Focus on biz dynamics in consumption over valuations: Emkay

Business for rural-focussed companies is expected to strengthen says Dhananjay Sinha of Emkay Global Financial Services speaking to CNBC-TV18 on the sideline of the Emkay Confluence. He also sees some improvement in urban demand.

Through the confluence Emkay is trying to assess whether rural and urban discretionary spending has improved at the ground level. It covers sectors like retail, information technology and banking and financial services, among others, Sinha says.

There has been increase in government spending and lot of thrust on policy front for rural India which is expected to drive demand, he says. Higher disposable income from pay commission implementation would also lift urban discretionary spending, he adds.

He prefers to focus more on business dynamics than valuations.Below is the transcript of Dhananjay Sinha’s interview to Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18.Latha: We had an interesting chat with Krishna Kumar Karwa and Prakash Kacholia yesterday. Tell us a little more about this conference. Have you already touched base with some of your foreign fund investors as well as the domestic funds? What is the mood there? Does it look like we are going to coast along to 9,000 anytime soon?A: Today, we have about 46 companies for the conference out of the total 100 that we are doing over the two days. There will be the balance number of companies on Friday, that is tomorrow. So, broadly, the profile of the company that we have lined up today includes retail, IT sector, a considerable amount of coverage of banking and financial services. So, the thing is that we are giving a lot of flavour in terms of rural and urban nuances. So, there are a lot of questions that investors have with respect to these areas.From a market standpoint, it does look like people will be looking at what the earnings trajectory could look like. Q1 we have seen there is sort of a betterment as far as sales growth is concerned, primarily arising from an uptick in the commodity prices and also, that there has been a considerable amount of government spending. There is a considerable amount of focus on rural demand if you look at what the governments are doing, both at the central and state government levels.So, we are basically trying to asses through our conference and through our meetings across multiple companies whether that is reflected on the ground and what companies are basically saying as a trajectory going forward. So, that is the broader context. The key things that we will be looking at would include, if you look at the urban discretionary spend, whether that is moving up or not. Over the past two years we have seen a very lack lustre demand over there.Clearly, rural demand is something everybody is waiting for with good monsoon and also the fact that there is a lot of thrust from a policy standpoint. We have a lot of representation there, especially with respect to the financial sector companies which have high exposure to rural lending. We have a lot of non-banking financial companies (NBFC) over here. So, that is the broader set of companies that we are looking at.Sonia: Of course, by the end of the day, we will get to know what the mood is like, but just talking a little more about the rural focus because that was the theme that Krishna Kumar Karwa and Prakash Kacholia were talking about yesterday as well. This is a theme that people have made money on over the last 6-8 months. Do you think there is still more scope here because even off late, we have seen names like Jain Irrigation, UPL, Escorts rally quite a bit?A: Yes, the key thing is that you have a lot of focus on rural. From a government standpoint, we have seen that in the Budget, there is a considerable amount of allocation there and there is a supplementary demand, which has been passed by the parliament, which also includes a significant focus on rural. So, there is a bulk of flow in terms of demand that will ensue going forward. While the stock prices may have reacted or pre-empted some of these recoveries, the broader context is that whether the business for these companies will strengthen going forward or not, clearly our view is that it would. As the numbers pan out, some of these stocks will be supported. Possibly there will be more upside to the stocks. So, we will have to look at it.It pans across multiple sectors which would include many of these fast moving consumer good (FMCG) companies, auto sectors. You will have a lot of banking and financial services companies which have high exposure there and a whole host of equipment manufacturers etc that will be gaining out of it.So, that is something that we will have to look at it as it pans out. Clearly, as of now, it appears that the government is considerably focused towards that and especially from a political standpoint also, that becomes very relevant. It will imply a lot of fiscal commitment, but we will have to play it out till the time it lasts at least. So, I am looking at that as improved business dynamics for the rural sector.Anuj: What about urban discretionary consumption? That space also did well, but the valuations there are a bit of a problem, so how would approach that space now?A: Valuations is a problem. What we are basically looking at is the business dynamics and whether that is improving or not. Now from a valuation standpoint, there will be a situation where there will be exuberance and there will be volatility thereafter, and there will be bouts of those periods where we will have very intense volatility, but what we are basically looking at is whether the business is improving for the various sectors or not.So, if you look at the urban side of things, over the past two years or so, the demand has been fairly lacklustre and we are seeing the compensation growth for companies have declined to something like 3 percent, if you look at a much broader set of companies. That is almost like a 25 years low. Clearly, employment is not growing that much and compensation is not growing so fast.On the contrary, what we are also seeing is that retail lending is growing at something like 18-20 percent. So, clearly consumers are leveraging and in the context that you have Seventh Pay Commission that will pan out given the context here that the entire Seventh Pay Commission recommendation would largely be given out this year, it is likely that the leverage for the urban consumers will also increase quite apart from the fact that you might have a better disposable income through the Seventh Pay Commission and also that with a top line growth of companies improving, it is possible that the compensation growth for employees could rise.So, clearly we are also looking at some improvement in urban demand as well. Overall, what we are considering both from a rural and urban standpoint that there will be a significant impetus to consumer demand and a large part of it would be attributable to the reflationary policies followed by the government through its fiscal measures and also the fact that RBI has been accommodative. So, all these things will translate into significant consumption demand both from urban and rural sector.