Talking Point | Systematix Group's Dhananjay Sinha decodes the faster decline in imports than exports, structural money vs. hot money, and more. #BQLive
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00:00 Hello and welcome to BQ prime. You are watching Talking Point and my guest today is Dhananjay
00:04 Sinha, who is the co-head of equities, head of research, strategy and economics at Systematics.
00:09 Dhananjay, thank you very much for joining us today on Talking Point. My first question
00:14 to you is that the Reserve Bank is expected to come out with this monetary policy in the
00:20 next half an hour or so. What is your take on how the governor would look at the monetary
00:29 policy and what could be the MPCs in terms of commentary and decision?
00:36 Yeah, so thank you for having me. So basically, our view has been that if you look at the
00:45 last policy statement, the RBI had gone a little bit hawkish while they were saying
00:51 that they are more inclined towards the removal of accommodation, etc. There has been a spike
00:58 up in inflation. The last print that we got was for August about 6.8% and for July it
01:07 had gone up to 7.3%. These are numbers higher than what the RBI's tolerance levels are,
01:15 which is at the upper bound about 6%. So that is one thing that would sort of play out on
01:20 RBI's mind. The other thing is, of course, that from a global standpoint, we know that
01:26 a higher for longer thesis is actually playing out. I think it's gaining ground, especially
01:32 in the context that in the US there has been an increase in inflation and that because
01:38 of the geopolitical issues, there is a sort of a rising truth price also, which is edging
01:44 towards 90-100 kind of range. So those are the things that are relevant. And we have
01:50 seen that because of this, the dollar is actually strengthened and that is putting pressure
01:56 on RBI, on the rupee and RBI has been intervening to intervention. So those are actually pushed
02:03 up the short-term rates and the long-term needs as well. So those are the things that
02:07 will require RBI to maintain a hawkish view and possibly indicate that there is a possibility
02:15 of further more rate hike, because if the US rate hike also happens, then RBI will also
02:20 need to take into cognizance that development. So I think overall, I would say it's going
02:25 to be a hawkish view as I expect and possibly the RBI would end up by leaving a possibility
02:32 of another rate hike.
02:33 Do you think the RBI, while the hawkish commentary is expected, may increase the inflation target
02:45 which it had indicated last time and also on the growth part of it, we've seen some
02:51 kind of sluggishness in terms of consumption and rain, monsoons have been pretty much slightly
03:00 below normal and that would mean that cash too might be much more, a little more sluggish
03:06 in terms of consumption coming in, especially from rural sector. So will it moderate the
03:11 growth rate as well going forward for the next two quarters?
03:15 Well, I think it's quite possible. So there does seem to be a sort of a disconnect between
03:21 how we see the economy and growth, etc. But what we are emphasizing is that beyond the
03:27 government spending, which has been a huge driver for the overall headline GDP numbers,
03:33 if you look at the household spending and also the private sector spending in real terms,
03:39 that is on an average averaging around about 2 to 3% or thereabouts. So that is already
03:47 there. I would say if you look at the performance of companies, the top line growth of FMCG
03:54 companies or consumer-related companies, there we are seeing that the top line growth is
03:59 almost virtually zero. So I would say close to zero. So essentially the overall demand
04:05 scenario seems to be weak and the government is actually driving a lot of sort of top line
04:13 numbers. So heavy lifting has been done by government spending on CapEx, etc. Going forward,
04:20 I would say that the impulses are not that great because if you look at the trade numbers,
04:26 there is contraction out there and that continues for the last several months, I would say 10
04:31 odd months, there has been a contraction in both exports and imports and services sectors
04:34 has also decelerated. And many of the high frequency indicators that we look at for services
04:41 sectors have also sort of come up. So I think there is clearly a deceleration and RBI would
04:47 sort of, in its projection of 6.5% real GDP growth, they are already talking about a slowdown
04:54 in the second half of the year and the next three quarters. So I think those things will
04:59 be maintained by RBI. But I would say that looking at the high frequency data, I do understand
05:06 that it is kind of much, much weaker than what the official estimates are. So that is
05:12 one part of it. On the inflation front, as I said, they will be worried about the implication
05:17 of the rising food prices and how does it sort of impact our inflation and how does
05:23 it impact government spending because government spending is not really budgeted for any expansion
05:28 in non-interest revenue expenditure. So there might be certain increase out there. So there
05:33 are multiple implications. Things are very fluid, I would say. And you have a, broadly
05:39 you have a situation of above target inflation and possibly a much weaker private sector
05:46 demand and you have the government doing a certain amount of heavy lifting. So I think
05:52 that's how I think things are placed at this juncture.
05:57 You know, Dhananjay, while the direct impact of fuel hike may not be coming through but
06:02 indirectly through derivatives it might come through to various sectors. In that scenario,
06:10 what is your assessment of which are the sectors which are now a little vulnerable with respect
06:15 to margins and profitability?
06:20 So I think this is a good question. So essentially, if you look at the last few quarters, as I
06:25 said, non-finance companies, the top line growth has actually decelerated quite sharply.
06:31 I would say fourth quarter last year was about 8 percent and first quarter this year was
06:35 about 0 percent or thereabout. And possibly it can get negative also as we go into the
06:40 second quarter. This quarter might be negative, I would say. So essentially what companies
06:45 have been doing was to really gain margins through because of the reduction in the raw
06:50 material cost as they scale down the cost of the utilization of raw material. Margin
06:56 expanded as that happens. Some of it was passed on to gain volumes and maintain a certain
07:01 market share. That was done by large companies. Now, what would happen now is that as the
07:07 costs rise through various channels and stuff, there is a possibility that margin expansion
07:14 story that was in the last two quarters might actually wither away. So there is a possibility
07:21 that margin pressure will emerge, I would say. And what would happen is that large companies
07:29 will gain market share. They will be able to pass on those costs, increasing costs.
07:34 But what would eventually happen is that the smaller companies who are into, let's say,
07:39 typically the B2C kind of business, they will not be able to pass that on. And the margin
07:46 pressure will be much larger there. And their ability to pass on the cost increases will
07:51 be lesser. So I think this dichotomy between large companies and smaller firms will start
07:56 to reemerge. Put together, everything, I would say the margin pressure will be there, especially
08:01 in the context that the demand scenario hasn't been that great. So I think this margin story
08:07 can actually inverse because of the rising crude prices. And crude prices, as it rises,
08:13 it has a percolating impact on other commodities as well. So over time, with the lag, that
08:19 can happen. What the government is trying to do is to restrain that increase by, you
08:26 know, government has actually cut prices for gas and they are trying to give, within the
08:32 Ujjwala scheme, they are trying to give some subsidy and all. It would also imply that
08:36 the government subsidy budget would also start to rise more than what has been budgeted.
08:42 Do you think that there may be an impact to the revenue buoyancy for the government as
08:46 a result of this? Of course, it will be because if you get the
08:51 assumption in the budget, they had budgeted for 10.5% growth in GDP growth, nominal GDP
09:01 growth, and a tax revenue growth of about 10.4%. The first quarter GDP growth in nominal
09:09 terms has been roughly about 8%. So already there is a sort of lowering in the nominal
09:16 GDP growth versus what the government has assumed. And we think that as we go forward,
09:22 you might actually see much lower nominal GDP growth. Our number is that it could actually
09:28 average about 6.7%. Now the government's elasticity of tax revenue collection was 1 versus nominal
09:36 GDP growth they had projected, nominal GDP growth projection of 10.5%, the nominal growth
09:43 in tax revenue has been budgeted at 10.4%. So that's ratio is about 1. Whereas our view
09:50 is that the structural elasticity is roughly about 0.7 or 0.8. So you have a situation
09:58 of lower nominal growth and lower elasticity, both impacting the tax revenues. What the
10:06 government appears to be doing is that they are leaning much more towards increasing collection
10:13 through indirect taxes. So that is actually increasing the overall net indirect tax to
10:18 value added GDP ratio to almost like a 30, 40 year high. And but other thing that they
10:25 are trying to do is to really do much more aggressive collection on the income tax. There
10:32 has been a reduction in the tax refund in the second quarter, as the numbers for September
10:39 has come out, it is showing that there is at least 20 to 25% reduction in the tax refund
10:45 over last year. So government is trying to look at multiple avenues to compensate for
10:51 the possibility of a shortfall. But if the nominal GDP growth continues to decelerate,
10:57 I don't think you can actually implement some of these one off things to really compensate
11:02 for the falling nominal GDP growth.
11:05 I was seeing some of the reports and numbers for direct tax collections, they were much
11:09 lower than the projected ones, requiring the government to go above 14% growth in the next
11:14 two quarters to meet them. Do you see that given the fact that you have now margin compressions
11:20 coming in because of the fuel consumption issue which is there, the corporate tax collection
11:26 may be falling short in this fiscal? And hence the profitability will be impacted?
11:36 So I think if you look at F20-22, the profit growth for nifty companies for instance that
11:41 represents also similar for other larger set of companies. So the profit growth in F20-22
11:50 was about 40% there. In F20-23, the profit growth was roughly about 11.5%. And if you
12:00 look at it, the trading EPS of large nifty companies that has come down to roughly about
12:06 3.4% growth, then it's quite likely that it might actually sort of flatten as you go forward
12:12 because of the margin pressure and the fact that you're talking about actually started
12:16 to flatten out. There is a possibility that the indirect direct tax coming from the corporate
12:22 profit might actually come down. And as we know that, you know, the corporate profit
12:27 tax rate has been reduced in 2009 FY19. So that is already reducing the contribution
12:38 of corporate tax in the overall tax collection. So if you look at incremental tax collection
12:44 over pre-COVID levels, and especially the surprises that has happened post the COVID
12:51 is largely come from indirect taxes and higher income tax than corporate tax. So upside surprise
13:00 on tax revenue post COVID, in that corporate contribution is just about 50. I would say
13:06 55%, 60% has come from indirect taxes and the balance has come from income tax. So I
13:13 think the dominance of corporate tax in the overall tax collection has actually come down.
13:21 And as we go forward, as the profit growth starts to come off, it's quite likely that
13:29 given the lower tax rate, the dominance of the share of corporate profit tax in the overall
13:36 tax collection will actually decrease even further.
13:40 Given all these factors, how much is the nifty earnings that you're looking to grow, looking
13:48 and growing by in FY24, given that we have already closed, you know, closed two quarters
13:54 and two quarters to go. FY23 you said 11% growth that was coming in. Do you see sub
14:01 10% coming in in FY24?
14:05 So the consensus estimate for FY24 and FY25 is roughly averaging about 16%. Right. So according
14:15 to us, it's a very tall task. What we believe is that if you look at the pre COVID trend
14:20 and the projected numbers for FY24 and FY25, the deviation is roughly about 70%. So this
14:29 is a very tall task, especially in the context that if you look at the trailing EPS growth
14:34 is just about 3.5%. So, and it's kind of decelerating from last year. So as the momentum comes down,
14:41 the ask rate for meeting a 60% growth this year and next year will become far more high.
14:49 So the ask rate will be very high. So I think there is a possibility of downgrades that
14:55 can happen. Now, I think this particular quarter because of the margin pressure that is there,
15:02 you know, if you look at various companies, there is a lot of expectation that following
15:07 the festival season, there will be a good demand. This is shown across multiple sectors,
15:17 including FFBG, autos, etc. These are some sectors that are actually seeing reasonable
15:22 volume growth. There, people have stocked up a lot of inventory and all. We need to
15:30 see whether the festival demand is good enough. If it is not, then possibly there will be
15:37 a heavier discount following the result season, you know, the festival season, and that might
15:44 start impacting their top line in the following two quarters. So I think there's a lot of
15:50 hope that we and that we gather from what companies are talking about. Things are there,
16:04 but we'll need to see whether the top line growth and the pricing part of companies remain
16:15 as strong or not. So if it dissipates, possibly there will be a sort of correction as far
16:20 as expectation is concerned. Our own view is that there can be about 15% downgrade in
16:26 terms of earnings. So that would imply that you would have a very flattish kind of EPS
16:32 growth in the next two quarters, two years.
16:34 Dhananjay, it was a pleasure talking to you today. Thank you very much for joining us
16:39 on BQ Prime.
16:40 Thank you very much for having me.
16:45 That was Dhananjay Sinha from Systematics. He was giving his view on how the earnings
16:50 are going to be and what he expects from the Reserve Bank of India today when it meets
16:54 to announce the MPC decision. Thank you for watching BQ Prime.
16:57 Thank you.
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