- Can PSBs continue to outperform private banks?
- Are there more multibaggers among midcaps?
Niraj Shah speaks to #EnamHoldings' Sridhar Sivaram on 'Talking Point'. #NDTVProfitLive
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- Are there more multibaggers among midcaps?
Niraj Shah speaks to #EnamHoldings' Sridhar Sivaram on 'Talking Point'. #NDTVProfitLive
_______________________________________________________
For more videos subscribe to our channel: https://www.youtube.com/@NDTVProfitIndia
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Don't enter the stock market unaware. Read all Research Reports here: https://www.ndtvprofit.com/research-reports
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00:50 Thanks for tuning into Talking Point.
01:05 I'm your host, Neeraj Shah.
01:06 The case for the chat today, well,
01:08 you can't have a conversation with a market veteran without talking about
01:12 what's happening at the public sector end of the market.
01:14 Almost any given day and today is no different.
01:16 So we will talk about what's happening for the key teams.
01:20 Overall, and within the PSU segment, maybe going ahead for 2024.
01:25 Our guest today, yesterday, enlightened me about the kind of outperformance
01:29 that PSBs have had over the past, not just one year, but maybe three years and
01:33 five years.
01:34 So that's the second point of conversation on the case for the chat.
01:37 And the second point that we will talk, of course, and needless to say,
01:40 when it comes to, I mean, we talked about multi-baggers in mid-caps.
01:44 When it comes to having Sridhar Sivaram of Enam Holdings, we shouldn't and
01:48 we cannot escape a confluence of macro and micro conversations.
01:53 So I'm gonna start off with that.
01:54 Sridhar, so good having you.
01:55 Thanks for taking the time.
01:57 The pleasure having you.
01:58 Sridhar, can't let you go without talking about what did you make of the budget,
02:02 simply because in some sense, so
02:05 much was anticipated around a few moves that could have been made, were not made.
02:09 And the market gave a bit of a thumbs up, albeit a bit delayed.
02:12 >> Yeah, so I think 5.1% fiscal deficit.
02:15 I don't think even the best,
02:18 whoever was the most bullish on the finance minister was expecting it.
02:22 And I think the trajectory for 4.5 for next year is very much on the cards now.
02:27 I think the path is looking much simpler.
02:31 There was an expectation that some of the subsidy numbers will be much higher.
02:36 On the contrary, the subsidy numbers were either flat or lower.
02:40 And so we would have expected some extra spending before the election,
02:45 and that's not happening.
02:46 And capital expenditure, which is the other number which one would look at,
02:50 is anywhere between 12 to 15%, what number you take.
02:54 If you take the revised budget expectations for the current year,
02:58 then it's around 15%, which I think is very good,
03:00 given that it was up 30% last year.
03:02 And they almost spent almost 90% of that,
03:06 almost close to 950,000 crores is what the revised budget estimate is talking
03:11 about capital expenditure from the government, which I think is very commendable.
03:15 Because many experts believe that they will not be able to spend so much,
03:20 and they have actually done it.
03:22 So I think I would say 10 on 10 from on all standpoints,
03:26 that the absolute fiscal deficit number is also down,
03:30 which was one of my concerns in the previous budget.
03:32 Because that determines how much you borrow, not just the percentage,
03:37 because your denominator is going up.
03:38 But your absolute fiscal deficit is coming down,
03:41 so your absolute borrowing number is coming down.
03:43 So it's really good on all front, and not expected
03:48 that this would come in an interim budget.
03:51 And I don't see this change if the government continues,
03:54 where probability of that is very high.
03:56 That they will change this too much.
03:59 So I would say it's very good.
04:00 In the past three, four years, transparency from this government
04:03 on budget has significantly gone up.
04:05 And I would like to thank the finance secretary also for that.
04:08 I mean, they have actually gone on record to say that they will clean up,
04:12 and they have done so.
04:13 Yeah, most certainly.
04:15 Just a word on the CapEx part, because that
04:18 has got significant implications for what markets do as well.
04:22 One thought that came in, and Pranjul Bhandari of HSBC
04:25 mentioned this, that the real story of FY24
04:28 has been state CapEx, because that has been really strong.
04:32 And maybe that gives the ammo to the central government
04:34 to maybe take the foot off the pedal.
04:36 One, because state CapEx is happening even if private CapEx is not.
04:39 And two, I think both the finance secretary and the finance minister
04:42 in an interview to us mentioned that the absorption capacity also
04:45 needs to be taken into account.
04:46 We just can't keep on announcing a higher number
04:48 when it's not getting absorbed.
04:50 Are you sanguine on CapEx?
04:52 And do you have any views on when private CapEx picks up?
04:55 So I actually made a recently--
04:57 last week made a presentation to a bunch of investors in the US.
04:59 And one of my slides was, is a country under construction.
05:02 So if you just go around, not just Mumbai, you just go around,
05:05 and I travel a lot.
05:06 There's so much of construction work that's going on.
05:10 On top of what has already happened-- roads, airports, bridges--
05:15 a lot has been done, and a lot is being still done.
05:18 So I would say that this is what has happened,
05:21 which is the CapEx number that we speak of.
05:25 And we have to keep in mind that when the government says
05:28 that CapEx is 10 lakh crores or whatever that number is,
05:32 on top of that, there's a leverage.
05:34 So actually, if you see what is happening in Mumbai,
05:37 I think the government puts only 10% or 15%.
05:39 The rest is all multilateral agencies giving you loans.
05:43 So in our case, it's Japanese and German counterparts
05:48 giving us loan in very favorable terms.
05:51 So there's a multiplier that the government puts in.
05:54 So if the amount is, say, 10 lakhs,
05:57 the actual capital expenditure is possibly
05:59 eight to nine times of that.
06:01 And that is what is making a difference,
06:04 because India is a very favorable destination right now
06:08 for a lot of global multilateral agencies
06:11 to fund capital expenditure.
06:14 And given that, I think what has happened
06:17 is that private CapEx, for whatever reason,
06:19 hasn't really picked up to the extent it should have.
06:22 And I think even the government will feel disappointed
06:24 that they did give a lot of swaps.
06:26 In certain pockets, it has.
06:28 But what had happened is in the previous term,
06:31 a lot of the CapEx came in bulky power sector,
06:35 where a lot of capital went.
06:37 This time, it is more in granular, smaller pockets,
06:42 like, say, PLI given in the EMS sector.
06:45 We are seeing a lot of activity there.
06:47 In solar and wind, we are seeing activity.
06:49 But they don't guzzle up as much capital
06:52 as it is for the thermal.
06:54 So I would say that a lot of this may change post-May.
06:57 And the finance secretary also made a comment
06:59 that they expect private CapEx to pick up second half.
07:03 So I think second half and maybe next year,
07:06 we would see a significant increase in private CapEx also.
07:09 So couple all of this with the valuations
07:12 that we are sitting at and with what our EM neighbor is
07:15 undergoing through.
07:16 What are the investing implications, Sridhar?
07:19 So one, I think I've been saying this for a while,
07:21 that I think EM as an asset class is dying.
07:25 For almost 17, 18 years, EM as an asset class
07:31 hasn't given any return.
07:32 This I'm talking of dollar returns.
07:34 And I've, in my previous avatar, have
07:37 spoken to many pension funds, have presented cases for India
07:41 and EM.
07:42 One of the things that always comes out is asset class
07:45 doesn't do well for about five years.
07:47 Most people absorb it.
07:49 But after 10 years, it's a serious red flag.
07:51 And now we are almost 15, 16 years.
07:53 We haven't seen-- and even within EM,
07:56 only two countries have actually given any serious returns.
07:58 One is India.
07:59 The other one is Taiwan.
08:00 So this is my point, that the EM as an asset class
08:04 is not homogeneous.
08:05 It has countries which have per capita of $35,000 and $2,000.
08:09 You have current account surplus countries
08:11 and current account deficit countries.
08:13 And you have commodity exporting and importing countries.
08:15 So the benefit of one negates the deficiency of the other.
08:20 So the sum of part is zero.
08:22 And that's what shows up in the index,
08:24 that it hasn't given any returns.
08:27 That is one of the reasons why I see a lot of FI outflows,
08:30 that despite India doing very well,
08:33 the asset class is not doing very well.
08:36 And I think that's my concern, that--
08:38 so a lot of people are now talking about EM x China
08:42 or Asia x China.
08:44 Maybe once those pick up, because China
08:46 has their own issues.
08:47 I'm not an expert on that.
08:49 But that country hasn't done anything for even almost 17,
08:53 18 years also.
08:54 So it's quite a shocking number.
08:57 So if that participation stays lackadaisical,
09:01 do you think Indian markets, from the valuations
09:03 that we are at, could still give a meaningful performance
09:07 on the back of domestic flows and flows
09:10 that niche players like you, for example,
09:12 might be getting, because when you go out and talk
09:14 to investors, it's more convincing as opposed
09:17 to do a passive investment, per se.
09:19 So I think that the domestic investor has really picked up.
09:22 So if you see--
09:23 I mean, some of the research analysts
09:26 have spoken about the 401(k) for India,
09:28 which is the pension funds investing in the markets.
09:31 And then the entire mutual fund industry,
09:33 which is now, say, 50 lakh crore or 50 trillion,
09:37 and almost 30%, 40% is equity out of that.
09:41 And that is continuously growing.
09:42 So almost $30, $40 billion of domestic flows
09:46 come into the Indian market, which
09:48 is able to absorb any selling that comes from the FIIs.
09:51 If, for whatever reason, emerging markets stabilize,
09:55 and then flows start to come, India
09:56 will definitely get disproportionate share.
09:58 Keep in mind, India's weight has almost
10:00 doubled in the last three years.
10:02 We're almost touching 18% index weight.
10:05 We used to be in single digit, 8%, 9%,
10:08 say, if you go back three, four years.
10:10 So index weight has also gone up.
10:13 So India is getting flows based on the index weight in MSCI.
10:18 But the overall asset class is shrinking.
10:20 So that is the larger concern, I would say.
10:23 But I think the domestic flows is a big story.
10:26 And that is possibly has held us very well,
10:28 despite FIIs selling, if you go back, say, two years back,
10:32 when FIIs had a massive sellout in India.
10:34 Yeah.
10:34 Because remember, I mean, I'm sure you understood this.
10:37 But just to lay it out, the MSCI EM
10:38 index, the basket of countries which have weightages,
10:41 and what Sridhar Shivram is saying,
10:42 that India's weightage in that index
10:44 has moved up from single digits, which is 7%, 8%, 9%,
10:47 whatever it may have been a few years back,
10:49 to nearly touching 18%.
10:50 So when passive flows come in, and they
10:53 say that let's allocate to the EM basket, 18% of that 100
10:56 rupees or $100 would go to India,
11:00 passive money, which has hitherto not been very, very
11:02 strong.
11:03 Just active also.
11:04 Active also.
11:05 For active also, if 18 is the benchmark,
11:08 I have to be plus minus 18.
11:10 So earlier I was 9.
11:12 Even if I was very positive, I'll be 15.
11:15 Now if my benchmark is 18, at 15 I'm underweight the country.
11:19 So I need to be at least 20, 25 if I'm positive.
11:21 So it works both ways.
11:23 Both ways, yeah.
11:23 And because fund managers have to outperform the benchmark
11:27 at the very least, if nothing else.
11:28 OK.
11:29 Sridhar, just one question before we take that break.
11:31 And because you speak to so many global investors,
11:35 what are they waiting for?
11:36 Are they waiting for EM to stabilize
11:37 for putting money into India?
11:39 Are they still not making individual idiosyncratic India
11:43 bets?
11:43 What's happening?
11:44 And what is it that they're saying?
11:45 When would they-- I mean, are they
11:46 comfortable with the valuations?
11:48 Or would they wait for a valuation pullback?
11:50 So I think country-specific calls, large pension funds
11:54 don't want to make.
11:54 So when I speak to my friends who run India-dedicated funds,
11:59 they're not seeing disproportionate allocation
12:02 vis-a-vis how the country has performed
12:04 from an index standpoint.
12:05 If you compare India versus China over the last five years,
12:08 there's been a massive difference, almost like 20%
12:12 CAGR difference, which is very massive.
12:16 But I think the reason is that countries
12:19 are in favor of labor of the year for a period like China
12:23 was.
12:25 We know what happened to Russia.
12:27 Literally, people had to write off to zero.
12:30 Similar issues happened with Turkey.
12:32 So within emerging markets, I don't
12:34 think pension funds or large investors
12:38 want to take a specific country bet.
12:40 They're happy taking a regional bet or an asset class bet,
12:44 because that seems safer for the person who
12:46 makes the asset class.
12:48 I think it may change over a period of time
12:52 if India continues to outperform the way it is doing.
12:55 Also, global asset allocators haven't really
12:58 allocated as much capital to India
13:00 as they would have to China.
13:02 But now that the index weight has gone up
13:04 and the buzz on India is also far higher,
13:07 I think that may change.
13:08 And I think the valuation argument, to a large extent,
13:12 India's pockets are both valuations.
13:14 I mean, you have very high PE stocks,
13:17 and you have low PE stocks also.
13:19 And you have somewhere in between.
13:20 I mean, our financials are no longer where they were.
13:23 I mean, you can't call a two times price
13:26 to book, which is one standard deviation,
13:28 a 1 and 1/2 standard deviation lower than the 10-year average,
13:32 as expensive as some of these banks.
13:33 So I don't think it's a valuation argument anymore.
13:37 OK.
13:38 OK.
13:38 Hold that thought, Sridhar.
13:39 We'll take a quick break.
13:40 Come back and talk more about specifics with Sridhar
13:43 Shivram of Enam Holdings.
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16:41 Back with Talking Point in conversation with Sridhar
16:44 Shivram of Enam Holdings.
16:45 Now, Sridhar, we left off with you saying
16:48 that it's a tale of two halves.
16:51 Some of the halves are not that expensive.
16:52 You mentioned financials.
16:54 I want to draw your attention to that, something
16:56 that you mentioned to me as well.
16:58 Not just currently, but if you look
17:00 at just the period of outperformance
17:01 of what's led to these valuations,
17:03 the last three or five years, as much as we
17:07 like to berate public sector units,
17:09 PSBs versus private banks.
17:11 Let's start off with that and move to other PSUs.
17:13 There's been a bout of outperformance
17:15 by public sector banks.
17:16 Now, what do you think one led to this?
17:19 Did you also preempt that part one?
17:21 And what's next now?
17:22 Because after such a long period of underperformance
17:25 and such good valuations relative to history,
17:28 do private banks bounce back?
17:29 So I think we were quite lucky.
17:31 I mean, as I've mentioned this in the past,
17:34 that sometime in November of 2020,
17:38 we had a call with the chairman of one
17:40 of the public sector banks because they were doing a QIP.
17:44 And we actually jumped into the call
17:46 only to understand how COVID is impacting.
17:49 And the government had announced some credit guarantee
17:52 programs, how that is playing out.
17:54 But as the conversation went, we realized
17:56 that their market cap was lower than their pre-provision
17:59 profit by a big margin.
18:01 I mean, normally, market cap to pre-provision
18:03 are in two, three, four times.
18:05 And they were like at 0.6 or something.
18:07 I mean, they were so absurd that we just kept the call.
18:12 It was a one-on-one call.
18:14 But we just figured out that the valuations were really absurd.
18:18 And then we checked all the others.
18:21 And we said that this is really out of sync.
18:24 And honestly, I never thought that I
18:27 will be jumping into buying a PSU bank.
18:31 But very early in my career, some of my earlier bosses
18:34 had always told that whenever you get into a meeting,
18:36 keep an open mind.
18:37 Don't have your biases.
18:38 We all have our biases.
18:39 I mean, PSU banks have not delivered returns for decades.
18:44 But every meeting, you go with a clean slate, not with biases.
18:51 And sometimes you learn it the hard way.
18:54 And those learnings did play out here, that we did jump into it.
18:57 And then we looked at others.
18:58 And we saw the same absurdity everywhere.
19:02 Hand on heart, did we expect that we'll still
19:04 hold on to many of those for almost now three and a half,
19:07 four years?
19:07 No, we didn't.
19:09 But we are still holding because the earnings have outpaced
19:13 the market returns.
19:15 So if you take the earnings from, say, FY21
19:20 and what they are delivering now,
19:23 and see the stock price returns, the earnings have outpaced.
19:26 So they actually got derated.
19:27 So it's a shocking number.
19:30 In fact, I knew on the back of my hand
19:33 that this is the case.
19:34 I recently did the numbers to see.
19:36 And it's shocking by a big margin.
19:38 So they've actually outpaced the earnings by a big margin.
19:42 And I think one of the big reasons
19:45 for the outperformance in earnings has been credit cost.
19:48 So the credit cost on an average used
19:50 to be about 2% for most of these public sector banks.
19:54 The last number for SBI would be 0.2.
19:58 Now, I think it can't go any below than this.
20:01 So I'm just giving you an example
20:03 of how credit cost has behaved.
20:05 And as Mr. Kotak said, this is like the Cinderella moment
20:09 for the Indian banking industry, that everything
20:12 is falling into place.
20:14 People are paying in time.
20:16 And many of the PSU banks have provided so much
20:19 that they have a lot of cushion.
20:20 So one of the reasons for the outperformance
20:22 is that the environment was benign.
20:26 They were shifting from a focus more on corporate to retail
20:31 as a result the NIMS were improving
20:33 and the credit cost was falling.
20:35 So I would say this was the broad framework.
20:38 Private sector banks didn't have the cushion
20:40 of the credit cost falling
20:42 because they were already very efficient.
20:44 Whereas these companies were, are,
20:46 or now becoming more efficient.
20:49 And when I meet some of these PSU bank chairmen,
20:51 I do feel that they are really good.
20:54 I mean, the discussions that you have with them,
20:57 it almost reminds me of how HDFC Bank used to be before.
21:00 I mean, they want to provide more.
21:02 I mean, in most of the cases, I can tell you that
21:05 if they want, they can show far higher profitability.
21:08 And they keep telling me,
21:09 "Sir, (speaking in foreign language)
21:13 "there is uncertainty ahead.
21:14 "There's a change in regulation.
21:16 "We want to have some cushion."
21:19 I mean, the discussions are at a different level.
21:21 So that's how I would put it,
21:23 that there is a method to the madness.
21:26 And we think that selectively,
21:27 it may continue for some more time.
21:30 - Okay, but where does this leave private banks, for example?
21:33 I mean, one of the largest lenders available at valuations
21:36 that it has never been available at for the while.
21:38 I mean, I'm talking about HDFC Bank,
21:39 but some of the others too, they haven't gone anywhere.
21:41 So now, is there, I mean, is there fundamental reasons
21:46 for that are changing for the performance
21:50 of the private sector behemoths to also change
21:53 from what it has been in the last 12 to 18 months?
21:56 - So I think one of the reasons for private sector banks
21:58 to have not performed comes from the fact
22:00 that emerging market as an asset class is not doing well,
22:05 and FIIs are selling.
22:06 And this is a heavily over-owned sector in the FIIs.
22:11 So if you see the FII holding in some of these banks
22:14 are structurally coming down.
22:16 So it comes from the original discussion.
22:19 So plus, I think some have had, say, structural issues
22:24 because of merger or whatever, which is behind us now.
22:28 Plus, the RBI's liquidity position isn't also really
22:33 helping the case for banks in general,
22:36 because there's a scramble for deposit.
22:37 I mean, you speak to any bank chairman or CEO,
22:41 he'll tell you that, you know,
22:42 deposit is the big issue right now.
22:45 The asset side is not the problem,
22:46 the liability side is the problem.
22:48 I think that may change.
22:50 We'll see what the RBI governor says in the policy,
22:54 tomorrow.
22:56 I think maybe it's, I would say, one or two-quarter issue.
23:01 I would still be quite bullish
23:02 on the private sector banks also,
23:04 because they've reached valuations
23:06 which are looking very good.
23:09 Maybe one or two-quarters of, you know,
23:12 pain because of the liability side.
23:14 But structurally, I think if the economy were to take off
23:18 and we see private capex coming back,
23:21 we think these banks will do well.
23:22 - Okay, we have time for one more question.
23:25 So, either PSUs at large,
23:29 or what does appear attractive to you
23:32 now that where we are sitting at,
23:35 I heard you mention that not everything is expensive.
23:38 There are some good pockets too,
23:39 so non-banks, maybe there are others too.
23:40 So what do you like?
23:42 - You're saying in the market in general?
23:44 - At large, yes.
23:44 - So I think the power sector looks very exciting.
23:47 I mean, this has been a sector which has been ignored
23:49 for a long period of time.
23:52 I would say everything in the power sector is looking good.
23:56 Even the thermal side is looking good
23:58 because India is under-invested in thermal.
24:00 We are literally hitting peak capacity every day
24:03 during the peak hours.
24:04 So we are seeing companies scramble to put more thermal.
24:09 We will double our wind capacity
24:12 in the next three to four years.
24:15 We'll triple our solar capacity
24:17 in the next three to four years.
24:20 So in the ecosystem, there is lots to play in this.
24:25 So I'm saying in the entire power space,
24:29 be it thermal, wind, solar,
24:32 there's lots to play
24:33 because the government is also playing favorably,
24:38 which is they also want the commitments
24:40 that they have kept globally on moving green.
24:44 They want that to happen.
24:46 So I think this is a space to be watched out
24:49 and entire ecosystem,
24:51 I mean, individually people have to figure out
24:53 what is to be played,
24:55 but I think this is a space which we remain quite bullish on.
24:58 - Okay.
24:59 Sridhar, always a pleasure talking to you.
25:00 Thank you for combining the macro and the micro both.
25:03 Lovely talking to you today.
25:04 - Thank you for inviting me.
25:05 - And viewers, thanks for tuning in
25:07 to this edition of The Talking Point.
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