It has been a hard year to call. Lots of news, lots of views. What do you make of the news flow and the market action so far for this year?
We started off the year with negative news flow on foreign flows. Basically, India was the only game in town through 2022 and at the start of the year, we started to see other emerging markets look more attractive which continued the pressure on foreign selling which was visible for much of 2022 as well except for the last quarter or so and then we saw that resume at the start of the year.
And then of course there was the episode of the report on Adani Group which caused a massive risk-off in terms of sentiment in so far as India is concerned. These two events combined plus the fact that India’s demand is slowing down, earnings growth is kind of ho-hum did not really leave any room for excitement. That caused the weak sentiment and lack of interest among market participants over the last two-two and a half months.
The way I think about it is that hopefully at some point in time during the year, we will start seeing an end of the rate hiking cycle of the last year or so. Hopefully, with growth expectations moderating, we will get into a situation where earnings growth will start meeting expectations and the extraordinary amount of capital expenditure that the government is putting into the ground will start to have a knock-on effect on aggregate demand. That is what I am hoping to see as the year goes forward. It has been a very lacklustre year so far.
Do you think the impact the market felt due to the selloff in Adani Group of stocks is behind us? Is the price adjustment over?
Yes, I think so. The whole episode which led to the selloff in the banks and weakness in the sentiment is now behind us. This is partly because all the financial companies and banks that are lenders to the group kept reiterating that insofar as the operating companies are concerned, the operating cash flows are sufficient to cover the debt. Now, I am not invested in any of these companies and so I do not have any first-hand knowledge on what indebtedness etc. looks like.
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But if I accept that at face value and then you look at the GQG transaction that happened last week, it appears that at least for the moment, the group has enough cash flows to be able to meet its obligations. Whether in the near term we will see more sell down from them or any specific asset sale is hard to tell. But I would imagine that given the steep fall in stock prices of the group and given the cash raise that happened last week, insofar as the market is concerned this is no longer an overhang.Has the Adani saga put a new lens to leveraged groups in the market? Without naming a few, is the market now going to be circumspect of highly leveraged balance sheets?
Well that has been the case for the last 10 years. Since you brought this up, I was just reading this morning an article on the appointment of Ashish Gupta as the CIO of Axis Mutual Fund and how he shot to fame with his House of Debt report in 2012. If you go back over the last decade, debt has been a dirty word pretty much all through and the market has been very careful about investing in companies which have a lot of debt.
I do not think there is an incremental change to that perception. I would not say that over the last two years or so of the rally that we saw post Covid, the market became a little bit cavalier in terms of how it looked at debt oriented companies. I do not think there is a change there frankly.
Interest rates are high, NIMS will come under pressure and the peak of the profitability is behind us. Do you think the best of the runup in banks is over?
I have been wondering about that too but let us take the three pieces that you spoke about. Let us first talk about rates going up and NIMS. Insofar as the results for the December quarter are concerned, there is no pressure on NIMS. And if you look at the outlook that has been presented by most of the banks after the December quarter results, they do not indicate any pressure on NIMS either. Bulk of the loan book is floating in nature and some of the FDs are kind of fixed in nature.
So in a rising rate cycle, the near term NIMS do not see much of a pressure. That is obviously evident in the numbers that we see in the December quarter and that is coming through in the commentary for the March quarter as well. I do not think NIMS are going to be under pressure right now.
In terms of credit costs, yes, in terms of operating expenses and credit costs, a lot of the good work done over the last four or five years is now finally showing through for the last three or four quarters. My sense is that write-backs are still not in. That may be a source of positive earnings surprises as we go ahead. There is a lot of chatter about difficult resolutions making some headway. So let us hope and see what comes through.
So putting this together, is the best of the rally in the banks done? The answer probably in percentage terms is yes but will we see more upside in the banks? My take would be yes, we will see more upside because earnings growth is still going to be quite robust, balance sheets are starting to grow. We are seeing loan growth in mid teens for most of the banks. So earnings growth is going to be very good.
If you look at long-term valuations, many of the banks are still trading at below median valuations from a long term historical perspective. One of the things that I have figured out over a period of time, or at least that is what I think, is that no sector tops out till it starts trading well above the median in terms of valuation. I do not think the valuations are excessive just yet and that gives me hope.
We are not going to see multibaggers from here. But will we still see some price action and is this still a good place to invest in? I think so.
What is your take on the telecom space as a whole? We are seeing a lot of faster data, mobile penetration. What about some of the headwinds for these companies like reduced profitability or high debt? Is that a concern?
Not to my mind. The stability in market shares between the two leading players and the small steps being taken to raise prices at the bottom of the pyramid, the rollout of the 5G services, will lead to a switch over at the top end of the pyramid. These are all factors that should help earnings as we go along.
Also, I am just thinking and reading about the news reports where the regulators are talking about OTT players having to share some of the revenues with the telcos. I do not know what will finally come through but it can be something better than zero, which is the case right now. That might be another leg up. It is a consistent earnings growth story. Valuations are okay. They are not super expensive. There may be a little more leg room here for the stock prices to move.
What about infrastructure because everyone is definitely bullish on this space. Is it now getting to that overcrowded trade, or are valuations still pretty lucrative?
Infrastructure is a difficult one. If you look at construction companies and providers of infrastructure services, this is a deeply cyclical business with huge payment issues and receivables in the past. I am very wary of investing in this area.
Insofar as infrastructure owners are concerned, if you go back in history and see how many of them have made money for investors on a consistent basis, the answers are very, very few. It is a growth area which is driven by government investment, and hopefully it will drive the economy. But does it mean that the stock market will make you money because of infrastructure? Probably not directly, maybe indirectly through machinery manufacturers, and overall aggregate demand picking up. That would be the way I would look at it. I am staying away from infrastructure space by and large.