How are you looking at Make in India gaining momentum? Any stocks or themes that you are looking at?
I would say the make in India as a theme has been around for a very long time and there are sceptics around those too because in the past the scheme has not worked. There has been a big lag but this time around we are confident. And why is that? I would highlight three things. One, I would say this time around, the government is working in a targeted fashion to address the issues related to industrial production which is land, labour, power, access to cheap capital, logistics and infrastructure.
All of these have been issues in the past and the government is working on it. We are also rapidly trying to curtail our $51-billion trade deficit with China and then you would see that every global company is really looking at China Plus One manufacturing strategy.
We have done a global survey on that recently for all the companies that we cover globally and we have learnt that around 75% of the companies are contemplating seriously having a China Plus One production strategy. If this really goes through as also the targeted efforts that the government is making will lead to some degree of success in terms of make in India.
Coming to the sectors that you mentioned, particularly within the Make in India theme, we are very confident that the success we saw within mobile phones will now translate into broader consumer electronic category which is all the white goods, televisions, so on and so forth. We also think that this will be reasonably successful in pharma as well as the coal sector. While coal is not so much of an export led sector, there is $23-billion of imports that we do every year for coal and that we think can be curtailed and then subsequently if the theme accelerates to more reforms within defence, maybe the production linked schemes will expand to textiles. We think it could continue to spread across more sectors at this time.
What about metals? Where do they lie on the overall scheme of things? How much room is there and near term risk as well?
Metals is connected with the make in India and the infrastructure push theme. Clearly infrastructure is a big driver of demand for metals. Also at this point in time, there is consolidation happening for sure and a lot of marginal, small metal companies are not able to scale up. The big companies are gaining market share plus the spread of margins that you have within the steel companies is actually accelerating in India as compared to that in China.
All these put together is already in a quite comfortable zone and if the make in India story accelerates plus there is talk of government giving a push towards more infrastructure capex and if both of that comes together, there could be a reasonably good rally within the metal sector and broadly the material sector including cement as well.
Lots has been said about how there is a chance that NPAs are going to balloon once the moratorium gets lifted and that is when the real picture with the NPA stress on the books is going to come to light. Do you believe that right now is the time to buy into banks when the prices are down?
Absolutely. If you look at the top four private banks in India right now, especially after the capital raise that they have done, their capital ratios are fantastic. In fact, we put out a report from the banking team that says the capital ratios for the private banks are now the best in the emerging markets and on the back of this capital raise. The top four banks now have 8-10% NPA coverage ratio. But the market might wait for a couple of months to get clarity on what kind of NPAs or loan restructurings will really come through and the rally may start only on the back of that.
But we are positive on a few private sector financial companies. We clearly think that they are really well capitalised. If the NPAs do not turn up as much as one worries about, then they have adequate capital for a good runway of growth — either right up to ’25-26 or this capital is probably available for inorganic growth as well.
Do you believe there is still a meaty chance to get into autos or auto ancillaries for the long haul?
For the short term yes, but unfortunately we are not so positive on anything discretionary at this point in time and autos fits in there. Retail credit growth, which is one of the key drivers for anything discretionary, is coming off. You would have seen that the retail credit growth is down to 10%, it used to be 17% prior to Covid and even the commentary or the outlook that you hear from the retail lenders is not that upbeat.
Combine that with the fact that recently we looked at 240 companies within NSE 500 that have reported earnings. So far, everybody is talking about curtailing costs. The overheads of these 240 companies right now is down by about 25% year-on-year.
Of course, some of these costs were transitory and may rebound but then some of these costs will be structural and while it is positive for earnings of these companies that are cutting the cost, on the other hand, it means more job losses, more income losses in general combined with the fact that retail credit is tougher to get now.
The volumes that the discretionary stocks saw in FY19 may now be back only by FY23. So, a flattish volume over a three-four year period, especially in the context of where these stocks are trading currently, do not make us very upbeat on discretionary stocks or the auto pack in general.
I know you are underweight financials but what is the rationale behind that? Is it a valuation strategy, is it the fact that you are concerned perhaps on the NPA front or you just see better opportunity elsewhere?
We are not underweight financials but as I said to the point that you made too, we think the markets will wait for a couple of months for clarity to emerge on the quantum of loan restructuring on NPAs that are coming up.
If the numbers are not too high, then we think that private sector financials have a pretty good scope of taking the market forward. So, we are not conservative on that space but we are just waiting for a couple of months for clarity to emerge in order to go all out.
ET Now: Going forward, do you see broader markets starting to perform? Do you see consolidation?
Amish Shah: For the broader markets, we were quite upbeat over the last few months but recently we are talking about markets consolidating for a while. On a bottom-up sector basis, some of the large sectors like IT, pharma, telecom which is about 44-45% of the index weight, have done really well and unfortunately the valuations do not have a lot of room for further rerating going forward.
Those stocks may take a breather now. Financials, which is the other large sector in the index for the next couple of months, as I said we do think that the markets will wait for clarity to emerge on NPAs or loan restructuring so they may not immediately perform, near term.
On the other hand on the positive side, we have increased our weights for industrials, materials and logistics sectors. We are already overweight on staples but all of that put together is more like 20% weight in the markets. When you look at it on a bottom up basis, I do think that the markets may take a breather a few months later.