Talking Point | Centrum Broking's Nischal Maheshwari talks about the implications of rising crude prices and the growth opportunities in various key sectors. #BQLive
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00:00 Hello and welcome to BQ prime, your watching talking point and my guest today is Nishal
00:06 Maheshwari, CEO Institutional Equities at Centrum Broking.
00:09 Nishal, thank you very much for joining us on BQ prime.
00:14 Let me begin with the hot topic today is about the oil crossing the $95 mark.
00:21 You know, it puts every calculation of earnings and everything into a different spin as oil
00:28 continues to be strong.
00:30 What is your view on how earnings are going to be impacted as a result of this crude inching
00:37 about $95?
00:38 So, good morning, Sajith.
00:39 Thanks for having me on the channel.
00:47 I think, yes, it's a worry basically for India as a country.
00:55 But earnings if you really look at it, basically we are not earning oil heavy as far as nifty
01:01 50 is concerned.
01:02 40% is banking, another 20% is IT.
01:07 So that way, basically 60% more or less basically has very little impact directly on the earnings.
01:16 So I don't see much issue as far as earnings is concerned.
01:21 Petroleum gas is the only sector and it is going to be a beneficiary and then there is
01:25 going to be some impact basically on the consumer companies because their packaging cost goes
01:30 up.
01:31 So I do not see much earnings impact basically.
01:34 But overall, yes, I think it is bad for the inflation in the country.
01:39 And that's going to have an impact basically overall.
01:43 We saw the first two quarters been relatively strong for many of the companies across board,
01:49 across portfolios of many of the investors.
01:55 How do you think this is going to play out in the second half of the year?
02:01 We are about to close the second quarter as well.
02:03 What is your view on the second quarter as we look?
02:08 So we continue to believe that this quarter is going to be strong.
02:11 Earnings are going to be strong because it's going to be largely driven by the banks.
02:16 Banks are still having a very good Goldilocks scenario basically and there is still good
02:21 growth on the credit side.
02:23 So I think banks seem to be doing well.
02:27 I think IT will be a bit of an issue basically because they may disappoint again.
02:34 But consumption is where we believe basically there is going to be good strong earnings
02:41 growth.
02:42 And you have to keep in mind basically in the last two quarters, we have seen the commodities
02:52 going down.
02:53 We have for the last four months now we are seeing WPI going into the negative.
02:58 I think that is all to show up into the earnings and growth of the various companies.
03:05 So I believe basically this quarter is going to be good.
03:09 I was looking at the banks as well as you mentioned that banks have been robust, especially
03:16 not only from a returns point of view but also the earnings which is coming in.
03:21 How do you see that sector and within that sector is there a play that you prefer?
03:29 So yes, obviously I think overall banks will do well.
03:35 So we are also of the opinion that the third quarter and the fourth quarter is going to
03:39 be good revival in the rural economy.
03:42 And we have already started seeing through the two wheelers growth, FMCG growth.
03:47 So I believe one of the sectors within the banks is the MFI and the SFBs.
03:54 So that is one space basically which we believe is going to be a big beneficiary of this.
03:59 And that is the sector basically which we are pushing saying that and the stocks most
04:05 of them seem to be cheap in that sector at the moment.
04:09 I think there are two things which you started initiated coverage.
04:12 I think Aptus Value Housing and Home First Finance.
04:16 How do you see this particular segment and these companies?
04:20 What makes you so bullish about it?
04:24 So I think that whole space is very underserved.
04:27 If you really look at it, basically this sector, this space, banks do not want to go.
04:32 This is less than 25 lakhs kind of a ticket size.
04:39 So banks really do not want to grow.
04:41 So if you look at it for the last 10 years, the 25 lakh plus space has grown at almost
04:47 17-18 percent, whereas this space less than 25 lakhs has only grown at around 11 percent.
04:54 And if I look at it, the last five years, it has actually grown only 6 percent.
04:59 So I think that's a huge space basically, which is available right out there.
05:04 All these three companies, so we have initiated Avas also along with Home First and Aptus.
05:09 And all the three companies are growing at around a 30 percent kind of a CAGR.
05:14 ROA is of more than 2 percent.
05:17 Aptus is actually 3.5 percent kind of an ROA.
05:20 Zadato is also close to around 3-3.5 percent kind of an ROA and an ROA is of around anywhere
05:25 from 20 to 30 percent.
05:28 So we have 30 percent kind of growth.
05:29 I think, yes, all the three stocks are a bit steeply priced.
05:34 But with this kind of a growth, we believe basically that's a good space to be in.
05:42 Do you see asset quality as good as other players in this segment?
05:48 Bigger ones in the mid-cap?
05:51 Yeah, I think all of them in the last five years also basically their asset write-offs
05:58 and asset quality has been as good or better than the larger home finance guys.
06:05 Within the, you know, you spoke about IT briefly and you continue to see a bit of a disappointment
06:12 in Q2, that's what you indicated over IT.
06:15 But we've seen some fund flows coming back into IT.
06:18 Do you see, you know, this is just a transient phase, maybe a quarter or two before it again
06:23 comes back?
06:25 I think so.
06:26 I think for the moment, yes, IT may be a bit subdued.
06:30 But what we have to see basically the IT historically used to get impacted whenever US slowdown
06:37 used to happen when it was a one-to-one correlation.
06:40 But now I think with this digital phase starting from the COVID time, I think most companies
06:47 have to necessarily go out and change their outlooks basically and become more digital,
06:54 more customer facing.
06:56 So they have necessarily been spending money on the IT, whether they are doing well or
07:00 not.
07:01 So I think that transition is still not completed as yet.
07:04 So we continue to believe basically that the demand will be there.
07:07 Second thing is with the labor shortage being in the US, the labor arbitrage would be still
07:14 bigger with India.
07:17 So I think these two things will continue to drive IT.
07:20 OK.
07:21 On the consumption space, is there a specific segment or sector that you like?
07:29 And is there any headwind that you see inflation being one of them?
07:32 And at least commodity crude inflation, will that have an impact going into consumption?
07:38 Because we all are basing our growth rates based on revival of rural in the second half
07:43 and the festive season, which is in the second half.
07:46 So is there a challenge which is coming up?
07:52 So I'm saying there from the issue as far as oil is concerned, I don't see directly
08:01 a challenge except for that inflation might still be able to hold on to higher.
08:06 And if the government passes on the full this thing, but you have to keep in mind that this
08:11 is being a now six months is going to be major elections there.
08:16 So I think some of this is going to actually, I believe, is all this pricing reasons we
08:21 get absorbed by the government for the time being.
08:24 And that's why it may not come to the end consumer and inflation may continue to remain
08:31 wherever it is.
08:34 And that's why I continue to believe that it may not impact the consumption or the festive
08:42 season.
08:43 You know, interest rates is also playing a big role.
08:48 What kind of what is your view on it?
08:50 How the rate cycle is going to turn around?
08:53 There was a view that by the end of the year or early next year, we will see a reversal
08:59 in rates.
09:00 Do you still continue to hold that view?
09:04 No, I don't think so.
09:06 Basically, we are going to see any rate cuts in the second quarter or the end of second
09:12 quarter of next year.
09:13 I'm saying calendar year.
09:14 So I don't really basically we are going to see any rate cuts till maybe early June or
09:22 next year and higher for longer.
09:25 What we're seeing in the US and the world, I think India will have to hold on.
09:30 Because yes, India has not increased rates for the last two quarters, but we are not
09:34 so decoupled that we can start cutting rates when the whole world is still holding on or
09:40 increasing rates.
09:41 Because I think that will put a lot of pressure on the currency and I think we will have pressure
09:47 then if the currency starts going down, then obviously the inflation, you start importing
09:55 inflation.
09:56 I think it's a very complex thing.
10:01 So I think government will hold on to the rates and maybe once US starts easing out,
10:08 I think we will also start seeing easing out here.
10:11 So, in your opinion, how do you see flows coming through in the next couple of months
10:19 or quarters?
10:20 We hit all time high of 20,000 and Nifty then retraced it and we lost around 500 odd points
10:27 from there.
10:28 And then do you see Nifty to be a range bound going forward for the next 6 to 12 months?
10:38 So 6 to 12 months, my view remains to be that I think we will hit a new high in a 12 month
10:43 time frame.
10:45 But immediately I think for a quarter, we have to just wait and see how the yields pan
10:54 out in the US.
10:56 I'm very sure basically we are not looking for any further rate hikes in the US because
11:03 I think the inflation and everything is on an easing path in the US.
11:06 So I do not see any rate hikes, but I think higher for longer will continue to put pressure
11:11 on the 10 year yield in the US and thereby putting pressure on the Indian currency.
11:16 And that may create a bit of a problem for us for the flows to come in.
11:22 So maybe this quarter is not going to be a strong flow as far as FIs are concerned, but
11:26 domestic is still going to be good.
11:31 And you see enough triggers for that new high to be hit?
11:37 I think biggest trigger with Sweet is the earnings growth.
11:45 Next two years, basically the market is actually projecting an earnings growth of almost 19%
11:55 CAGR.
11:56 Now, if I assume basically there will be disappointment and maybe it will come to maybe
12:01 12%, 13% kind of a number also, then also in that kind of a scenario, we are saying
12:09 that we are at around 20 times one year forward, which is not a very aggressive valuation.
12:16 Historically, we have gone 23, 24 times.
12:20 So I believe basically that number should go back to maybe 21, 22, which should lead
12:27 to 10% growth in the next two years, 10% each.
12:32 So that's what my target, that's what my thought process remains to be that by the end of next
12:36 year, we should be at 21 and a half thousand Nifty.
12:42 You know, within the Nifty, how do you see the Nifty EPS growing this year?
12:47 Have you made some changes given the fact that things have changed in the last couple
12:52 of months or you're still holding on to the growth rate of Nifty?
12:56 We are still holding on.
12:59 I think this year is mostly is going to be in the bag.
13:04 What changes will happen basically is likely going to happen next year.
13:07 I think definitely we are looking at a 15% plus kind of a number for the earnings for
13:13 Nifty.
13:14 Do you see any kind of impact because of the coming state elections or elections early
13:21 first half of the next calendar year, some kind of consumption led or infraled push coming
13:28 in that will be a tailwind for the economy?
13:34 So I think elections historically has been positive for the economy.
13:42 If there is no changes at the moment, doesn't seem to be there is going to be any major
13:49 change happening in the 2024 elections.
13:54 So if that continues, I think continuity of the policy happens.
14:01 That is very, very positive for the investor for another four or five years.
14:05 And elections typically tend to show a lot of spending by all the political parties involved.
14:13 So I think that's going to be overall be good for the economy.
14:17 Nishal, you interact with a lot of institutional clients.
14:21 We have the National Stock Exchange also looking at extending index derivative trading to evening.
14:28 You head this institutional equities thing.
14:31 I want your opinion on it.
14:32 How do you see this?
14:36 I don't think extending ours is going to help us basically because there is very little
14:40 participation from the international clients in the Indian derivative market.
14:44 So if we are assuming saying that it's going to be daytime there or something like that,
14:50 then it's not going to help us.
14:53 So I think the best thing is basically this is a long enough time period.
14:58 Otherwise the fatigue sets in.
15:00 So in between now also, if you really see basically from 11 to 1 or 11 to 2 or something
15:06 like that or 12 to 2, the trading volume is much lower than the other hours.
15:12 So I think somewhere people are somewhere basically extending these timelines is not
15:20 going to help.
15:22 But as institutional equities are working, are you ready to do that if it happens in
15:29 the next couple of months?
15:30 I mean, they will be I'm told that exchanges will give a couple of months for all the participants
15:34 to be ready.
15:36 And the feedback from some of the institutions which they have been speaking to is that they
15:40 would like to have some window in 6 to 9 p.m. band.
15:46 So we have to see basically if 6 to 9 because then that 6 to 9 can be maybe largely be retail
15:53 or institutions also want to participate there or not.
15:57 But then 6 to 9, they also need to have a whole bunch of next staff to actually take
16:05 orders, place orders and settle it.
16:07 I'm saying that is going to be a challenge.
16:09 Yes, I think systems are there.
16:12 System is not an issue.
16:13 Basically, what we need to get is another set of people to come into the 6 to 9 time
16:19 frame.
16:20 That's all.
16:21 Nishal, before we end, is there any disclosures that you want to make?
16:27 I think what all stocks which we have spoken about, though I don't think I don't remember
16:31 talking about specific stocks, but I think we have been recommending these stocks and
16:37 clients will be holding in their portfolio.
16:41 Some of these stocks may be personally held by me also.
16:45 Thank you, Nishal.
16:46 It was a pleasure talking to you today.
16:47 Thank you very much for joining us on BQ Prime.
16:49 Thank you.
16:50 Thank you.
16:52 Thank you.
16:53 Thank you.
16:53 Thank you.
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