Private banks, large NBFCs should continue to do well: Dhiraj Relli, HDFC Securities
In an interview with ET Wealth, Dhiraj Relli, MD and CEO, HDFC Securities talk about which sectors you can bet on now, expectations on how long the ongoing slump will continue and why trade wars are favourable for India.
How long do you expect the ongoing slump to continue?
I think all stakeholders were living in denial about the ongoing slowdown until now. We did not anticipate this slump to last so long. In India, we have always believed that consumption is a secular story. So we never thought we would have issues on the consumption front. We have always been more worried about the investment cycle. The next bull run will actually come when we see investment cycle kicking in, especially private capex. Right now, that seems to be a distant possibility. We are hovering at around 74% capacity utilisation across industries. Only when promoters see the demand decisively exceeding supply will we see resumption of private capex.
This question—of whether we are in a structural or cyclical slowdown—can be debated forever. The fact is that we are in a slowdown and that will not go away for at least another few quarters. Some of it is owing to the reforms like GST and RERA— though these are good for the economy in the long run, it did impact growth in the near term. Introduction of GST has impacted the informal sector in a big way. The cash economy, which we believed as the parallel economy, was more than that. That is why GDP growth has tapered off.
However, the government is taking measures now, be it in the form of bank recapitalisation or setting up a Rs 25,000-crore realty fund or reduction of corporate tax. The recent tax cut will make a lot of projects viable, improving margins and earnings for companies. Earnings growth this year will have limited impact on the slowdown because of the tax cuts. It is a sustainable benefit which should revise corporate growth.
Are global factors no longer a concern?
More or less most global factors are aligning in favour of India, barring some impact from the Brexit. Trade wars are favourable for India. We have little dependence on exports. There is an opportunity for India to gain higher export share from emerging economies. The US-China trade tiff looks to be getting resolved soon.
China being in a position of strength has been able to have prolonged negotiations with the US. I don’t think protectionism can sustain for long. Countries will move towards free trade structure eventually. All major global institutions advocate free trade environment and discourage protectionism. The US Fed is reducing interest rates, but from here on the cuts are likely to be limited as the US economy continues to do well. For an economy like China, 5-6% growth is decent. They have got the model right in various areas, particularly the electric vehicles segment where they have taken a lead.
Are you at all concerned about valuations of so-called quality stocks?
Valuations are stretched, no doubt. But I don’t expect these to correct significantly in the near future. These companies are fetching a premium for being market leaders— able to withstand turbulent and disruptive conditions, demonstrate capability to gain market share and for having higher governance standards.
As long as these factors persist, preference for these stocks will continue to be higher. When the firms at the tail end of the NBFC sector stopped getting funds, a few NBFCs could stand out, gain market share and attract funds at their convenience. This played out in private sector banks too, gaining share relative to public sector banks grappling with NPA issues and capital adequacy bottlenecks. The top three private sector banks have clocked 20%+ growth in the last few quarters. Such companies can continue to command higher multiples. While the upside for these stocks may be limited, I don’t expect sharp price correction. Some may see time correction.
Does the mid-cap space look more attractive now?
In 2017, mid-caps and small-caps gave stellar returns. From 2018, we have seen multiple negatives for these segments. The re-categorisation in mutual funds hurt the segment. Long term capital gains (LTCG) tax too was introduced around the same time. All these factors together resulted in a big blow to the mid-caps.
Over the last two years, most mid-caps and small-caps have corrected between 30-50% from peak valuations. We have seen price correction as well as time correction here. My belief is that we will see a healthy uptick in the broader markets next year, even as frontline indices give muted returns. However, stock selection will be critical. Retail investors should not jump onto the bandwagon and invest in all and sundry. Be sure of the quality of the business model, management and sustainability.
Which sectors are you betting on now?
Private sector banks and large NBFCs should continue to do well. PSUs will continue to vacate market share. Even some of the smaller private banks can grow faster as the base is very small. Private banks are also beefing up their liability franchise. The advantage PSU banks had owing to their distribution is narrowing because of digital penetration.
Domestic pharma companies will do better than export centric ones. Auto ancillaries will also pick up when the sector bounces back from the cyclical slowdown. There are new options emerging in the non-lending financial services segment. Listed insurance companies and asset management firms have done really well and more such listings are expected. The penetration levels are low in these areas. Low penetration remains a solid theme to play be it in terms of credit penetration, durables sales, insurance coverage or formalised investment vehicles like asset management companies.