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Vinay Jaising, MD and Co-Head, Portfolio Management Services, JM Financial Ltd, says “for us, capex and industrials put together, had north of a 50-55% growth. Railways, again, fantastic growth. So that space, in terms of earnings trajectory, did really well. In energy, we are underweight but that did extremely well, courtesy the OMCs. I do not know how long that will sustain or whether we will start seeing either crude prices move up or margins move down, but overall in terms of numbers, a 20 plus percent year-on-year increase in capex made our overall portfolio earnings go up north of 25% and that was exciting for us.” The markets got mighty enthused by the big GDP number. There has been two back-to-back strong readings on the GDP. In the last commentary, the RBI governor already took their own estimate for GDP higher, above 7%. Other rating agencies could follow soon. Is this growth sustainable? The market will start looking for valuations if the growth is not sustainable, but growth appears to be falling in place now? Vinay Jaising: Absolutely. It is very important to understand that India’s GDP growth is in a positive territory. Whether this 8% plus because of a subsidy reduction will go to the GVA of 6.5% inching up to 7% plus we have to see. For the next year, that is a more steady state. Now, look at 7% plus of real GDP growth for the country and inching up as times come, as capex really plays out and as corporate India’s earnings increase and finally, when the consumption cycle also comes up. It will take six to nine months and we will see a better growth trajectory for India. But, if we were to look at US data, the US GDP growth last year has been about $1.6 trillion. What is interesting is that in US GDP, the debt increase has been almost $2.6 to $2.8 trillion. So, the US is paying its way out. It is increasing GDP by increasing its debt burden even more. India is not doing that and that is where the big difference lies. Investors will see that the quality of the growth of the Indian economy is not coming at the cost of its debt going up, rather it is because of the economy improving in a bottom-up basis. That is a big thumbs up for India.

Which end of your portfolio saw the strongest earnings this quarter? So, how did your portfolio companies fare on the revenue front and the profitability front?

Vinay Jaising: If you look at even the broader 500 index, you will see that the financials grow at 20-21% while the overall growth was at 25%. That means the other industries did a lot better than the financial sector, which I think is a big positive because one needs other legs to grow.

For us, capex and industrials put together, had north of a 50-55% growth. Railways, again, fantastic growth. So that space, in terms of earnings trajectory, did really well. In energy, we are underweight but that did extremely well, courtesy the OMCs part of the story. I do not know how long that will sustain or whether we will start seeing either crude prices move up or margins move down, but overall in terms of numbers, a 20 plus percent year-on-year increase in capex made our overall portfolio earnings go up north of 25% and that was exciting for us.

What was a tad bit disappointing, even the auto ancillaries and auto companies, with companies like Tata Motor doing really well on the earnings front and ditto for telecom. We had lots of pluses. Ditto for pharmaceutical, speciality chemicals. Certain spaces were up 25% plus.

The disappointments were largely in the IT space, which was well expected. The financial space, which was also partly expected. But apart from that, maybe also the consumer space. That is why I think you are alluding to the question of revenue growth. The consumer space disappointed us a little bit on the revenue growth as against sales realisation growth, which was better.

The volumes are still a question mark as far as we see the consumer space come in. But there was some amount of margin improvement. Net-net, post the quarterly result, we have all raised our numbers tepidly, maybe 1% to 1.5% for India Inc for the next year. We are now closer to 15% moving up to 16% growth for the next 12 months. That was inching up as we looked towards the next two to three years.

I was just speaking with the Auto Components Manufacturing Association’s head. There are reports coming in that $6-7 billion worth of fresh capex may be lined up by auto component manufacturers. When I asked him what was triggering it, because the OEMs are not showing very big numbers, they say that both legacy OEMs as well as EV companies are lining up launches going forward. Any company you are playing in your portfolios on the auto component side?

Vinay Jaising: Today, as we look at the next 12 to 24 months, yes, there is capex going in both in the EV part of the story more than IC part of the story and on a year-on-year basis, we are moving to better specifications or lower emission norms for the auto industry, so you will start seeing that phased amount of capex being spent by all the OEMs.

At this juncture, we are looking exactly opposite of what you just said. We prefer the OEM place purely because we are seeing good volume demand come up. Names we like, case in point, are companies like Tata Motors. Even today, we are seeing them have a good order book, but more importantly we are seeing their debt numbers come down substantially, more so globally than domestic and all of a sudden we will have a total net debt negative which means cash plus company and companies like them. Maruti too post its correction for us now as we are looking at interesting avenues for OEMs as much as ancillary companies where a lot is already built up in their prices.

But you are right. We are seeing some semblance of growth in capex coming up in the auto sector and the entire sector would gain because of capex coming out as far as OEMs are concerned as well as the ancillary companies are concerned.

I want to come back to the financials. Some of the large private banks and NBFCs have gone through corrections and PSUs have done well. If GDP grows so strong, then the bond yields are also likely to edge lower and this will be the area which will benefit. How are you playing the lenders?

Vinay Jaising: So, this is an interesting question and a little bit of just a top-down view. So far, the overall loan book has grown by retail India consumption.We are seeing that grow on a year-on-year basis and we have seen that grow for a couple of months. We have not seen corporate India singing so far. As far as growth is concerned, 6-8% growth is there.

Post elections, we will see the next leg of loan book growth which today is at give or take 20%. The incremental growth is coming in from the corporate sector, the yields for the loan book for the corporate sector is much lower than the yields of the loan book on the retail sector. The quality of the book would be better, but the yields are much lower. So, technically, we are seeing that in the banking sector, one end is robust with high loan book growth; on the other end, the deposits are not growing at the same rate as the loan book. So, we are seeing the cost inch up for the banks.

On the third end, the incremental loan book is coming at lower yields. So, for us, NIM is under pressure next year or so though the quality of the book would be better and that is the story for us in the banking sector. So, we are a bit underweight in this space. Having said that, as interest rates move down, which they will sooner than later, in the next six months, based on our estimates, you would start seeing all the banks which are linked to the repo rate would have to get their deposit rates or the loan book rates at a lower level.

So, we are going to see the yields come down faster for them than the NBFCs. It is a nice time to look at some of the NBFCs where we are very confident about the loan book. The NBFCs could be some housing finance companies or even some MFIs which have flat, fixed yields. But get the advantage of a lower cost coming in. This will be the exact opposite of what we were probably playing historically wherein we are betting a lot more on banks.

Which are the stocks which you are exposing your portfolios to and overall, in chemicals, is the worst over?

Vinay Jaising: Sudarshan, our analyst, very strongly believes that in chemicals, we could be a quarter or two away from the bottom of where the pain coming in from China in terms of costs or the inventory levels going down and how the realisation also for a lot of these companies are at a bottom. So, we need to bottom fish out here.

Look at those names where you think there is a very robust demand coming up, not just from China, from the rest of the world and there are two-three companies we like out here. Archean, one of our favourite picks, did really well last month. But we have companies like Tatva Chintan which play the EV story pretty well and it is tough to say whether this quarter or next quarter would be the bottom of it. But this is something which we have been owning in our portfolio. It has not done well for us, but we think we are close to the bottom out here.

The other names we like, which are pseudo chemicals and pseudo healthcare, companies like Blue Jet where again it has been impacted due to the constraint of some pharma company in the US not taking the product for them, but clearly these are names which are close to the bottom and as China starts reviving which could be a quarter or two forward, lots of these names would do a lot more better in the future.

  • Published On Mar 4, 2024 at 02:20 PM IST

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