A worker cuts Iron sheets on a road in “loha mandi” ( iron market) in Naraina , New Delhi, India. (Prashanth Vishwanathan/Bloomberg)

Earnings Can Double If Capex Is In Check, Says Kenneth Andrade

Indian manufacturing and services companies’ earnings can double in the next three to four years as capacity utilisation improves in the absence of new investments.

At least Kenneth Andrade, founder of portfolio management firm Old Bridge Capital Management, thinks so. Investors have to think about what is it that they are buying when equity markets are trading at 20-22 times their earnings, he said. Earnings have to improve to justify the valuations.

“In large pockets, the probability of doubling profitability in three to four years is very real, and justify buying select companies in the manufacturing and services vertical,” he said.

The growth in this space will be about capacity utilisation moving up from 70-percent odd in March 2017 to 85 percent in the next few years.
Kenneth Andrade, Founder, Old Bridge Capital Management 

Corporate India has been on a capex freeze for the last a couple of years. “When supply is constrained, demand becomes a natural gradient. The capital deployed going ahead will remain frozen, but a shift of even 5 percent in the GDP will bring about incremental pricing and cash flow.”

Andrade said an uptick in yields could become an overhang for equity markets but isn’t necessarily a new phenomenon. This would also bring valuations off average highs as equity markets have been volatile for a couple of years due to an uptick in yields. That’s because volatile markets at times of heady valuations pull down average PE multiples.

Old Bridge Capital has shied away from investing in non-bank lenders for the last couple of years. But will it invest in banks?

If you account for 80 percent of disbursements in a previous business cycle, there are bound to be risks, and that is playing out in the public-sector banks.
Kenneth Andrade, Founder, Old Bridge Capital Management 

The natural progression of market share gains by private banks has happened, and will continue, he added.

Watch the full interview here.