India in a structural bull market; like industrials: Edelweiss

Maheshwari believes the worst in terms of earnings for India is behind us and the upcoming quarters will see an upgrade in earnings. He is very bullish on the industrials as a theme outperforming. The capital goods sector too will see better volumes especially for the likes of BHEL etc, he adds.

For FY17, he expects earnings to be around 13 percent and in FY18 around 18 percent.When asked about what they expect from tomorrow’s monetary policy, Khemani says it is unlikely to be a make or break event because market has already factored in one-two rate cuts by RBI over the next 12-18 months. The focus right now is more on uptick in the core economy, which will translate into earnings growth because one cut is not going to drive growth as such, says Khemani.Below is the transcript of Vikas Khemani and Nischal Maheshwari’s interview to Anuj Singhal and Nimesh Shah on CNBC-TV18. Anuj: I believe 500 investors are attending your conference. Can you give us a breakup of what kind of investors are attending? Khemani: This is our annual conference and it gets bigger every year, I have seen over the last many years. This time around, it is very special in the sense we have highest number of foreign institutional investors (FII) attending, we have about 50 plus FIIs coming and attending the conference. And we have 70 plus CEOs coming and attending the conference apart from a lot of other experts who will be part of the panel discussions. Anuj: This 50 plus FIIs that you mentioned, it is important because we have not seen so much of FII inflows in our market for the last three months. So, any profile of these FIIs, whether they are long-only funds, whether they are some of the exchange traded fund (ETF) investors and what kind of money inflow can we expect from here on? Khemani: They are all active investors, not ETF investors, but most of them are big names and big FIIs, predominantly long-only and there are some hedge funds as well. They are looking to basically get a sense on what is happening in India. In our conference, this is the highest number of participants from any FII and this is happening right after demonetisation. This is the first conference after that, after the Budget. People are looking to right now assess what is happening in India and we think we will start seeing significant interest coming from FIIs. We are getting incrementally more inquiries. Some of the FIIs have expressed their disappointment if they are not able to join us, so they are asking for some of the takeaways from the conference once it gets done. So, interest in India is really high. Nimesh: Just to take Anuj’s point forward, even beyond the conference, you speak to most of the large institutional clients. Is there a bit of a panic now that they have missed out on this big opportunity when the markets were down at 8,000, we have rallied about 10 percent from there. Are you getting a sense that maybe if this momentum continues, there will be a lot of those momentum chasers who will have to do this panic buying into the markets from an FII perspective at least if this momentum continues? Khemani: Certainly, post Trump victory and demonetisation which happened, both on the same day, emerging markets trade changed from a Trump victory perspective, a lot of FIIs who were invested into India through their emerging market funds, they had to exit, not because of India only but also because of the emerging market view changing and dollar rally happening. And they have missed out this whole rally which has happened in India. Also Indian rupee has outperformed. So you have both impact on the investors who sold out of India, but right now, as India long-term story looks one of the best in the emerging markets, it looks very attractive, some point in time, they will have to come back, get in. and also, dollar traded changing. So somewhere emerging market trade also seems to be coming back. So you will see in my opinion, this calendar year a huge amount of flow coming through. So, we will have twin engine of domestic liquidity as well as international liquidity and that will drive the markets. Nimesh: The big debate now is the earnings season. The quarter has been slightly better than what the street was expecting. In your sense, is the worst over in terms of earnings and do you think going forward, the street will have to upgrade their earnings, the way this quarter has been for most of the corporates? Maheshwari: I agree with you. For 2017, the worst quarter has been behind us. Incrementally, we are going to keep on seeing better earnings, even in this quarter itself. Basically, if you look at it, most of the sectors have really done better than what people would have expected. Again, for FY18, I believe there is a big industrial upgrade which is going to be likely happening as far as earnings is concerned. And that is going to be driven largely industrial sectors because I clearly see somewhere that the industrial activity has started picking up in the country whether you look at volumes happening, whether you look at quantities of stuff being done. Those are things basically which are quite positive. Nimesh: So, what is your number for FY18 in terms of earnings for Sensex or Nifty and vis-à-vis, what kind of valuations you are looking for in the Indian markets now? Maheshwari: Our numbers for FY17 is around 13 percent earnings growth and for FY18, we are at around 17 percent earnings growth which are more or less close to the consensus. Anuj: November was all about panic, was all about fear. We had the Trump victory and demonetisation on the same day, but do you get a sense that from fear now we have moved to greed side because while earnings have not been bad, we have seen not seen the end of downgrade cycle and that is something which the market might not be recognising. Your sense on the way things have moved up over the last one month or so? Maheshwari: The last quarter basically, I believe that there you might still see some challenges. But incrementally, it seems to be quite clear saying that for FY17 the worst is behind us. and for FY18, given that the kind of industrial activities which we are seeing in pick up especially on the demand side, I see that earnings might be getting upgraded from here onwards. Anuj: So, many big names attending your conference from the corporate side. You have of course, Romesh Sobti, Adi Godrej, Rana Kapoor, Bhaskar Bhat. What spaces do you think would be most exciting going forward from here? You have seen a big rally play out in banks and non-banking financial companies (NBFC) of course, domestic consumption has done well. But what spaces excite you the most? Khemani: In the conference we are trying to showcase most of the companies, best companies so that investors can take a look at entire India Inc broadly and make their judgement. But we are very excited about financials being one of the main driver of the index and markets and obviously where the earnings are also coming through. So, we are kind of excited about that. Industrials is again a space where we think lot more drivers are there from regulatory standpoint, demand standpoint of view, you are seeing a fairly large width of the company, we have done some thematic reports on unorganised to organised, on railways and we are seeing large number of midcaps, opportunities in those 2-3 spaces. We are showcasing many such opportunities in the midcap space. So it is a combination of both largecap, midcap, all kind of sectors, themes versus particular sectors. So, it is a fairly good showcase and that is the reason you are seeing the kind of participation you are seeing. Nimesh: While he spoke about large corporates attending, I am more curious to know what Rakesh is going to speak at your conference because you have a very balanced markets panel where you have Rakesh Jhunjhunwala, you have Sunil Singhania, one of the biggest fund manager and some of the FIIs whether it is Fidelity or for that matter Jupiter, what is theme that you would like to discuss with Rakesh? Khemani: Our aim of the conference this time around is this time it is different and what we believe is there are certain things out here which are different and we have asked panellists to weave this overall theme into market specific and also both global as well as domestic. So, it will be a good interesting discussion around and I will leave it to that time’s discussion basically to figure out what is happening and what is different and how you can make money out of it.Anuj: We had Bharat Heavy Electricals’ (BHEL) numbers before we started discussion with you. Of course, I am not asking you to comment on individual stocks, but what have you made of some of the earnings in the capital goods, power space? We have seen clearly the stocks have also moved on from the recent lows. Maheshwari: Particularly, this sector, you have seen volumes picking up and I will just put one or two results out here. Maybe Cummins you should go back and look at it and again, today in case of BHEL also. Cummins, we have seen now for three quarters continuously volumes picking up from the domestic market, not the exports. And in case of BHEL, again we have seen topline growth coming in very strongly in this quarter. So, they have been showing profitability for the last two quarters, but the important part was when they will start showing the topline growth which has happened in the current quarter. So, outlook on the industrial side looks to be promising now. Anuj: It has flattered to deceive. Last time also I remember, it had a rally from Rs 140 to Rs 160 and then that rally petered out. Do you get a sense that this time it will be different just to borrow the theme from your conference? Maheshwari: Looks like. We are very positive on the whole industrial sector and in case of BHEL also, we believe that the capacity which we have in the sector, capacity utilisation itself will start going up because the outstanding peak power utilisation is much lower than what is expected. Anuj: Tomorrow of course, we have the outcome of the monetary policy as well. Is that something which is being discussed among investors or do you think that will not move the needle this time because transmission has already happened? Khemani: I do not think this is really make or mar event at this point in time. As far as the Indian markets are concerned, by and large there is a consensus that there is a scope for maybe one or two more cuts in the next 12-18 months. So, right now, markets or investors are looking for an uptick in the core economy which eventually will translate into the earnings growth. So, the markets are looking for real signs of growth. Markets now know that one more rate cut is not going to pick up the demand going forward. So, those are the issues. So, I do not think this is going to be a big game-changing event. Nimesh: I will ask about a couple of other sectors including IT and pharmaceuticals because that is being largely talked about. Before that, I was reading an interesting report from your end wherein you have actually dissected the sectors which are going to benefit from this big shift from unorganised to organised sector. Can you just briefly tell us about which are the sectors which are likely to benefit the most if this shift has to happen in the next few years? Maheshwari: This whole report is about basically moving from unorganised to organised space and there, the major driver is going to be the goods and services tax (GST), but the sectors which we have outlooked out there is basically paints, we have ceramics, ceramic tiles, we have plywood. So, several of them, all consumption, footwear. They are around 30-40 percent of these sectors are basically in the unorganised sector. Nimesh: But many of the plays seem to have played out whether it is tiles, paints. Most of the stocks have been identified and it is played out over the last two years. Anything which emerges as a new theme which is probably still untapped and you think there is a huge potential likely? Maheshwari: Our thought process there is basically a multi-year theme. This is going to play out over the next 5-10 years. The biggest thing about GST is not about alone just movement of the differential between the tax rates, the big thing is basically unleashing the demand itself because your cost of production, cost of goods goes down, then the consumption will start going up in case of these. So, that is the biggest driver out there and I believe that these sectors are going to be not only driven for the moment from unorganised to organised but the demand itself is going to continue to grow in these sectors. Nimesh: You have identified dairy as a sector which probably will benefit from this move from unorganised to organised sector. Anything else that you think will play out in a very big way in this theme? Maheshwari: I have spoken all these sectors, specially ceramic tiles, plywood sector, footwear, clothing, all these sectors basically are going to be big beneficiaries out of this. Nimesh: I just got a first glance of the book that you are going to launch tomorrow. It is a little unique. It is titled, ‘This time it is different’. If you could just briefly tell us what is this and what is the key outcomes that you have gathered from that book? Khemani: This is the work of last couple of months where every conference we try and launch some book and this builds perspective around the whole issue. What we have seen is that whenever there is a strong leadership, we have analysed, if it is some international examples saying that there is a confluence of circumstances and a strong leadership which happens into the history of the country, though there are times where real transformative changes could take place. And we have gone and studied some of the historical events like Margaret Thatcher era, Deng Xiaoping era, Ronald Reagan era and we saw some stark similarities in those kind of circumstances and leadership emerging and we are seeing a similar kind of situation happening in India after Prime Minister Modi has taken over. Strong leadership and complex circumstances have created this kind of situation where development is back on agenda, demographic profile is pushing the agenda, clear mandates. All this confluence of circumstances is pushing this agenda ahead. So, we think and which we are going to talk more about in the conference and maybe later in your channel where we think there are certain forces which are at play if they play out the way they are. It is early part, but we are seeing a lot of similarities. So, if they play out then India could be in a transformative stage in the next 5-10 years. Nimesh: So from the market’s point of view, can you stick out your neck and say we are in a multi-year bull market from here on? Khemani: Oh yes, I have no doubt in that. We are in a structural bull market and we have been at play and it can create serious wealth. We will be surprised, even that probably it will be much ahead of our anticipation.