Hopeful Of A Multi-Year Capex Cycle, Says Kotak’s Sanjeev Prasad

The cycle is likely to be led by household capex as people look to upgrade homes, followed by private sector investment which could get a boost from recent policy changes.

“I’m hopeful about household capex, which is essentially money going into residential real estate,” Prasad told BloombergQuint in an interview. “If you look at household physical savings rate, that has come off sharply over the last ten years or so. It used to be 15-16% of GDP in 2012-13, it has come down to 11-12% of GDP currently.”

The conditions over the last 12 months, as a result of the Covid crisis, could precipitate a change in mood around investment in real estate. “What has changed in the last 12 months is that there is a big desire for everyone to upgrade because the quality of housing stock in India is very poor and, because of work-from-home, etc., people want to upgrade.”

The ingredients needed to convert that change in mood into actual transactions have been there for a few years, Prasad said.

A real estate investment cycle, if it accelerates, will bring gains for the economy as it creates jobs and demand for a host of commodities from steel to cement.

“It can become a big positive for the economy because the multiplier effect of housing on the economy is massive,” Prasad said.

Beyond household investments in real estate, private sector capex may also pick-up as pandemic related disruptions start to fade. “There are a lot of good things the government has done over the last few years—corporate tax cut, labour reforms and PLI schemes,” Prasad said. “Hopefully all that results in more private sector capex.”

The Indian economy has seen weak investment growth for years now. The share of gross fixed capital formation in GDP fell to 28.8% in FY20, before the pandemic hit. This is well below the peak of over 34% in FY12.

Consumption, however, continued to grow as the ability of consumers to get leverage was high. While this story played out for sometime, consumption growth started to weaken as jobs creation remained weak.

Against that backdrop, an investment cycle is much needed.

In the near-term, the focus will remain on the growth recovery from the second wave of the pandemic and the recent increase in inflation.

Prasad is skeptical of a quick rebound in consumption after the second wave, as was seen after the first wave. He cites a few reasons for the caution.

First, the rural economy is more impacted this time compared to the first wave.

Second, in urban India, especially for the urban poor, this is the second year in a row that they have seen severe disruption in economic activity.

Third, if you look at middle and high income households, a lot of purchases of items such as consumer durables, autos have already happened after the first wave. So the demand may be subdued from this category, Prasad said.

“Based on these three factors — there recovery could be slower compared to last time. I don’t think a V-shaped recovery is happening this time.”

Inflation, meantime, remains a key monitorable globally and domestically. U.S. inflation is running at its highest levels since 2008 and local inflation is now above the central bank's comfort band.

Is the current bout of inflation transitory, as central banks have maintained?

“We’ll get the answer over the next 6-9 months. So far, the market has assumed that inflation is transitory, as guided by central banks,” he said. “But if this (higher-than-expected inflation) continues for the next 6-9 months, markets, central banks and the markets will have to recalibrate their expectations.”

The higher-than-expected inflation prints may prompt central bankers to begin talking about an unwind of the extraordinary support provided over the past year. The pace of that withdrawal depends on how long inflation remains high.

India, however, will find itself better-placed to withstand the impact of this tapering, Prasad expects.

Inflation is lower than where it used to be, the current account deficit is at less than 1% of GDP compared to 4.5% in FY2013. “So I don't see the same level of tumult (we saw in 2013) if the U.S. Fed starts signaling a reduction in bond purchases finally. And remember it will be a gradual process linked to new economic data.”

For now, markets have remained upbeat, with the benchmark Sensex and Nifty indices are trading at near record highs.

Prasad is looking at 30% growth in the net profits of the Nifty 50 companies for FY22 and 15% in FY23. “This is on the back of 22% growth in FY21, so it's not as if we have built in some conservatism.”

What multiples the market chooses to attach to these earnings and hence what levels it trades at depends on the mood of the market at that point in time, he said. “It will all depend on what is the growth inflation dynamics, which, in turn, will dictate the policies of the central bank, which in turn will determine bond yields and cost of equity.”

The buoyant mood in secondary markets is likely to spill over into the primary markets and this time a number of new technology firms are expected to consider listings.

Does Prasad see interest in this space?

Somewhat under the radar but many of these companies have built reasonably good business models and are quite scalable now, he said.

“If you look at the whole consumer retailing piece, you have several decent companies in various verticals, apart from the horizontal e-commerce platforms,” Prasad said. “Yes, many of them are still consuming cash but to some extent you have started to see consolidation also, which could lead to better economics faster.”

When asked whether these companies will manage to get the kind of valuations they have on overseas markets, Prasad pointed to high multiples that Indian investors are already paying for good quality business models in India. These multiples are based on the assumption that India's growth should be there for the next 30-40 years.