India Has Become A ‘Show Me The Money’ Market, Says CLSA’s Mahesh Nandurkar
India has been a “hope market” in the last few years on expectations of a broader earnings growth rebound, says CLSA’s Nandurkar.
CLSA Ltd.’s Mahesh Nandurkar said investors are waiting for earnings to pick up before putting in more money in equities as the actual boost from the corporate tax cuts is lower than expected.
India has been a “hope market” in the last few years on expectations of a broader earnings growth rebound, the India strategist at the brokerage told BloombergQuint in an interview. “India has become a ‘show-me-the-money market’ where people want to see their hopes turning into reality [first],” he said, adding, “My sense is that trade is going to happen but not in a hurry.”
Nandurkar’s cautious optimism comes even as Finance Minister Nirmala Sitharaman’s cut in corporate tax rates to stimulate India’s GDP growth from its slowest pace in six years is expected to boost earnings.
The real EPS upgrade has been lower at 4-5 percent than the theoretical EPS upgrade of 8-9 percent, according to Nandurkar. That’s because there is still lack of clarity on to what extent the tax-cut benefit will be passed on through EPS, he said. There have also been some pending earnings downgrades because of the much sharper slowdown in the September quarter compared with the preceding three months, Nandurkar said.
“The market did go up much higher (after the corporate tax cuts) and now we have come back to a level which is about 4 to 5 percent higher,” he said, saying CLSA’s 12-month-target for Nifty 50 is 12,500 and it expects polarisation to continue for some time.
Economic data for the three months ended September have also been far worse than the preceding quarter, he said, adding the year-on-year comparisons will become easier from December. Besides, investors are concerned about non-performing loans or pressure on margins. “As leading state-owned banks start offering a repo-rate linked product, it could pressurise the margins,” Nandurkar said.
Still, CLSA is bullish on banks and financials. “We have an overweight stance on private financials and banks, and within that with a well spread out portfolio for private banks and retail versus corporate banks,” Nandurkar said.
But on the non-lending side the brokerage doesn’t have any concerns. “Yes, the valuation has gone up, but the business fundamentals are strong. It doesn’t have too many concerns,” he said. With respect to non-lending financials such as life insurance, general insurance and asset management companies, he said “there’s a clear view that these sectors have fewer headwinds compared to other lending sectors”.
Real Estate A Good Bet?
Real estate stocks have outperformed in the last one year and CLSA continues to be positive about them. “A market share shift will continue to be in favour of the larger developers in the listed space,” Nandurkar said.
WATCH | CLSA’s Mahesh Nandurkar On Corporate Tax Cut's Impact On Markets
Edited excerpts of the conversation:
You would’ve had your own analysis on what this does for companies and how this affects the EPS growth and then, whether or not it’s time to see a re-rating on some of the companies and some of the sectors on the basis of that. What would your end-year target look like for the index now on the basis of all that is happening over the last two weeks?
What has happened over the last two weeks especially referring to the corporate tax rate cut is obviously a big positive and while the theoretical EPS upgrade coming on the back of the corporate tax rate cut could be in the region of say 8 to 9 percent for the Nifty as a whole; but the real EPS upgrade is actually far lower than what the theoretical upgrade is because of a couple of reasons.
Firstly, how exactly do the companies treat this corporate tax rate cut and what kind of benefit gets passed on through to the EPS level. The second question obviously is there have been some pending earnings revisions on the downside because of the much sharper slowdown that we have seen in the September quarter as compared to the June quarter and the analysts have obviously used that downgrade which was still waiting to happen into the numbers.
To that extent, the market did go up much higher and now we have come back to a level which is about 4 to 5 percent higher than where we were before the corporate tax announcement. So, I would say that the EPS revisions have broadly been factored in and this is a re-rating event as well which the market has not really given due credit to just as yet. So, therefore, we remain optimistic and our twelve-month target on Nifty is about 12,500 so roughly a 10 percent return over the next twelve months.
This obviously leaves some room on the upside for Indian equities. You need that large chunk of money to come in to drive interests back to those levels back on the index. So far, even if you have to analyse the last week’s performance or two weeks’ performance post the corporate tax earnings, again it’s a question of those big heavy hands that have been at play, that have driven the index to levels of about 11,600 that it had originally hit. So, it’s not like the rest of the market is contributing, it’s not like the broader markets have turned around in a jiffy or even for that matter, the bottom 30 stocks of the index have done anything. It’s just the top 10 stocks in the index have done what they’ve done.
There continues to be that polarisation of the market. We haven’t really seen the changes at the broader market level, and I guess that will take some time because the changes on the ground, the real economic changes will take some time simply because the corporate tax rate has been cut, I don’t think the companies really make changes to their plans straight away.
So, it’s going to take a while and as we have seen, the economic data over couple of months have definitely worsened. I would say that the September quarter; year-on-year numbers are looking weaker than the June quarter. So, that thing also needs to be taken into account. So, my sense is that, it’s going to take a while, but we feel that probably the September quarter will be the quarter where we will see things bottoming out even from the economic activity perspective as well as the GDP growth perspective.
From the December quarter onwards, we will obviously have some benefit of the year-on-year comparisons becoming easier and also, the impact of lower rate cuts and liquidity etc. beginning to flow through in the system.
Do you get a sense that your key clients might be inclined to or might show acceptance to starting to bet beyond the 25-30 performers not just the Nifty but beyond as well- even in banks, for example, we still seeing the HDFCs and the Kotak Bank doing very well while ICICIs and the Axis had some days of uptakes they’ve cooled off to. The other ones keep on languishing so even in the 35 percent of the weightage of the market, the preferences still haven’t changed.
The Indian market has generally become like a “hope” market over the last couple of years. There has always been this expectation of broader market rebound or the earnings growth rebounding, which hasn’t really translated into reality so far. So, a lot of investors want to see the reality before jumping in.
So, my sense is that, yes there is some inclination and clearly the valuation gap has widened between the leaders and the stocks that haven’t really participated as much into the rally, also the mid-caps versus large caps. My sense is that trade is going to happen I would say over the next six to twelve months and probably beyond but it’s not going to start in a hurry because as I said, now India has become ‘The-show-me-the-money-market’ where people want to see the hope actually showing at least to some extent into the reality.
What about the later stage financials? We’ve talked about banks enough. The ones which have performed really well are some of the non-lending financials. It’s a small pack but insurance has done fabulously well in the last six to nine odd months. You’re seeing asset management companies even though there is only one notable name out there doing extremely well. What’s the house view out there Mahesh and what do you personally believe? Can there be more gains in this space which seems extremely overvalued optically?
So, we as a house continue to be overweight on the banks and financials. We still have clearly an overweight stance on the private financials and banks within that with a well-spread out portfolio for the private banks, I mean the retail banks versus the corporate banks as well.
Talking about the non-lending financials which is the life insurance, general insurance, the asset management and so on, there is clearly a view that this is one sector which doesn’t really have any headwinds like some of the banking or the lending sectors still has in the minds of investor whenever it is to do with non-performing loans or whether it’s to do with the worries on the margins. As the leading state-owned banks start offering a repo-rate linked product, it could pressurise the margins. So, these are still the two concerns on the banking side even on the private banking side. But on the non-lending side clearly, we don’t really have any concerns.
Yes, the valuations have gone up, but the business fundamentals are strong and it doesn’t really have too much of concern. So, this is clearly emerging as one of the sectors where the valuations can look optically on the expensive side but I think if we take a leaf out of what we have seen in the Indian markets over the last several years (I mean there are a few sectors like consumer staples, consumer discretionary where the valuations did appear quite expensive for a long period of time and it still does) my sense is that the non-lending financials as a sector is getting into that phase.
So, I will not really be too much worried because of the high multiples on that space just as yet because it’s just the beginning and my sense is that these stocks can continue to deliver returns in line with the earnings growth which is going to be in my view in high double digits.
So just to get this correct, Mahesh you’re saying that here on the re-rating may not happen on the valuation front for maybe the insurance companies but earnings lead- the valuations may stay higher and earnings lead momentum could give the stock returns. Am I correct?
Absolutely. So, I’m not really worried about the valuation being on a higher side. I think it can continue to remain at those elevated levels for a very long period of time.
Mahesh, almost a year ago or so, CLSA as a house is pretty positive on real estate and some of the bigger developers. Does that stance stay or with whatever’s been happening with regards to pressure building up on funding lines for developers, developers defaulting on loans to NBFCs, that stance changes a bit, or do you modify a bit?
Not at all. That stand very much remains on track and over the last 12 months, as you rightly remembered - some of these property developers have delivered pretty decent returns and above market despite the broader mid-cap or the small-cap segment having done quite badly as such. So, in the context of that, the property developers most of which names are in the mid-cap segment, have outperformed in a pretty decent way.
My sense is that, the events that you talked about where there is some rising risk of some developers defaulting or even the possibility of some of them probably facing some kind of credit issues etc. is all a relative good news for the names in the listed space because most of these companies continue to actually benefit on the relative basis out of the stress that we are seeing in some of these smaller unorganised developers etc.
The market share shift continues to happen. So, even if one does not take a very bullish view on the real estate market as a whole, but definitely the listed developers which form a very small part of that broader real estate market, can easily continue to gain share and deliver much better returns.
How much prominence are you giving to the wane on what’s happening globally to domestic sectors like metals which have really suffered at the hands of weaker cues coming about globally, the China-U.S. trade war. We’ve not really seen that upcycle for them in a really long time.
That’s true. So global cues are very important because the markets don’t necessarily just respond to the local developments. A lot depends on what’s happening globally, and a lot depends on what’s happening to the FII sentiments and FII flows. We clearly have had this view as a house view for the last kind of twelve months or even more that the global growth is slowing down and the concerns are coming up on the growth expectations now in the U.S., Europe, and China as well.
That obviously doesn’t really bode well for the global commodities and the metal sector. So, that continues to remain big underweight in our portfolio. In fact, we’re not recommending any metal stock at this point in time. So yes, so we are not kind of been jumping into doing a bottom fishing on that space.
Going back to financials, what’s your take on whatever has been announced in the recent past with regards to whether or not it means pushing back of NPAs that are in the MSME segments to external benchmarking of loan rates, to the consolidation of PSU banks etc. So many developments in what we’ve been seeing in the financial space and how do these play out for you?
Well, the way it plays out to my mind is that, the financial sector clearly plays a very important role in the broader economic activities in the country. So, what makes us optimistic about that space is that; one, we are clearly seeing the inflation remaining low and therefore we continue to believe that there is a lot of room for the RBI to still cut rates. We expect another 75 basis points somewhere around that accumulative rate cut that RBI can possibly do in the current cycle.
We are just about beginning to see the transmission of the lower policy rates into the bank lending rates as well. My sense is that this process will also be accelerated because of; one, we are now seeing a reasonable level of liquidity in the banking system which is very visible in the fact that the banks as a whole are depositing almost 1.3 to 1.5 trillion rupees with the RBI under reverse repo. So that means, clearly there is enough liquidity in the banking system.
The government has also started putting money into the equity capital of the state-owned banks. They’ve committed almost $10 billion. My sense is, as a combination of equity infusion as well as ample liquidity means that the transmission should happen and the risk appetite in the banking and finance space should slowly begin to get normalised. So currently we are clearly at a situation where there is huge amount of risk-averseness and that’s the reason the money multiplier has also come down but with these two things: reasonable liquidity and equity infusion, we feel that the money market also the money multiplier will slowly begin to get normalised. The risk appetite begins to get normalised and that’s the reason why we feel that the economy might be bottoming out sooner rather than later.
I was thinking of asking you either IT or auto. I’m choosing autos because that’s the more ‘in’ thing right now. The stocks are no longer at the levels they were at before Sept. 20th. Is there still merit in trying to own these names? Do you believe that there could be returns?
Well, we are still cautious. We are still under-weight on autos as a space. Where I would probably like to start accumulating is the four-wheeler segment. I would still say that the two-wheeler is still not a very structural long-term story.
Yes, you can see some small-term bounds and maybe the growth can bounce back up from a shorter-term perspective, but it is still a sector that I am not going to bet on with a longer-term view. But yes, the four-wheeler, the passenger car vehicles segment is where I will like to start but it’s not a kind of a decision that I am going to take in a hurry. So, I can rather wait but if I have to, then maybe the passenger car segment is where I will start buying.