 "We see India attracting a torrent of foreign inflows in 2015: Ajay Bodke")
In the midst of markets scaling fresh record highs and the Sensex recording its highest weekly gain since June 2014, Ajay Bodke, Head - Investment Strategy & Advisory, Prabhudas Lilladher Private Limited, tells Surabhi Roy that India’s aggregate demand will start propelling the country’s GDP growth rate to 6.5 to 7%. He believes that Digital India, Make in India and Swaach Bharat Abhiyaan is likely to act as a catalyst for upping the share of domestic manufacturing from around 16% currently. Edited excerpts:
Markets have topped its previous all-time high following robust growth forecast by the IMF and on expectations that the pace of foreign inflows would improve after higher-than-expected monetary stimulus from the ECB. How do you see the markets panning out in the year 2015 and key levels to watch out for?
A confluence of global & domestic factors has come together at the current juncture to propel India’s economic growth.
The near-halving of crude oil prices is likely to result in a mammoth savings of upwards of $ 60 billion. Every $10 drop in crude prices leads to India’s GDP rising by 0.1%, fiscal deficit falling by 0.1% and consumer inflation falling by 0.2% and we have seen a near 50-60% drop in oil prices over the last few quarters.
Oil prices are expected to remain benign due to massive demand destruction as a result of near-recessionary conditions in Euro Zone which is fighting to stave off a deflationary spiral, weak demand conditions in Japan, slow down in China that has been the prime reason for the bust-up of the ‘super-commodity cycle’ in industrial metals & crude as well as worsening aggregate demand conditions in all the commodity exporting economies like Brazil, Russia, South Africa, Australia, Indonesia etc.
The massive discovery of shale oil & gas in the US has weaned it away from its large dependence on imports and added to the woes of oil exporting countries. Also, geo-politically the NATO is happy with the squeeze on finances for its trouble-making adversaries like Russia, Venezuela and Iran whose regimes are likely to face increasingly hostile protests from their citizens as the welfare spending gets curtailed due to drop in oil earnings.
With Mario Draghi launching QE, we expect large flows into risk-on assets like emerging equities & currencies especially of those countries which are large commodity importers like India. We expect the Greece election results to have no impact as the Syriza leadership has already indicated that in the event of their victory they would like to stay in the Euro Zone. Once in power, all the extreme positions suddenly get moderated and seemingly irrational persons discover the virtues of moderation.
Domestic demand drivers
The government is committed to reviving the moribund investment cycle and has displayed its resolve to push-through much-needed reforms in sectors as diverse as insurance & pension, coal mining, telecom, power, banking & financial services.
It has resolutely passed ordinances in view of the disruptive tactics adopted by the belligerent Opposition in the Upper House of parliament. It has reiterated its commitment to medium-term fiscal consolidation plan and vowed not to breach the 4.1% fiscal deficit target in FY15 and try to outperform the 3% fiscal deficit target in FY17.
It has also opened up a whole host of sectors like Defence, Railways, Construction, Insurance & Pensions for long term FDI inflows. Its emphasis on Digital India, Make in India and Swaach Bharat Abhiyaan is likely to act as a catalyst for upping the share of domestic manufacturing from around 16% currently.
De-control of diesel, raising the natural gas prices and targeted disbursement of cooking gas subsidies are pointers that the government is committed to curbing non-merit subsidies and freeing up resources to pump into productive sectors of soft infrastructure like health, education, sanitation as well as hard infrastructure like roads, railways, airports, ports, urban infrastructure, power etc.
We are confident that a year down the line, these initiatives would start bearing fruit and India’s aggregate demand will start propelling the country’s GDP growth rate to 6.5 to 7%.
What is your take on rate sensitive shares post the RBI surprised the street by cutting the repo rate from 8% to 7.75%?
Consumption sector will get a fillip due to fall in interest rates as it leaves more money in the pockets of consumers for discretionary spending. As EMIs on mortgages, car & two-wheeler loans, personal loans and credit cards fall, consumer discretionary sectors like white goods & brown goods, automobiles, consumer finance etc get a boost.
Also, many capital expenditure heavy sectors like engineering, construction, infrastructure build-up like roads, airports, power plants, mining etc see their projects costs going down with a fall in their interest costs which form a substantial part of their cost structure and as interest rates fall many stalled projects and green field projects would see a renewed interest and would take-off.
This would help kick-start the slack investment cycle. As investment cycle picks-up it eases the supply side bottlenecks and ensures that inflationary pressures are addressed structurally. This supply-side response helps curb inflation and aids the RBI in keeping interest rates lower.
It thus starts a virtuous cycle of low inflation, low interest rates, higher investments, higher employment and higher economic growth. We expect interest rates to ease by at least 75 to 100 basis points over a 12-month period from now
All interest rate sensitive stocks have zoomed-up after the cut in repo rate by the RBI and expectations of further rate cuts over the next 12-18 months. As the RBI has indicated a decisive shift in its monetary stance from neutral to accommodative, many interest rate sensitive sectors like banking & financial services would stand to benefit from a lower cost of funds, higher credit demand, gains in their existing investment book in bonds and reduction in NPA/restructured asset book due to likely revival in investment cycle & perk-up in economic growth
What is your assessment of the third quarter corporate earnings for large-cap stocks so far?
We expect the revenue growth for the PL Universe of companies at 6.9% YoY and 3.6% QoQ for 3Q FY15 whereas EBITDA margins’ (excluding BFSI) is expected to expand by 25 bps YoY and 51 bps QoQ. Based on the results announced so far, the sales growth is tepid in low single digits. In our interaction with many companies it appears that although the sentiment has perked-up for the better, the translation of that buoyant sentiment into actual demand will take a quarter or two.
Besides, rural demand also seems to be anemic due to delayed monsoons and modest increase in MSPs. However, gross margin expansion is seen due to sharp fall in input costs on a YoY basis which is also flowing down in an improvement in operating margins. Although a token 25 bps rate cut has been announced, we feel the transmission effect will take time.
FY15, FY16 & FY17 estimated sales 7 earnings growth
We are estimating 10.1%, 18.6% & 18.1% growth in earnings (EPS) of NIFTY companies in FY 14-15, FY15-16 and FY16-17 respectively. Our estimated NIFTY EPS for FY 14-15, FY 15-16 & FY16-17 stands at Rs 446.5, Rs 529.4 & Rs 625.4 respectively. Estimated Revenue growth for NIFTY companies for FY 14-15, FY15-16 and FY16-17 stands at 6.5%, 9.2% & 9.4% respectively.
How do you see the trend of foreign fund inflows in 2015?
We see India attracting a torrent of foreign inflows in 2015. With both industrial & agri-commodities trading at multi-year lows, all the commodity exporting economies have seen their aggregate demand collapsing, growth caving in and twin deficits ballooning.
Euro Zone and Japan are battling near-recessionary conditions with fears of deflationary spiral hovering over them, China is busy navigating a soft landing of its economy in the midst of massive ‘mal-investment’ in build-up of infrastructure during the boom years to keep the economy humming as also worries about its fragile yet large shadow-banking sector that can create turmoil is not handled with care.
The US and the UK are the only two engines of growth currently for the global economy. India being one of the largest beneficiaries of the plunge in crude & other commodities like thermal coal, palm oil etc. will get a boost to its GDP growth and attract large FII equity inflows due to problems else were. Indian markets are deriving pleasure from other markets pain (or what the Germans term as Schadenfreude).
What is your investment strategy given the current scenario? Which sectors are you bullish/bearish on?
We would advocate an overweight on interest rate sensitive and cyclical sectors like automobiles, banking & financial services, capital goods & construction as well as adequate representation in the portfolio to FMCG and IT.
AUTO & AUTO-ANCILLARIES
In interest-sensitive & cyclical sector like automobiles, we would recommend Maruti Suzuki and Tata Motors. Maruti would be the biggest beneficiary of upturn in volume growth in the car sector with falling interest rates and EMIs. With its mammoth market share and widest distribution network it is likely be an outperformer.
Tata Motors JLR business is chugging along fine but its Indian Commercial business has been a drag due to troubles plauging mining sector due to Supreme Court’s strict orders stalling mining activity in the country. With relaxation been granted by the Hon. Apex Court to mining activity and the government’s resolve in auctioning of the coal mines transparently and with alacrity, we expect the mining sector to revive aiding volume growth in the Medium and Heavy Commercial vehicle sector.
Tata Motors has the largest market share in the CV industry and would be the prime beneficiary. In auto-ancillary we favor Motherson Sumi (one of the largest suppliers to Maruti and also having a multi-billion Euro order book to supply European auto giants) and Bharat Forge which is India’s largest forgings player and among the largest in the world. Its foray into the defence sector will be watched closely by the market in the medium term.
BANKS & FINANCIAL SERVICES
In banking we would advocate holding HDFC Bank, ICICI Bank and a few PSUs like SBI, Bank of Baroda & Union Bank. HDFC Bank was an under-performer last year due to FII’s inability to buy the share due to the upper cap being hit. It is the best managed bank in the country with among the highest Net Interest Margins (NIM) and Return on Assets (ROA), its consistent 20-25% growth with negligible NPA’s is the envy of the entire industry.
As its premium over other banks (Price to adjusted Book Value) narrows, it will drive investor interest and it is likely to see a sharp up-move. It is a retail focused bank which would benefit with improvement in consumption sector of the economy with fall in interest rates. As the investment cycle picks up the Corporate focused bank like ICICI would benefit with improved credit off-take and upgrade in its NPA/restructured assets.
PSU’s would gain majorly due to sharp rise in profits on their investment book (many of them hold SLR securities in excess of the requirement) and also improvement in economy would lead to sharp drop in requirements to provide for NPAs. Likely upgrade in NPAs & restructured assets would free up capital which can be used for growth and for shoring up capital adequacy norms as per BASEL III requirement. Many of the PSU’s trading at or below book values can see smart upgrade and would likely selectively outperform.
CAPITAL GOODS & CONSTRUCTION
In capital goods & construction we advocate a portfolio comprising of Larsen & Toubro, Cummins, Crompton Greaves and Ashoka Buildcon. We are confident of a revival in the capex cycle in a quarter or two and these companies would be beneficiary of that revival.
As more infrastructure projects take off and process industries like oil & gas, mining, cement, textiles, metals etc look at green field expansion, these companies would benefit. A renewed emphasis on build-up of highways through NHAI would aid Ashoka Buildcon.
FMCG
In FMCG we continue to like Colgate Palmolive & Britannia. Both are benefitted by the sharp plunge in their raw material prices and continues move up the value chain through innovative product launch.
INFORMATION TECHNOLOGY
As the two largest markets for their services namely the US and the UK chug along at good clip, Indian IT players would leverage on that growth through higher outsourcing. Growth in FY16 would be a tad better than FY15 with slightly higher margins. Infosys, Tech Mahindra, KPIT Technologies & Hexaware are our preferred bets in the sector.
Markets have topped its previous all-time high following robust growth forecast by the IMF and on expectations that the pace of foreign inflows would improve after higher-than-expected monetary stimulus from the ECB. How do you see the markets panning out in the year 2015 and key levels to watch out for?
A confluence of global & domestic factors has come together at the current juncture to propel India’s economic growth.
More From This Section
Global demand drivers
The near-halving of crude oil prices is likely to result in a mammoth savings of upwards of $ 60 billion. Every $10 drop in crude prices leads to India’s GDP rising by 0.1%, fiscal deficit falling by 0.1% and consumer inflation falling by 0.2% and we have seen a near 50-60% drop in oil prices over the last few quarters.
Oil prices are expected to remain benign due to massive demand destruction as a result of near-recessionary conditions in Euro Zone which is fighting to stave off a deflationary spiral, weak demand conditions in Japan, slow down in China that has been the prime reason for the bust-up of the ‘super-commodity cycle’ in industrial metals & crude as well as worsening aggregate demand conditions in all the commodity exporting economies like Brazil, Russia, South Africa, Australia, Indonesia etc.
The massive discovery of shale oil & gas in the US has weaned it away from its large dependence on imports and added to the woes of oil exporting countries. Also, geo-politically the NATO is happy with the squeeze on finances for its trouble-making adversaries like Russia, Venezuela and Iran whose regimes are likely to face increasingly hostile protests from their citizens as the welfare spending gets curtailed due to drop in oil earnings.
With Mario Draghi launching QE, we expect large flows into risk-on assets like emerging equities & currencies especially of those countries which are large commodity importers like India. We expect the Greece election results to have no impact as the Syriza leadership has already indicated that in the event of their victory they would like to stay in the Euro Zone. Once in power, all the extreme positions suddenly get moderated and seemingly irrational persons discover the virtues of moderation.
Domestic demand drivers
The government is committed to reviving the moribund investment cycle and has displayed its resolve to push-through much-needed reforms in sectors as diverse as insurance & pension, coal mining, telecom, power, banking & financial services.
It has resolutely passed ordinances in view of the disruptive tactics adopted by the belligerent Opposition in the Upper House of parliament. It has reiterated its commitment to medium-term fiscal consolidation plan and vowed not to breach the 4.1% fiscal deficit target in FY15 and try to outperform the 3% fiscal deficit target in FY17.
It has also opened up a whole host of sectors like Defence, Railways, Construction, Insurance & Pensions for long term FDI inflows. Its emphasis on Digital India, Make in India and Swaach Bharat Abhiyaan is likely to act as a catalyst for upping the share of domestic manufacturing from around 16% currently.
De-control of diesel, raising the natural gas prices and targeted disbursement of cooking gas subsidies are pointers that the government is committed to curbing non-merit subsidies and freeing up resources to pump into productive sectors of soft infrastructure like health, education, sanitation as well as hard infrastructure like roads, railways, airports, ports, urban infrastructure, power etc.
We are confident that a year down the line, these initiatives would start bearing fruit and India’s aggregate demand will start propelling the country’s GDP growth rate to 6.5 to 7%.
What is your take on rate sensitive shares post the RBI surprised the street by cutting the repo rate from 8% to 7.75%?
Consumption sector will get a fillip due to fall in interest rates as it leaves more money in the pockets of consumers for discretionary spending. As EMIs on mortgages, car & two-wheeler loans, personal loans and credit cards fall, consumer discretionary sectors like white goods & brown goods, automobiles, consumer finance etc get a boost.
Also, many capital expenditure heavy sectors like engineering, construction, infrastructure build-up like roads, airports, power plants, mining etc see their projects costs going down with a fall in their interest costs which form a substantial part of their cost structure and as interest rates fall many stalled projects and green field projects would see a renewed interest and would take-off.
This would help kick-start the slack investment cycle. As investment cycle picks-up it eases the supply side bottlenecks and ensures that inflationary pressures are addressed structurally. This supply-side response helps curb inflation and aids the RBI in keeping interest rates lower.
It thus starts a virtuous cycle of low inflation, low interest rates, higher investments, higher employment and higher economic growth. We expect interest rates to ease by at least 75 to 100 basis points over a 12-month period from now
All interest rate sensitive stocks have zoomed-up after the cut in repo rate by the RBI and expectations of further rate cuts over the next 12-18 months. As the RBI has indicated a decisive shift in its monetary stance from neutral to accommodative, many interest rate sensitive sectors like banking & financial services would stand to benefit from a lower cost of funds, higher credit demand, gains in their existing investment book in bonds and reduction in NPA/restructured asset book due to likely revival in investment cycle & perk-up in economic growth
What is your assessment of the third quarter corporate earnings for large-cap stocks so far?
We expect the revenue growth for the PL Universe of companies at 6.9% YoY and 3.6% QoQ for 3Q FY15 whereas EBITDA margins’ (excluding BFSI) is expected to expand by 25 bps YoY and 51 bps QoQ. Based on the results announced so far, the sales growth is tepid in low single digits. In our interaction with many companies it appears that although the sentiment has perked-up for the better, the translation of that buoyant sentiment into actual demand will take a quarter or two.
Besides, rural demand also seems to be anemic due to delayed monsoons and modest increase in MSPs. However, gross margin expansion is seen due to sharp fall in input costs on a YoY basis which is also flowing down in an improvement in operating margins. Although a token 25 bps rate cut has been announced, we feel the transmission effect will take time.
FY15, FY16 & FY17 estimated sales 7 earnings growth
We are estimating 10.1%, 18.6% & 18.1% growth in earnings (EPS) of NIFTY companies in FY 14-15, FY15-16 and FY16-17 respectively. Our estimated NIFTY EPS for FY 14-15, FY 15-16 & FY16-17 stands at Rs 446.5, Rs 529.4 & Rs 625.4 respectively. Estimated Revenue growth for NIFTY companies for FY 14-15, FY15-16 and FY16-17 stands at 6.5%, 9.2% & 9.4% respectively.
How do you see the trend of foreign fund inflows in 2015?
We see India attracting a torrent of foreign inflows in 2015. With both industrial & agri-commodities trading at multi-year lows, all the commodity exporting economies have seen their aggregate demand collapsing, growth caving in and twin deficits ballooning.
Euro Zone and Japan are battling near-recessionary conditions with fears of deflationary spiral hovering over them, China is busy navigating a soft landing of its economy in the midst of massive ‘mal-investment’ in build-up of infrastructure during the boom years to keep the economy humming as also worries about its fragile yet large shadow-banking sector that can create turmoil is not handled with care.
The US and the UK are the only two engines of growth currently for the global economy. India being one of the largest beneficiaries of the plunge in crude & other commodities like thermal coal, palm oil etc. will get a boost to its GDP growth and attract large FII equity inflows due to problems else were. Indian markets are deriving pleasure from other markets pain (or what the Germans term as Schadenfreude).
What is your investment strategy given the current scenario? Which sectors are you bullish/bearish on?
We would advocate an overweight on interest rate sensitive and cyclical sectors like automobiles, banking & financial services, capital goods & construction as well as adequate representation in the portfolio to FMCG and IT.
AUTO & AUTO-ANCILLARIES
In interest-sensitive & cyclical sector like automobiles, we would recommend Maruti Suzuki and Tata Motors. Maruti would be the biggest beneficiary of upturn in volume growth in the car sector with falling interest rates and EMIs. With its mammoth market share and widest distribution network it is likely be an outperformer.
Tata Motors JLR business is chugging along fine but its Indian Commercial business has been a drag due to troubles plauging mining sector due to Supreme Court’s strict orders stalling mining activity in the country. With relaxation been granted by the Hon. Apex Court to mining activity and the government’s resolve in auctioning of the coal mines transparently and with alacrity, we expect the mining sector to revive aiding volume growth in the Medium and Heavy Commercial vehicle sector.
Tata Motors has the largest market share in the CV industry and would be the prime beneficiary. In auto-ancillary we favor Motherson Sumi (one of the largest suppliers to Maruti and also having a multi-billion Euro order book to supply European auto giants) and Bharat Forge which is India’s largest forgings player and among the largest in the world. Its foray into the defence sector will be watched closely by the market in the medium term.
BANKS & FINANCIAL SERVICES
In banking we would advocate holding HDFC Bank, ICICI Bank and a few PSUs like SBI, Bank of Baroda & Union Bank. HDFC Bank was an under-performer last year due to FII’s inability to buy the share due to the upper cap being hit. It is the best managed bank in the country with among the highest Net Interest Margins (NIM) and Return on Assets (ROA), its consistent 20-25% growth with negligible NPA’s is the envy of the entire industry.
As its premium over other banks (Price to adjusted Book Value) narrows, it will drive investor interest and it is likely to see a sharp up-move. It is a retail focused bank which would benefit with improvement in consumption sector of the economy with fall in interest rates. As the investment cycle picks up the Corporate focused bank like ICICI would benefit with improved credit off-take and upgrade in its NPA/restructured assets.
PSU’s would gain majorly due to sharp rise in profits on their investment book (many of them hold SLR securities in excess of the requirement) and also improvement in economy would lead to sharp drop in requirements to provide for NPAs. Likely upgrade in NPAs & restructured assets would free up capital which can be used for growth and for shoring up capital adequacy norms as per BASEL III requirement. Many of the PSU’s trading at or below book values can see smart upgrade and would likely selectively outperform.
CAPITAL GOODS & CONSTRUCTION
In capital goods & construction we advocate a portfolio comprising of Larsen & Toubro, Cummins, Crompton Greaves and Ashoka Buildcon. We are confident of a revival in the capex cycle in a quarter or two and these companies would be beneficiary of that revival.
As more infrastructure projects take off and process industries like oil & gas, mining, cement, textiles, metals etc look at green field expansion, these companies would benefit. A renewed emphasis on build-up of highways through NHAI would aid Ashoka Buildcon.
FMCG
In FMCG we continue to like Colgate Palmolive & Britannia. Both are benefitted by the sharp plunge in their raw material prices and continues move up the value chain through innovative product launch.
INFORMATION TECHNOLOGY
As the two largest markets for their services namely the US and the UK chug along at good clip, Indian IT players would leverage on that growth through higher outsourcing. Growth in FY16 would be a tad better than FY15 with slightly higher margins. Infosys, Tech Mahindra, KPIT Technologies & Hexaware are our preferred bets in the sector.