2018 is going to be a tough year for Indian equity markets and so one should not expect great returns. There is lot of event uncertainty through the year, said Sridhar Sivaram, Investment Director, Enam Holdings
In this type of scenario, the main aim of the house is to protect capital by investing in good companies with strong earnings growth. The house is very upbeat on road construction space and some engineering companies.
He said India macros have significantly deteriorated and it is the micro story that is playing out, adding that the best bull markets have come when the macros are bad.
Improvement in commercial vehicles and tractor segment are some of the space that tell you the micros are improving, said Sivaram.
Sectorwise, he said that the Indian IT players have missed the bus in terms of getting into new technology like artificial intelligence etc. While their Chinese counterparts are way ahead.
Moreover, Nasscom too has predicted only a 7-8 percent growth for the industry and so, at the most, they could be a value buy. However, foreign investors don’t look for value investments. Therefore on a structural basis the house is not bullish on IT, said Sivaram.
When asked about the benefits of the e-Way Bill, he said in the short-term it could have issues but it is good over the long-term. In short-term, companies may find it difficult to move goods easily because lot of paper work will be required. It will first be started for movement of goods within the state and later for moving between different states. It will aid GST collection in the long-term.
With regards to banking, he said we could be nearing the end of the banking clean-up cycle. There is opportunity for private banks and NBFCs to gain market share because much of the lending activity for PSU banks has come down.
Below is the verbatim transcript of the interview.
Anuj: Is this still a bull market correction or start of some kind of bear phase?
A: I would say it is still like the bull market correction. We haven’t seen any correction last year. Globally, also we haven’t seen a correction last year, but we haven’t had the exact 9 year bull market that the US Market has had because we have had our own choppy sessions in between. So, I would say it is healthy correction that was broadly required. We are back to 10,000 which we hit in July, so that is almost 8 months of market move is gone and in the interim we had patchy earnings and plus many news flows which are not great for the market. I would say it is a good consolidation that the market needed and there was irrational exuberance as one says in the market at various pockets some of them have corrected very fast. So, I think it is great, it is a reminder for people that this is not one way street. We have seen market for 20 years and we see this very often, but many of the investors who have come in the last three years haven’t seen it at all.
Latha: Just a counter theory whether one should worry about this. The SEBI moved first asking people to declare their default disclosures and it looks like the Reserve Bank stopped that and put in their own version asking that first time default itself should be treated with resolution. The point is there is a very strict NPA recognition and therefore provisioning norm lying ahead. Does this have the potential to keep markets lower for a longish bit?
A: I think this entire banking clean up, we are seeing almost for one and a half years now and I think we are towards the end of the cycle now. I have had the chance to meet at least 7 or 8 bank CEO’s over the last 15-20 days. I think a broad sense is that most people or at least the markets have already factored a lot of this as NPAs because these are either recognised as restructured or in some other name or nomenclature that some of these banks disclose. So, it is only a question of moving there from there to actually NPA and maybe some increase in provisioning.
Our stance to most of the banks was please do it in one short in the March quarter itself. However as it seems most bankers don’t seem to be wanting to do that including some of the private sector. So, we would have been happier if everything came in this quarter and FY 2018-2019 would have been a normalised year. But as it is turning out I don’t think that it is going to be the case. Lot of it will be recognised in the first and second quarter of next year also which is something I am not very happy with the way the banks are going about this.
Latha: My point is what is the impact on generally the market itself, if say bankers don’t lend or if they have to quickly recognise NPAs?
A: Quickly recognising NPA in our view is not an issue because investors like ours and many of the others have already treated this as NPA and we adjust our books, so I don’t see that as an issue. My issue is this lingering around and continuing for a much longer period of time and the other think as you mentioned lending that I think as specially on the PSU side, many of the lending activity, I can say probably has 90 percent come down substantially because approval are becoming much more stricter. So, this is an opportunity for private bankers and NBFCs to step in and to use this as an opportunity to gain market share. So, I think the PSU loss of market share will only accelerate from here. Speaking to many companies I mean some sort of letter of credit or any of the other form for exports have significantly come down. Even if it is AAA rated company banks are not even giving these or if it was taking two days earlier it is taking one month. So, I think those are the challenges some of the companies are facing.
Sonia: What role do you think this spike up in crude will play in dragging the markets further down?
A: India’s macro has significantly deteriorated. So, if we go back say three years to where we are now, we are seeing inflation inching up. Even though it is still within the RBI band we are seeing our current account deficit moving up and also we are seeing interest rates from RBI signalling is moving up. So, I think the sweet spot that we were in during the last three years has surely moved away.
Having said that India’s some of the best bull markets have come when our macro hasn’t been great. So, India is a really a micro story. If I look at the micros I am seeing some of the micros really improving. So, you look at commercial vehicles (CVs) or look at tractors or look at two-wheelers generally the numbers that we are seeing they are seeing much more positive numbers as far as micro is concerned whereas macro is deteriorating. So, I have no debate that our best of macro is behind us and I think it is already had some impact on the market. It depends on how RBI takes it forward from here.
Latha: Both of us are only asking you what is the kind of downside you are seeing in market?
A: It is very difficult to say what will be the downside for the market. In general our belief is 2018 is a tough year and not to expect too much of returns. In fact we are currently underperforming the emerging markets, we are almost 10 percent and as long as we hold some range in the market somewhere in this range say plus minus 5 or 10 percent that should be a good outcome. Keep in mind that we still have many uncertain events ahead. We have a E-Way bill which is starting from April 1st which lot of people tell me is slightly disruptive. Then we have some elections which are coming.
Normally elections don’t have long term impact, but it does come up with short term impact. Some of the experts tell me that we could have a Lok Sabha election in November. I am not an expert on that but if those are the things that are playing out 2018 has many uncertain events and we have had a great 2017 so if I put all those things together this looks like a tough year and protecting capital will be my paramount objective right now.
Anuj: Let us talk about you said it is a micro story. One story which has played out is a lot of money has moved from largecap financials to IT this year and in fact in the last quarter of last year as well. Do you reckon it is just a valuation adjustment trade or are you sensing something big here?
A: So I am not a big fan of IT because I think the Indian IT companies have really missed the bus in terms of getting into the new level of cutting-edge technology be it on the artificial intelligence or machine learning any of those. When I look at Chinese counterparts who were nowhere have suddenly have market caps of you know 10 billion - 20 billion who are in the specialised technology space. So, still we may not like when you say it is body shopping, but look at the way H-1B visas are applied for, you know that this is a labour arbitrage that is going on and look at the Nasscom numbers it is 7 to 8 percent growth. So for a value investor there is some opportunity here, but normally global investors don't come to India for value investing. I could buy Accenture or IBM for the same price, so if you ask me I'm not a big bull on Indian IT. There is some value and you could play that, but on a structural basis if you ask me I am not bullish on IT.
Sonia: I just wanted to come back to the point you were making about the e-way bill roll out. What is the feedback you are getting? What kind of hurdles do you think it could pose?
A: So, if you look at the way E-way bill is structured today if I am a company I am moving my own good from my factory to godown I need a e-waybill, from my godown to my distributor I need e-waybill. So there are too many documentation that is required. Today with the lack of e-waybill there's a complete free-for-all, so if you see one of the reasons why we haven't seen increased collection in GST when I speak to people on the ground corporates that the unorganised actually gained, so the whole thesis was organised will gain over unorganised. It has been the opposite unorganised has gained because there is nothing, there is no stopping anywhere, there is no checking. So it is complete free-for-all.
So now to correct that the government is going a bit more stricter on the e-waybill. They have tried it twice and they had glitches. So, in my view this will have some issues at least in the initial phases for the first one month. We have seen this that in the past two attempts the systems were not great. So, this time they are trying to do only interstate and then they will come with intrastate. I do anticipate that this will have some issues, but over a longer period of time this is great. But in the short term when we are already grappling with many of these issues this may not be great when you see companies complaining that you are not able to move goods.
A: As I said this is very bottom up right now, so you can find good companies with strong earnings growth visibility, so that is our broad thesis with which we work. So, there are enough sectors like one of the sectors that we like is on the road construction side and having met some of these companies over the last three months what we have seen in the last few months and in the next 3-4 months there is an expectation of huge amount of orders which are on the pipeline and some of them are in advance stages. We are already seeing every day we get announcements of road companies getting orders. So we do like the road space in particular and there is similar stuff in some of the engineering companies. Consumer durables is one of the spaces that we like generally consumer in general and of course the private sector banks is the other space that we broadly like.
Latha: Finally, you said your move in the current scenario will be to protect capital. How do you do that?