-Will the India valuations stay higher?
-#SMID correction bottoming out?
Niraj Shah speaks with #HSBC’s Amit Sachdeva on 'Talking Point'.
For the latest news and updates, visit: ndtvprofit.com
-#SMID correction bottoming out?
Niraj Shah speaks with #HSBC’s Amit Sachdeva on 'Talking Point'.
For the latest news and updates, visit: ndtvprofit.com
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TVTranscript
00:00 [MUSIC PLAYING]
00:11 Thanks for tuning into Talking Point.
00:13 I'm your host, Neeraj Shah.
00:14 The case for a chat today--
00:18 well, you can argue multiple points, which should
00:21 be the key talking points today.
00:23 One, whether the India valuation will stay higher for longer,
00:25 because every single time that the markets have
00:28 had a skittish move, they've come back
00:31 and climbed the walls of worry and are hitting fresh highs
00:33 today.
00:34 The Smith correction-- is it bottoming out?
00:36 April thus far has seen mid-caps and small-caps outperform.
00:40 It's only three days, but starting
00:42 to outperform the large caps yet again,
00:43 despite all the worries about small-cap valuations.
00:46 And of course, BFSI updates, as they're trickling in,
00:51 do they inspire confidence in the sector?
00:53 Because that's a big heavyweight.
00:55 This and a lot more with Amit Sachdeva.
00:59 He's head of India Equity Strategy at HSBC.
01:02 Amit, so good having you.
01:03 It's been a really long time.
01:04 Thanks for taking the time out.
01:07 Thanks, Neeraj.
01:08 It's always a pleasure to be on your show.
01:10 And good morning to all the viewers as well.
01:12 Thank you so much.
01:12 Thanks so much.
01:13 Trust me, it's an absolute delight to have you,
01:15 I must say.
01:16 So Amit, let's start off with what
01:18 your thought is about this consistent skepticism
01:23 that we've heard about the markets and the valuations
01:27 and the possibility of the correction,
01:29 and how every single time the markets have come back
01:33 and climbed the wall of worry, at least thus far.
01:36 Sure.
01:37 I think it's easy to reflect going back
01:40 to what we said in the past.
01:42 And I would start with the same thought.
01:44 And I've reiterated it again and again,
01:46 that Indian market has a certain Goldilocks scenario.
01:51 Once that sets in, it's very difficult to go.
01:54 And if I were to think about current context as well,
01:59 this was decisively set last year.
02:02 We've seen a major bull run.
02:04 And we've argued once that momentum sets in,
02:06 doesn't go away that easily.
02:07 And small phases of consolidation, in fact,
02:10 investors use it in such phases to buy
02:13 into this consolidation mode.
02:16 And what we're seeing is basically
02:18 reflection of that dynamic.
02:20 Why this is happening is because India's internal construct
02:25 is very positive, macro earnings.
02:28 Even valuation, I would argue, one can--
02:30 there are excesses and there are tolerable valuations.
02:34 And there's earnings and obviously
02:36 this dynamic of risk tolerance of the market
02:38 continues with it, which reflects in small and mid-cap
02:41 majorly outperforming last year.
02:43 But small bit of panic, for example, correction happens
02:46 and then people start to write obituary
02:49 of that small and mid-cap space as well.
02:51 We've always cautioned that one must stay
02:54 cautious on the overarching mid and small caps construct
02:58 because they run way ahead of his own bull market scenarios.
03:02 And one has to be maintaining bit caution.
03:04 But we also said in this note was
03:06 that we are not in 2018 style correction in mid-caps as well.
03:11 If you recall in 2018, when the correction
03:13 sets in mid-cap, small caps corrected basically 30% off.
03:18 And market also was down 7%, 8%.
03:20 So it was a major bearish phase.
03:23 But at the same time, the context
03:25 then was very, very negative.
03:27 We had even ILFS crisis as well in that year.
03:32 US bond yields were rising.
03:34 Growth was slowing down.
03:35 There was a major earning downgrade happening.
03:37 If you put the current context, none of that is in the picture.
03:40 So although there is an expansiveness,
03:42 debate will continue.
03:43 But my sense is that we are in a decisively positive phase.
03:47 And that is the reason that you see
03:50 these small phases of consolidation
03:51 but market rebound very quickly.
03:53 And I think that phase will persist for a decent length
03:56 of time as well.
03:57 And that's the reason we continue to be
03:59 very positive on the market.
04:01 So Amit, most if not all, but I can say with conviction
04:07 that 95% of the AMCs as well as your peers on the sell side
04:14 that I speak to are negative mid-caps, small caps,
04:18 positive large caps as a stance while being in agreement
04:23 that the real growth story over the next three years
04:25 will be in the mid-caps and small caps.
04:27 Are you advocating to your large clients
04:29 as well to be overweight large caps and underweight mid-caps
04:33 and small caps in the near term?
04:35 I think that's a good--
04:37 and I think that's what we have been also advocating
04:39 since the last few months is that large capital
04:43 space last year was major laggard,
04:46 and I took to, for example, mid-cap space.
04:48 Mid-cap space and small-cap space
04:51 outperformed the market majorly, and large-cap space
04:53 relatively lag.
04:55 So there's a relative pocket of value.
04:57 And how much that is, let me just phrase it.
05:00 Typically in bull runs, we've seen that small and mid-cap
05:03 space is typically 1.4x the market value.
05:07 This time it was 2x the market value,
05:08 way ahead of fundamentals.
05:10 We also noticed that peak valuation of mid-cap space
05:15 over the market is about 35%, 40%.
05:18 And once that premium builds in, there's
05:22 a very less tolerance of that premium holding at that level.
05:26 So it comes down.
05:27 Now if you see that when the year began
05:30 and then we've seen small and mid-cap correction,
05:32 we've seen that premium come down to about 17%.
05:35 And market breadth for mid-caps also was 73%.
05:38 So it became much more tolerable.
05:40 So what we've been saying is that large-cap space relative
05:45 to mid-cap space and small-cap, as an average basket,
05:48 tends to offer certain superior pockets of value,
05:51 while one has to be increasingly cautious buying
05:53 into momentum in certain small and mid-caps
05:56 to avoid large-scale corrections.
05:59 If, say, for example, there's a major global risk off happens,
06:02 or some other event happens, food touches under,
06:04 and all the rest of it, and bond yields
06:06 continue to stay very high.
06:08 There's a polar or negative context for equities.
06:10 Then you could see that some correction could be very stark.
06:12 So one has to also brace up for those uncertainties,
06:16 if I may say.
06:16 So on balance, our view is that small and mid-caps
06:21 are not in that 2018 style correction.
06:23 So can we use to buy into sell-off?
06:25 But also, large-cap offers slightly better value.
06:29 But also not to forget that FIFOs became negative
06:32 at the beginning of the year.
06:33 FIFOs come back.
06:34 We'll also see that as a tilt towards large-caps as well.
06:36 So that also, we should keep that in mind.
06:39 Yeah.
06:40 And here's the other point that Amit is making,
06:42 that the earnings expectations, or whatever, mid-teens,
06:47 is a lot more realistic this time around
06:49 than what it may have been the last time we
06:51 had a very steep correction.
06:53 So that's to be kept in mind as well.
06:56 Just one small point--
06:58 Amit extended this conversation on mid-caps
07:00 before we move on to specific themes.
07:02 When I look at your model portfolios or the model
07:06 ideas that you guys give out, the range is very interesting.
07:12 And some of those ideas are very different in that, I mean,
07:16 not everybody goes for, as a top idea, this jewelry
07:21 name that you guys have.
07:22 Not everybody goes in for a railway stock as a top idea
07:26 after the rally that we've already
07:27 seen for some of these stocks in the last 12-odd months.
07:31 So what gives?
07:32 What's happening here?
07:35 So look, I assume that you're referring to our mid-cap style
07:40 note, which we put together key ideas in a mid-cap space.
07:43 So I would refrain from definitely discussing
07:46 any individual name.
07:46 We are not allowed.
07:47 Agreed.
07:48 But what I want to say is that our view that I explained,
07:53 that how we think about mid-cap is that deep correction
07:56 unlikely.
07:57 And some of the mid-caps' names are long-range themes.
08:01 They are multi-year themes, for example.
08:03 And then what happens in this scenario
08:06 is when market is in risk-taking mode,
08:09 market tends to identify those opportunities which
08:12 are multi-decade stories, multi-year stories.
08:15 And these corrections become a good point to buy into it.
08:19 So market is looking for next mid-cap idea
08:21 or a next large-cap idea.
08:23 And that is the quest that continues to go on and on.
08:26 So reflecting that thought, some of the ideas
08:29 that you see in that list qualify for that bucket as well.
08:33 And that's the reason you see that diverse range of ideas.
08:36 But it has a certain guiding principle
08:38 that one of that guiding principle is that.
08:41 OK.
08:42 Well, and not a bad way to think about things, viewers.
08:45 If you indeed want to be in that space,
08:46 then try and expand the horizon and try and look
08:49 at the decadal opportunity or the multi-year opportunity
08:52 as the case may be.
08:53 I want to start off with something
08:54 that is a bit of a recency bias, Amit,
08:56 and that is the BFSI updates as they've started to trickle in.
09:00 I mean, HDFC Bank rejoicing is one case in point.
09:02 But we saw deposit growths being healthy for a clutch
09:05 of banking names.
09:09 So banks and NBFCs, Q1 updates thus far,
09:12 are looking pretty decent.
09:16 Is that strong enough a reason for this hibernation
09:22 in performance to reverse of sorts?
09:24 As I said, I would reserve my comments
09:30 at the very broad level.
09:31 But if you come and think of it, and if I reflect on the last
09:34 piece we published on our R&R and sector preferences,
09:39 we noticed that banks or the largely financial space
09:44 has definitely seen dynamics turning negative,
09:48 investors' optimism being more pessimism,
09:51 there was a sell-off, and all the rest of it.
09:53 Sector has sort of accumulated some apathy, if I may say.
09:56 And that's the real sector has moved to a quadrant
10:01 that we define as a risk-on quadrant.
10:04 What does that tell us?
10:05 Is risk-on quadrant is where the investors are already
10:08 pessimistic, and business dynamics
10:10 continue to be negative.
10:12 And that quadrant is very interesting.
10:16 For example, if market wants to buy a risk with a two-year
10:20 view, in that sense, market then starts
10:23 to value those opportunities as small improvement
10:26 in output, et cetera.
10:27 So my sense is that's a very interesting bucket
10:29 to watch out for.
10:30 And hence, banks and financials as well.
10:34 As the market's tolerance for risk rises,
10:36 I would say at some stage, that makes
10:39 a case for some sort of preference for those as well.
10:42 But given the market is sort of mixed,
10:45 one has to play all the opportunities
10:47 as a blend of all opportunities.
10:48 For example, risk-on bucket, but also momentum bucket,
10:51 also that structurally winning bucket.
10:53 So I would probably have a balanced risk
10:56 view in the current market, rather than just go all out
10:58 and buy all the risk, or go out and buy all the momentum.
11:02 So I think the prudent strategy for us
11:04 has been, in the way we have selected our top ideas,
11:07 is to manage that sort of quantum of risk.
11:11 And hence, banks, although it has sort of slipped
11:14 to a risk-on bucket, one has to take a slightly longer view,
11:18 not a shorter-term view.
11:20 But still, it could be part of the risk thinking here.
11:23 OK.
11:24 And I'm just using the names as an example.
11:26 I do not want you to comment on those.
11:28 But I'm just trying to ask you, would your preference list
11:31 have the larger names and some of those old quality names
11:35 which haven't performed hitherto, at least haven't
11:38 performed on the bourses?
11:39 They may have done reasonably OK fundamentally,
11:42 but haven't quite performed.
11:43 Or is the preference towards, say, mid-size private banks?
11:47 Or is the preference towards PSUs,
11:48 which have performed thus far, but on the valuation front
11:51 might still be OK?
11:55 I think its preference is clear in the way
11:58 our stock picks have been.
11:59 And I think our bank analysts would be the best
12:01 to comment on specific ideas.
12:03 But clearly, we are positive on some of the large cap names.
12:07 OK.
12:08 That's one piece.
12:10 I just want to round off this BFSI piece.
12:15 And viewers, post the break, we'll
12:17 talk about some of the other pieces
12:18 and then wrap up the conversation with Amit's view
12:20 on what the global macro suggests.
12:22 But just rounding off this piece before we take that break,
12:24 Amit, on financials, non-lending financials,
12:29 what's the sense there, from capital markets to insurance
12:32 to what have you?
12:34 Is that a pocket to be overweight on?
12:40 Well, our view is that it's still in that--
12:43 the bucket is stuck in that zone where
12:45 one has to take a bit of a risk on position there.
12:49 So I think we stick to financials
12:51 as within the financial bucket.
12:52 And our reference is towards a larger bank space.
12:55 Now, we shift focus to consumption.
12:58 And before I get in my colleague, Bahima,
13:00 just a word from Amit on what--
13:03 where is it that HSBC believes people should play--
13:08 or how is it that HSBC believes people should play consumption?
13:11 Amit, this is a question.
13:12 I mean, I thought we've seen the K-shaped consumption theme
13:15 play out, wherein the upper end of the K, which
13:17 is the premium consumption, did very well.
13:19 Staples haven't.
13:20 It's been ho-hum.
13:22 Maybe a trend did well.
13:23 Some of the others did not.
13:24 I'm just trying to understand, how are you guys advocating
13:27 that investors should play consumption in India?
13:31 Look, I think that's a great question.
13:32 And everybody has that question in their mind,
13:35 that consumption clearly has shown two spectrums--
13:38 one part of consumption doing really well
13:40 and one part of consumption is very weak.
13:42 And if you recall, we had portion on FMCG-style
13:45 consumption a while ago.
13:48 That piece seems quite not well-placed,
13:52 and stocks have corrected as well.
13:54 My sense is that demand situation
13:56 continues to be a little tepid.
13:58 As such, from Staples or as a general basket,
14:02 I think near-term recovery is still questionable.
14:04 And we had several pockets of consumption--
14:07 for example, QSRs and if you look at even apparel
14:11 and a few other--
14:12 even discretionary consumption at the mass end
14:14 is also impacted.
14:16 So our view has been that, for example, retailers
14:20 are a good way to play some of these periods of tepid
14:26 consumption, where there's a structural growth, where
14:28 there's a network rollout, where the business models are winning.
14:31 I'm not specifically guiding for any particular stock.
14:34 What I was trying to say is that our view was
14:37 where the growth is almost very structural.
14:40 Growth is easy to come by.
14:41 Growth doesn't seem undeterred.
14:44 And that kind of dynamic is needed
14:48 for performing in the current context.
14:50 For example, obviously, there's a rural has been an issue,
14:52 and sometimes urban demand has been an issue as well.
14:57 So it's a mixed state.
14:58 So our view is that there's a large opportunity, where
15:01 there's a structural growth, where there's a winning
15:04 business model, and where we see demonstrated
15:07 consistent performance.
15:08 That's the kind of stocks we have picked.
15:10 We have stayed away from largely Staples
15:13 in the current cycle.
15:15 But at the same time, once there's a larger connection
15:18 there, and there's a demand, it takes
15:20 a turn, which we think that somewhere may happen next year.
15:24 But it's too early to call that out.
15:25 So I feel that the consumption basket seems very interesting.
15:29 Market would value a structural delivery of growth,
15:32 where the growth remains consistent,
15:34 growth remains above average.
15:36 Market would really value that.
15:40 OK, for some people, it's a bit of a return to growth.
15:42 And talking about Avenue Supermarts in particular
15:45 individually today, not with Amit,
15:47 but with my colleague Mahima, because the brokerages
15:51 have come out with a very chalk and cheese
15:54 view on what they make of Avenue Supermarts numbers.
15:56 But what were the numbers?
15:58 Mahima joins in to talk about that and the brokerage updates.
16:01 Mahima.
16:02 Right, Neeraj.
16:03 So the business update that came in
16:05 suggests that the revenue is estimated to rise 20% YOY.
16:09 Now for Q4 FY24, the revenue is around 12,300 crores,
16:13 which was 10,300 crores in FY23.
16:16 In terms of store addition, this quarter
16:18 has had the highest count of store additions around 24.
16:21 So now the total store count stands at around 365.
16:24 Now even in terms of stock performance,
16:26 where the stock has been in a recovery mode, in 2023,
16:30 around May 18, it was at its 52-week low of 33,500--
16:37 sorry, my bad--
16:38 33,52.
16:39 And now today, the stock price is around 4,400.
16:42 So the stock has been on a recovery mode.
16:44 Now what you can expect based on the Q4 results
16:48 were some kind of margin expansion,
16:50 some kind of improvement in the product mix.
16:52 The demand trends in the apparel segment
16:54 is something that should be on the radar
16:56 to watch out for in the same store sales growth.
16:58 Now what are the brokerages saying about this?
17:01 Well, the city note on Avenue Supermarts
17:04 says that it maintains sales at the target
17:06 price of 3,200.
17:08 They've upgraded this target price from 3,100.
17:11 They're saying that the Q3 part was 4% lower,
17:14 basis their estimates.
17:15 And the average revenue per square feet has fallen by 10%.
17:19 Now this fall in the revenue per square feet
17:23 continues to impact.
17:25 They continue to be impacted because
17:28 of the inferior product mix.
17:29 And second, the store additions that are taking place
17:32 are taking place in the smaller towns.
17:33 There was also a Macquarie note that
17:35 says that they are encouraged by the healthy sales momentum
17:38 in DMART, which boasts their belief in the value proposition
17:43 that DMART offers.
17:44 And lastly, there was a Morgan Stanley note
17:46 which suggests that the improving trends in growth
17:49 and efficiency metrics support their thesis for DMART.
17:51 However, their ability to re-engineer growth
17:54 with a grocery-first strategy will be on their radar.
17:57 So this is the overall street view that
17:59 is there on Avenue Supermarts.
18:02 OK.
18:03 Mahima, thanks a lot for that.
18:04 So that's the view on retail, of course,
18:06 and what others have also said about retail
18:09 and what the numbers for Avenue Supermarts have looked like.
18:12 Amit has expressed some thoughts around consumption and retail
18:15 already.
18:16 Amit, I want to--
18:17 we have about six, five minutes on the show.
18:19 I want to kind of bring in the global picture
18:21 into perspective.
18:22 Are you sanguine about global growth,
18:25 and therefore, could globally linked sectors
18:29 do better than what the market currently fears them to do?
18:36 Well, I think global picture continues
18:38 to be slightly uncertain, right?
18:40 In some sense, demand scenario, and the way
18:44 several pockets of economies are still
18:46 grappling under fears of recessions and all those things.
18:48 So that picture remains mixed.
18:50 That said, I think that's the reason, actually,
18:53 if you look at the one thing to watch out for, actually,
18:56 from a global scenario is, rather than global growth,
18:59 I would probably think that there are global risks
19:01 we need to watch out for, right?
19:03 Because what's happening with crude,
19:05 or what's happening with the US bond yields,
19:07 would have a larger overlay on Indian market
19:09 as well in the coming months.
19:11 If, for example, the expectations of rate cuts
19:13 in the Fed, what happens in the second half, for example,
19:16 if the geopolitical situation, how it evolves,
19:18 and for example, in the Middle East,
19:21 and how the crude sort of behaves in a manner that
19:23 would also weigh.
19:24 I think these are also larger global macro factors needed.
19:28 We need to watch out for.
19:29 Well, some, obviously, growth in external sectors,
19:33 these are various pockets of it.
19:34 Pharma could be another, and IT could be another,
19:37 and there are different drivers of it.
19:40 But at the same time, I would probably
19:43 think that, from a global macro context,
19:45 we need to worry about these two aspects as well.
19:49 OK.
19:50 Within those worries, is there a silver lining, though?
19:52 I'm just trying to understand the manufacturing
19:54 numbers across the board.
19:56 India, manufacturing PMI looking very strong.
19:58 China data starting to look up a little bit.
20:00 Europe, not too bad.
20:01 Is there a silver lining?
20:03 Could manufacturing link themes do better than feared,
20:07 or would you still be on the sidelines?
20:10 We like manufacturing link themes in India.
20:12 And some of the names that we mentioned in our top ideas
20:15 also are linked with those themes.
20:17 And at the same time, there's a overarching context
20:22 also we need to account.
20:24 Got it.
20:25 OK.
20:25 Amit, I appreciate you taking the time out
20:30 and speaking to us today.
20:32 Thank you.
20:32 Thank you very much for being with us,
20:35 and look forward to talking to you soon.
20:37 Thanks, Neeraj.
20:38 Thank you for having me here.
20:40 Not at all.
20:41 Well, that's Amit Sachdeva of HSBC.
20:43 Now, viewers, the other thing that I just
20:46 wanted to bring out before we wrap up this conversation,
20:50 and which is what, again, was a result of the note
20:54 that they have put out.
20:55 They say that on the mid-cap side,
20:57 mid-cap valuations have come down to the five-year mean,
21:01 and the mid-cap market breadth has declined to 73% from 90%,
21:06 which is when they wrote the note a few days back
21:08 at the beginning of the year.
21:09 And all of this signals some potential downside,
21:13 but limited.
21:14 So I think the crux of today's talking point
21:17 has been, especially because they wrote this note,
21:19 is that while there is so much of fear around mid-caps
21:22 and small caps, maybe, just maybe,
21:24 the downsides fundamentally based
21:26 on average valuations in the past and current are limited.
21:29 Maybe the macro and the data that we have
21:31 also points towards that downside being limited.
21:35 And I don't know if the market is--
21:37 I'm not predicting this, but all I'm saying is,
21:40 with the market returns thus far in April,
21:42 or maybe even before April, when we came out
21:46 of a slightly brutal, quick, swift sell-off in the mid-caps
21:49 and small caps, the turn has been largely in favor.
21:53 Now, will this last?
21:54 Anybody's guess.
21:55 But for now, the market does seem
21:57 to be rewarding bottom-up growth stories
22:00 and not differentiating too much between what is a market
22:03 cap of a particular company.
22:04 That's all that we have on this edition of The Talking Point.
22:07 Thanks so much for tuning in.
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