The coronavirus outbreak is throwing up challenges as well as opportunities for Indian companies to plug the global shortage of materials supplied by Chinese companies, leading to hardening of prices, Vinay Pandit, Head, Institutional Equities, IndiaNivesh, says in an interview to Moneycontrol’s Kshitij Anand.
Q) On the global front, coronavirus is making investors edgy. But there are green shoots with respect to the domestic economy as well. Can investors use the dips to get into beaten-down sectors?
A) I don’t think it’s a “climbing the wall of worries” situation. I believe it is a combination of the potential outcome of the government focus on the agri-rural economy in its Budget, the expectations of a strong rabi output and the expectations of a strong Kharif led by high reservoir levels.
Moreover, the coronavirus outbreak is throwing up challenges as well as opportunities for Indian companies to fill the global shortage of materials supplied by several Chinese companies, thereby leading to the hardening of prices.
Auto sector woes, too, seem to be coming to an end with the BS-VI deadline looming closer, and channel inventories now standing very light at barely 15 days, thereby demanding significant refill (probably back to 25-30 days).
These factors are providing the impetus to several sectors such as auto, pharma, consumption (including FMCG goods), chemicals and agri inputs and metals. With a bumper crop in rabi, inflation is bound to ease, though IIP may take some time to bounce back.
A 10 percent nominal GDP is easily doable; however, earnings growth needs to be on similar lines to capture this economic growth factor. Significant liquidity in the markets, coupled with these above factors, is fuelling the upside in the markets.
Q) Coronavirus concerns are mounting and if the situation escalates, do you think it will have a lasting impact on the Indian economy and India Inc earnings?
A) The impact of the coronavirus outbreak may last long (if several global news flows are to be believed). Several agencies are working fast towards finding a solution, while China, I believe, has taken some hard measures (which only they could) to contain the spread to other countries.
This, coupled with increasing temperatures due to the upcoming summer, should start easing the further spread. However, I believe an impact of three quarters will definitely be visible due to this outbreak.
The impact will be positive or negative, depending on the competitive scenario and import dependence. Few examples are listed here: (1) vinyl acetate monomers is a big raw material for paint companies and 19% of the total demand in India is imported from China.
The outbreak could lead to prices hardening, and thereby impact adhesive and paint companies. (2) Carbon black is a big raw material for tyre manufacturers and 10.5% of the total demand in India is imported from China.
A supply disruption will benefit carbon-black manufacturers but impact tyre companies in return. (3) Refractories and related raw materials like magnesite is a need for the steel/refractory manufacturers, and 9% of the total demand in India is imported from China. A disruption in these supplies will impact manufacturers, while it will benefit local suppliers.
Q) What is your take on the December quarter earnings? Are there any green shoots?
A) In the Nifty50, excluding Yes Bank, revenue de-grew 3 percent, while earnings de-grew 5 percent YoY. If not for the lower tax benefits offered recently at 25 percent (all inclusive), the earnings de-growth could have been potentially higher.
This was primarily aided by better earnings growth reported by oil and gas companies, BFSI companies and consumption-related sectors, which were traditionally paying tax at 33 percent.
For midcaps, revenues and earnings were flattish, excluding Vodafone, which continues to be the biggest drag to overall earnings in the index.
The smallcap stocks, on the other hand, reported marginal to flattish revenue and EBITDA growth. Overall, the December quarter earnings have been soft, in spite of it being a festive quarter.
Chemicals and agri inputs, private banks, retail & apparel companies, and IT/ITES companies have delivered a positive performance during the quarter, while auto OEMs, large auto ancillaries, metals & mining companies, defence-sector-related companies (equipment and explosives), and cement companies disappointed during the quarter.
There are definitely green shoots visible in auto, auto ancillaries, agri inputs, chemicals, domestic pharma, banking, and retail sectors, while Q4 is critical for the defence pack.
Q) What is your take on LIC going public? It will no doubt become the most-valued company in terms of market cap but will the government make this happen in the next 12 months or so?
A) LIC going public is a “must-happen” scenario if the government is serious about fiscal deficit going down to 3.3 percent and below in 2021.
Just on plain vanilla valuation parameters, it will definitely be the most valuable financial services company as well as be among the top three-five companies by market capitalisation in India (will definitely come into the Nifty on that account and further increase weightage of BFSI in the Nifty).
The market cap of HDFC Life is at 1.0x of its AUM, and that of ICICI Pru Life is at 0.5x of its AUM, while the market cap of the SBI Life market is 0.75x of its AUM.
Against these, LIC’s AUM stands at Rs 31 lakh crore. At 0.5x, this automatically makes it the No 1 company in India. However, valuation of LIC is not going to be so straightforward owing to factors such as (1) basis of charging management fee (2) basis of funding solvency margin (3) impact of upcoming wage negotiation and (4) share of variable assets in policyholders’ funds, among others which will help arrive at the true value.
The embedded value methodology may not be feasible here owing to the large back book. One may have to look at the price or book value basis.
Q) Mutual fund investors are showing confidence despite weak macros and volatile equity markets, which is a positive sign. Investors have pumped Rs 1.2 lakh crore into various schemes in January. This time, small and midcap schemes also attracted large sum of money. Do you think the lull in small and midcaps is over?
A) Real estate has been under distress for a long time now. Gold, equity and debt assets are the most preferred investment options now, other than fixed deposits and tax-saving instruments.
Hence, we continue to see a lot of long-term sticky money flowing into mutual funds through SIPs, which stood at Rs 4,095 crore in January 2017 and have now grown to Rs 8,532 crore per month.
This is long-term sticky money and flowing in month after month. With the available free float gradually drying up in frontline largecap and larger midcap stocks, coupled with any change in the definition of the midcap category by SEBI (whereby the number of stocks under mid-caps may be extended), money is bound to flow into small-caps (ie companies above Rs 1,000 crore market cap).
Several funds have now also started raising fresh money through NFOs for small-cap investing. These factors will aid in bringing back the excitement to small companies (ie companies below Rs 8,000 crore market cap).Q) When did your love with capital markets begin?
A) Now, that’s a trend breaker question, considering the serious flow of prior questions. My love for capital markets began in 2004, with my first job in equity research.
I figured out the field of equity research thanks to a friend who used to do similar work for a KPO, but without meeting management. I found that a little strange, having worked for a corporate prior to that role.
I believe it’s practically impossible to properly study, analyse and research a company without meeting the management, seeing their plant or meeting their teams and understanding their product offerings.
That enthused me to do research and thus started my fling with capital markets. I did not start with investing but rather started with advising investors on where to invest. Since then there has been no looking back.
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