Bet On Domestic-Oriented Counters, Not International Themes, Says Jyotivardhan Jaipuria

We will have to break it up into two. Is this the peak of the market over the next 2-3 years? The answer is no, there’s more to go and corporate earnings will probably come back and and we will see markets giving good returns. But can we get a correction from these levels? Can people buy cheaper?

We have seen Indian markets do well this year. We forget to keep that in context of what the globe has done. A lot of Indian market returns don’t come as a result of India factors. It comes from what the emerging market does. The correlation between MSCI emerging markets and MSCI India is as high as 85 percent. So, part of it is MSCI doing well, global markets doing well and so India is part of it. The second thing that probably attracts people to India is two things. If we will look at macro, India is seen as the most promising country over the next 5-10 years. The macro stress is very low. The earlier twin deficits are no longer a concern. We always had good micro level management companies.

The challenges were not overblown but may be the impact on the stock price was overblown because I thought we will get correction when we get companies not reporting good numbers because of GST. But what we have seen in the last 10 days is that every time some company reports bad numbers, markets said, okay this is a GST problem, it’s a temporary thing, and brushed it aside.

It’s still very early days but you can see that there have been GST-related problems. All the consumer companies have reported weak earnings and there we may not get a recovery as quickly as people wanted. So, if we see the last three weeks, there is are mixed feelings. Some companies are saying things are getting back to normal and others are saying its not normalised yet and probably will take two months to normalise. Even the September quarter will not be a great one. It will have some impact of the transition to GST.

A lot of the stress is partly linked to revival in the economy. Once we get earnings revival and economic revival coming, a lot of stress will start easing off. RBI has forced banks to now provide quite a bit for what they believe is stressed. But there will be new companies which may come under stress which didn’t appear a year ago to be a stress factor. Overall, given the provisions we’ve had over the last two years, I don’t think we will get provisions higher than what we have seen. So, it’s about how quickly the provisions come down and how some of these guys recover. There will be some companies probably going into the watch-list which get into NPLs. But worst of that is getting over and corporate banks are the interesting place to be in.

There are retail lenders which are very finely priced and quite expensive but very great quality. There are corporate banks which are relatively cheaper but there is much more stress there. For people, it could be a buying of mix of those. But we are slightly tilted towards the corporate banks because in the next two years, this is where you can make incremental delta.

We never say no to anything. You have to weigh the risk and returns. There are some interesting private sector banks which, more or less, give you the same sort of reward with probably lower risk. That’s why we are not inclined toward PSU banks.

IT is one sector where I have not been bullish for years now. What we have seen in the sector is that growth rates are going to slow down and it’s just a secular trade. It’s not a cyclical trade. A lot of this companies are cash-rich. They are doing buybacks and trying to return some money back to shareholders. So, in an environment where nobody owns them and valuations are looking expensive, there are some tactical thing where you buy some of the IT stocks because expectations are zero in them. Some of them are trying to reduce their cost pressure to match the revenue. So, it may not be a bad place to be in when the market is doing nothing. It may be a hiding place but not for us, we are not very bullish on it.

Yes, we continue to stay invested. One is the cyclical element, which is that the monsoons have been good after two years. But apart from the cyclical element, structurally we have an election after two years. The better part of 2017-18 Budget was spend on rural India and that trend will continue. Secondly, the government has brought about steps like the crop insurance scheme. There is a lot of infrastructure spending in the rural areas. A lot of these things will give farmers some income stability. Volatility will come down as a result of the crop insurance scheme.

What we are playing largely are the tractor companies and the agro-chemical companies. I am worried about the non-banking financial companies. Loan waivers are being given to farmers but there will be no waiver for the microfinance companies. The farmer will say, ‘I don’t pay these guys, so why should I pay microfinance guys? Let me see what happens and some day I will get a loan waiver there also.’ So, that’s the one thing which has been worrying me.

The two-wheeler space is interesting but it’s just that we preferred to play this theme with the tractor companies. The one two-wheeler space is a similar way of playing it. I don’t find valuations attractive for stocks in the FMCG space. A lot of these are great companies but some are expensively priced. To that extent, how do we make money out of it? A lot of the good news is in the price already.

I don’t see any rational behind it. The government benefits because they get money which helps the divestment number. But beyond that I don’t see the synergies behind these mergers. In the PSU banks too there has been talk about mergers. One is not sure how it will play out - whether the minority shareholder will benefit, whether it’s creating efficiency, or is it more like an exercise where the government gets the money.