Rural market alone may escape consumption slowdown: Anand Tandon
Banking remains an overweight sector in any portfolio.
Do you think valuations in consumption are not cheap and one should be careful about buying those names?
Consumption has been the only theme that has been driving the market and it continues for the lack of any other theme. While there was some hope that corporate growth will revive and earlier this year, there was even some talk about the capex cycle starting, which never happened and even the consumption theme has to take a bit of a back seat because consumption itself is clearly slowing down.
The one area where perhaps you are not likely to see much of a slowdown is likely to be rural consumption because after the monsoon, we are likely to get a reasonably decent second season for crops for the rest of the year, plus with the government attempting to increase the prices of various commodities and trying to push more money into the rural markets, that is one place where you may not see so much of a consumption slowdown.
Yes, they are extremely overpriced, if you have to be buying anything which is consumer facing, you should be looking at things that are selling in the rural market.
Do you find anything attractive from the cyclical basket?
If by that you mean the commodities, it largely depends on the global cycle. Global commodities is not something that I am a great bull on, given where we are in the overall global economic cycle. Domestic commodities like cement etc probably will do better than many of the other sectors and therefore even though it is not as if they are really running away with things, you are still probably better off owning them because the growth rate will probably be a little better than what many of the other sectors will come up with.
On the domestic side, industrials etc are not doing all that well and we are still some distance off. You have to have a much higher capacity utilisation before you can start seeing anybody putting up capex. The entire focus on saying that we will somehow incentivise companies to start capex is putting the cart before the horse.
Aramco is a strategy bet, but given the government’s divestment drive, Aramco interest in BPCL could be exactly what they need.
Certainly this is one of the companies that can be sold. Unfortunately, the government is saddled with a lot of companies which are not really saleable. You can only sell something that makes money and has some prospects. Anyone buying it gets almost a quarter of the Indian distribution in terms of petro products and close to 15,000 established outlets all at one go. Obviously it is going to be something which will be valued extremely high and will allow the government to make a lot of money at one stroke.
Whether this will be replicated or is replicable in other cases which are not so attractive in terms of their prospects is the real question. If you sell the best that you have got right upfront, what are you going to do when you go to sell Air India? That is something that one has to look at. But that said, by itself I do not see anything wrong with the transaction.
But do you think that when you look at divestment targets, if any big company is thrown open for privatisation, it will attract a lot of investors?
If there is privatisation and the government does not try and control the company after it has exited or even if it is not fully exited, it does not have any kind of say in the management of the company, the strategic value somebody will be prepared to pay will be far higher than if they were just an investor along with the government.
All said and done, the government as your partner is hardly the best way of running a business. You already have them as a partner in terms of the taxes you pay them, you do want them involved in the decision making as well, which will necessarily slow down all economic processes. So yes, if you are going to raise any serious money, privatisation is the way to go and it is just that you need to do a basket where you are also getting rid of some of the duds.
When you look at the pharma pack, should one selectively start to look at the pharma pack? There are a lot of companies which have huge exposure to India and other markets as well. Should the correction be used as a buying opportunity?
I have been bullish on pharma way before the market has been and perhaps the market has been right because the problems do not seem to end. That said, structurally we are again at a stage where the pricing pressure is perhaps a bit lower in the US market and the consolidation has probably run its way through. So from here on, the question will be who has a better portfolio, who is doing more complex generics and there the competition is less rather than the totally commoditised kind of generics where you are going to be up against a whole lot of people.
The Indian market will continue to grow at a steady clip. It is doing a little over double digit kind of growth and I do not see that changing very dramatically though there were some fears about the government trying to increase the list of regulated drugs. But broadly, an almost double-digit volume growth or a little more will continue and while that can provide steady earnings, I am not sure that that can drive valuations very high.
So, to a large extent you have to look at companies which have a good portfolio going forward in the US and other developed markets and where the margin can be quite good. There are several companies which are now attractively priced if you take a three-year view.
When you look at some of these pharma names, how do you think the markets are reacting to various Form 483s that are coming in?
About four years ago, there was nobody who was willing to say that there would be anything wrong with pharma and everything was being priced as if there is no cyclicality or no risks. Now, we have come to the other side of the extreme where we are saying that look everything is a problem and FDA will pretty much stop all business from India. I think neither of that is true. At the end of the day, India remains one of the largest suppliers of generic medicines and the globally there is still a lot of pressure in terms of medicine prices going up.
So you have to find ways to reduce it in terms of scale as well as production capacity and the number of plants etc. India is one of the largest markets. FDA itself has to be a little careful about how they rollout all the rules and regulations so as not to harm their own market. The market is a bit overplaying things. But that said, you have to come to a stage where the Indian companies too become a lot more careful about their quality parameters and do not just take things with a chalta hai (anything goes) attitude.
How would you look at the banking space?
I do not think that we are fully out of the woods yet. Basically it is still running on one part of the business which is the consumer. Everybody whoever was lending to corporates is also now talking about lending to consumers. That is hardly good news for the industry as well as the fact that you are now setting yourself up for having an over-exposed book in terms of the consumer market and that will mean that the cost of credit there has to go up as well.
Eventually, these things tend to move in cycle. When everybody decides that consumers are the place to be, you can almost take a bet that that is where the defaults will start to come through because the credit quality, etc, will start to fall because of the excess of competition.
On the other hand, the corporate book does not seem to have improved very dramatically, though we have not had huge number of NPAs but the numbers are still coming through. We keep on getting newer and newer problems almost on a weekly basis which is not good news. Overall. banking will still be something that will improve over last year, certainly the corporate facing banks will not see the same level of NPA accretions as we have seen in the past. But the growth in terms of the bottom line which was expected to be very robust is likely to be less so. This remains an overweight sector in any portfolio in my view.
Would you like to buy into some of the auto names? Do you believe that auto as a pack should do well? It is a pure domestic story, prices have come down, yes sales are yet to pick up. Do you believe that prices are factoring in the risk?
We are still some distance away from getting a turnaround in terms of domestic demand. Even the festive season has not been all that festive. We have still seen a de-growth year-on-year in terms of most of the product lines. Till the new BSVI norms etc come through and sales start from there, we will still have an issue in terms of actually growth coming through.
At this stage, almost anything that exports, to my mind, is better than something which is doing only purely domestic because though India is struggling with exports. The reality is anything that is able to export in a situation like this is probably very competitive and doing a great job. To my mind, export-oriented companies are always a little better than just pure domestic plays and there are companies in the auto sector as well which are exporting where I would imagine that whenever the turnaround happens, it will be a much faster pickup. Right now though, the global markets do look a little grim.