"Financials, excluding insurance, reported amongst the best-ever financial performance and are in the pink of health right now," says Atul Bhole, SVP and Fund Manager at DSP Mutual Fund, in an interview with Moneycontrol. He also believes "the environment would start becoming challenging for financials and men would be separated from boys."
He feels only a few select private banks and NBFCs having strong deposits, lending franchises and discipline, would continue to sustain the momentum.
Atul, a veteran with over 17 years of experience in equity research and asset management, says that macro indicators in the commercial vehicle space, like e-way bills, toll collections, IIP growth, and infra activities, continue to be robust leading to higher fleet utilisation. Based on these facts, there is room to believe that the commercial vehicle cycle still has a few more legs remaining, he says.
After looking at March quarter earnings, do you expect better earnings performance from financials in the June FY24 quarter as well?
Financials, excluding insurance, reported amongst the best-ever financial performance and are in the pink of health right now. Most of the lenders benefitted from the sector tailwinds of enhanced credit growth, improving net interest margins and lowest credit costs. This has resulted in very decent RoA (return on assets) and RoE (return on equity) delivery by the sector.
We believe all of these tailwinds cannot be expected to continue for long. Credit growth should normalise with inflation cooling off andglobal slowdown impacting India's story too, at least to some extent. With robust balance sheets and recent benign credit experience, most lenders are aggressively chasing growth, probably at the cost of the right pricing.
To support the credit growth, the fight for deposits is picking up. All this can start putting pressure on margins. The lowest credit costs also can not last long and should mean revert over time. The rate cycle might help wholesale-funded entities going ahead but it would be just a few quarters' respite.
Net-net we believe the environment would start becoming challenging and men would be separated from boys. Only a few select private banks and NBFCs having strong deposits, lending franchises and discipline, would continue to sustain the momentum.
Is it the time to go overweight on consumption space given the commodity prices stabilised?
Within the consumption basket, the discretionary part has already done very well in the past 2 years with well-to-do population spending on homes, travel, jewellery, apparel, etc. Companies catering to this demand might see a tepid business for the time being as the demand propensity cools off a bit for some time.
On the contrary, staples demand is struggling to hold on for quite some time due to distress in rural and urban poor’s incomes as well as inflation hurting their purchasing power negatively. On both counts, some relief can be expected.
Rural wage growth is bouncing off from the lows and rising infrastructure, real estate spending would help on the income side. With raw material cooling off, companies are judiciously passing on the benefit either through grammage increases or through higher discounts.
These measures can revive demand. Companies should also be able to recoup lost margins over time. Staple companies have gone through decent time correction and can be looked at, at this juncture.
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Are you worried about the earnings growth of IT companies in Q1FY24 and FY24?
IT companies might see further pressure holding on to the growth rates as well the margins. The US economy is rapidly deteriorating with every passing day and may be some time away from seeing the full impact of the Fed’s actions. Though corporate and individual financial health is better versus past cycles, nonetheless, their behavior could turn very cautious towards spending as more uncomfortable events and news flow unfolds.
The industry has always been very competitive and restricts pricing power, though domestically, salaries have gone up and currency is not helpful this time around. Some companies are still putting a brave face in terms of guiding for sustained growth and margins, but we believe this can be at a bigger risk. Interestingly, however, stock price behaviour can be very different compared to business delivery and is going to be a challenge in terms of timing.
Have you seen many earnings upgrades after the ongoing corporate earnings season?
Most of the commodity and PSU companies are yet to report results. In the published results, we are seeing most of the earning upgrades in financials, auto and industrials sectors while IT, consumer, chemicals, cement are seeing earning downgrades. Overall on an aggregate basis, the earnings estimates should hold in a narrow range.
Do you expect some kind of slowdown in commercial vehicle space in the auto segment?
Commercial vehicle (CV) sales which have generally averaged around 3,00,000 units per annum in the past decade have seen just around 2,10,000 per annum sales during FY20-22 for all the known reasons. Though FY23 was good at 3,58,000 units, the catch-up is yet to get completed.
Macro indicators like e-way bills, toll collections, IIP growth, and infra activities continue to be robust, resulting in higher fleet utilisation. Based on these facts, there is room to believe that the CV cycle still has a few more legs remaining.
After the recent corporate earnings season, do you ask your clients to take sizeable exposure to new-age companies?
Investing in new-age companies caused huge losses to investors due to irrational exuberance during and immediately after listings. Though these stocks have corrected 60-70 percent from the peaks, we still prefer to be on the sidelines for the inability to understand the business models and establish a clear path to profitability.
Some of them are attempting to be profitable but will obviously suffer on the growth side and might also see a lot of their franchise stats coming off. Moreover, corporate actions immediately post-listing, very low ownership and virtually no skin in the game by promoters, along with imminent share supply from initial investors are other notable apprehensions. Stocks have seen and might see bounce-backs post such fierce correction but that falls in the ambit of speculation and not investments.
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