Indian Economy Is Suffering A Cardiac Arrest And Just Paracetamols Won’t Work, Says Basant Maheshwari
The government cannot look at markets and ignore the economy as both should be addressed simultaneously, says Basant Maheshwari.
The Indian economy is in a “bad shape” and needs more policy support than just sparing foreign investors higher tax surcharge, according to veteran investor Basant Maheshwari.
“The government cannot look at the markets and ignore the economy as both should be addressed simultaneously,” said the co-founder and partner at Basant Maheshwari Wealth Advisers LLP, which managed assets worth Rs 224 crore as of June. “The underlying thesis is the economy has to improve.” The measures could be in the form of lower goods and services tax for carmakers to boost sales, he told BloombergQuint in an interview.
The Indian economy is grappling with a prolonged consumption slowdown, reflected by fewer sales of biscuits to cars. This, along with the budget’s proposal to raise tax surcharge on the nation’s super-rich and foreign investors, triggered a selloff in the stock market.
Overseas investors have pulled out Rs 22,488 crore from the Indian equity market since July, according to data available on the website of National Securities Depository Ltd. This led the benchmark Nifty to post its worst July in 17 years.
You don’t just give a patient two paracetamols when he is suffering a cardiac arrest. The patient (economy) is suffering a cardiac arrest right now and the government is thinking whether to put a stent, pacemaker or perform an open-heart surgery. But one of these three will have to be done.Basant Maheshwari, Co-Founder And Partner, Basant Maheshwari Wealth Advisers
Pockets Of Opportunity?
Citing the examples of Page Industries Ltd., Maruti Suzuki India Ltd. and Bosch India, Maheshwari said he does not see a buying opportunity in these market leaders even in the current period of despair as there is less room for them to grow further.
“If you’re looking for growth companies, look for those which currently hold a small percentage of the overall market pie.”
Watch the full interview here:
Here’s the full transcript:
I have to say you got it right when you were reading the screen and thinking that there is some bit of accumulation buying happening. My question is, there is some noise or some moves being considered. We don’t know what will happen. There are meetings also lined up. Is that good enough for the markets to move up? Or is it good enough for the confidence of market participants to go out and make fresh large-ticket purchases?
Two things there. Confidence, yes that’s actually good enough for the market to stop collapsing. If this wouldn’t have happened, we were going nose down into an abyss, because for the moment, the two-three crore stock holders in India -- maybe if you add the SIPs, eight-nine crore -- they thought they were orphans on the street, the Oliver Twist types. Suddenly, somebody got you a plateful and said, okay, what do you want to eat? We are just looking at the plate right now. Let’s see what comes our way.
I like the point that you had made you know, and somebody else had spoken about this too. There is a handful of measures that can be taken. Its like a quiver full of arrows, you fire two or three, whichever one hits, works. Now whether or not, it is on the lines of one of the news channels were reporting yesterday. They may be something, the LTCG etc., as our reporter said today, the FPI surcharge. Let’s work with our realistic assumption, for now which sounds realistic, that there might be some re-think on the FPI surcharge, not so much on all the others. Is that good enough as well? For holding a steady and then making us move in line with what the globe does?
No, I don’t think FPI surcharge by itself is good enough for the Nifty to rally all the way up. You have to add another thing to it, because the basic economy is somewhat, in a bad shape. So, let’s assume you do LTCG, you do dividend distribution tax, you do the FPI surcharge, and then you say, go and dance, have a party all night. But after one quarter, there is still a Maruti who is going to tell you, ‘Hey, we just couldn’t sell as many cars as we thought we could’. So, you have to look at it from a two-pronged policy. You look at the stock market first, and then you look at the economy again, simultaneously. You cannot look at one and ignore the other.
For example, they do nothing here and they just get us back to 8 percent, then I think we would’ve survived this also. So, the underlying thesis is: the economy has to improve.
...and sometimes when the patient has had a cardiac arrest, you don’t give them two paracetamols. I think the patient [Indian economy] is under cardiac arrest, the government is thinking whether to put a stench, a pacemaker or a surgery. One of these three will have to be done.
Where does that leave us? Does it leave us more vulnerable to external shocks also? Because internally we are so weak and we are still in recovery mode and not even started the first leg of it. So, the external shocks can hit us harder?
So, two things again. Externally, economy is in a mess with negative interest rates and all those theories. You open up any financial newspaper and they will give two hundred different ways on how the entire globe can collapse. But my sense is that, the Dow is hitting a new high at least in next year because that is what will make Trump win the next elections. So, let’s look at it from Trump’s point of view, you cannot let the Dow go down. I think there would be some arrangement between China and the U.S., a face-saver for Trump, he will try and portray what he has done. So, economics will defy the stock market at least in the U.S. and as long as the Dow is up, we are okay.
But internally, when we go down to earnings and start to observe things on that level, that recovery to come in and meaningfully be accepted by the market and say fine this is the turnaround buying into these stocks...
My major part of the market, 20-25 years, I’ve said, “Government ko jo karna hai, karne do, earnings ayegi, toh bhaav badd jayega” (Let the government do what it wants to do, if earnings come by, then the prices will rise) but there are critical moments like this, like it was in 2008, where the government had to come in. Like you say for example, earnings will take care of prices and you say, any income above 10 crores will be taxed 95 percent. Its just an assumption, but earnings won’t be able to take care of prices. So, there is something that the government has to add and the government has realized, that it has to act. So, on its own, the economy cannot recover. It needs some support. So, the support could be in the sense, if anyone who buys a car till Dec. 31, 2019, gets an 18 percent GST. Suddenly, the cars will be picked up, the bikes will move off the shelves. TVS, which is thinking of laying off people will say, hey wait a minute, you guys can work for six more months and then lets see what happens for the next few months. Now if those 20,000 people get their salaries for the next six months, they will go out and buy some shampoos and soaps. That’s going to help Hindustan Unilever.
So, this is all in hopes of the government doing something, if they don’t do that, do you expect prices to converge down towards earnings? Because earnings are not looking like they are going to meet the prices at the top.
So obviously, it is a big hope because the risks of not doing anything is too high for any political establishment. I am a patriot only if my stomach is full. I’ll still be a patriot if my stomach is half-full. If I don’t have a job, if I can’t send my children to school, patriotism takes a little bit of a backseat. And that is 99 percent of the population.
There has been just one Bhagat Singh for the last 100 years. Can’t assume every Indian to be so patriotic. So, the government will do something because it realizes that if it doesn’t do anything, after four years, after five years, there is going to be again the same narrative -- ‘where are the jobs?’Basant Maheshwari, Co-Founder And Partner, Basant Maheshwari Wealth Advisers
So, something has to come and I am not saying that something has to come, not because I have some information, but because the data tells me that if it doesn’t come, then it will become very difficult for the government to explain its own narrative to the public at large. And it is not just the investing community because if the job gets pushed out, it is not just the research analysts and the fund managers that will go out of their jobs. Even the factory floor workers get out of job. So, I think something should come, but we’ll have to see.
Actually, we have to see, who gets first out of the job, the fund manager or the broker might come a little bit later on. My question though, if you look at the economic statistics etc., do you think the government measures, as they have to take it, would be largely towards the consumption-oriented sectors that you mentioned because they probably get the impact quicker? Or it would be towards the much-ailing capex space as well because it is much spoken about, balance sheets are delevered, the capacities are lying idle, if they go and give dosage out there, those pockets can move up.
You already have stuff that is not being sold out. Why would you add new capex? So, first, the things have to move off the shelf and for that, the easy way out is to encourage the consumer to go and buy. Once that happens, it sets things in motion because that consumer spends that money and creates that demand. For the last couple of years, for a year and half, this economy is working on government expenditure alone. And in high school economics, we learnt C plus I plus G plus X minus M. and unless there is a C and and unless there is a G and and unless there is a X minus M all working together, I think it is going to be tough. So, I think there is going to be a consumption push because it is easier to push it that way and it is easier to encourage a guy to go and buy a new phone than to encourage an industrialist to put up a power plant. Because you’ve already got the capacity which is not selling.
Let’s make an assumption that some moves will be taken. What moves will be taken? Because the markets don’t quite know what the moves are but they try to preempt and make purchases. You can time the bottom. Page industries, volume de-growth for the first time. Bosch shutting down some plants, Jamna Auto, leaders in the forklift saying that the whole month of August might be a shut down. We’ve seen a number of companies coming and shutting the auto guidance. Do you go out and buy these stocks which are good quality names? High ROC, high ROE, in these times of despair?
No, and I will tell you why. Page, I’ve held for five years, six years so I almost know it from the back of my hand, not that much. It is already 50 percent plus of the premium in a rare market. Maruti, no recommendation. Maruti, again more than 50 percent of the market. Bosch, maybe 80 percent, 90 percent of the market. When the valuation have been built on the premise that it will grow a 20 percent, a 30 percent, you, in the act of growing at 30 percent, become more than 50 percent of the market, you cannot grow it 30 percent because the market has to grow it 30 percent. For example, Horlicks was around 80 percent of the market and that is why it grew at 10 percent.
Like a Hindustan Unilever, grows at 10 percent but trades it at an abnormally high price earning ratio of 60 times, not because the PE is high but because the yield is high. So sometimes we just look at the PE and say, ‘iska PE bahaut jyada hai, nahi nahi, iska dividend bhi jyada hai’ [the PE very high but the dividend is high as well]. So, PE is not only the thing that drives the price but the dividend as well.
So, my sense is that if you are looking for something that holds you here in these times, if you are looking for a growth company, for example, you have to look for that kind of the company which is a small percentage in the overall market pie. Because then you can elbow two people out, grab some market share -- do apne aap mar jaate hai [the two die on their own] in the downtrade. India is facing a classic case, I can talk about it as I don’t own it, almost all the sectors, the leader is eating up a market share and the small guys are committing suicide.
Aviation, Jet fell off the way and Indigo is becoming big. So in almost all the sectors, you can find this happening. You have to understand why are you buying a stock, so if you are buying a stock which has a price which is built in, on the basis of high growth, you have to understand where the growth has to come from and the market is not happy for a company growing at 25 and suddenly starts to grow at 10 or 12 and as you grow.
As you grow, the high ROC or high ROE invites new participants in the business. So, your incremental growth is taken away. For example, (not a recommendation again) I heard that Van Heusen starts selling 150-200 worth of crore of stuff every year, Page I think three, three and a half thousand crore of sales, I don’t follow the stock but broadly, so 8 percent of incremental growth and we have got a new frog in the well called Van Heusen who is picking up the market share. So, Page’s, somebody will pick up 2 percent, somebody will pick up 3 percent somebody will pick up 4 percent. But 2, 3 and 4 are enough for this company to grow from 25 to 15. That’s the problem.
The other point is that, the usual suspects that people run towards in such times. Which is your IT services and your farm earnings. You have people not knowing where to park money, so they choose these services to park money in. So, if the cycle turns, is it prudent enough to say that these will look less and less attractive?
I think pharma, has seen its best. We don’t buy Pharma stocks we tried to do very cute things with five years back, and it didn’t work out. IT in that form I think is in bigger sense. Where is the boom coming from in India? Is it coming from the guys working at Infosys, TCS who have three credit cards and they go around malls in the evening, swiping those cars. Three four years back, the IT services started growing from say 15-20 percent from 10-12 percent. I think Indian consumer boom, the birth of this consumer boom, has been our IT exports. So, if IT goes into a steady slowdown, you need something to keep the consumer hanging. So, what was our something else? It was our banking and financial services. So, Infosys and TCS had guys roaming around malls in the evening, swiping and I mean, punching their credit cards around, you had that HDFC bank manager also joining in the queue. But everything survives on a basic industrial infrastructure. So, IT survived on U.S. and in the words of most of my IT friends, are ‘code coolies’. We don’t innovate, we help them innovate. So, beyond a point, our services could become redundant because of robotics or whatever that’s another story for another day. For development I think, you need to develop something in turn to help the consumer.
IT is good for a 10 – 12 percent growth. I think it is okay because out of that 10 – 12 percent, we get some dollar appreciation, something on buybacks and once buy backs have been taxed, it is very difficult for companies like Infosys and TCS to hold that valuation also together. No recommendations; whatever I talk about I think its good to understand, and suddenly you think, is India only a 20-stock market? And I cannot find an answer to that myself.