Talking Point
-Q2 Earnings soon: Can IT pick up steam?
-Oil on the boil: Impact on equities
In conversation with #AmbitAssetManagement's Sushant Bhansali. #BQLive
-Q2 Earnings soon: Can IT pick up steam?
-Oil on the boil: Impact on equities
In conversation with #AmbitAssetManagement's Sushant Bhansali. #BQLive
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NewsTranscript
00:00 point and my guest today on talking point is Sushant Bansali who is the CEO of Ambit
00:04 Asset Management. Sushant, thank you very much for joining us on BQ Prime. My first
00:11 question to you is that you know we've been seeing a spurt in crude prices over the last
00:16 few months and that has put the entire you know calculation of earnings for many of the
00:22 dependent companies and sectors you know in array. Can you give your assessment of what
00:29 kind of impact do you see especially as we complete the second quarter?
00:35 Sure, you know so margin expansion was getting better for the last two quarters as crude
00:43 prices came down after the massive rally in early 2022. Right and again going back to
00:51 about $100 crude prices is definitely a cause of concern for most of the companies in corporate
00:58 India and especially profit making companies. So the margin expansion probably might stabilize
01:04 right now and not increase further as we were expecting in Q2 and Q3. But hopefully with
01:10 the increased festive demand and the increase coming back of the growth rates, hopefully
01:15 the overall EBITDA and profitability of the companies will be in line with expectations
01:20 as compared to what we were expecting couple of quarters back.
01:25 What do you think of earnings growth that you are pencilling in for this financial year
01:29 and whether will it have any impact because of the crude going above $19.95?
01:35 Yes, if crude sustains above $19.95 for a prolonged period of time say about next three
01:43 to four months then definitely the earnings estimates will take a hit for the rest of
01:47 the year. We were building on a nifty basis about 15-16% earnings growth and that can
01:53 get impacted in a few of the nifty components and will probably bring it down by a percentage
01:58 or two percentage points. A large part of the earnings was led by financials which doesn't
02:04 get impacted by crude prices. So on a nifty basis definitely the cause is not that big
02:12 as a result of volatility in crude prices. But many of the good quality franchises and
02:18 our portfolios as we look at where we are building about 18-20% earnings growth, they
02:22 might get impacted by a couple of percentage points.
02:27 You spoke about the fact that you have a good position in financials, banking and financials.
02:34 Within the banking financial space is there any specific favourites that you have?
02:40 We have been investing in the leaders of the past across the segments be it the mega cap
02:47 banks or the large cap banks or even the mid-sized banks and they all are continuing to do well.
02:53 I think systematic credit growth is expected about 14-15% for this year and should be there
03:00 in the next year as well as we speak. There has been a big shift in terms of infrastructure
03:06 lending which has picked up quite a big pace this year, especially the CapEx led, whether
03:15 you look at roads and bridges, whether you look at metals and mining or power, there
03:20 has been a titanic shift I would say in FY24 section so far.
03:28 So my question is that some of the big guns in the sector like ICICI bank and HDFC bank,
03:37 they have been growing at steady rates but HDFC did come out with some kind of surprise
03:40 with respect to the integration with HDFC and as a result of which it is looking at
03:46 lower margins and some bit of hit on the asset quality. Is that a worry for you in the short
03:53 term for you or will this normalise over a period of time?
03:58 So merger of this nature and just if you look at the impact of exchange and account is not
04:02 much I would say that there has been a surprise, surprise but if you look at the change in
04:08 accounting policy converting from an NBFC to a bank and accounting policy changes needed
04:14 what were prevalent for HDFC bank because that was the entity which merged HDFC into
04:19 it so those policies shall prevail. One could probably get surprised slightly in terms of
04:25 the asset quality but whether it was the bonds impact or probably even the accounting policy
04:33 can impact. Much of it I would say was estimated by most of the people probably not given that
04:42 much impact in valuations before the clarity came but any merger of this nature takes about
04:49 2 to 3 years of integration at least and while the systematic integration in terms of people
04:55 and processes is being taken care of well, the financial impact of such a large merger
05:01 does take 2 to 3 years and we have already seen about I would say couple of quarters
05:07 of integration on the financial side. It started on 1st of July so first quarter is already
05:14 behind second quarter they have already given some guidance for the rest of the year. So
05:19 we are actually quite bullish on the whole segment and especially the mega cap banks
05:26 the balance sheets of the system is quite clean and even the PSU banks are delivering
05:30 good numbers for the last couple of years. Do you expect this sustained improvement in
05:36 names for PSU banks as well because they have been outperforming the broader market by a
05:44 big margin and within the financial space is NBFC interests you especially the mid cap
05:51 ones? Yes, so from NBFC perspective there are very few NBFCs who have been able to scale
05:57 up if you look at the journey of NBFCs most of them struggle to go beyond the 10,000-20,000
06:05 they are hardly you can count on your fingertips the number of NBFCs who have scaled beyond
06:09 20,000 crores of lending and those who are able to sustain through they know the trick
06:15 about managing the balance between growth and asset quality and that's why they have
06:21 been able to sustain and grow up. Now most of these franchises I would say that will
06:25 continue to do well the opportunity of shadow banking NBFC is really big in country like
06:30 ours and especially with the arrival of FinTech and most of the new structural reforms like
06:35 account aggregator etc and even GST data would say I would say increase the growth rates
06:44 quite a lot for this sector so we are quite bullish on NBFCs as a play for the next few
06:51 years. How do you look at IT because that's one sector which has been very sluggish for
06:56 last couple of quarters but I think you are bullish on it if I'm not wrong. Yes, so we
07:03 continue I would say be constructive we are not super bullish on the sector but we continue
07:08 to be constructive and we rather increase the rates of IT in the last six months in
07:14 our portfolios and so far it has played out well and as a theme I think digitization is
07:20 something which any and every business in the world will need and large businesses have
07:25 started taking I would say making lots of investments on the digitization of their whole
07:31 operations and that should continue to provide a great opportunity for Indian IT services
07:36 sectors for the next decade or so. Are you penciling in a lower margin profile and a
07:42 lower revenue growth rate for the Indian IT sector because that's something which is coming
07:48 out when we speak to others as well the kind of growth rate the high teens growth is not
07:55 there any longer and margins are also getting compressed for many of them. Yes, so this
08:02 is a cycle which plays out every few years where there is a euphoria in terms of growth
08:07 rates then there is a euphoria because of the growth rates as people are seeing the
08:11 pipeline in terms of hiring and we saw that in FY21 and FY22 and after that there is a
08:17 cooling off period consolation period and that which is what we are going through at
08:21 this point of time. It shall continue to probably another couple of quarters and post that things
08:27 will be much more rationalized. The sorted players I would say are not feeling a large
08:33 pinch on their margins or growth trajectory. The expectation of street might have been
08:38 super bullish but most of these players have seen decades of such cycles and they are well
08:45 prepared for them and responding to it quite well. Shishant, within the consumer space
08:53 autos is something which you are looking at I think if I am not wrong two wheelers is
08:57 what you are very bullish on but we saw some data coming out in the month of September
09:02 basically the CV sales have been pretty good in that as the wholesale numbers are good
09:12 but over a year to date period it is only 2 to 3% growth for CVs. Do you see CVs coming
09:19 back in a big way in the second half of the year given the kind of numbers we have seen
09:23 in September? Yeah, so I would say I will not get into monthly numbers per se but if
09:29 you look at the broader trends and if you see that about the CAPEX projects which have
09:36 been sanctioned this year which is at probably about 10 year high. Now that is a lead indicator
09:41 that the CAPEX cycle, private CAPEX cycle especially has started in the country after
09:45 a long period of time of waiting for the last decade and that should lead to a great CV
09:51 market for the next few years and two wheelers I would say continues to be the flavor for
09:58 us and it has done well in the recent past and given that this year the festive season
10:03 is slightly delayed. Normally the festive season starts in September or late August
10:12 this time started in mid of September. From that perspective things have shifted from
10:18 Q2 to Q3 and we are quite hopeful for a great festive season in Q3 for this year. Are you
10:25 bullish on EVs also in the two wheeler space? Not much I would say, still early days for
10:33 EVs in terms of whether you call the technology on the battery side, whether you call on the
10:39 charging side. There are lots of challenges still coming I think the way of EVs as a sector.
10:48 It will take another two or three years I would say for all these challenges to get
10:52 sorted and post that I would say that EV can be a great enabler for the sector but next
10:59 couple of years I don't think we will have a large, although the base is small so you
11:04 can say that growth rates are there but EVs replacing the traditional engines, ICE engines
11:10 probably that will take still a few years from now. Are you seeing when you speak to
11:19 dealers and when you speak to companies are you seeing the fact that there is a replacement
11:26 of the current ICE engines is happening through EVs? Is there a trend like that? Maybe at
11:31 a slower pace but is it there? Probably at a very granular and slow pace I think. Definitely
11:40 whatever is happening is because of the replacement cycle only in terms of the adoption of EVs
11:46 so far especially in the two wheelers but still I would say if you look at the numbers
11:53 it's not even a double digit market share in terms of overall two wheeler sales so we
11:59 are I would say lots of time away probably 2025-2026 the earliest we can see that EVs
12:08 getting into probably high teens or more than 20% of overall sales. Give me a sense of what
12:16 is the kind of demand growth that you are pencilling in especially from a consumer FMCG
12:25 point of view. Are you seeing some kind of indication of revival of rural growth coming
12:31 back and hence consumption from rural side coming in? So rural has always been a phenomenon
12:39 of that the demand shall come in the second half of the year of every fiscal year. I think
12:43 we've been evaluating and listening to this for a long period of time. Last three years
12:48 that has not taken place to a large extent. This year being an election year in few states
12:54 as well as national elections in mid of early mid of next year we are and given that the
13:01 monsoon has been good hopefully the recovery will be better in the second half of this
13:06 year better than the last three years I would say. Since COVID the rural demand has not
13:13 picked up that well as urban demand has. I think urban did much better and that's why
13:18 overall demand for the sector was satisfactory for the last three years but if the rural
13:23 demand adds up this year then probably we'll have much better year on few of these sectors
13:30 on consumption. What about consumer discretionaries I think you're bullish on them right?
13:35 Yeah consumer discretionary I think is a great thing for the next couple of decades
13:41 as the per capita income grows and the way it has been growing in the last two decades
13:46 I think it shall continue to for the next two decades as well in the similar phase and
13:51 as more and more people come out of poverty and start consuming more discretionary items
13:57 the bottom of the pyramid and the mid level of the pyramid on consumer discretionary can
14:02 be a great thing for a country of the size which we have. Any particular companies that
14:09 you like in that space? Yeah there are lots of companies I think whether you look at segments
14:16 in footwear, whether you look at segments in jewellery, whether you look at in apparel.
14:21 Apparel I think has been a very tough but sector historically because of the inventory
14:26 challenges because there are lots of patterns, size, designs etc and change in fashion every
14:34 year or two so it's a tough sector but there are many I would say players who have done
14:38 well in the recent past and has been able to I would say figure a way out on how to
14:44 run fashion apparel and have a quick turnaround of inventory. How do you look at some of the
14:52 new age companies which are into this kind of market as well? We have a couple of them
14:58 which have already listed whether it's in the Fintech or whether it's in the apparel
15:02 space or beauty space which is there. Are you looking at them from a point of view of
15:09 consumption and are you bullish on them? Yeah so we are I would say bullish on the sector
15:16 per se but individual companies I think we are given our investing style of investing
15:21 into profitable business with a great track record. I think we are still sometime away
15:26 of investing into these businesses. Few of these businesses in the next decade I would
15:30 say will become mega cap companies and probably form part of Sensex and Nifty in the next
15:38 7-10 years as well and as time comes along, as the profitability comes along hopefully
15:43 they will become investable for us as well. Real estate has been doing well but I might
15:51 be understanding is that you like more of an ancillary to the real estate sector than
15:55 real estate. Why is that? Yeah so I think I kudos to you I think you have done a great
16:02 research in terms of what we like and what we don't like. So you picked it well. If you
16:07 look at the sector per se, all the players, the listed companies in this sector are operating
16:14 into few micro markets. There is no national level player in this sector as such. Time
16:22 and again many companies have tried to grow outside their home markets but not many have
16:27 been successful or super successful and that's why they have not been able to create a pan
16:33 India sort of business model. While the ancillary players if you look at it, the successful
16:39 ones, the larger ones are the ones who have become pan Indian players and given that this
16:43 is a cyclical business whether you look at micro markets or you look at the segments
16:47 across each of these micro markets it's very difficult to find a player who will sustainably
16:53 able to grow for next three four five years. We are not into the trading mindset of investing
17:00 and that's why we like to invest in companies which can offer growth sustainably for the
17:05 next few years and in that para phase the ancillary industries have become quite well
17:10 whether you look at tiles, whether you look at probably companies in sanitary ware, faucets
17:18 etc. These are companies where people have created brands and have been able to have
17:24 a great pricing power and have sustainable profit despite micro challenges in a few micro
17:31 markets.
17:35 In the chemical space also I think you are overbought or bullish there but we've seen
17:41 some kind of select sluggishness in the pricing in that market of late. Are you still bullish
17:46 on chemicals?
17:47 Yeah as a long-term team I think we would say we are bullish on the sector. What we
17:53 saw of pharma playing out in couple of decades between 90s and 2010-15 right. Similar I would
18:00 say chemicals have been playing out in the last seven or eight years and this is just
18:04 the beginning. In the next couple of decades I think many of the chemical companies in
18:09 India will create great businesses and big businesses. Import substitution has been a
18:13 big theme which was not I would say delivered so far by the sector but we will see more
18:20 of it coming. There are a couple of players who have started doing on the import substitution.
18:25 So far in the last seven or eight years most of these companies were exporting goods and
18:30 they were like it was becoming more like China plus one post the pollution sanction norms
18:35 which China came out in about a decade back. But even government's focus on import substitution
18:42 many of the players have now started spending on projects which will have products many
18:49 of the products which we have been importing large and historically these products have
18:55 been made either in China or in Europe and as the pollution norms are furthering clamped
19:00 in the investments on the greener side of those products are happening in India and
19:05 that's why we are quite bullish on the sector. In the short term I would say there are still
19:09 challenges remaining in this sector. Don't expect miracles to happen in next one or two
19:14 quarters but our view is that the downturn is behind us. The sector has sort of bottomed
19:21 out. The recovery might not be very quick but the recovery is already started I think
19:28 about a quarter back. Do you see when you interact with these companies the benefit
19:32 of China plus one actually playing out or is it just organic demand is so high for these
19:38 chemicals that the growth is coming in? So if you look at global demand that has not
19:47 increased massively in the past 7-8 years. So definitely it's not a new demand which
19:52 has been fulfilled by the Indian players. So the case then is that it is substitution
19:59 of one's production center say China or let's say even Europe because China also became
20:06 large because of substitution in US and Europe and now we are substituting probably China
20:11 and a part of Europe and that has been the reason behind large capex and large volume
20:16 growth for most of the chemical players in this country. So demand per se I don't think
20:21 it has become too big for a country like India to deliver such a large growth in the last
20:27 7-8 years. Finally Sushant you spoke about almost all the sectors and you also spoke
20:35 about how earnings are expected and maybe there may be 100-200 bps impact on earnings
20:41 which is because of the crude impact. Where do you see Nifty headed in the next 12 months?
20:47 We are not in the prediction game as such but we are super bullish on India and 12 months
20:53 from now which is next Diwali don't know how things will play out in the short term because
20:58 we have a big I would say macro event in between which is general elections and we will have
21:03 to keenly watch as to how it plays out. If it plays out well and again we have strong
21:09 majority government and it can be of either party but if there is a strong majority government
21:14 then I would say that Nifty which is closer to or rather below 20,000 today can easily
21:20 be above 22,000 next year. Just a 10% growth rate for Nifty given the fact that earnings
21:27 are growing at more than 13-15%? Yeah so we had a good run up in the last couple of months
21:33 of quarters from March from 17,000 Nifty moved to 20,000 and given the election rally in
21:42 between I would say there will be weakness in the market which might be there and there
21:48 might again be you will see big jumps but there might be volatility in between and that's
21:52 why I am being cautious in terms of because these things get picked up. If I make a statement
21:57 of 25,000 I am telling you on channels and all media this thing will roam around. So
22:03 I want to be cautious around it but on 2025 we will definitely see 25,000 Nifty.
22:09 Ok, just to put it in perspective do you see fund flows also increasing accordingly because
22:15 we will have fund flows coming for the bond index because India's inclusion into the debt
22:20 market and fixed income but do you see it coming into equities as well or there will
22:26 be some diversion of current equity flows into the bond?
22:30 Yeah, unlikely that equity flows will go into bond. I think the bond already given the interest
22:36 rate cycles the money from equity to debt moved about a year back and now is the turn
22:41 actually from debt to equity which will play out and for a country like India which historically
22:46 was growing about 1.5-2 times of global growth and in the current scenario growing about
22:52 2.5-3 times of global growth more and more equity flows will come and if we are able
22:57 to continue to showcase our stewardship, leadership and I would say our commitments to green energy
23:07 and climate change etc. lots of global money will come they all are chasing growth and
23:13 they are not getting it anywhere else in the world and for the next 10-20 years I would
23:19 say that these flows will be super strong and well aided by domestic flows. If you look
23:23 at the last couple of years it's a domestic flows which saved the Indian markets. Had
23:28 it been some other time the large FPI outflows between September 21 and March 22 or June
23:37 22 probably would have taken our markets by 25-30% tides but we had a single digit outflow
23:45 on Nifty. So domestic flows is very strong and that culture of equity investing I think
23:52 is growing up quite well in this country and that's what gives us so less and that's why
23:56 we are so bullish on equity markets for the next couple of decades.
24:00 Sushant, it was a pleasure talking to you on Talking Point today. Thank you very much
24:04 for joining us on BQ Prime.
24:07 Thank you.
24:08 Thank you.
24:09 Thank you.
24:11 Thank you.
24:12 Thank you.
24:13 Thank you.
24:14 Thank you.
24:15 Thank you.
24:15 [BLANK_AUDIO]