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00:00 [MUSIC PLAYING]
00:03 Thanks for tuning into Talking Point.
00:11 I'm your host, Neeraj Shah.
00:12 In the case for a chat today, well,
00:14 after the Fed's decision that has come out,
00:16 you can't talk about anything else but the possibility
00:19 of rate cuts.
00:20 And would rate cuts in the second half of the year,
00:23 consecutive as they might be, make emerging markets
00:26 an attractive destination or more attractive?
00:29 That's the first point.
00:30 We talk about whether private CapEx recovery is underway
00:34 or not.
00:35 And when it becomes underway, would it
00:37 help select facets of the market?
00:40 Our guest today has arguably been constructive on BFSI.
00:45 We talked to him about whether there is more in store for BFSI
00:50 or rather whether 2024 will be a year when BFSI stocks can
00:55 finally show or prove their mettle.
00:58 Our guest today is Dheeraj Agarwal, MD
01:00 of Ambit Investment Managers.
01:01 Dheeraj, great having you.
01:02 Thanks for taking the time out.
01:04 Thank you.
01:05 Thanks.
01:06 Dheeraj, can't not talk about what the Fed said,
01:10 leaving the case for three rate cuts unchanged,
01:14 which was a bit of a surprise to many.
01:16 And Jarom Pal also talking about slowing down
01:18 QT at some point of time in the year.
01:21 What did you make of the commentary
01:22 and what would it mean for emerging markets like India?
01:27 It's clearly a dovish pivot in this particular commentary
01:30 as compared to the last few commentaries coming in by Fed,
01:33 which has been slightly on the hawkish side, I would say.
01:36 And I would add slightly because it's not
01:40 that the Fed has ever indicated that they will not be going
01:42 into a rate cut cycle.
01:43 But they've always maintained that they
01:45 wanted to see inflation sustained at their target rate
01:49 of roughly 2% before they're actually
01:52 going for any rate cuts.
01:54 And this was a little bit more specific guidance
01:57 that markets can expect two to three rate cuts, maybe three
02:01 rate cuts in the second half of this year.
02:03 So certainly it is a dovish turn.
02:06 And the impact of that we are seeing on the emerging markets
02:09 all across this morning, including India.
02:13 This certainly removes one uncertainty
02:16 because 2023 we started with the markets expecting rate
02:20 cuts in second half of '23.
02:22 It did not happen in '24.
02:23 We started with expectations of rate cuts as early as March.
02:28 It got pushed out to June or July.
02:31 So this is the first time there's
02:33 a little bit more certainty.
02:34 So more than the cut itself, I would
02:36 say it's a certainty of this event happening
02:38 rather than risk of it getting postponed yet again
02:43 is what the market is happy about.
02:46 Got it.
02:49 Dheeraj, sometime at the end of last year,
02:52 risk assets started factoring in that there
02:54 will be these rate cuts.
02:55 Then there's a doubt that crept in the first couple of months,
02:58 also showing in the way the yields have behaved recently.
03:01 I would only want to understand from you,
03:04 what do you think the stance of a foreign portfolio investor
03:07 might be?
03:08 Because hitherto, we missed FPI flows into India
03:11 in a meaningful way in the last six months
03:14 or give or take a few sporadic instances.
03:17 Does the US economy performance--
03:19 does Japan's policy normalization
03:23 and does a potential troika of rate cuts from the Fed
03:29 alter the FPI stance in any fashion into India?
03:33 I don't think so, honestly.
03:36 So FPI has been struggling with one basic variable in India,
03:40 which is the macro looks outstanding
03:43 and the micro is a little mixed.
03:45 And second, within the whole micro sphere,
03:50 wherever there is high confidence
03:51 in terms of earnings delivery, the valuations
03:53 are a little bit of a concern.
03:55 So I don't think any of these factors go away.
03:57 So some of these macro variables are
04:00 very good to move the markets on a short-term, near-term basis.
04:03 But once you zoom out and then once again,
04:07 you start focusing on what the earnings
04:10 delivery of the economy is.
04:13 And on that front, I've maintained
04:16 that for this year, the markets will be nonlinear.
04:18 And when I say markets will be nonlinear,
04:20 I basically try to imply that markets will
04:23 be very volatile through 2024.
04:25 And the primary reason for that is earnings performance
04:29 of the market.
04:31 So last three quarters, while FDI earnings
04:33 have grown at 23%, 24%, sales growth is only 5%.
04:38 And both of the earnings expansion
04:40 is coming through margins.
04:42 And the positive impact of the falling WPI
04:45 will start to fade away very, very soon.
04:48 And if sales growth doesn't pick up,
04:50 we have a slightly choppy earnings season
04:53 into the coming quarters and hit the choppy markets
04:56 on our cards.
04:57 So is that the base case, that the optimistic numbers of FY25
05:01 on the EPS growth front might actually come under question?
05:06 Yes, that's my base view, that the optimistic earnings
05:10 estimates of FY25 will keep seeing cuts.
05:13 5% sales growth is part of the week.
05:15 And remember, this 5% sales growth of the previous nine
05:18 months is despite a 9% nominal GDP growth.
05:22 So negative sales growth is lagging the nominal GDP growth
05:26 by a good 400 basis points, which is not a good sign.
05:29 Why would that be happening, Deedat?
05:31 Just trying to understand this.
05:33 Two possible explanations for that.
05:35 One is, if you listen to most of the consumer companies'
05:39 commentary in the previous results season,
05:42 almost everybody said that the smaller regional players have
05:46 bounced back very, very strongly and taken market share away.
05:49 And I'm extrapolating that a possible reason what
05:54 has given Philip to the smaller regional players bouncing back
05:57 is, in the last six to eight quarters of cost benefit
06:03 for listed companies, instead of pricing them,
06:06 passing the benefit onto the consumers,
06:08 the companies chose to increase margins.
06:10 So just to give you an example of Unilever,
06:14 just for an illustration point, because Unilever
06:17 is the largest consumer company in the country,
06:20 over four quarters, the gross margins
06:22 have gone up by 900 plus basis points.
06:25 Now, at those kind of margins, regional companies
06:27 are viable once again.
06:29 So the smaller regional companies
06:31 went through this whole pain of winding down a little bit
06:36 because of formalization and GST.
06:39 But now, they've got their act together
06:41 in terms of getting more formal.
06:43 And with this additional, most of the margins
06:45 are profitable again.
06:46 So some amount of market share is being
06:48 lost to unlisted players.
06:50 That's possible reason number one.
06:52 The possible reason number two is
06:55 the K-shape of our economy.
06:57 So luxury is doing fantastic.
07:00 Mid and bottom is probably still struggling to some extent,
07:05 which basically means that a large section
07:08 of unlisted space, which is exposed to mid and lower
07:12 segment, are still struggling.
07:14 Fair point.
07:15 Could there be a case be made for mean reversion
07:18 for this as well?
07:18 I mean, you're right.
07:20 I mean, Bayes' consumption has struggled.
07:22 Staples has struggled.
07:23 So I'm kind of making a segue into consumption,
07:25 if you will, Dheeraj.
07:26 But do you think a mean reversion could be--
07:29 a case could be made or predicted?
07:31 Or would you rather wait for evidence
07:34 to show up on the screen?
07:36 I mean, honestly, I would rather wait for some evidence
07:38 to show up on the screen.
07:39 Because it's easy to take a mean reversion call
07:43 if the valuations have reached a level where they are clearly
07:47 in the cheap territory.
07:48 And then you can say, at these valuations,
07:52 even if I have to wait for a few quarters for a mean reversion
07:54 trend to restart, it's fine.
07:57 But that's not the case yet.
07:59 So I would rather wait for some signals.
08:01 Point well taken.
08:02 Thanks for that insight.
08:03 The other one, Dheeraj, that I want to talk to you about--
08:06 and there's this Morgan Stanley note to the Asia EM
08:09 note, which speaks about--
08:10 they're saying that it's India's decade,
08:12 and India and Japan still remain the preferred markets, et
08:14 cetera.
08:15 And of course, their considerations
08:16 are very different than what our local managers would be.
08:18 But I'm still trying to understand.
08:19 The argument is that it's a good domestic alpha opportunity,
08:25 because private capex finally seems
08:28 to have entered a clear up cycle.
08:30 We've been missing private capex for a long time now.
08:33 I would love to understand what are your thoughts--
08:35 I mean, your and Ambit's thoughts--
08:37 when it comes to private capex.
08:39 Has it taken off to your mind, or is the proof still missing?
08:45 No, it's picking up.
08:46 It's picking up.
08:47 So on this whole capex front, I would
08:50 like to put two things on the table.
08:53 One is, it has been picking up.
08:55 This has been a capex-driven market.
08:58 But at the same time, one should take cognizance of the fact
09:01 that the capex growth, or the private capex growth,
09:04 is not as strong as what the headlines make it out to be.
09:10 So there is-- they're offsetting impact.
09:13 So even on the government capex in the last few years,
09:16 while the government-budgeted capex
09:18 has gone on very, very strongly, the PSU capex
09:21 has been a little bit under pressure.
09:23 So if you consider public capex as PSU capex
09:27 and government capex combined, their growth
09:30 is more like single digits.
09:33 But it sounds a lot more, because the on-budget government
09:37 capex growth has been almost 23%, 24% in the last three
09:41 years, 17% budgeted for FY25.
09:45 So capex will pick up, undoubtedly.
09:48 The capacity utilization ratio for India as a country
09:53 as a whole is reaching 77%, 78%.
09:56 At that point of time, you have no choice
09:58 to start reinvesting.
10:00 So yeah, we are optimistic on private capex.
10:04 But just temper it down in terms of what extent and size
10:07 and strength of the whole capex.
10:11 Got it.
10:11 And OK.
10:12 OK, and Deedat, just before we slip into that break,
10:14 so the headline number, not that strong, but a bit of a pickup.
10:18 Maybe the pickup comes in.
10:20 I was looking at a note by Pranjul Bhandari of HSBC
10:23 who said that in select cases--
10:25 and I wonder if your view is the same or similar--
10:28 in that some of the capex that is happening
10:30 is happening in sectors wherein the initial spurt is not
10:34 as high as maybe what will come about in the next two or three
10:37 years.
10:38 So both FDI will come in into some of these sectors.
10:40 And the resultant up move in capex over the next 24 months
10:43 on the private side would be thick and fast.
10:47 Could that be possible?
10:49 And could that have a multiplier effect?
10:51 Sorry, that's my main question.
10:53 Yeah, see, the capex will certainly pick up.
10:56 So both in terms of capacity utilization number,
10:59 which I gave, as well as some of the new sectors
11:01 that we're building, like semiconductors, EV, et cetera,
11:05 where new money is coming into the ground.
11:07 So capex will certainly pick up.
11:09 We will continue to be sort of a capex-driven economy
11:13 for the next few years.
11:15 And I will just link it back to the consumption discussion
11:21 that we had a while ago.
11:23 So mathematically, and we have seen that in the 2003 to '08
11:27 cycle as well, when the capex growth is picking up,
11:30 the consumption growth tends to take a backseat.
11:33 Anecdotally, why does it happen?
11:36 Because a lot of consumption and capex in the Indian context,
11:40 the way our national accounts is defined,
11:42 the household savings and household consumption,
11:45 a lot of it actually goes into businesses as well.
11:49 So when there is a tendency or when
11:52 there is a positive bias towards the economy about reinvesting
11:56 more in your own business, many people
11:59 just tend to postpone consumption,
12:01 whichever areas it can be postponed,
12:03 to be able to free more capital for investment.
12:06 So there's always a little bit of a trade-off between I and C.
12:10 So I would assume, I would say, that within the GDP component,
12:14 I will continue to grow double digits, which
12:16 is what it has been doing in the past, which
12:18 will put a little bit of pressure on C
12:20 for the next few years as well.
12:21 That's my [INAUDIBLE]
12:23 OK, sorry, just a follow-up.
12:25 I'm tempted to ask this to you.
12:26 So would you believe the bottom end of the C will suffer?
12:29 Or the premiumization, which has held out
12:31 for the last three years post-COVID,
12:33 will come into question?
12:35 I think premiumization is probably shielded.
12:38 OK, shielded.
12:39 OK, fine.
12:40 OK.
12:42 So in that segment, even the high ticket expense
12:47 is not that large percentage of expenditure of--
12:52 Got it.
12:53 --the super-rich, right?
12:54 So that just continues to go on.
12:56 Got it.
12:57 Interesting point.
12:58 Well, we told you first on February 26
13:01 that Wokard, the company, was looking to raise funds via QIP.
13:05 The announcement has now been made.
13:07 My colleague, Smriti, who broke the story then,
13:09 has more details.
13:10 Smriti, good morning.
13:11 Good morning, Neeraj.
13:12 Yes.
13:13 So we broke the story here first.
13:15 Now it's public that the company is looking
13:17 to raise 350 crore rupees.
13:19 Now, that's the base offer with a green show
13:21 option of 220 crore rupees.
13:23 The issue price is set at 517 rupees, which is about 5%
13:27 discount to yesterday's closing.
13:29 Now, the equity dilution post this issue is around 7.1%.
13:35 And now remember, in August of 2023,
13:38 the shareholders of the company had approved a proposal
13:41 to raise 1,600 crores via public or private placement.
13:46 And now, out of that 1,600 crores,
13:48 they're looking to raise 350 as a base offer.
13:52 OK, Smriti, thanks for bringing us this detail.
13:57 And of course, I'm sure we'll keep us updated
14:00 with what happens with the QIP response
14:02 as well, supposedly strong.
14:04 And that brings me to health care as a pocket as well.
14:07 I mean, Wokard is a specific case in point
14:09 and important to highlight today.
14:10 But Dheeraj, health care is in some sense chalk and cheese,
14:14 isn't it?
14:15 The US generic makers have had a good 2023
14:18 after a long lull, if you will.
14:21 But as an overall pocket, it's kind of
14:24 has its ebb and flows with more downsides than upsides.
14:29 I mean, is there a trend that could be predicted
14:32 for health care per se?
14:35 Yes, I think there is.
14:36 I think US generic is on an uptrend.
14:38 And these uptrends don't fizzle out
14:40 in a short span like one year.
14:42 So the previous US generic uptrend
14:45 we saw topped out in 2014 after a good 11, 12, 13 years
14:52 of a very, very strong uptrend.
14:54 It's been in a downtrend since 2014, '15,
14:58 approximately with price erosion,
15:01 double-digit price erosion, sometimes even high teens,
15:04 continuously right up till 2022, '21, '22,
15:09 which is when it started to bottom out.
15:11 So eight, nine years of down cycle does various things.
15:15 It forces weak players out of the market.
15:17 It forces consolidation.
15:19 It forces a little bit of supply deficit
15:22 because people underinvest.
15:25 And a time has come where a number of generic drugs
15:28 are actually going into a little bit of a supply deficit
15:30 scenario as well.
15:31 A few specific drugs, sometimes there
15:33 has been supply shortages as well.
15:36 So I would say this whole US generics uptick, which
15:39 has happened, is not an uptick.
15:41 It's a reversal of trend.
15:43 At the very minimum, it should last five, seven years.
15:45 So I've been very constructive on pharma
15:47 from a medium-long-term basis, at least for now.
15:51 And is it contained to US generics only?
15:55 Or do you believe other facets of health care?
15:56 I mean, people talk about CDMO being this multi-year
15:59 opportunity where people are not seeing the--
16:02 people might miss the forest for the trees
16:04 if they look at only the near-term performance,
16:06 or for that matter, hospitals and diagnostics as well.
16:08 Anything on those lines?
16:11 So positive on that, too.
16:14 CDMO is, in some sense, no different
16:17 as compared to any offshoring sort of a strategy
16:20 or any offshoring kind of a business.
16:22 And there are multiple factors playing.
16:23 India's expertise in chemical engineering,
16:26 whether it is chemicals or pharmaceuticals,
16:29 high quality of production, as well as some amount of China
16:33 plus one shift, which is happening across sectors,
16:36 will then continue to benefit us.
16:38 CDMO and those businesses, by definition,
16:41 will remain slightly more mulky and chunky.
16:43 And hence, one might say some volatility up and down
16:46 going forward as well, like we have seen in the past.
16:49 But structurally, in an uptrend, for sure.
16:51 And same with hospitals and health care.
16:56 The incidence of Indians reaching the market
17:00 where they can afford a better quality health care is rising.
17:03 The penetration of health insurance is rising.
17:05 India is sort of a health tourism destination
17:11 is also improving.
17:12 So that business also seems to be in a structural uptrend.
17:15 So the entire sector, I think, should do well
17:17 over the next five, seven years.
17:19 OK.
17:19 Could we extend that argument to two other large sectors, which
17:22 is BFSI and IT?
17:23 Let's start off with BFSI.
17:25 Almost everybody on the street--
17:28 I don't think there is an exception to this rule--
17:30 is constructive on banks.
17:34 One doesn't know when would that uptick come.
17:36 But for now, say for select private banks,
17:39 the larger ones have been sulking.
17:42 When can we make this case that [NON-ENGLISH SPEECH]
17:46 Now we will see them move.
17:49 I mean, how do you make that case?
17:53 Two things in terms of banks.
17:54 So the larger ones have been sulking
17:55 not because the larger ones have been doing badly,
17:58 but simply the rest of the sector
17:59 started doing so well, right?
18:01 So what we have seen in the last three years in banking
18:05 is a mirror image of what happened between 2015 to '20.
18:09 In fact, in one of the recent newsletters
18:12 that I wrote, I actually published
18:13 a very interesting chart where I showed
18:15 that if you look at the bank Nifty constituent performances
18:21 for between 2015 to '19 and 2021 to current,
18:27 it's exactly a mirror image of each other.
18:30 So '15 to '19, Kotak and HDFC were up between 150% to 175%.
18:38 Amongst the large banks, SBI and Bob were right at the bottom
18:41 with minus 10, minus 5, plus 5, et cetera.
18:44 2021 to now, BOV is up right at the top at 177.
18:48 SBI is about 150.
18:50 And HDFC and Kotak are right at the bottom
18:53 with just 5, 10% performance.
18:54 And the reason for that is the other banks
18:57 which are not doing well in '15 to '19
18:59 started doing well in this horizon.
19:02 So if you look at FY24 numbers,
19:05 it'll be very difficult to distinguish
19:06 within the top five large-cap banks,
19:08 whether it's ROE, growth, NPL ratios, et cetera.
19:14 All the metrics look very, very similar.
19:16 So there has been a valuation convergence
19:20 in the banking system.
19:21 So the bigger guys' valuations have come down
19:25 by the stocks not doing much and the earnings rising.
19:29 And the names which struggled between '15 to '19,
19:32 the valuations are part of our stocks' performance.
19:35 So at some point of time,
19:36 the whole conversions process gets over.
19:39 Sector is doing well.
19:40 I don't see a big issue in the sector.
19:43 The growth is intact.
19:45 There are no big challenges on the credit risk,
19:49 at least for the next few years on the horizon.
19:51 So no reason why the sector as a whole
19:53 can't start delivering good performance going forward.
19:57 - Okay, so, okay, that's on banks
20:02 and I have some insights there too.
20:04 The other one is information technology.
20:08 Now, whether the rate cuts or the rate cut chatter
20:11 improves sentiment and valuation multiples argument
20:15 is one thing, but until recently,
20:17 none of the companies are talking about
20:19 demand turning at the corner at all, no visibility there.
20:23 Would this be a, therefore, would this be too early
20:26 for somebody to look at IT,
20:27 nevermind the fact that they are high quality companies?
20:30 - I think IT might struggle a little bit this year
20:34 in terms of growth pick up.
20:37 So, you know, US is, as we all know,
20:41 US is a hardcore capitalist country.
20:44 And sometimes I feel a little strangely
20:47 hardcore capitalist country, because once I say it,
20:52 you will be able to see that in perspective.
20:56 The US companies start dialing down on expenditure,
21:00 even if there is a fear of a slowdown coming in
21:04 at some point of time down the line.
21:05 They don't really wait for a slowdown to come in
21:07 before they start cutting expenditure.
21:10 And that's what has been happening in the US right now.
21:13 Every single economist is calling for a growth slowdown
21:17 at some point of time, it hasn't happened yet.
21:19 Few even calling for a mild recession.
21:22 Again, no signs of that yet.
21:25 But those calls by the macroeconomists
21:28 is enough for the companies to say,
21:29 "Hey, let's just postpone our spending for some more time.
21:32 There's no hurry."
21:33 And then they just do it time and again.
21:37 And hence, till such time, that whole cloud
21:40 on whether the US economy slows down or not goes away.
21:43 Whether it actually slows down or not is in material.
21:46 I don't really think US companies
21:48 will bump up their budgets in a big hurry.
21:50 And hence, IT will continue to do their middling
21:55 sort of a performance.
21:57 But if the markets were expecting or hoping
22:02 for a big bump up in spending budgets
22:05 by the American companies, and hence a big pickup
22:08 in growth this year from IT sector,
22:10 it might be a loss for a disappointment.
22:12 - Fantastic insights, Dheeraj, lovely talking to you today.
22:16 Thank you so much for taking the time out
22:18 and being with us.
22:19 And see you in the studios sometimes.
22:21 - Thank you, would love to drop in.
22:24 - Great, thank you.
22:25 And viewers, with that, it's a wrap
22:28 on this edition of Talking Point.
22:29 Thanks so much for tuning in.
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