Interview with Sridhar Sivaram, Investment Director of Enam Holdings.
With the bullishness in the market seen with every passing session, Enam Holdings remains constructive on the markets overall. “Macros look better for India and earnings will be strong in FY18,” Sridhar Sivaram, Investment Director, Enam Holdings told CNBC-TV18 in an interview.
Having said that, Sridhar says, there could be some froth in the midcaps, especially when the market moves in this way.
In the current set up, he feels that domestic cyclicals and companies which are deleveraging their balance sheets are the themes to play.
Among sectors, he feels that a lot of recognition has happened as far as NPAs are concerned and believes that PSU banks cannot be a basket trade.
Below is the verbatim transcript of the interview.
Latha: What is the sense, are you getting a sense of any bit of frothiness or do you think the good times have just begun?
A: When markets move like this, there will surely be some frothiness. Surely there is some frothiness in the midcap space and one has to be careful on that. However, broadly if you ask me, I still remain very constructive and bullish on the market because I do expect FY18 earnings to be very strong as we discussed last time also. The other thing is that this time the participation has been very poor. People are just not wanting to believe that this market will move up.
Latha: Why would you say that, I thought we have got record mutual fund flows?
A: People are forced to put money. So, if you ask, you speak to fund managers, they will tell you that we are being forced, this is not what I want to buy. So, it is not the perfect participation. This is being forced, where the money is coming in and even foreign institutional investors (FIIs) if you see, post demonetisation all of them, a lot of them reduced the India overweight and India was one of the best performing markets in the first four or five months. Now, even China has overtaken India. So. We are seeing strong performance even from emerging markets.
So, there was a disbelief even for emerging markets as we entered 2017 and now we are seeing very strong performance even for that. So, when I put everything together, globally also, growth is expected to be better than what it was the previous year. Even for India, the macro is looking much better. I can argue the macro was always looking good for India, but now even better; the way inflation has come down, nobody would have expected that we will see inflation closer to 3 percent.
I expected to go closer to 2 percent by July and I completely disagree with Reserve Bank of India’s (RBI) forecast of 4 percent average; we have discussed that before. So, I sort of agree with Arvind Subramanian where he says that there is some scope, but that is a separate debate altogether. In general I see macro very good, I see earnings surprising for FY18, so, I would not be surprised if this market continues to move up and some correction is bound to happen and I think that is very healthy.
Sonia: It is hard to thump the table and call for a buy when the market has gone up so much, we are sitting at new highs, but you are doing that. So, tell us what would you buy at this point?
A: As I discussed last time, it is the domestic cyclicals. That is the story. No point looking at things which are outside India right now. So no point looking at IT, pharmaceutical, just look at stories which are domestic cyclicals.
The other favourite theme of ours is the transmission of interest rate that has happened. So, look at companies which are deleveraging, whoever has fairly good business model and transmission across the board has happened at least for 100-150 basis points which has happened over the last three to four months.
So, the full benefit of that will be seen in the current year. So, I think there is a huge story waiting to be discovered there. These are not always the best managed companies, some of them are changing, some of them are being forced because the banks are pushing them, but there is opportunity available here. So, I think the domestic cyclicals is a story and that is where we are looking and finding value right now.
Reema: Domestic cyclicals encompasses a lot of sectors. Can you narrow it down for us where you still see an earnings upgrade opportunity, or perhaps conversely on the flip side where valuations appear to be too rich and therefore you would avoid?
A: I would start with the entire construction sector. You look at the way order books are shaping up, not only on the roads, people are underestimating the orders that are coming from the urban transportation side. More than Rs 2 trillion worth of orders have already been placed, and another Rs 2 trillion waiting -- I think about 15 cities odd are also getting into metro related stuff. So, there are huge orders which are coming from state.
We are so focused only on looking at the National Highways Authority of India (NHAI) orders, we are missing out that our own city is seeing huge metro rail orders which have come up. The good thing is that they have split the orders to six different companies, so, work is not going to stop because at least five of them or four of them will be doing the work at the same time. The point I am trying to make is that there is enough opportunity there, a lot of orders are flowing in there. Railways is the other one.
Reema: You spoke about the roads and the opportunity, not just from NHAI, but even from the state body. Talk about railways.
A: Railways is the other place where a lot of work has happened. The dedicated freight corridor (DFC) is well documented though it is a separate organisation on its own. So, if I look at the entire railway basket, they were a bit slow to start, but a lot of work has happened so we are seeing a lot of order flows even from there. The other place for cyclicals is the commodity pack, not necessarily because of bullishness of commodity, but some of the balance sheets are getting repaired. So, as a result, you are going to see significant earnings bump up and cement is something that we are bullish on.
So, if I put a basket, there is enough opportunity. There are some select capital goods plays where there is opportunity available, some in logistics, consumer discretionary and durables, both have opportunities. So, I think there is enough space available there where you can play which is the domestic consumption and the cyclical story, some related to infrastructure, some related to the capex which is slowly coming back. I cannot see that it is really come back in a bang but at least we are seeing early signs.
Latha: To get back to financials, are you confident enough to bet on the corporate facing banks, especially state-owned corporate sector banks and within the non-banking financial companies (NBFC) space. We have played the housing trade, now what will you play?
A: On the public sector undertaking (PSU) banks, can’t be a basket trade. So, there are one or two, or some of the large ones are doing all the right things. The private sector, especially the corporate facing, I think there is time to relook at them because lot of recognition has happened as far as the non-performing assets (NPA) is concerned and a lot of resolution is also happening.
I am happy that government has taken some steps, it is debatable whether right step to involve RBI or not, but the point is that decisions were not being taken. So, now with some sort of an oversight committee, possibly some of these decisions will be taken which is great for the banking system in general. If we get little bit of push from the economy, which I am hoping, and so I think the financial pack is looking interesting.
Latha: NBFCs you mean?
A: NBFCs I am still very cautious. I think the more ground level checks we do, we find that all sorts of unsecured lending, Loan Against Property (LAP), all these are facing stress. Now not everybody will see it and micro finance institutions (MFIs) we have already seen, they are seeing huge stress. Whatever we have heard is that March was good, April has deteriorated again. So, these are not publish data so these are basically anecdotal. So, we will know when the next quarter results come.
So, I will be very careful as far as MFIs are concerned, as far as NBFCs are concerned, because a lot of them because of the valuation push have pushed the growth envelope. As a result may have detreated the credit standards. Even on housing, pure housing is fine but they do not make money out of that. So, you have lend to the developers and the LAP. So, that is where the risk is lying. So, one has to be very careful as far as that because the banks, it is already pricing in the trouble, whereas in the NBFC, the trouble is not being priced in. So, the risk reward is heavily loaded against me when I look at the NBFC.
Sonia: Stock of the moment is Manappuram Finance, almost 7 percent uptick on that stock, big volumes getting traded over there.
A: Just to say, I do like the gold finance because they are secured and they do have -- so even if they have some issues, they have gold. So, you have a secured lending where you have a 4.5 percent return on assets (RoA), 23 percent return on equity (RoE), I am saying the industry as such so I don’t want to name any particular company here. However, I am just saying that I am okay with secured lending. I am uncomfortable with unsecured, sub-prime lending where people are just taken their eye off the risk.
Sonia: If you had to put money into one stock that could help you buy a penthouse, which one would it be?
A: When you invest in any stock, at that point no one knows that this is going to be five-bagger, 10-bagger, you just do your due diligence and do all your right things, keep your risk metrics and then you invest based on certain assumptions. Sometimes assumptions are so conservative, the actual numbers are much better, sometimes it is not good. So I think it is just a question of doing your homework right and I don’t think anybody can pin-point and say that this is going to be a 10-bagger or a multi-bagger. So, we just try and do our homework right and hope things work out well.
Latha: Just give us one number on this earnings growth, I know it is always easy to do it sectorally, but 20 percent is what the market is betting, 18 percent is almost consensus.
A: So, I think it will be 20 percent. As I discussed last time also, that for the broader market, a 1 percent reduction in interest rate is 10 percent increase in earnings. A simple math is that the total loan outstanding is 40 trillion and the total profit pull is only 4 trillion. So, 1 percent reduction is USD 400 billion of extra profit. So, that is a neat 10 percent for the broad market.
Now obviously it will differ from sector to sector. So, in our view the cyclicals which we are bullish on, will have a higher impact on interest rate, just reduction of interest rate than the 10 percent which I am saying for the market because they are the ones who have more debt. As a result, they will benefit more. So, when you put this on a spreadsheet, you actually get outstanding numbers. So sometimes you cannot believe the numbers.
Latha: Who knows the RBI may be convinced by the same data that you are referring to and refine its neutral and that is what they said first, it can be a cut, hike, or a pause.
A: I am not bothered about what RBI does, it is the liquidity in the market which is determining. So, RBI was cutting interest rates for a long time and you know more because Raghuram Rajan was so uncomfortable with the fact that despite all the cuts, the transmission was not happening.Even as we speak, in the last three months, we have seen three months Commercial Paper (CP), certificate of deposit (CD) rates come down by another 25 basis points because of the liquidity. So, I am really not bothered about what RBI does as long as they don’t increase rates. If this liquidity continues, the transmission will continue to happen and that is all we need for some of these corporates.