Santosh Joseph of Germinate Investor Services LLP believes the domestic consumption story is definitely going to be a multi-decade play even now from here and it is a great opportunity that one cannot miss out.
As income levels rise and as more consumption kicks in, it will trigger multi-order benefits of India becoming even a bigger and stronger consumption play, says the founder and managing partner of Germinate, backed by his more than 17 years of experience in asset management, banking and insurance. Santosh had earlier served as the state sales head and vice-president at DSP BlackRock Investment.
On the September quarter FY23 earnings season, which will start flowing in October, Santosh says the numbers should be good and should be better than the previous quarters.
Santosh shared his views on the financial markets in an interaction with Moneycontrol. Excerpts from the interview:
India stands out strong, outperforming most of its global peers year-to-date. Do you think this will continue in the rest of the year as well?
Yes, at the moment, India seems to be outperforming the global markets and emerging market peers. Whether this continues or not we do not know. There are two ways to look at how this will play out, will the rest of the global market catch-up with India? And two, will India correct and be in line with the rest of the global markets?
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One thing is clear that it will take us some time to realise how this is going to play out. On the other hand, what people are appreciating or maybe putting some sort of a better value to is that, India as a market or an economy is better placed than most global markets. For example, when the whole world is worried about inflation, even though India's inflation is a cause of concern, but at the ground level many people seem to have absorbed inflation well and many companies have been able to pass on inflation well and it's a more manageable issue.
Likewise, on the demand and supply side of various production services, we seem to be getting most of the things in better order and well organised. Therefore, there is a little bit of premium that India is enjoying. If the rest of the world deteriorates further, maybe our premium will stretch and maybe even perform better than the rest of the world and for a long time to come.
We all know that India is definitely in a sweet spot. The question is how much sweeter will we get from here and will we have a long run in this outperformance compared to the rest of the markets in the world.
What is the sense you are getting from India's market capitalisation-to-GDP ratio at 107 percent, which is much higher than long-term average of 81 percent?
As far as the GDP to market capitalisation ratio is concerned, though this is an elevated number, this is nothing to be overtly alarmed about because this is a very macro number and this number can go higher.
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We should also remember that India's ability to actually attract a lot of global flows is in place and when more global flows come in eventually because of India being in a much better shape than other countries, this market capitalisation-to-GDP ratio will grow and even when GDP numbers come, that number will get slightly adjusted.
Sometimes you will notice that these numbers could be stretched far more before they normalise or correct. So, you could also notice that these are all lead indicators and this is a telling sign that maybe our GDP is expected to be more stable or grow even better therefore people are willing to pay a premium for the kind of GDP growth that we are experiencing and witnessing.
Do you think private banks will continue to enjoy trading premiums in coming years as well?
The private banks will continue to enjoy a premium. Since Covid, if there is one sector that has really not done as much as the markets generally have done, it is the financials and the private banks in particular.
After the massive cleanup that has happened and capitalisation that has happened, banks are well positioned. Many of them are at attractive levels as far as valuations are concerned on a price-to-book level. The second important thing is - since pandemic and the bottom and low was formed, after almost five to seven years or maybe close to a decade, we have seen a very good volume growth in terms of credit offtake and that is a positive trend.
When we see a credit offtake, it doesn't just happen in a spurt. It sometimes grows bigger and we notice that these massive credit offtake numbers will also benefit the private sector banks well and therefore banks will start trading at better valuations to the larger market. We have already seen initial signs of that playing out in this recent market move.
What about defence and energy? Do you see them as good themes for investors over the coming years?
Energy is a very important theme and some of the policies we have towards energy are evolving and it also invites some of our industries to participate in it. If there is one thing that is going right in our energy and defense sector is the Atma Nirbhar programme run by the government and to a certain extent the PLI (production-linked incentive) scheme also.
On both these sides we have a huge scope to develop, build, operate and grow these two verticals. Basically, both the sectors are not very big in the given context compared to some of the other sectors we have. So, it may be still too early to say that they will become big players straight away but maybe over a period of time these could become the dominant sectors. A lot is going to depend on the policy and how the policy action takes place.
FIIs have definitely made a good comeback in August, but in the last few days, there is too much volatility in their flow. What are your thoughts?
Yes, in the last two months the FIIs have made a comeback and the August numbers are really encouraging and heartening. We need to remember that this is on the back of almost 6-7 or even 8 months of relentless selling from October-November last year through May - June this year.
FIIs are back, but not completely. Interestingly there's a lot of retail and domestic activity in the marketplace. The markets are volatile because of the way the energy prices are across the world and the rest of the world becoming extremely volatile thanks to the strong calls on interest rate hikes globally across various economies.
So, I think at some level the market will settle out, they will find India as a great spot to be in. There will be a return of FIIs that have left India and a lot more new FIIs will want to come and participate in India especially after the massive changes we have seen with the FIIs after looking at Russia or China. India could benefit from this incremental flow tremendously in the next few years.
What are your broad expectations for the September quarter earnings season?
For the earning season most of what we have seen right now gives us a feeling that we may come out with good and better numbers than expected. The extremely pessimistic scenario may not be the case and in the given scenario, looking at how we are globally, a good set of numbers in India will make our markets a lot more stable, reduce volatility, maybe even look more optimistic. The outlook is that the numbers should be good and should be better than the previous quarters.
Do you think the domestic consumption is a good story to play?
Our Indian domestic consumption story is definitely a massive play and one cannot afford to miss out on this domestic play. We have a long way to go in terms of the growth of our purchasing power on a global scale and we also have an extremely young population earning well. Our IT & services contributes well and growth in manufacturing and services will further fuel the consumption play.
The entire consumption play which was subdued just a little before pandemic and during pandemic, is just not a temporary pent up phase demand but is a more secular natural growth story and it will only get better by the years. As income levels rise and as more consumption kicks in, it will trigger multi-order benefits of India becoming even a bigger and stronger consumption play. This is definitely going to be a multi-year multi-decade play even now from here and it is a great opportunity that one cannot miss out.
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