Earnings upgrade likely; confident of auto, NBFC: SPARK Cap

Latha: In the markets itself, 8,650 is proving to be a roof, what is the view at Spark, you think we cut past it?

A: The way we see it is we are getting into an earnings upgrade cycle and we see quite a few drivers taking us in that direction. Government spend for us is the first key thing that we see. I think the data points coming out are very positive. If you look at the last year same quarter, government capital expenditure de-grew; it has grown close to 20 percent this year. Indirect tax collection is up about close to 37-38 percent. This is giving government the luxury to spend; that is significant, that has been a casualty for last four years. We see that having material impact on earnings, on demand and on cash flows and indirect impact on asset quality, on employment and wages.

Latha: One of the big traits of the last few months has been mutual funds getting more money. It is just that the domestic investor is there so aside from your fundamental argument there seems to be a liquidity argument. Can you feel that in Chennai? At Spark itself is there more retail activity?

A: We don’t track retail investors at all but what we are seeing is unprecedented mutual fund inflows for a weak quarter in historically been so savings is something that we are taking big bets on. A fair proportion of my model portfolio is biased towards companies with benefit and improving savings mindset and customer.

For example banks, deposit mobilisation has gone 2 percentage points better than credit growth. That will bring deposit rates down. If you go back to 2002-2003 this is precisely what happened. Deposit growth was close to 13 percent, credit growth was up less than 9 percent. So that sowed the seeds for credit growth to pickup in eventual years. So, for us deposits are something we are betting big on.

NBFCs who are also primarily wholesale borrowers, they will start seeing interest rates, the borrowing rates come down. Market intermediaries, mutual funds, brokers like us typically these are the beneficiaries of savings pickup in general.

Sonia: We think the four wheeler space there are very interesting trends. On one hand you have stocks like Maruti Suzuki that continue to hit new highs and on other hand you have stocks like Tata Motors where we have seen a considerable de-rating of the company but now there are some signs that perhaps the worse could be over. As an investor how do you approach the four wheeler space?

 A: There aren’t too many car manufacturing stocks that you can look to play. Maruti is possibly the only one. Any large quality car manufacturing stock will be a preference in our portfolio.

Latha: You started off with the theme government is spending a lot. Which kind of stocks would be the beneficiaries? Infra companies have fairly broken balance sheets so what will you pick – cement, infra?

 A: Road, toll operators, EPC contractors. I am not sure my compliance is going let me allow specific stocks but clearly EPC contractors, toll operators and even specific companies who will benefit out of these. There are quite a few of them who are – more important than the direct manufacturers are more indirect beneficiaries. What we see is the impact of this on asset quality. So, SME banks, SME NBFCs will see non-linearity on their growth, on their NPA front.

 Latha: I don’t see any PSU banks in your list?

 A: PSU banks are still structurally challenged. We have been calling them a decade of distress for them in some form. We continue to see significant issues. Interest rates going down is a bit of a double edged sword for them. Pension liabilities go up when interest rates go down so when bond yields and the benefits do come for them pension liabilities area challenge. So, clearly PSU banks will and we still NPA challenges to be quite significant there to continue.