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00:00 Hello and welcome to BQ Prime.
00:01 You're watching Talking Point.
00:03 And my guest today is Gautam Duggar,
00:05 head of research and institutional equities
00:06 at Motilal Oswald.
00:08 Gautam, thank you very much for joining us on BQ Prime.
00:11 My first question to you is on the regional conflict which
00:15 is coming up, which came up over the weekend,
00:17 the Israel-Gaza war.
00:20 What could be the potential impact for Indian equities
00:25 or in some of the Indian companies?
00:28 Good morning.
00:29 Thanks for having me.
00:30 See, this is a very evolving sort of a conflict.
00:33 I think Israel-Palestinian crisis is not
00:37 something which is new.
00:38 In the past also it has happened.
00:40 Just the scale of conflict and the extent of damage
00:43 is very different and disproportionate this time,
00:48 and in a way a bit unfortunate also for human lives.
00:52 But as far as markets are concerned,
00:53 Sajid, if you had seen the reaction of the markets
00:55 this morning, global as well as Indian,
00:58 and the way the world has behaved,
01:00 because that is one thing which people always
01:02 get most worried about, because supply chains come into picture
01:06 and there is always a sort of a panic reaction
01:09 in the first instance.
01:11 But we've seen that today at least so far,
01:15 the markets have been very mature and calibrated.
01:18 And if you see even past conflicts,
01:22 whether it is Russia-Ukraine or the periodic North Korean
01:26 related news flow which we keep getting once in a while,
01:29 every once in a while, we've seen
01:31 that typically the sort of things usually
01:35 create a downward sort of a moment
01:40 in the market for a few days.
01:42 And then after a week or so, people
01:44 move on to the next thing.
01:46 And usually in the past, buying during such periods
01:50 of downturns have helped.
01:52 Now obviously, every period has its own different context.
01:56 So I don't want to second guess what can happen here.
01:59 But I would imagine that in another three, four days,
02:04 the market will start talking about earnings
02:07 and other fundamental factors.
02:08 So this can at max be a couple of days of a news cycle.
02:14 Unfortunate as it is, but yeah, markets
02:16 have handled it very well so far.
02:18 Do you think that unlike the Russia-Ukraine war,
02:23 there could be an impact to the supply chain?
02:25 Because that's much bigger worry, right?
02:27 Because in the Russia-Ukraine, it was not the war,
02:29 but the impact on the supply chain
02:31 that led to a lot of issues.
02:33 So do you see a similar impact coming in the future from this?
02:38 I would not imagine so, Sajith, because the commodities
02:42 involved are very different.
02:44 And this so far seems to be a very localized conflict
02:48 with most of the world opinion sided towards one side.
02:54 In Russia-Ukraine, we have seen that the global opinion
02:57 has been slightly more divided.
03:00 While I'm not an expert on strategic affairs or defense
03:03 matters, all I can say is it's too early
03:05 to sort of pontificate on what exactly
03:09 can happen to the supply chain.
03:11 We will have to allow some time to elapse and see
03:14 how things develop.
03:15 This is still a just 48 hours old war.
03:18 So let's see how things shape up and then accordingly
03:22 form a view.
03:24 In this context, we have completed the second quarter.
03:27 What's your take on the second quarter
03:30 as earnings for Nifty or your portfolio companies?
03:35 So yeah, I mean, second quarter earnings preview
03:37 we've just released.
03:38 And we've done several changes in the model portfolio.
03:41 We are expecting a very healthy quarter.
03:45 First quarter we had seen close to 30% earnings growth
03:48 for Nifty and about 18% without OMC.
03:52 We are seeing something similar this time around as well.
03:55 21% earnings growth for Nifty and 15% excess OMC.
04:00 For our broader coverage viewers,
04:01 we are penciling in a 40% earnings growth,
04:04 largely because of a very sharp upswing in OMC's profits
04:09 on a YY basis.
04:11 If you keep aside OMC's, then even for our coverage viewers,
04:17 we are talking about a 20% plus earnings growth.
04:21 And this is a quarter where margin expansion
04:24 will be very strong on a YY basis across sectors.
04:28 Auto, cement, consumer, metals, oil and gas.
04:33 There's a few sectors where margin expansion
04:35 will be very strong.
04:37 We are expecting close to 250 to 300 bids
04:39 of margin expansion at operating level
04:42 for different set of aggregates,
04:43 depending on which one you look at.
04:46 So while the top line growth is expected to be a bit tepid,
04:51 given what is happening and given the fact
04:53 that a lot of the inflation is in the base now.
04:56 So we are talking about 6% to 7% top line growth
04:59 for both our coverage and about 8%, 9% for Nifty.
05:03 But the EBITDA growth will be in the range of 17%, 18%
05:07 and earnings growth in the range of 20% to 40%.
05:10 That 40% spike is largely owing to OMC's
05:13 in our coverage viewers.
05:14 Without OMC's for our coverage also,
05:16 we are talking about 20% to 21% kind of an earnings growth.
05:20 Sectors which are expected to lead are the same
05:22 that we have seen for last three quarters,
05:24 which is financials.
05:26 Auto once again, Auto has had a very strong
05:29 and a stellar run for the last three quarters
05:31 in terms of earnings growth.
05:33 We expect that to continue in this quarter as well.
05:36 And then oil and gas, as I mentioned,
05:39 even XO of OMC's is talking,
05:41 we are talking about a 15% growth.
05:43 Aside of that, tech is expected to be very muted,
05:47 6, 7% earnings growth.
05:49 Consumer about 14, 15% earnings growth.
05:52 And then we have sectors like cement,
05:54 which are coming back after a very long time.
05:56 The last time cement had shown an earnings growth
05:59 was in September 21 quarter.
06:01 After that, there has been an earnings decline
06:03 for the next seven consecutive quarters.
06:05 And this quarter now we are expecting a very strong
06:08 70% growth on an extremely low base.
06:11 So optically it will look very strong
06:14 because your EBITDA margins, EBITDA part amount
06:18 of them are going to look pretty good.
06:20 And sector which is not going to do well
06:23 are some of the smaller sectors like specialty chemicals,
06:26 where we are expecting about 20% earnings decline.
06:29 And even sectors like retail,
06:31 where also we are expecting a double digit earnings decline
06:34 because the demand has been very soft
06:36 in the quarter that has gone by
06:38 for segments like QSR, Apparel, Footwear.
06:43 So net-net at an aggregate level, very strong growth
06:46 led by domestic cyclicals, which is financials and auto.
06:50 - Also, is it going to be led more by volume
06:55 or pricing as well?
06:57 - So it's very difficult to categorize that pricing
07:02 and volume equation at an aggregate level.
07:05 You have to look at sector by sector.
07:07 For example, in auto, there is a contribution
07:10 from both volume, pricing, operating leverage,
07:13 as well as lower commodity costs.
07:15 In consumer, it is largely led by lower commodity costs
07:19 because the top line growth is just about 6%,
07:22 which basically tells you that volume growth
07:24 is extremely tepid and which is perfectly in line
07:27 with what the managements have guided
07:29 at the end of the first quarter FY24 earnings season
07:33 and what we are gathering from the on-ground channel checks.
07:38 In other sectors like cement, volume growth is pretty decent.
07:42 I mentioned it for auto also.
07:43 And then in some of the other sectors,
07:45 volumes do not make much of a dent,
07:48 whether it is metals or oil and gas there,
07:51 but the underlying commodity price behavior
07:54 plays a much stronger part.
07:57 - So when you speak about oil and gas
07:58 and this outlier which is coming in
08:01 because that's bumping up the entire top line
08:04 and the bottom line for the Nifty
08:07 and your portfolio companies,
08:09 have you factored in the fact that
08:11 there hasn't been much change to the marketing margins
08:13 and that could be muting the profitability point of view,
08:18 not the EBITDA.
08:19 At the EBITDA level, they would be doing much better,
08:21 but profitability level?
08:23 - So as I mentioned, at the profit level itself,
08:27 there is a spike which is coming in,
08:29 but they've always been noisy on either side,
08:32 whether on the downside or on the upside.
08:34 Right now, it is contributing on the positive side.
08:37 We've been used to seeing that negative contribution
08:40 for a fairly long period of time.
08:42 So generally we sort of exclude them
08:46 when we are performing any serious analysis
08:49 on numbers and aggregates.
08:51 So oil and gas earnings, specifically the three ONCs,
08:56 they usually tend to sort of create a distortion
09:00 in the aggregate numbers.
09:01 So it's always advisable to look at the aggregate trends
09:05 by removing ONC.
09:06 As it is, there is just one ONC left in Nifty 50 index.
09:11 So you just have to ignore that
09:13 and look at the rest 49 companies
09:15 when you're doing a YY comparison
09:17 to get a slightly more substantive insights.
09:20 As far as their own stock performance is concerned,
09:22 I think it's dictated by things
09:25 which are outside the realm of fundamentals,
09:28 which is what is happening globally to crude,
09:31 how the government is reacting,
09:33 how the politics are shipping up,
09:35 do they have the pricing freedom and things like that.
09:38 So earnings necessarily do not make much of an impact
09:41 on their stock performance on either side.
09:46 - In the technology space,
09:49 Gautam, TCS is coming out with his earnings.
09:52 There's a buyback also on the agenda today,
09:55 the fifth one.
09:56 Will that be enough to support the stock in the short term,
09:59 given the fact the kind of macroeconomic headwinds
10:02 and demuted earnings growth that you're predicting?
10:05 - So, Sajith, IT is going through a bit of a rough patch
10:10 because of what is happening globally
10:12 to the growth narrative
10:14 and also to the interest rate movements that have happened,
10:17 plus the commentary,
10:18 which sort of signifies that we have not seen
10:21 the last of the rate hike.
10:22 And therefore, the concerns from a global group
10:25 point of view should continue to remain there.
10:28 That being said, IT sector right now,
10:30 I mean, very counterintuitive.
10:33 If you look at the large cap IT stocks,
10:35 they're almost at their 52 week highs,
10:38 which sort of belies the underlying
10:40 very weak growth narrative, which is coming in.
10:43 Part of the reason is because of the point
10:46 from where we are looking at it.
10:47 Because if you look at it from an October 21 perspective,
10:51 most of the stocks are still down 20, 30%
10:54 from their respective two year highs,
10:56 while the market is at a new high, right?
10:58 As far as TCS is concerned,
11:00 we are used to seeing their buybacks
11:02 and very healthy free cash flow returns that they provide.
11:05 So this will be, I think, the fifth buyback.
11:08 The last three buybacks put together,
11:11 18, 16, and 16,000 crores,
11:13 have they've written 50,000 crore back to the shareholders.
11:17 So one needs to see the details of the price,
11:22 the quantum and the method in which they will be doing it.
11:25 But this is par for the course,
11:27 as far as the large cap IT companies are concerned,
11:29 because they've established this practice now
11:33 to return 80, 90% of their free cash flows
11:37 in the form of a dividend or a buyback.
11:39 As far as the fundamentals are concerned,
11:41 I think we might be in for a couple of more quarters
11:45 of near term pain,
11:46 as far as the sequential constant currency revenue growth
11:51 is concerned, because the global macros
11:53 are still not very looking rosy,
11:57 and which is what we have seen commentary from Accenture
11:59 also in numbers, I think a couple of days back.
12:03 So one needs to watch out for some of these things to clear.
12:08 At the margin, however, the valuations
12:10 are relatively more favorable for IT
12:13 than what they've been for large part of 2021.
12:17 We are expecting a very muted quarter
12:19 across the board for IT sector,
12:22 just about 6, 7% earnings growth YOY,
12:26 and even dollar term sequential constant currency
12:29 revenue growth in a very flattish zone
12:31 of 1% point plus minus 50 basis point.
12:35 - Another key sector which has been performing well
12:39 is the banks and financial segment.
12:41 Do you expect the NIMS growth to continue there
12:45 and the top line for some of the banks?
12:48 Or there are some pockets where
12:50 there could be some slowdown?
12:51 - So we are expecting a moderating moderation
12:56 in the NIM net interest margins already.
12:59 We had seen that in 1QF 524,
13:03 and that trend will continue in this quarter as well.
13:06 And of course, for the next half as well.
13:09 So in so far as earnings growth for the banks is concerned,
13:12 we are clearly seeing a distinct moderation now,
13:15 which we had highlighted when we released
13:18 our first quarter's preview as well three months back.
13:21 So we are talking about a growth
13:23 which is moderating from 30% to 25% this quarter,
13:27 and maybe about 17, 18% in third quarter,
13:30 and close to 10, 12% in the fourth quarter
13:32 for private banks,
13:33 and somewhat similar number for PSU banks.
13:36 So on an aggregate for the full year,
13:38 the growth will still look pretty solid at about 20%.
13:42 But it's a very nonlinear growth
13:44 in terms of quarterly distribution,
13:46 because every quarter is slightly more moderate
13:49 than the previous quarter.
13:51 So let's see what the comment is,
13:53 because the credit growth is running quite fine at 14, 15%.
13:57 Maybe you're in for one, two quarters more of NIM,
14:00 which is now settling into a slightly more sustainable zone
14:06 compared to what we had seen in 4QF 523,
14:09 where NIM had spiked up to a very sharp,
14:14 very sharp levels,
14:17 which obviously was not sustainable.
14:18 So nothing unusual happening.
14:20 There is just that the growth will look slightly moderate
14:24 every subsequent quarter.
14:25 But on the flip side,
14:26 the valuations are extremely reasonable for banks,
14:31 both private as well as PSU,
14:33 more so for PSU, of course,
14:34 and which is where we have a single largest overweight
14:37 in our model portfolio with about 7% allocation
14:41 to PSU banks.
14:41 And we hold SBA and Bob in our model portfolio.
14:44 - Two sectors which I need your views on
14:49 is the consumer sector,
14:50 because the demand has been muted there.
14:52 There was some expectation that after the monsoons,
14:54 the rural demand may pick up,
14:56 but monsoons have been pretty much at par.
14:59 Do you see the revival of demand coming in
15:02 from rural and semi-urban
15:04 and that helping both consumer and retail segment?
15:08 - So, Sajid, my view is slightly,
15:12 I'll break it into two different parts.
15:15 When you say consumer,
15:16 let's say consumer staples is one segment
15:19 and consumer discretionary is another segment.
15:22 As far as staples is concerned,
15:23 I think the demand will take a couple of more quarters
15:26 to revive because the rural has been lackluster
15:30 for some period of time now.
15:32 And while the monsoon has revived in September,
15:35 the August has been very bad
15:37 and that will impact showing,
15:38 or yields in some specific cases.
15:43 Plus, as always, the monsoon has been uneven
15:46 in terms of spatial distribution.
15:48 That said, second, the inflation has been also impacting
15:52 the consumer demand on the ground,
15:54 which is what most of the consumer companies pointed to
15:58 during the 1QF 524 earnings calls
16:00 and also at our annual global investor conference,
16:04 which we did in the last week of August.
16:06 So as far as staples is concerned,
16:07 I think it will take a couple of quarters
16:09 for volumes to revive.
16:11 And at the margin, companies are not very confident
16:13 of taking disproportionate price.
16:15 In fact, the competition from the smaller
16:19 and unorganized guys in most of the consumer categories
16:23 has picked up, which is what was alluded to
16:26 by Hindustan Lever and Britannia
16:28 and some other consumer companies also three months back.
16:31 So they will be very reluctant to take
16:33 any meaningful price hikes in an environment
16:36 where demand is already constant.
16:39 So net-net, it will mean that top-line growth
16:41 will look very, very sedate.
16:43 And whatever earnings growth that has to come
16:46 will have to come from margin management
16:48 rather than led by demand.
16:51 Whereas discretionary is concerned,
16:53 we are seeing a very different trend emerging out there.
16:56 You saw the price release of Titan on Friday.
16:59 They're talking about a 20% top-line growth
17:02 on a very high base.
17:03 So clearly discretionary is very different
17:06 from staples as far as demand patterns are concerned.
17:09 And within discretionary also different segments
17:11 have very different trajectories.
17:13 So hotels is doing very well,
17:15 jewelry is doing well, aviation is doing well,
17:18 but at the same time, QSR, footwear, apparel
17:22 are not showing that strong demand sort of patterns.
17:27 So one has to be very, very choosy within the sectors
17:31 and also within the categories that you choose in a sector.
17:35 So as far as we are concerned,
17:36 we are significantly overweight on consumption
17:39 and we have only one consumer staple stock
17:42 in our model portfolio, which is ITC.
17:44 We hold around seven to eight consumer discretionary stocks
17:48 and our single largest platform
17:51 still continues for Titan for last many years.
17:54 And even now, other than Titan,
17:57 we hold Indian hotels, Metro, Zomato, Lemon Tree,
18:01 D-Mart and Kajaria in our model portfolio.
18:03 - Gautam, it was a pleasure talking to you today
18:07 to get an understanding on the earning season
18:10 that's just going to start today for TCS earnings.
18:13 Thank you very much for joining us on Viki Prime.
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