In structural bull run; like IT, passenger cars: Religare

He says two other sectors are seeing slowdown – cement and two-wheelers. The two-wheeler market is seeing a slowdown in rural demand as well.

Trivedi is bullish on sectors such as IT, passenger vehicles and cement - despite the slowdown - over the long term.

Below is the verbatim transcript of Gautam Trivedi's interview with Sonia Shenoy & Reema Tendulkar on CNBC-TV18.Sonia: I was going through your takeaways from your road trip. You have got a first hand account of the extent of the crop damage and the impact of the unseasonal rains. How bad has it been and do you think it could have an impact on many of these consumer stories in the quarters to come?A: We have done two road trips so let me talk about the different stories associated with both of them. We did Unjha, which is a large agri center in Gujarat about three weeks ago and on May 15 & 16th we were in Maharashtra.Firstly, The extent of the crop damage due to unseasonal rains and hailstorms has been more in Maharashtra than we have seen in Gujarat. That is Of course natural and one cannot control where it is going to rain or hailstorm.

However, the fact is that the damage seems to be a lot more in Maharashtra as compared to Gujarat. Secondly, there is a clear impact on fast moving consumer goods (FMCG), so we are seeing a rural slowdown and there is a lot of pain within the farming community.However, more importantly we have seen significant slowdown in cement and cement is not so much affected by the rural slowdown. As cement dealers told us, it is more because of a drop in consumption by as much as 25-30 percent and this is in both the states lead by the fact that there are virtually no infrastructure projects that are operating at this point and there is a real slowdown in the real estate space, which seems to be an all India phenomenon.

I do not think it is unique to these two states. Cement slowdown is not caused by rural slowdown but due to low demand from infrastructure projects and real estate. So these are the two things that we have found on the road trip.The other sector which is impacted is the two-wheeler industry. All the two-wheeler dealers that we met on both these trips are struggling whether it is Bajaj Auto or Hero Motocorp. The one segment that seems to be still doing well is the scooter segment. Bajaj is not present in the scooter segment, but that segment seems to be doing a lot better than the average motorbike.

Reema: Will this hurt growth in FY16? Yesterday we had Ambit as well as Macquarie which pared down their gross domestic product (GDP) estimates for India for FY16. At Religare, do you believe that the there is downside risk to growth estimates?A: The fact is you have the regular normal monsoon which is kicking off now, the season kicks-off in another six weeks. So, it is hard to predict today, how that could potentially impact the whole year’s GDP. Now, of course, the unseasonal rains and the hail storms have damaged crops, but farmers could rebound in terms of their incomes depending on how the normal monsoon sets in. So, we have not seen that and it would be too early to make a judgement purely based on the unseasonal rains and hailstorms.But having said that, the one sector that is doing extremely well is the auto sector. We met multiple Maruti dealers in both these states - Gujarat and Maharashtra and their business is actually rocking. We went to the showrooms to meet the dealers and the showrooms were packed with customers. Business is doing well, for example, the Maruti dealer in Mehsana is having one of his best years. He is selling as many as 500 Marutis a month versus about 300 about six months ago. So, that is obviously a huge pick-up and Dzire so far remains the top selling model.Sonia: These are very interesting take-aways. It is quite disconcerting to see that there is a big slow-down underway in the cement sector because of the lack of movement in the infrastructure projects etc. But I was also going through another note where you say that there is massive rural to urban shift and the younger generation of farmers do not want to toil for 12 hours in the farm and would rather prefer working in cities and towns. As a stock market investor, how do you capitalise on that theme and what are the stocks or sectors that you would look to buy now?A: That is a very interesting observation by you on that report because that seems to be an underlying theme not just on these two road-trips but even the ones that we have done in the past wherein we have found that the younger generation of the farming community does not want to engage in farming. It is really hard work, frankly. But besides that, it is not necessarily as remunerative as it probably used to be and of course, you are at the mercy of the weather. So,there are the bunch of factors where you find that the second generation is not that keen to participate in farming, something which their forefathers and their parents have done.

To cite that example that you are referring to, this is the farmer we met in Unjha, which is about two and half hours north of Ahmedabad and what he said is his two sons are in the town of Unjha and they refuse to come and work with him. They are traders in cumin (jeera) and are doing extremely well. So, the perception is that people living in the urban areas are leading a significantly better life than the people in the villages. Whether that is true or not, it is debatable, but the fact is that it is the perception and hence second generation is not going into that profession or that business.Having said that, the other fall-out of this is that the amount of land under cultivation is definitely shrinking. So, the farmers in both the states, Maharashtra and Gujarat, pointed out that where there was fertile land, roads are being built and of course, we do need roads to connect India with the rest of Bharat. However, the reality is that the road eats up agricultural land. You have commercial properties coming up on either side of the road, further eating up on agricultural land. So, the reality is you have got a bunch of issues which are potentially long-term questions which any government, for that matter, needs to address because the amount of land under cultivation is shrinking and the amount of labour available to do this is shrinking. In fact the farmer in Gujarat said "I wonder in 20 years, who is going to actually do farming". Maybe that opens up the door for mechanisation but the reality is even for mechanisation, you need larger tracks of land. The average holdings are merely two to three acres. So these are bigger issues and will impact food inflation going forward.

Reema: In your road trip you also interacted with various bankers. What is the reading on the NPAs as well as the credit growth and what would it imply for the rest of India as well?A: I do not want to generalise based on what we have seen in two states, which is a wrong thing to do, but the non-performing loans (NPLs) are not necessarily growing; they are constant but the fact is the NPLs are reasonably high anywhere from 4-5 percent at the rural micro level.Sonia: Given the volatility that we have seen, is this is a good time to be accumulate stocks and if yes, apart from the pockets that you mentioned what are the good spaces to look at now?A: The market has recovered and people who were super negative until ten days ago are starting to feel little better, but the reality is in the last five year bull run that we had between 2003 and 2007, there were about 7 to 10 percent or more corrections. In fact within the first 16 months of that bull run, we had 27 percent correction. So the fact is that people got spooked by the first 10 percent correction and this is only first of the many that will come but the reality is as we believe at Religare that we are in a minimum five year structural bull market led by the Modi government and the fact is that if they are assuming to come back to power, the bull run could continue beyond that.The sectors that we like from a longer term perspective and ignoring the short-term volatility would still be cement in spite of what I told you about what we discovered on the road trips. We like the IT sector more from a rupee play and in passenger cars; Maruti Suzuki remains our top pick within the auto space.Sonia: You have liked cement in the past but in your road trip you mentioned that the key takeaway was that cement volumes are down by 25 percent. When do you expect to see a recovery, will it come in this fiscal or would we have to wait for three or four more quarters before we see more recovery in cement earnings?A: I think the recovery will definitely come in this quarter based on what we are hearing from the likes of Nitin Gadkari or even Piyush Goyal and the fact is that if mining indeed does takeoff, which we believe will definitely takeoff, infrastructure and government has come out with a very innovative programme to sell the government projects and raise over a lakh crore. So you will see at some point all of this has to reverse and we have seen a lot of negativity over the past five-six years within the infrastructure space and the company debt of course, there is a massive debt problem but the reality is you will see a reversal of fortunes for this sector and cement demand will come back with a bang.Sonia: If you had to summarise your road trip for us, what is the sense you are getting about the rural economy as a whole. Is there any recovery in store or do you think things are going from bad to worse?A: I do not think they are going from bad to worse and as I said at the beginning that we have normal monsoon season, which would kickoff in six-seven weeks. Let us wait and watch before we draw a deep conclusion from what we have seen on these two states plus we will be doing at least two more trips between now and the next three weeks. So we can talk again in about month and I will give you an update.