Was RBI maintaining the status quo on rates entirely unprecedented in light of the rising inflation? Could there be some countercyclical measures on the anvil?
With regards to RBI’s decision, we were a little surprised. We do note that inflation has moved up due to food and vegetable prices; but in our view, that is largely cyclical and can stay for the next three to four months, but more important is growth.
RBI in their own projections cut growth rate by 100 bps. They still kept rates unchanged and that was a bit of a surprise. Having said that, we believe the liquidity situation in India has improved quite a bit. The wholesale rates have started falling. Also, RBI has already cut rates by 135 bps, whereas the lending rates have declined by only about 40-50 bps. A whole lot of catchup can happen, the lending rates can fall.
In fact, liquidity is easing and so the wholesale rates are falling. Going forward, we expect deposit and lending rates to fall too. Coming back to RBI, from here, till about late March, there is scope to reduce rates further because growth at 4.5% is quite moderate.
What is your view on some of the banks and financials?
The banks and the financials could be in a sweet spot because just drawing from the previous answers what we were discussing, liquidity is good; also rates are falling, but the transmission has not yet happened.
For transmission to happen, we would require some risk appetite pick up which can happen for many reasons; one of them could be also policy signals, so that animal spirit needs to be revived. We think that with time that will happen and if there is a base case, we continue to remain bullish on the private sector banks and that is more of a structural call.
Also, whatever has gone on in the Indian financial sector for the last one year, has led to private sector banks gaining both deposit and loan market shares. Their pricing power is back, their credit costs will fall. They appear to be in a sweet spot. Cyclically, one should also add that if our view on rates getting lower and liquidity getting better and risk appetite coming back in the next one or two quarters plays out, then after remaining on the sidelines on non banks for more than a year, it is time to re-evaluate them, particularly the good quality ones with asset quality.
How is the disconnect continuing between the midcaps as well as the largecaps and then within the Nifty as well. Just 10-15 odd stocks are doing the heavy lifting. Is this the time to buy into the mid and smallcaps given that they have just recovered 15% from their lows?
First of all, we look at stocks on a bottom up basis and not so much on the market capitalisation basis. Having said that, we do think that, it is a fact that the markets have got quite skewed. The reason why they have got skewed is because of this consolidation that has played out. In most of the industries, the large companies gathered more market share and their earnings and profitability rose and so did the stock price.
For midcaps and smallcaps, the valuation looks attractive, but for them to do well, the transmission mechanism has to resume, the money needs to flow, the credit needs to grow. Once credit grows, the midcaps and the smallcap companies will have the necessary resources to achieve whatever they want. Their valuations are attractive. We are just waiting for the animal spirits to kick up and the transmission mechanism to resume.
Is that going to be little pushed back a bit because you do not know how the US China situation is going to pan out? Also, volumes dry up in the year-end. The markets may get in a bit of a corrective zone in the next couple of months?
It is quite possible. Honestly, I do not have a view for a couple of months. In fact, our base case is that for that to happen, it may take up to a quarter or may be even slightly more. If we compare this year to last year , global developments are actually far better than what it was. Even six-nine months or a year ago, we had tremendous uncertainty on global trade war, Brexit and China was not giving any stimulus. Most importantly, the central banks including the US Fed were on a tightening mode.
Once credit grows, the midcaps and the smallcap companies will have the necessary resources to achieve whatever they want.
But today, the trade war uncertainty has come down. Our view is that trade war should see a pause. Looks like the Brexit will be not as hard as people thought it would be. China has already made some tax cuts and most importantly, the central banks are on easing mode. They have cut rates, they have added liquidity and they have given up guidance that rates are going to remain for a longer period. The global liquidity scenario has turned benign and this should play out in about a quarter or so.
Where else, would you look for opportunity?
Apart from the banks, logically taking that step forward, one should be looking at interest rate sensitive sectors also. That would be real estate. In our view given the price stagnation that we have seen in real estate and the falling rates, the affordability has improved. At the same time, the inventory is now getting a drawdown. For someone with a slightly medium to longer term perspective, that is one good segment to look at . Ancillary segments like building materials can do well too.
Apart from that, we still play that consolidation theme that we have referred to. We have already covered consolidation in private banks. We have also seen consolidation and some bit of pricing power returning in organised retail and telecom.
Coming to telecom, are you hopeful that the government is going to push back the AGR dues payment deadline? Are you more hopeful that with the tariff hikes kicking in, we will have a much better P&L of the incumbents?
May be a bit of both. The telecom tariff hikes will bring in better P&L to the incumbents. In fact, our analysis shows that the tariff needs to go up a bit more for them to pay their dues as well as do capex.
We have now seen an inflection point where the industry revenues are growing and you would appreciate that this is a fixed cost industry. The incremental revenues straight away flow to the bottom line and our cash flows improve. If this continues, we would see a scenario whereby if the government is supportive of relaxing some of the payment deadlines, they should be able to pay back their dues and also do the capex that is required. That should be the turning point for the sector.