There is still value in some small-cap stocks, says Bandhan AMC's Manish Gunwani.
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00:00 I'm your host, Neeraj Shah. The case for a chat today is the budget 2020 for only a bond budget
00:05 or do equities benefit meaningfully from this as well? We'll ask our guests that.
00:10 Will the Indian equity market sustain their outperformance over other emerging markets? And
00:15 are their pockets of value in small caps still existing despite the rally that we've seen?
00:21 Well, let's pose all of those questions to our guest today. Manish Gunwani of Bandhan AMC joins
00:25 us on the show. Manish, great having you. Thanks for taking the time out and being with us. I hope
00:29 all is well. I believe it's the first time that we're talking to you on NAD Profits. So, welcome.
00:33 Thanks, Neeraj. Thanks for having me.
00:36 Pleasure is entirely ours. Manish, I was reading an article that you had written or an interview
00:41 that you had written about wherein you believed at the start of the year that Indian equities would
00:47 be that point of outperformance or that oasis of growth, if you will, in an otherwise not so
00:54 strong global market scenario. Does the budget do anything to reinforce that view, Manish?
01:01 Yeah, it does because while it may look like a very placid budget in one sense because it's a
01:09 vote on account, I think it's a pretty brave budget in the sense that obviously there is no
01:16 populist or revenue expenditure growth is very minimal, which basically keeps a lid on inflation.
01:23 So, from a macro stability perspective and more directly maybe from a currency perspective,
01:30 because I think a lot of attraction for India is as much from currency as from stock market. See,
01:37 a lot of us in the stock market, obviously we are bottom-up people, but I think the interesting
01:42 trend that is developing is that the dynamic of India's macro stability in terms of current
01:53 account deficit and inflation, I think that is probably understated to my mind in the sense that
02:01 for a foreign asset allocator, if you look at India, it's a currency where the current account
02:07 dynamics is seeing a generational shift. It's once in a 30-40 year kind of shift where
02:13 an economy which is typically 2 to 3 percent current account is probably moving to 0 percent
02:20 versus US, which is still 2 to 3 percent. So, in that sense, the currency dynamics, I think,
02:27 will attract a lot of foreign capital. And the budget to the point that, as I said, keeping
02:33 inflation under control, keeping interest rates benign because we've seen bond yields fall after
02:41 the budget, all that means that the dynamic of foreign asset allocators looking at India,
02:51 probably more from a fixed income perspective, it probably looks attractive initially.
02:56 But even for equities, if foreign capital is attracted, then obviously the growth prospects
03:04 go up. So, I'm quite positive that in the medium term, India will continue to outperform emerging
03:13 markets, especially given this developments what are happening on the currency side.
03:20 Okay. You surely, I mean, I'm just trying to understand, is your belief too that this,
03:31 you know, I mean, from an investor's hat, wearing an investor's hat, always keeping an eye out for
03:36 that 4 percent average depreciation in the rupee while factoring in the kind of returns that you're
03:42 doing, especially foreign portfolio manager. I know you manage domestic portfolio. I'm just
03:46 trying to ask you whether global investors had, do you think that's a big change?
03:50 Yeah, I think, personally, I'll not be surprised if rupees flat for two, three years,
03:57 because when you look at line item versus US, whether it is current account deficit, real rates,
04:06 I think India is actually better in a lot of respects. Government debt to GDP, for example.
04:12 So, the simple point is, for example, that if you take our 10-year yield minus inflation,
04:21 we probably about 200 bps real rate, whereas in US it's almost zero at this point of time.
04:27 So, on various metrics, I think that India is screening very, very strongly for foreign capital
04:37 to be looking at India in a very, very positive way. So, yeah, to the point you asked, historically,
04:47 Indian currency has depreciated three and a half to 4% last 30 years. Can it next five years do
04:54 much, much, much better than that? I think so. Okay. So, Manish, the other aspect is
05:01 you saying that the Indian markets will be that bright spot, quote unquote. I'm not verbatim
05:10 quoting you, but something like that. Now, I have a two-part question here. One is, as somebody who
05:17 is managing large pools of money, are you comfortable putting in money to work at these
05:23 valuations? And two, is this whole conversation around Indian valuations overblown? Because
05:28 at any given point of time, in any of the quarters, in any of the last few years,
05:33 say for one or two, you could have had the same question asked to you that Indian markets are
05:38 overvalued, should one invest in them or no? Yeah. So, look, when I'm talking so positively
05:46 on the Indian currency, don't get me wrong, I'm not so bullish on global growth or as a
05:51 consequence of global growth, even India growth. So, for example, I don't think we will have a
05:57 2002 to 2008 kind of cycle where global growth was strong. China, India were growing 19%.
06:05 Commodities had a super cycle. I'm not of the view that we're going to get that kind of cycle,
06:12 either globally or in India. So, I do think that structurally, very big parts of global GDP, like
06:21 Europe, Japan, China, and maybe even US on a cyclical basis will slow down, or they're already
06:29 slow. We've seen China and Europe obviously struggle even last year. So, let me be clear that
06:37 I'm not so positive on overall GDP growth, but I do think that both on a relative basis
06:47 and the fact that our net service exports have become much bigger than our energy imports,
06:55 which is the big delta in current account dynamics. Obviously, we will look very,
07:03 very attractive for foreign capital. Does it mean that we will get very strong EPS growth on
07:08 overall basis? I don't think so, because as I said, when global growth is slow,
07:14 India also can't go back to 19% growth, I think, when global growth is deflationary and
07:25 soft. So, in that sense, I think we will have a very selective bull market, because valuations
07:34 obviously are expensive right across, which is why I think there are pockets of value more in
07:43 the small cap space, I feel, which can do well. But to expect that we will have a very strong
07:54 bull market like 2002-2008, not something my base case is.
07:59 Did I hear Manish Gunwani tell me that there is more value in the small caps?
08:04 So, let me nuance it a bit. See, what I'm trying to say is that we are living in a world which is
08:14 Japanified, right? I mean, every big region is looking more and more like Japan with high debt
08:19 to GDP, very poor demographics, very low real rates, right? So, there is a bit of a challenge
08:31 on growth globally. And when that happens, the very, very large sectors or very large companies,
08:38 I think, rely more on industry growth or global growth, right? I mean, whether you see banking,
08:44 IT services, FMCG, they are a play on very broad-based growth. They can't be very narrow
08:52 because these sectors or these companies, they are like 50 billion, 100 billion, 200 billion,
08:59 very, very big company. Now, if you are having an environment where global growth is soft,
09:06 India growth is somewhere between 6% to 7%, then I don't think there'll be big upgrades in
09:12 large caps, right? Also, I think one big issue we are facing is that there is inequality of growth.
09:20 Most of the world is having a K-shaped economy, in which case, again, if the pyramid doesn't
09:27 broaden, then very large companies will struggle. So, I think there are multiple challenges for
09:34 very large companies, unless you have a very, very sharp tech mode or a non-linear business
09:41 model, which the FAANGs have, for example, right? Now, in that scenario, you will have to find
09:48 companies which grow irrespective of the industry growth not being too great, which typically will
09:56 obviously happen in small caps. Now, I know the small cap last year has been on a tier, so I'm not
10:03 necessarily saying small cap index will do well because the small cap index has 250 or 400
10:09 companies, but can 40-50 of those companies do better than nifty 100? I don't think so.
10:17 And then it's our job to find those 40-50, right? Yeah, and viewers, I hope you understand the
10:25 nuance that Manish Bhanwan is trying to make. Please don't accept that statement that small
10:29 caps as a bucket will do really well. As an index, it may not. In fact, out of whatever number of
10:34 stocks, 75% may not do well, but a portfolio or a fund house can choose the best of the remaining 25
10:41 and still give extraordinary returns. I think that's the point to make. And therefore,
10:45 within that landscape, it pays to try and hunt for winners, and which is what fund houses or
10:52 fund managers can do well. So I think that's the point Manish Bhanwan is probably trying to make.
10:56 So therefore, let's try and give more nuance to this as well. Sorry, I'm picking on this point
11:02 because it's an interesting one. Not too many people come out and are brave enough to say that
11:06 nahi mujhe small caps mein teji dikhti hai. So here's my question to you. There are some pockets
11:11 which are overvalued, both large cap, mid cap, small cap, the entire universe. What within this
11:15 smaller universe, be it mid caps or be it small caps, do you find hints of value or hints of
11:23 predictable earnings growth, which will take care of the steep valuation as the case may be?
11:28 So I think two, three segments which we've been bullish on is one is the power capex theme,
11:36 the power equipment theme actually, because there is a big global synchronized capex which
11:44 is happening towards renewables, transmission and distribution. So anything in the power
11:50 equipment value chain, whether it is transformer, substations, wires, cables,
11:55 windmill equipment, whatever, I think that is an interesting space to look at.
12:00 The second is even in financials. I think a lot of the small cap financials, which are in BFCs or
12:10 microfinance or AMCs, I think they are more interesting than large banks because large banks,
12:19 as I said, first of all, I don't expect credit growth to accelerate. So there's no
12:23 big cycle there. Second is large banks are big in unsecured retail. They are very dependent on
12:31 CASA, which is not growing. So the large banks have a lot of issues. The small financials,
12:39 if you can choose, as I said, it's all about what you want to choose. But I think there is
12:44 interesting plays in small cap financials. Real estate, again, is a sector where I think
12:53 the small caps look more interesting than the large caps. There are a lot of building material
13:00 or domestic cyclicals in, let's say, pipes or various kinds of segments where, again,
13:09 small caps look better. I don't think there are any big large caps there, but basically
13:13 small caps look better than mid caps also. So there are, I think, a host of areas where still
13:22 it seems to make sense to be in small caps versus mid caps or large caps.
13:28 Wow. OK, we'll try and probe some of these on the other side of this break. We'll also talk about
13:34 the most obvious ones, the pain in banks and how it continues, because I heard Manish Gunwani say
13:39 that the growth in some of the AMC or other financials, the non-lending financials could
13:43 be even better than the banking space. Should you bet on banks at home because we have limited
13:48 capital? I think all of that coming up on the other side of this very quick break.
13:52 Stay tuned to this very interesting conversation on Talking Point today.
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17:05 Right, back with Talking Point right here on NDTV Profit in conversation with Manish
17:10 Gunwani of Bandhan AMC. One of the points that Manish made before the break was about how select
17:17 pockets at the broad end of the spectrum might do better. And because the thesis is interesting,
17:22 viewers, he used the term "Japanified," if I'm not wrong. And in a world which is Japanified,
17:28 high debt, maybe low growth, et cetera, larger companies align themselves to the growth rates
17:33 of the world at large maybe. And therefore, the growth rates out there may not be as impressive,
17:37 whereas smaller companies might be able to do. So there's a nuance to the point that Manish
17:41 Gunwani is making. Now, I will ask him about some of the specifics within there. We'll end
17:46 with the obvious question on PSUs. I assure you that. Manish, I want to ask you about the
17:53 non-lending financials. There seems to be a belief that the industry is in some sense consolidating
18:00 on the broking side. On the AMC side, the top five, top 10 are kind of holding fort and becoming
18:07 larger. And at some point of time, it will start showing in the numbers. Maybe it's come in the
18:11 brokerages. It'll come in the AMCs after the lull for the last two, three years, just wanting to
18:15 understand what's the rationale of betting on the capital marketplace, for example.
18:19 So definitely, I think for different reasons, consolidation seems to be happening. I think
18:26 on the retail broking side, actually, it's the most visible and acute purely because
18:33 there's a tech element, right? I mean, the tech platforms have taken massive market share from
18:40 the traditional brokers. On the exchanges, we are seeing actually fragmentation in one sense,
18:48 the smaller exchange getting a bit of market share. On AMCs, I think it's difficult to make
18:56 out right now because some of the top AMCs have done very well in terms of equity performance.
19:00 So we don't know if the market share is happening because of that. But yes,
19:04 the sliding market share of top AMCs is definitely at a state. And more importantly,
19:11 I think that the equity MTM growth obviously is helping earnings. So the AMCs are a flexible
19:20 place. So as long as you believe the market is going to do well, they'll do well. I think because
19:23 purely the mark to market itself will translate into earnings. So there is a lot of interesting
19:31 things on the capital market. It tends to be a late stage play. So in the last stages of a bull
19:36 market, capital market stocks tend to do well. I think in one sense, we are seeing that kind of
19:42 behavior. But the point is that I think there is also a lot of capital in large banks, which is
19:51 wanting to come out given the underperformance.
19:58 And that's, I think, an important flow dynamic. And the point I was making was that
20:03 in the expensive banks, I think you're seeing multiple challenges that are three big challenges
20:12 to my mind. One is a lot of them have exploited on security data. And we've seen both the regulator
20:18 and anecdotal talk about credit quality worsening there. The second challenge is on the CASA side,
20:26 where especially on the savings account, we're seeing multi-year low growth. And the third is
20:33 that in various profit pools, let's say in credit cards, payments, distribution,
20:40 platforms like ZeroDom, Grow, UPI, for example, against credit cards. So there are a few profit
20:50 pools of banking which are getting disrupted by tech as well. So within these three big challenges,
20:56 and I think that's the reason why big private banks are not performing.
21:01 Yeah, it's an interesting thought. And for everybody who's saying that private banks are
21:07 screaming value, they've been value for a while now, maybe what Manish is saying is our reasons
21:11 which are keeping the stocks off. Manish, the other aspect is, and which has befuddled most
21:17 investors, is what's happening with PSUs. It's unreal. I mean, we've seen cycles, this such
21:24 seems to be, honestly, the cycle seems to be different from a price performance perspective.
21:29 My question to you is, is it fundamentally different? Does it make sense to bet on
21:34 some of these government owned entities? Or would you be sceptical?
21:39 So I think PSUs have gone from a broad based undervalued basket to some froth coming through.
21:51 But again, I think we should not paint all PSUs with the same brush. So we are definitely
21:58 overweight on some PSUs where we think that with some a bet on reform happening or where the asset
22:08 value of the PSU is much in excess of the market gap. Now, in general, across PSU, that gap between
22:17 asset value and market gap, which used to be very big maybe two years back, is now zero,
22:23 even negative in some cases. So we, for example, we are not in different stocks because we think
22:29 that the valuations are very, very stiff and there is no asset there. It's all earning based.
22:36 Earnings are obviously more volatile than asset values. But if you look at some of the old economy
22:45 sectors like refining or steel, I still think that some of the PSUs have asset value. Now,
22:52 can that asset value translate into either earnings or value unlocking through divestment?
23:00 Now, that's a probability based bet you get, every investor will have to take.
23:04 And in that probability based scenario, we still think some of these PSUs
23:12 have value. But yeah, on a broad basis, it's becoming day by day very difficult to say PSUs
23:19 have value actually. Just before we wrap up the conversation Manish, because we can't paint PSUs
23:25 as a single bucket because there are different sectors. What within the businesses or sectors
23:31 or themes, be it PSU or private, but predominantly I'm asking this from a perspective of a PSU,
23:37 what themes look attractive where the PSUs have a dominant presence? I mean, there's OMCs,
23:41 there is power, etc, etc. What looks attractive? So one, from earnings momentum, anything related
23:49 to power is attractive, right? So whereas coal production or thermal plants and all that.
23:54 The other way to look at it is, if you see a PSU and say that if this were to be divested or run
24:04 very, very efficiently, what would be the normalized earning or what would be the value
24:09 can be sold for? So a lot of the PSUs we own are actually from the second basket. We also have the
24:17 thermal power and the power basket, but they're the, as I said, day by day, the gap between
24:25 fair value and market cap is running out. But if you think about that, we have not seen a third
24:35 term government for long. So we don't know what kind of reform, what kind of actions can happen.
24:41 But if you believe that some divestments can happen at strategic level, you will have to think about
24:49 when these PSUs are divested strategically, what can be the fair value. And in some cases,
24:56 we feel it is a multiple of current market price, in which case it is good to have
25:03 some bets. Now you can say that I will take 0.5% or 5% of portfolio. I think it's up to the
25:09 judgment, but I do think there were some bets. Wow. And that's an interesting call viewers,
25:15 because the FM in our interview as well, went out to say exactly the same thing that divestment will
25:21 not be a necessity. It'll happen when there is fair value and they are trying to make changes
25:26 in the organizational structures as well to enable these PSUs to reach fair value sooner
25:31 rather than later. Manish, fantastic talking to you today. Thanks so much for giving so many
25:37 insights in one single conversation, and which means that we should try and have you more often
25:42 than what we usually do. But lovely talking to you today. Thanks. Thanks for having me.
25:47 The pleasure was ours. And viewers, thanks for tuning into this edition of The Talking Point.
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