot of spread, a huge depression in spread where AAAs are being able to raise money at extremely low rates and that is not following through for the AAs. The same thing is happening in the equity markets. Stocks that are very liquid, large companies, who are able to grow even at 10% to 20% are trading at 40 to 50 PE.

So there is an expensive uptrend. One can look at midcaps and on the credit side, look at some very interesting AA papers. The valuation is in favour of maybe some of the smaller companies and midcap companies, it is not in favour for some of the larger companies.

There was a huge fund raise which happened a few days back. You were also one of the bankers of Bajaj Finance. It was a big QIP. There was a huge response, How do you analyse that kind of response?
The offer was of Rs 8,500 crore but it saw unprecedented demand. But Bajaj Finance is a unique company. It is one of the best financial services businesses in India. It has managed its business successfully over cycles and is operating with extremely high quality assets in terms of asset quality and the growth rates have been phenomenal over the last decade, not to speak of a fantastic management with top quality governance. When you see a company like that and which is able to grow 20-25% over half a decade or more, there is tremendous interest from both FII and domestic investors. We had almost Rs 40,000-45,000 crore of demand from the highest quality investors,. Everyone was interested in a piece of the pie.

Some people say that it is an NBFC with the soul of a bank and probably that is why it works out so well. Meanwhile, the NBFCs have been to hell and back in the last 15 months.
To hell for sure, back I am not sure.

But if you look at the steps the government has taken, some of the companies including yours, some of your peers have successfully managed to raise money via ECBs or NCDs. They have improved their capitalisation levels versus a large lot which has not been able to do that. How are you analysing things as they stand as far as NBFC space goes?

The issue to start with was focussed on liquidity. But now the issue has moved to asset quality as extended period of not having liquidity can result in asset quality issues. The good part is that the government has realised this. Many of the large banks have realised this and there is a lot of support coming in for NBFCs and we are seeing that on the ground. This last scheme which has been announced last night by the finance minister is a fantastic scheme giving Rs 25,000 crore of priority finance for completion of real estate projects to me and will release Rs 1 lakh crores of liquidity in the sector.
When you look at the Rs 25,000 crore of projects, these are already under construction. Normally, construction costs are 20% of sales. So if Rs 25,000 crore is the number which is going to complete these projects, you are going to release almost Rs 80,000-100,000 crore of cash flow in the system via sales and this is a big number.

Take Bangalore city for example. The average starting price in Bangalore for a unit is Rs 6,000 a square foot. The construction cost for that unit is not more than Rs 1,500. So, as long as I spend Rs 1,500 per unit and complete the unit, my receivables cycle of Rs 6,000 comes back into the real estate NBFCs and the developers and the entire supply chain of real estate whether it is steel, cement, ceramics.

The finance minister has not given us a Rs 25,000 crore boost, she has actually given us a Rs 1,25,000-crore boost but the market is not being able to see it. It is a fantastic step. She has gone and addressed the core of the issue which was a fantastic move last night.

You mean to say that the Rs 25,000 crore is potent enough to release over Rs 100,000 crore worth of liquidity into the system? This will be in six-eight months?
In a 1-2-year cycle but it is a lot of capital focussed on a single sector — below Rs 2 crore homes, which is amazing because the maximum money in this country is stuck in real estate. I go for a morning walk and I talk to a few friends. On an average, half of their capital is stuck in real estate — either in projects not completed or in projects completed where they are earning a very low yields on their investment. This is the most important sector for India and the Finance Minister has taken clear note of that and is putting steps in place to enable liquidity and given a confidence booster.

We get mixed signals so far in the second quarter earnings. Titan, has cut down its guidance but a Bajaj Finance says no need to cut outlook yet. What do you think when you meet companies across the world?
In case of Titan, it may not be an issue of demand only. The issue could be trends. Do younger people really want to buy gold jewellery or watches? Or would they want to buy smart watches, Apple watches? It is more about consumer behaviour. Bajaj Finance is a financing model. As long as the consumers want to buy something, their financing is available. A specific consumer company is about its own product. So those are two different categories.

But in the last 20 years, Indian corporates have gotten very smart about how they allocate their capital and for a long-term investor. the most important thing is how a management of a company, how a board of a company and how the CEO of that company thinks about its capital allocation and across all my conversations with all of our clients we clearly see a trend that Indian corporates have become very smart about how they allocate their capital and how they make returns on that capital and which was not necessarily true in the last two decades. This is a big fundamental shift you are going to see over the next 10 years. In the next two months, you are going to see smarter utilisation of capital that is given to private corporate sector to invest. This is a big theme which a lot of big global investors —- whether private equity, sovereign or even FIIs — are looking at. This will result in higher returns on capital over the next five to 10 years, thereby making India a very attractive investment opportunity.

We have seen a couple of quarters of around 5% GDP growth and the fear is the recovery cycle may get prolonged. What is your own thoughts on recovery? How many quarters will it take befoer nudge back towards 6.5 to 7%?
We will have to be cautious in the next four quarters. The steps the government has taken will see changes very quickly on the economy in the next one year. Things may get worse before they get better. One has to be cautious on the economy front but the government is very focussed on it. RBI as a regulator is very focussed on it and we are hearing all sort of positive noises which is a good thing.

This will not be a prolonged slowdown, I think there will be a bounce back. Having said that, there are global concerns on growth. We have talked about this in the last couple of months and there have been some drop in estimates of global growth next year from IMF and many other bodies. That of course, is a concerning factor because you have these trade headwinds and if you have less trade, it means you will have less GDP growth.

How India performs through this cycle of lower global growth, domestic liquidity challenges and warning to maintain the fiscal deficit and how India is being able to perform through this, is going to be a challenging task. I am very confident with what we have seen in the last two, three months.

Since good prices and good news would not come together in the next 12-18 months, do you think this is a good time for investors to deploy funds which they have raised and have been sitting on? Do you think this is a good time for portfolio allocation?
100%. As I said earlier, I would have a larger portfolio allocation today towards midcap stocks. Some are at attractive valuations and where we see good, robust cash flow generation on the public limited side. On the private side, you already have a slew of private equity as well as venture capital funds, funding projects and venture capital in private equity are seeing their peak historic levels of funds raised. There is a ton of capital which can fund private companies in India. So that is not an issue. On the credit side, there is an amazing opportunity to invest in maybe AA bonds over AAA bonds.

I understand that you are working very closely with several high quality interesting startup disruptors. How is the appetite from your investing friends and fraternity towards this area of the market?
There is very high interest but at the same time one has to be careful because the burn rates of some of these companies are very high and if you have a concentrated source of capital which is funding some of these companies, that to me is a high risk event because if that concentrated source of capital is not being able to put more money to work, it should not lead to half of operations at the startups end.

For a startup, the most important fundamental thing is that they have to constantly raise money. When you are approaching a new sector and you are thinking about a new design for a new sector. you are bound to have a lot of burn because you are taking a different, more comfortable approach but when you want to grow very fast and get customers that approach you, make sure that you have enough capital to burn through, reaching that peak size where you have become profitable and that can be a 10-year journey.

Capital is available but I would be cautious on startup India. They should broad-base the kind of capital they are raising, they should not be depending on single or dual sources of capital to raise money and they should have an eye on profitability finally at some point in time and not just be burning capital.

We have seen a couple of quarters of around 5% GDP growth and the fear is the recovery cycle may get prolonged. What is your own thoughts on recovery? How many quarters will it take befoer nudge back towards 6.5 to 7%?
We will have to be cautious in the next four quarters. The steps the government has taken will see changes very quickly on the economy in the next one year. Things may get worse before they get better. One has to be cautious on the economy front but the government is very focussed on it. RBI as a regulator is very focussed on it and we are hearing all sort of positive noises which is a good thing.

This will not be a prolonged slowdown, I think there will be a bounce back. Having said that, there are global concerns on growth. We have talked about this in the last couple of months and there have been some drop in estimates of global growth next year from IMF and many other bodies. That of course, is a concerning factor because you have these trade headwinds and if you have less trade, it means you will have less GDP growth.

How India performs through this cycle of lower global growth, domestic liquidity challenges and warning to maintain the fiscal deficit and how India is being able to perform through this, is going to be a challenging task. I am very confident with what we have seen in the last two, three months.

Since good prices and good news would not come together in the next 12-18 months, do you think this is a good time for investors to deploy funds which they have raised and have been sitting on? Do you think this is a good time for portfolio allocation?
100%. As I said earlier, I would have a larger portfolio allocation today towards midcap stocks. Some are at attractive valuations and where we see good, robust cash flow generation on the public limited side. On the private side, you already have a slew of private equity as well as venture capital funds, funding projects and venture capital in private equity are seeing their peak historic levels of funds raised. There is a ton of capital which can fund private companies in India. So that is not an issue. On the credit side, there is an amazing opportunity to invest in maybe AA bonds over AAA bonds.

Corporate governance issues in the last 15-16 months have really come to the fore. Companies where there were question marks have been derated, companies which were above par have been assigned premium valuations. Sometimes very high quality companies also come into corporate governance glare for some whistleblower complaint etc. Do you think that this trial by fire will continue for some time till we are in a risk-off environment in India?
Yes, totally. The trial by fire will continue for a period of time and I must say that see governance is very important at the end of the day and for most foreign investors today that is the top priority. If companies are low on governance, they will take a large beating in their multiples and you are seeing that.

Infosys is a high quality company but still somehow they got caught in the crossfire?
But you have heard the statement from Mr Nilekani. He said even God will not be able to change Infosys numbers. So I am sure they will come out of it.

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