A catch-up trade is happening now on back of liquidity, believes Sridhar Sivaram, Investment Director at Enam Holdings. But, he adds that this liquidity will not continue forever and earnings will have to come through.Enam expects earnings growth to be around 10 percent for FY17 unlike other brokerages that are estimating growth of mid double-digit growth. Any dip in the market with expectations of earnings following through will be a buying opportunity.Speaking to CNBC-TV18, Sivaram said that a 25 basis point hike by the US Federal Reserve in December is already priced in by markets.Sivaram expects the Reserve Bank to cut 50 basis points by October this year on back of positive inflation numbers last month.Among sectors, Sivaram is positive on cement, banks in short-term and insurance companies. The house is underweight on IT space, but certain stocks can be looked at, he says.Below is the verbatim transcript of Sridhar Sivaram’s interview with Latha Venkatesh & Anuj Singhal. Latha: The liquidity has taken the market very close to new highs. Are you comfortable buying?
A: I think we have to put this in context that if you see emerging markets for the year, is up 16 percent and India as of yesterday is up about 8-9 percent; this is Morgan Stanley Capital International (MSCI) dollar returns. So, the liquidity is very strong and it is coming through in emerging markets, lesser so in India and more so in many of the other markets. So, many of my friends who are managing emerging markets, the question they ask me is why is India not moving up. So, I guess there is a catch up trade which can happen as long as the liquidity continues.
However, as of now, India is actually underperforming the emerging markets and which is sore point for many emerging market fund managers because India is a consensus overweight and it is up 8-9 percent emerging markets. If you see some of the larger markets, there are up 20-25 percent, I am leaving Brazil which is up 65 percent, even if you take markets like Indonesia, Korea, Taiwan, many of them are up 20-25 percent. So, I guess there is a catch up trade here but I am not very sure if so much will happen because the starting points are different. India did outperform if you take a three year view.
Latha: Is that the wrong index we are looking at, is the money likely coming in midcaps which is up about 20 percent year-to-date (YTD) or metals, or public sector undertaking (PSU) banks, they are all up about 20 percent YTD?
A: Which is right but if you take any large investor in India and look at their portfolios, it is very difficult to put so much money into those midcaps. So, if money does come into some of the largecaps including say in IT, pharmaceutical or some of the fast moving consumer goods (FMCG) companies, you can then reallocate your portfolio slightly here and there based on, if you think you are bullish on financials, PSU banks or whatever, but large part money does come into some of those larger names. So, it is difficult to believe that many of the fund managers would have zero weight in IT and everything in financials or PSU banks. I don’t think people manage money that way.
Anuj: The interesting bit is what about liquidity going forward because sooner or later Fed is going to hike rates and sooner or later Reserve Bank of India (RBI) is going to cut rates as well. How do you see the liquidity panning out for our market because truth be told, earnings have still not improved and it has been a liquidity driven rally. So, what is the risk for this market in terms of that liquidity?
A: I think the earliest one is expecting Fed to hike is sometime in December. The consensus is that may not be more than 25 basis points as of now. So, up to 25 basis points it is reasonably well priced in I would say within the markets. I don’t think there will be too many issues as far as liquidity is concerned as long as it is 25 basis points. I think the commentary is more important than what the exact hike is. I agree with you that liquidity cannot continue like this indefinitely and more importantly the earnings have to come through.
We have seen two years of hope that the earnings will come. We have seen very patchy growth as far as India is concerned, green shoots for three months and then we don’t see any follow-through on that. Maybe we are coming to an end of that because from the government standpoint some reform measures have happened; many building blocks are in place. I am still not very gung-ho on earnings for the current year where consensuses is still 16-17 percent. I think the number is going to be closer to maybe high single digits or 10 percent but possibly maybe we are better positioned for next year than this year.
Latha: What was for your universe or stocks that you watch the earnings growth in the first quarter?
A: First quarter numbers, if you take the aggregate, it was like 4-5 percent. However, then people then say okay, remove financials, remove this. I am not a believer, if I want to look at the market earnings, I will look at it on the whole. But obviously, there are sectors where you would not be investing, where you think there is not enough growth. If I look at the growth stocks, then they are north of 15-16 percent but then they are also priced for perfection. So, it is a tough balancing act that one has to look at.
Latha: One of the near-term factors, and it has gotten a little nearer now, is the Budget. 40 percent of the revenues have been taken out now and that will be in the goods and services tax (GST). Will you once again get those tantrums from the market because of this capital goods issue? I am asking you because Shaktikanta Das met a lot of foreign institutional investors (FII), so is the tax bogey likely to once again mar our happiness in January?
A: You are talking about the capital gains?
Latha: Yes.
A: I think the capital gains issue is an issue which will come up again and from whatever discussions you have in Delhi, this has really not gone away and this has to be kept in mind. The policy makers are quite encouraged by the fact that the market's reaction for the Mauritius and the Singapore tax treaty renegotiation has been very benign. In fact, it would say that it has not reacted at all and the market moved on from there.
So, that has surprised positively and this may not be that great because now they think that or at least that is the view that they can impose capital gains and the market will take it in stride. Maybe yes, but one has to move beyond capital gains and look at earnings. If the earnings are strong, market will take that in their stride._PAGEBREAK_Latha: So, if there is a tantrum and the markets dip, you will be a buyer?
A: Yes, I would be, provided if earnings are following through. My whole issue has been that the earnings have been very weak and we are monitoring that very closely. And if that be the case, then there is an opportunity to buy.
Anuj: Apart from banks, consumption has been the other big theme that has made a lot of money and in that three sectors really standout: auto, cement and oil marketing companies. What is your view on all these three sectors? They have all rallied all closer to lifetime highs now.
A: If I look within these three spaces that you have mentioned, cement is looking much better than some of the others only because the capacity utilisation on cement is very low right now. And if one were to take a view that recovery happens sometime late this year and early next year it continues, then as the cement consumption goes up, their capacity utilisation goes up, so they have operating leverage. Some of them also have debt so they also get financial leverage if interest rates were to come down.
Latha: This bashing of consumer goods for their valuations is a familiar theme. But yesterday from the GST council and we later spoke even to the Kerala Finance Minister, they are all veering around to 20 percent, I will not say all, but it did not look like there is a big 24-26 percent standard rate. The Kerala Finance Minister actually said that he would be okay with an 18-20 percent standard rate. Is there something to juice out on the GST front now that it is three weeks or four weeks that we will get the standard rate?
A: From whatever we hear and understand, we are not going to get one rate. There could be three-four rates and if that be the case, one has to look at where the average is. And I think the reason for this is they do not want the service tax to go up that much, because if your standard rate is 20 percent, service tax goes from 15 percent to 20 percent. So, you do not want the service tax to go up because that is going to be inflationary immediately. So the whole thing is coming down to that. So, you will have a rate which is lower to adjust the service tax. But, 20 percent is going to be roughly the range that we will get on GST. Market should be okay with 20 percent.
Anuj: What about Infosys now? In the morning, we had a view from Credit Suisse that yes, the stocks have corrected a lot, yes the premium has come down, but maybe some more is left in terms of derating.
A: My view has been reasonably steady on this that 40 percent of the IT companies’ revenues come from banking, financial services and insurance (BFSI) space and if you look at some of the large banks and business, the financial firms in the US, they have been cutting on their IT spend. Their whole business model is getting redefined. At a time like this, I do not see that changing a lot. So as a result, their revenue growths are going to be constrained. At best, 8-10 percent revenue growth is what one can expect.
That is really not an exciting space because people come to India to invest in growth companies. If I have to invest in value based companies, I have many others available in the US in the similar space trading at half the valuations. So, this has become very stock specific and as a sector, I would be underweight. But, stock specific I would look at some of these stocks.
Latha: I have a couple of questions more on financials. Non-banking financial companies (NBFC), what is the view on rates? They have been the best beneficiaries of the wholesale rates falling and today the old 10-year also is below 7 percent. The new 10-year has gone to 6.8. You still like the NBFC space? And the second question is on insurance, that is the new finance space, do you like it?
A: First, on rates itself, we have a very aggressive view that RBI will cut 50 basis points in October. And our view coming from the fact that the inflation number itself, we saw very positive inflation print last month. We think the number will be below 4.5 for this month and sometime between now and December, we see a number below 4 percent. So, as a result, we see a strong interest rate cut coming through. Once in October and maybe possibly in December also with some liquidity thrown in along with that. However, with that as a view, financials as a basket is clearly an overweight. But if you ask me, my preference will be more for banks and maybe some PSU banks thrown in. NBFCs have already rallied, they will continue because they have strong growth, but from a short-term perspective, I would prefer banks and medium-term, it is a basket of many of these.
As far as insurance is concerned, there is a myth in the market that India is underpenetrated as far as insurance is concerned. And I am very happy to see that one of the brokerage houses has finally put out a report on addressing this. So, simply put, if you see insurance as a percentage of gross domestic products (GDP) for India is about 2.7 and you take any of the Brazil, Russia, India, China and South Africa (BRICS) countries, all of them are below 2. Normally, financial products are analysed as the basis of per capita GDP, not the absolute number. We are at USD 1,500-1,800 per capita. China is at USD 6,000 and their penetration is 2 percent. So, it is wrong to just look at insurance penetration just on an absolute number and say Korea is at 10 percent, so we have a long way to go. Their per capita is USD 20,000, so let us not compare that.
The other point is that India has almost 300 million insurance policies outstanding as of yesterday. And if you take 200 million households as a total household and say only half of them are insurable, you already have three insurance policies per household. This is reflected, if you take the last five year’s compounded annual growth rate (CAGR) of new business premium, they are in the low single digits. So, it tells you that insurance is a reasonably penetrated market. However, within that there are opportunities, so we are seeing some of them getting listed, but if somebody is going to buy thinking that this is an underpenetrated market then I think they are treading on the wrong lane. So, that is my broad view on insurance.
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