“Our analysts believe if you look at the interest rate curve, which tells you where the order book would come of US, it has moved up for 10 years from 4.1 or 4 to about 4.47 to 4.5 percent, which basically means interest rates are in the high for long regime,” says Vinay Jaising, JM Financial.
Let us start by the auto sector. This EV transition that everybody has been talking about, it is not entirely a new theme. It is something which is well discovered. We know about it and we all know and the consensus seems to be that it is the future. Do you think the best way to play it perhaps through these battery makers and other ancillaries or do you think there is any of those auto OEM manufacturer which stands to perhaps gain the most in this entire EV race?
It is a very interesting question. EV is not new. There are two or three ways to play EV. First is the ER&D names. You have got a couple of names in the IT sector wherein you can play the overall EV story, be it KPIT. A little bit of it coming in Persistent. A little bit of it coming even in companies like Cyient. The second way to play it is the chemical way wherein you have companies like Tatva Chintan, which will be a big EV producer, especially for hybrid cars and their electrolysis in the future.
The third way is the OEMs. If you look at companies like Tata Motors, they again own either directly under them 100% or 80% of companies which are invested into doing EV or they own Tata Technologies, which again gets a lot of its bread and butter from the EV story.
What is important here is if you are looking at an ancillary, look at the return on capital employed the ancillary will give you in the overall scheme of things and how much time it will give you to make a difference in its earnings.
We come from the school of thought, it is better to buy the first three, which is the IT names or the OEMs or even the chemical names over pure ancillary names.
But what about IT sector as a whole? Now I ask that question because there are initial signs that things have bottomed out, whether it is the fact that TCS has started or resumed the campus hiring again or the numbers coming in from Info Edge’s Naukri making you believe that perhaps hiring is picking up and of course, deal wins were as it is strong for these companies. There was not a big lull in deal wins. Do you think this as in Q4 will perhaps be the worst of the quarter and from Q1 onwards, there will be material improvement or do you think it is still some time away for the IT sector?
I come from the thought of the latter. Our analysts believe if you look at the interest rate curve, which tells you where the order book would come of US, it has moved up for 10 years from 4.1 or 4 to about 4.47 to 4.5 percent, which basically means interest rates are in the high for long regime.
Step two of that would be you would see IT companies globally reducing their order sizing in the future and you will probably hear a lot of that in this quarter’s results or next.
So, are the stocks close to the bottom, the largecaps? I think so, but I do not seem to see triggers in the next three to six months for them. So, here in IT, in the traditional IT names, we would be underweight as of now. Are we looking at them? Yes, we are, but we are in no hurry to buy them. We are playing it largely by the ER&D names, the IT sector.
But I also wanted to get a sense from you regarding this entire real estate boom that we are seeing and for the last six months, the worry has been when will that bubble burst? Is it already plateaued? But if you look at the demand coming in, in terms of consumer durables as well, in terms of the other building materials as well, it continues to be quite high. Again, what is the best way to play the real estate boom that we are seeing?
The single biggest name which comes into my eyes is basically the housing loan companies, be it Chola, there are tonnes of names in the financial sector you can play the real estate boom. A) The yields are better. B) They are as good as secured loans. C) These companies have their costs or I would say their deposits which they have got at relatively high rates.
If you look at results of companies come in like Chola, you are looking at the loan book grown north of about 65% on a yearly basis, even on a QoQ basis you are seeing 15% to 17%. So, good numbers coming up. You can play it any of the ways. We are happier playing it through the NBFC space.
I also see you are quite bullish on the capex cycle and you are playing it not only through capital goods, but you are also playing it through the defence theme. So, Bharat Electronics and Hindustan Aeronautics are the two names that I see in your list. Could you talk to us a bit more about the rationale here and the longevity that you are looking at holding these stocks for?
Sometimes our analyst feels they are looking at consumer names when we talk about defence because one thing which is increasing on a year-on-year basis is the expenditure in defence. If you look at the last 10 to 11 years, the overall defence expenditure has gone up north of two times, but what is more interesting is the domestic names, be it Bharat Electronics, be it Hindustan Aeronautics, their part of the business has gone up by more than three to four fold.
Currently today, you have more than a four times order book to sales where each of these companies have. Hindustan Aeronautics, interestingly on its manufacturing part, has more than eight to nine years of an order book, which means you have got a good longevity for their earnings to come up. Typically, the export cycle has still not started. In the case of Hindustan Aeronautics, it is 1%.
In case of Bharat Electronics, I think it is about 9% to 10%. These numbers are set to increase substantially and that would gain India and more importantly, the Indian defence companies as well.
Today, you are playing the defence name more with the atmanirbhar concept, which is instead of depending on the rest of the world for your defence equipment, you are buying it from these companies. In the future, they would become bigger export houses that one can imagine. So, we really like these names.
But I also see SAMHI Hotels in your list. What makes you tilt towards that and not say let an Indian Hotels or even Chalet, Lemon Tree?
Purely valuations. So, the name you would look at in the hotel industry, all of them gain for extremely high productivity today. They are all super efficient. You are seeing the average rentals per room on a daily basis literally going up.
SAMHI on one side has somewhere close to 7,000 to 8,000. Indian Hotels are somewhere close to 18,000 to 20,000. Chalet is between the two. So, the rate of growth, if you start seeing the pricing power of the hotel industry, inch up would be more for SAMHI.
Being more a levered play, this company has grown both its rooms, but as its cash flows improve, its interest costs would also further go down, so you would see an EBITDA growth more importantly, a net profit growth much faster than the other peers.
But the hotel industry I think the earnings growth will be equal to largely the quality of rooms they get in and whoever has the highest hotel room growth I think that company would be looked very well as far as the bourses are concerned.
But I also want to know your view regarding BSE. I mean if I have it right, the stock has become 4x what in the last 12 to 18 months. How much further do you think it has the rooms to actually rally?
Our analyst has raised the numbers multiple times on BSE in the last couple of quarters. Currently she expects a 40% to 45% growth in earnings for the next two years and even on that on her numbers in the option market the market share would be about lower than 20%.
Now, typically if it is a oligopolistic market, you cannot have 80-20. Today it is obviously 90-10 market share overall in any of the markets especially if the products are very similar.
So, I think BSE is a long run to gain in terms of revenues and earnings which are growing north of 40% can inch up and when you are seeing such high quality earning growth a PEG of one which means a 40 times multiple is very possible. So, we are pretty excited about this stock.
Again, since we are talking about earnings and valuations I just want a macro view from you in terms of Indian market itself. I mean for FY24 itself almost 30% return on the Nifty is 70% on smallcap, valuations are no longer comfortable. We are very close to that five-year average or a little higher than that. What do you think is a realistic expectation because at one point of time obviously you have all the investors and experts talking about the big theme of amrit kaal and the long term upside that is there in India, but realistically do you think we have the wheels in place to kind of repeat the 2024 or FY2024 performance?
I do not think so. Having said that will there be an absolute return on the market from current levels? I am pretty confident there and there are more technical parameters to run that argument of ours. Let me run you through a couple of them.
First India’s overall weightage in an FII has gone down from a peak of north of 20% to about 16.5%. It is at 11-year low. Second, you have just seen India included in a couple of emerging market bond indexes be it JPMorgan or be it Bloomberg.
So, you will see a lot of money coming in from there. Third when you are looking at India’s economic growth compared to the rest of the world, today we are incrementally adding about 15% of the world’s GDP.
We are accounting for about 1.5% to 1.6% of the profit pool or what weightage one puts in as far as indices are concerned.
I think all these things are set to move up which means the importance of India is only increasing. Fourth, if you look at the corporate capex spend that has still not happened.
We did speak about capex a little bit which we are excited about, but all the capex is largely being funded by the government. The government has had a CAGR of capex spend of about 30 plus percent in the last three years.
Once corporate capex starts increasing, you will see a lot more projects and you will see a lot more profitability come in corporate India.
Today corporate India’s profits give or take change at about 5% of its GDP. Can that number go to 10 which is very similar to what US is today in the longer term?
Probably the answer is yes but you need to start seeing corporate capex growth. And finally, earnings, we are just getting into the earnings quarterly results. You have heard about consumer names, you have started hearing about jewellery names but if you move on towards corporate earnings, now it is not about just finance which was growing historically though 30% of the overall indices but financial were growing very well in the past.
Last quarter you saw them grow at 20, but you saw many other industries be it industrials, be it telecoms, be it auto grow way north of 20% and you had a broad-based growth, I think that is where India is heading towards, huge earnings growth.
So, keeping all these things in mind I think the earnings trajectory of India could be north of 15%. Obviously, elections, geopolitical risk are some things we need to access, but if things go India’s way, an absolute 15% return on a 12-month basis cannot be ruled out.