The underlying in terms of the economy is pretty fine, though it is not going to be a hockey stick kind of an economic cycle as people were hoping for, says Aditya Narain, MD and India strategist at Citi. The quality of growth is good and hence there might be an extended economic cycle, he told CNBC-TV18.
This, according to him, even the markets will welcome. However, he adds that at the moment the market has very little appetite for big misses, disappointments and corporate governance issues. "While it is a good market, it is not good enough to overlook such issues," he says.
As far as highly leveraged companies (books) are concerned, Narain says in such cases there has got to be some underlying momentum backed by leverage.He continues to retain his December 2015 Sensex target at 32200 and June 2016 target at 35000.
On the Reserve Bank giving in-principle nod to 11 applicants for payments banks, he says economy-wise it is a huge step because it is an extension of a fair amount of work that has been happening for some time now. In that sense, it is a forward move in terms of financial inclusion and financial expansion.
Below is the verbatim transcript of Aditya Narain's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18
Latha: You wrote a report saying that hereafter when we look at banks we should be looking at their digitalisation commentary and investments. How much of a wallet, how much are they investing on an HDFC Bank wallet or smart wallet, the one that State Bank of India (SBI) launched. Those are the dialogues that we should be looking at and low and behold the Reserve Bank of India (RBI) announces that it is going to give a slew of payment bank licences. So, before I get to the macros, is this a big thing, not just market wise, economy wise?
A: Economy wise it is a bigger thing because it is an extension of a fair amount of work that is being going on for a bit. So, in that sense it moves this entire financial expansion and financial inclusion bit another step forward. The other thing that is interesting with these licences is the fact that whereas so far most of these licences have been somewhat close restricted, been very stringent in terms of the numbers that have been give out, this time a) they are very generous in terms of the numbers and b) the backgrounds of the promoters is very board and that will tend to have an extra kicker because you will end up getting different mindsets, different models and different reaches and that is what is equally material; not just new licences have come or that 11 have come but the fact that the promoter groups are just coming from very different backgrounds.
Latha: We will learn to plough this in the days to come but any market impact, Aditya Birla gets a 3 percent uptick, both Idea Cellular and the NBFC, Bharti Airtel share is up 2 percent, the market is very excited, is there a profit and loss (P&L) impact?
A: I think the P&L impact is going to be modest particularly compared to the parent. What it does is from an economy perspective, as I said the financial system perspective, it is another leg forward and that is probably what is going to be more material.
Sonia: Your enthusiasm on the market has been palpable every time you come and speak with us. Are you still as enthusiastic?
A: I remain very comfortable with the market. As I said, this payment bank is another step on this front. The underlying in terms of the economy is shaping up pretty well. It is not shaping up as rapidly as people hope for it to but it is on very sound foundations. The quality of the little bit of growth that you are getting is actually pretty good. My own sense is that you are actually going to get an extended economic cycle and to that extent the market will tend to value them up sooner rather than later.
So, it is not going to be a hockey stick kind of economic response and that is what people have been hoping for. However, the underlying is in good shape, the way businesses are approaching their own growth and their own risk is a significant step up over the previous economic cycles that you have seen and market should effectively reflect it.
Latha: Your thoughts on Amtek Auto? I know it is stock specific and that is not your comfort zone but this is like a huge punishment?
A: We don’t cover the stocks; we don’t have stock specific comment but in some sense the market still has very little appetite for big misses or disappointments or corporate governance issues. That is a reality one has to live with it at this point in time. It is a decent market but it is clearly not good enough to kind of override any of these kinds of events.
Sonia: So this market even has a low appetite for companies that continue to be highly leveraged because there was a time about six months back where lot of people were advocating, getting into these high level stocks expecting a bounce back or a contrarian play?
A: Because you are leveraged and there could be an upside people are not effectively going to buy into that. You got to have some story or some underlying momentum or earnings move backed by leverage which gives you the kicker as far as the stock is concerned. However, purely because you are leveraged and if things happen then these stocks will bounce that is for the someone on high risk appetite nit for the normal.
Latha: Let me come to your main thesis, your Sensex December 2015 target is 32,200 and June 2016 is 35,000 on the Sensex. First tell us if you still stand by these or you want to tweak them higher or lower and more importantly earnings, you said it is not going to be hockey stick and it is going to be slow but every season is a disappointment.
A: Firstly, in terms of the targets, we stand by them. We have tweaked them in the past but when we put them out we stand by them. From an earnings perspective, you are right, it is not going to be hockey stick, growth is not going to be hockey stick, earnings could be a little better going forward. However, what you are seeing is probably the last of the downgrade cycle. You must remember you had a massive upgrade cycle in the latter half of last year when the market was running and that was the market chasing levels.
This year has been much flatter, much more muted and there has just effectively been an adjustment. So, I would say this earnings season and this month as people re-fix numbers, that should be effectively the last of the big downgrade cycle. Beyond that I do believe earnings are going to effectively pick up. It is not going to be so topline driven, I don’t think you will necessarily have too much gross domestic product (GDP) growth support but from an earnings perspective the last quarter of this year is when you start looking up.
Latha: Very important take aways that Raghuram Rajan will watch how the depreciation move goes from here on and as yet not worried, any comments?
A: By and large what you are seeing in the system is a little bit of expansion. A lot of work is going on in a lot of areas. There are a lot of challenges. It is very simple; again going back to that hockey stick argument if someone expects a rapid increase in the way these banks functions or a rapid improvement in asset quality, cost or move up in stock prices that would be running up ahead of yourselves. However, a fair amount of work has been done. It is happening on multiple fronts and that is really the positive story that you get within the banking system and the broader economy. You just have to be watchful of the facts that don’t extrapolate results in a hurry.
Latha: What did you make of Arundhati Bhattacharya’s growth comments?
A: The banks have generally tended to be a little consistent and if you look at the market there are areas particularly this transport space where you are seeing green shoots. I see two things one it is going to be gradual second there it is going to be less credit in this recovery then you have traditionally seen in the past and part of it is to really do with the fact that inflation is a lot less.
Third thing which is a very good for business but bad for business per se is that businesses are been very cautious and carefully in terms of how they expand. So you are not going to see excessive binges as far as leverage is concerned. You will see people being much more reticent on that front and that too some extent is going to be overhang in terms of credit numbers that you actually see.
Sonia: Lupin has been one of your top picks as well in your coverage universe. How do you deal with the pharma space now? Do you continue to buy some of these tier I pharma stocks or you do you start to look at the midcaps as well?
A: One we have been positive on this space for quite a while. Secondly, we have been positive because we think the cycle for the next two to three years is very robust from an earnings perspective from an approvals pipeline perspective. Third is then we differentiate between different models so one of the reasons why Lupin is our top pick is simply because we think they have a stronger business model than others so that there is going to be greater leverage on it. Otherwise I would say with pharma you don’t call, I mean you call business model you see where they are in their line of or in their trajectory of approvals in terms of growth.
Latha: Is 5:25 ever greening according to you?
A: It is a means of resolving the entire issue. Arundhati Bhattacharya was right when she said in the developed markets it is slash-and-burn kind of approach whereas in here you kind of handhold the system through it. If you were to go through the past experience in the Indian Banking system the last two times that they have fixed an asset quality problem it has been through the slight level of gradualism.
So, that is the route that they are going to try again and this is a reasonably legitimate way of doing it. It is a question of does the market end up seeing very obvious 5:25 which shouldn’t be 5:25’s or are they more genuine or more understandable. That is going to drive perception rather than the fact that it is another form of restructuring. It is definitely legitimate. It just needs to be marketed a little better and you need to be little careful about doing 5:25 for assets that require harder cut.
Sonia: The sixth pay commission when it came out, it resulted in higher salaries and better spending, you think the seventh pay commission would lead to the same?
A: I think it will have quite a significant impact. I do however believe that the sixth pay commission in some sense the economic impact was kind of unanticipated or unexpected. This time there is going to be a build up towards expectations, so, in that context it might not be as much of a multiplier for the market because it is going to factor in a little bit. However, this business of spreading the wealth as it were people look forward to it, because they are government servants there isn’t that tendency to save simply because you have pensions, assuredness of the job. However, it will have a positive impact but there is going to be a lot of build up into it. If I go back, there was no build up, it was just fiscal stimuli as they called it later.
Sonia: You have 35,000 target on the Sensex by the end of June 2016, so, you continue to be very optimistic?
A: We do. Everything we have heard today actually suggests there is some kind of bottoming out, some activity happening and a lot of the newer activity that is happening whether it is payment banks, whether it is FM licences, whether it is those coal mine auctions – there is a certain amount of new business activity that is beginning to happen. Most importantly it is very rational, so, as I said initially, there are not going to be any excesses, you are not going to get hockey stick growth but you will get is sensible investments, sensible returns and for businesses it will work out very well and that should translate into a stronger market.
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