Robust consumption and strong capex growth seem to be the key driving factors for the India growth story, for now, despite an air of slowdown across most major economies. There are, however, three immediate risks that are potent enough to slam the brakes on the country's momentum, says Akhil Bhardwaj, senior partner at Alpha Capital.
The seasoned wealth management professional is upbeat on the pace of India's economic growth and the bullish sentiment it fuels in investors. But, he measures his steps all the way, given the looming risks to the macro fundamentals that may derail the recovery, and suggests investors not to go overboard on the spate of public issues lined up for the week. "Small investment exposure could be done in Tata Technologies," he advised during an interview to Moneycontrol. Excerpts from the interaction:
With the increased risk weights with respect to consumer credit exposure, do you think the RBI wants to arrest the rate of growth? Also, is the RBI expecting some risk factor?
The RBI has increased the risk weight for unsecured consumer loans and credit cards from 100 percent to 125 percent, which directly means banks would be required to keep more capital to cover the potential loss. This move of the RBI is not the arrest the growth but an advance step to control the default risk.
After Covid, banks were aggressively offering loans to retail consumers which also included the top-up loan on CAR (capital adequacy ratio) or houses where minimum or no documentation is required. So, the RBI has intervened to curb this unwanted practice by tightening the norms. This norm has come in because of the fast increase in unsecured loans and initial delinquency trends seen in this segment.
It’s a control measure step by the RBI so that the system remains insulated from any potential risk. In fact, in pre-Covid times, the risk weight was 125 percent and during Covid-19, it was dropped down to 100 percent to boost the growth. Now it is retained back to its original level.
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Do the pharma stocks look better in terms of value?
Nifty Pharma has given a 22 percent return in the last one year and has majorly come in the last six months. Despite this stupendous return, the PE of pharma has fallen from 33 to 31, primarily because of a good jump in earnings per share. The EPS of Nifty Pharma in the last 1 year has jumped by 30 percent whereas the index has only moved up by 22 percent. This indicates the scope of further ramp-up.
The pharma sector is a lucrative sector as it is defensive in nature. It has pegged a growth of around 11 percent in the last decade and is expected to grow at the same or better pace. The same is driven by strong demographics, rising income levels, improved research and diagnostic and growth in lifestyle diseases.
The Indian pharma sector is the third largest in the world in terms of volume. But export is only 6.5 percent of total export. This creates a big scope penetration in exporting Indian drugs.
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Are building and construction material stocks trading at high valuation?
From the valuation point of view, these stocks have become more attractive because their PE has fallen due to a run-up in earnings. Although the entire infrastructure sector has run up by 22 percent in the last year its PE has fallen from 21 to 17.
There are multiple factors behind the strong earnings– The First is that post Covid the demand for houses has increased very much. Those living in small houses wish for bigger houses with extra room for office space due to WFH (work-from-home) culture pickup. Second is the FII inflow into the real estate sector.
According to Colliers, around $27 billion has come in the real estate sector in the last 6 years. This is a 3 times higher number compared to the previous 6 years. The building & construction material stock supporting realty has also benefitted in the same proportion.
Do you think Tata Technologies is a great buy at the current price?
Tata Technologies is going to hit the primary market on November 22. The grey market price of Tata Technologies is hovering at Rs 352 although the price band for the issue is Rs 475-500. This 70 percent premium is something that everybody likes to have in their portfolio. However grey market is highly speculative and non-regulated. It also doesn’t track the financials of the very stock.
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The universe of the grey market is small while the universe of listed stocks is very big. The subscription for Tata Technologies should only be done on the scanning of the financials of the company. The Tata Technologies was valued at $2 billion when TPG Climate picked a 9 percent stake in Tata Technologies.
I would suggest not rushing for IPO and may consider buying the stock post subscription when its track record is built for a sufficient time frame as good stock would keep performing well in the long run.
Are you taking any exposure to IREDA, Fedbank Financial Services, Gandhar Oil Refinery and Flair Writing via their IPOs?
Tata Technologies, IREDA, Fedbank, Gandhar Oil & Flair Writing IPOs are going to hit the market soon. This definitely would create much confusion in the investor's mind about which one to but much hype is created around Tata Technologies because of the strong brand and Tata is coming with an IPO after a gap of 2 decades. TATA following is huge in our nation.
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All the companies have their own strengths IREDA is PSU, Gandhar has a name in its field, and Flair Writing is a strong brand name in stationary products. However, RBI’s increased risk weight regulation for unsecured loans may lower the investor's energy for a subscription.
I would suggest not rushing for IPO and may consider buying the stock post subscription when its track record is built for a sufficient time frame as good stock would keep performing well for the long run. However, small investment exposure could be done in Tata Technologies.
What do you expect from the commentary by the Monetary Policy Committee meeting next month?
The RBI monetary policy is expected to maintain the status quo maintaining the repo rate to 6.5 percent. However, the RBI would follow the USA Fed policy rate graph to maintain enough attractiveness to not allow substantial money to flow out of India. As this suppresses the Rupee.
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Generally risks are unknown to the market. Do you see any kind of risks emerging that can spoil the market recovery?
The India growth story is expected to remain strong on the back of strong consumption demand and robust capex growth. The market is also supported by strong DII investment. The three major risks which may impact the growth recovery and spoil the mood of investors are:-
1) Global geopolitical crisis – The war between Hamas and Israel may be extended to other nations, leading to global disturbance and surge in oil prices, which inadvertently affect the growth of high import-oriented countries like India.
2) Delayed reduction of interest rate – The delay in cutting the interest rate may happen due to high commodity prices and high inflation. It will keep credit costs high and hamper corporate expansion.
3) Impending general elections – Our market has discounted the winning of the BJP without a coalition. Any adverse result from this expectation may pull down the market.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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