Oct 19, 2016 04:00 PM IST | Source: CNBC-TV18

FMCG dependent on Budget; bullish on BFSI, bearish IT: Ambit

Consumer demand in the three months to November is likely to be meaningfully better than the corresponding period of last year on account of abundant provisioning for loans and consumer appetite for purchasing goods, said Saurabh Mukherjea of Ambit Capital investments.

Consumer demand in the three months to November is likely to be meaningfully better than the corresponding period of last year on account of abundant provisioning for loans and consumer appetite for purchasing goods, said Saurabh Mukherjea of Ambit Capital Investments.

He, however, added that while consumer demand isn’t a worry, softening investment demand over the past 3-4 months is a concern.

In an interview with CNBC-TV18, Mukherjea argued that there was a valuation-to-earnings mismatch for most IT companies while on the FMCG sector, he said a proposal on the lines of universal basic income could give a huge fillip.

Below is the verbatim transcript of Saurabh Mukherjea's interview to Sonia Shenoy on CNBC-TV18.

Sonia: How are you feeling this festive season because not too many retail investors are feeling that festive? Are you getting a sense that things could slow down a bit from here for the markets?

A: With regards to consumer demands, every indication we are getting is consumer demand in the festive season is fairly healthy. Most retailers, most dealers, distributers of whether it is auto products, electrical products that we are talking to, are reporting fairly brisk sales in the festive season and much better sales than they were seeing in September, October and November last year. I don’t think the consumer demand piece is the concern.

Where there remains a challenge is this whole investment demand story, the capex demand story which I think has softened another notch in the last three or four months. Government capex growth really has throttled off as budgeted. I think that is hitting the IIP numbers quite visibly, it is hitting demand for trucks, credit demand remains weak, power demand growth has also conked off so the concern would be on the capex side.

The consumer piece I think is in good shape, both in terms of credit demand from the consumer side and underlying demand for electrical products, auto products and aspirational consumption products.

Sonia: You would not worry that the festive season this time has not done as well as well as the festive season in the previous year because that is what some channel checks are indicating to us?

A: What we are hearing from our dealer-distributor networks, if you add together September, October and November -- I know November is not here yet, but the inventory buildup that we are seeing suggests that September, October and November this year will be meaningfully better than it was last year. Behind that there is a reason; the reason seems to be there is very aggressive provision of consumer credit finance to buyers out there. So, for products like fridges, air conditioners, two wheelers, there is abundant provision of finance out there. Car finance is also pretty easily available.

More generally SME working capital finance seems to have been eased quite aggressively in the last six months or so. So, I am not that worried about the consumer piece. There might be a couple of results here or there which suggest a degree of slowdown in some of the frontline consumer stocks but overall my reckoning is that the aspirational consumption piece is in as good a shape in India as you have seen it in the last three or four years.

Sonia: What about the market itself, we have many events upon us, the biggest one being the US Elections that everyone is going to react to. Do you get a sense that the market could still hold on to these levels of 8,400-8,500 irrespective of which way these triggers go?

A: As Prashant Jain said, it is very difficult to forecast short-term market movements. I would not profess to be an expert at that. Our FY17 year-end target for the Sensex remains 29,500; we are sticking to that. We don’t see any reason to suddenly upgrade our FY17 end target and to that extent we are at 28,000 odd in the Sensex and clearly the degree of full valuation at the market level. However, that is almost always the case in India that at the market level they sell them a great story to be sold. Stock picking sensibly, acquiring sensibly run franchises, good and clean companies as I keep calling them has been a consistently money making proposition in India. I think that remains true today.

There potentially is a negative surprise from the Fed coming up in December but that is reasonably well flagged. I think the Fed is doing a good job of telling the world that look after the US Presidential Elections, we probably will hike. My hunch is that Reserve Bank of India (RBI) really can’t do that much by way of rate cuts until the Fed makes its move in December.

Sonia: We spent all of last week debating on whether Tata Consultancy Services (TCS) will do better than Infosys or vice-versa. You have been bullish on TCS but the worry is that there is not enough growth visibility for a company like TCS given the track record that we have seen over the past couple of quarters. What is your sense?

A: On the IT sector, I have been worried for a while. I agree with you that we have some of the stocks on the IT sector, we do have buys on them but the sector as a whole clearly is challenged from a topline growth perspective and if your topline growth numbers are single digit and on top of that have operating margin pressure thus creating EPS growth prospects in the mid-single digits, we clearly have a problem as a sector especially the sectors trading at 14-16 times earnings.

So, that mismatch between the P/E multiples that the IT sector trades at, clearly are well held, a very popular sector but EPS growth prospects which are muted for the foreseeable future that does create share price pressure on the sector and I don’t see that abating in the near term. I am not an IT expert specifically but this mismatch between elevated P/E multiples and modest EPS growth prospects does worry me with regards to the IT sector.

Sonia: If IT does not assume sector leadership then where do you see leadership emerge from, what components do you think could take the market to that 29,500 level that you spoke about?

A: As we have discussed before, we have got giant banking sector in our country or rather let us put it even in a broader context of the large insurance now coming on board. We have got a big BFSI sector in India and as we have discussed on your program before, the PSU lenders seem to be dying a slow death every quarter, seems to spell another notch in the decline of the PSU lenders. There is 20-25 large PSU lenders; they account for 72 percent of loans outstanding in the country and as the public sector banks seed market share to the private sector lenders, there is clearly big growth prospects for private sector lenders on the asset side.

On the liability side, I think the black money crackdown is pushing liabilities, or pushing erstwhile black money savings gradually into the formal financial economy and thus making it easier for private sector lenders to get their liabilities funded. So, both in the asset and liability side you have got a fairly long growth runway for Indian lenders. So, provided they don’t make a hash of consumer lending over the next couple of years, I think there are several private sector lenders in our country who have got a very strong growth runway over next two to four years; that is one clear area where I think there will be market upside prospect.

Sonia: What about FMCG, today we are talking about the possibility of higher goods and services tax (GST) rates for FMCG, higher rates for cigarettes, etc, how would you react? ITC has been one of your top favourites for a while but do you get a sense that there could be a volume crunch down if prices would have to be increased to offset these taxes?

A: If you look at the FMCG as a sector, as a whole there is no denying the fact that the amount of subsidies that the UPA government was throwing at, at rural India, was a big boon for the FMCG sector. This government has been much more circumspect on the subsidy front and that has had a bearing on the FMCG sectors growth prospects. Similarly the black money crack down and the throttle of the construction sector employment also has hit FMCG sector hard.

I think the big catalyst here has to be the Budget. I think whether this government can launch something along universal basic income and a lot of people are saying that universal basic income is on the cards. If we hear a launch of a universal basic income scheme either in the Budget or perhaps in some pre-Budget document, I think that will be a major fillip for the FMCG sector because it is fairly clear now that the impetus that government spending gave to FMCG is gone and unless that returns in some shape or form, good monsoon here or there is not going to make that much of a difference. My strong hunch is that before GST gets rolled out, India will have a universal basic income construct rolled out.

Sonia: Another sector that you got bang on recently was the oil marketing space and now it has become a perfect cocktail for them with global prices -- brent prices moving lower, local prices moving higher. Do you get a sense that there could be more value accretion in this space irrespective or despite the kind of moves we have already seen?

A: Provided our political masters don’t suddenly decide to go back to the old regime where fuel was being subsidised by the government and by the OMCs, provided the political masters let the pumped prices of diesel and petrol reflect global prices, I think the OMCs actually have very powerful competitive advantage. Their petrol forecourt networks, their pipeline networks and then the refining capacities, theses are very powerful competitive advantages.

If the government doesn’t mess around with their balance sheets I think OMCs actually still have plenty of upside promise in them. So, keep an eye on the oil price. If the oil price stays sensible and our political masters decide not to be populist, the OMCs actually make a lot of sense to buy and sit on for several years.

Sonia: It is extremely speculative but who do you think will become a bigger economic, global economic threat, Donald Trump or Hillary Clinton?

A: The way I see it is India’s destiny is largely in its own hands. We have got an economy which is reasonably healthy; we have got under leveraged consumer segment. If we can get our act together on the banking sector and over a two-three year period gradually drive a capex recovery, it doesn’t so much matter who comes to power in America from an economic perspective. If Trump comes to power in America, the politics of the global ecosystem changes. From an economic perspective, I think we do tend to over play the significance of the US elections on us. Ours is largely a self contained economy. Our exports as a percentage of GDP are not particularly big and we have got so much slack in so many different parts of our economy, if we do a better job of running this economy, we have got many years prosperity ahead of us regardless of who wins in America.

Sonia: Do you think the prudent way to look at this for an Indian retail investor would be to buy every dip if in case the elections pan out negatively, so it could perhaps just be a non-event from an Indian investor point of view?

A: Whilst I would love to say that buying every dip is the classical way to make money, my strategy has been a little bit more straightforward that identify a set of companies whose financials are in good shape, whose management seems honest, whose corporate governance is sensible and whose franchises have the ability to deliver healthy levels of return on capital employed year after year. Identify those companies, buy 15-16 of them on your portfolio and sit tight for a long period of time.

Buy good companies without really worrying about where the Sensex is that day and then sit on it for a long period of time. That sort of methodology, buying high class companies, sitting patiently that has made money in every country and every generation and I think that will work in India. Over and above that you can also ally some market timing skills which I confess I don’t have but if you can put some market timing skills to work over and above that then so much n have but if you can put some market timing skills to work over and above that, then so much better for you.

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