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00:00All right.
00:11Hello and welcome to Talking Point.
00:13I'm your host, Neeraj Shah.
00:14And the case for a chat today with our guest
00:17is simply around what the near term and the medium term
00:20might hold in store for multiple things.
00:22So firstly, will FIIs or can FIIs
00:24invest in India amidst the higher multiples?
00:28Is past history anything to go by?
00:30I think Vinod Karkhi dwells a lot
00:32on learnings from the past.
00:33So it'll be lovely to talk to him on that.
00:35Whether there's room for credit to grow and aid CAPEX?
00:40I think we'll pose a question to him around that.
00:42And whether low deposits can dampen the BFSI outlook
00:45or do valuations provide comfort there?
00:49He's Senior VP, Equity Research at ICICI Securities,
00:51joins us right now on the show.
00:53Good having you.
00:53Thanks for joining in.
00:54I hope all is well.
00:56All well, Neeraj.
00:57How are you?
00:58Very, very well.
00:58Thank you, Vinod.
00:59And I want to start off, Vinod, by asking you
01:02whether you believe the nature of the money getting invested
01:04into India can change in the second half
01:07now that major events are out of the way?
01:09Let's assume the budget is a bit of a non-event
01:11from a capital market investor perspective on taxation
01:14front at the very least.
01:16Do you think at some point of time
01:17FIIs make a comeback into India despite the higher valuations?
01:23Or is that a difficult call to make?
01:26Well, talking about events, I mean,
01:31you can call it a myth, basically.
01:34Over the last, since COVID, there
01:37were like B4 events, which resulted in high uncertainty
01:44for investors.
01:45And they were the best times to buy within this bull market,
01:51if you may call it so, so far.
01:54So to answer your question, if there is an event where
01:59you find uncertainty, in fact, our reading
02:02has been that all through over the last several years,
02:06whenever there is an event risk-related uncertainty
02:09and markets take a little bit of a knock,
02:12that has been the best time to invest.
02:15Not when everything is hunky-dory
02:17and volatility is extremely low, and everyone
02:21is extremely confident about the future.
02:23That has not been the best time to buy,
02:27at least in the recent history.
02:30So we had several, so if budget or something else
02:36comes up, leads to some kind of uncertainty
02:39and some of this euphoria, I mean,
02:43this optimism that we have been seeing post-election
02:45is allowed.
02:46I think that would be a good time to buy overall.
02:51OK.
02:52Vinod, are you constructive on markets currently?
02:57Well, the way I look at overall market is quite simple,
03:01in fact.
03:02So I'll start getting worried on the overall market when,
03:06so if you look at the multiple and the growth,
03:08there are two aspects to this.
03:11If you just go back to when the global financial crisis,
03:17at the start of 2008 calendar year
03:19was when we're looking at the forward multiples,
03:22it used to be, in fact, similar 21 times
03:25or something like that.
03:27So point in time multiple tells you nothing, basically.
03:30So and in September of 21, we were at 23 times forward.
03:35So what can you say, basically?
03:37So the point is, and which investor, I mean,
03:42legendary investors like Ben Graham and some other guys
03:46who have built some frameworks like the Shiller model, what
03:48they say is that we better look at where you are in the cycle
03:52overall in terms of corporate profitability,
03:55leveraging, and other things.
03:57So currently what I see is that while we are at somewhere,
04:01I mean, the higher end of the multiple, around 20 times,
04:0521 times, in terms of the profit cycle,
04:09we are somewhere in the mid cycle, around 5% of GDP.
04:14Max, we have maxed out at around 7%.
04:18And if I look at what leads to maxing out of profit cycle,
04:23it's very simple.
04:24You have overheated economy.
04:26You have high leverage in the balance sheets
04:30and high operating leverage.
04:33And risk-taking is very high, a lot of acquisitions
04:36and a lot of, what I should say, a lot of effects,
04:40outlook being very high and all that,
04:42investment cycle being very at the top of the cycle.
04:45So I think those things, if you look at the profit cycle,
04:49we are mid cycle.
04:50I mean, in terms of corporate re-leveraging,
04:52I think we have hit a bottom.
04:54And maybe some pickup might, we might hope for some pickup.
04:58And overall, NPA cycle in the system is still bottoming out.
05:02So overall, I think we are at mid cycle profit
05:08and almost at the, just below the peak of multiple.
05:13That's how we should look at it.
05:15I'll start getting worried on the market
05:17when we are at peak profit cycle,
05:21driven by high leverage, high operating leverage,
05:26and peak profitability.
05:30OK, high operating leverage, peak profitability.
05:32As of now, those situations don't exist, I presume,
05:36is what Vinod Karki is saying.
05:37Vinod, what takes this market higher?
05:40Is it the mover of the last few days, which is BFSI,
05:44because it was dead and buried, or rather, not moving,
05:46because in hibernation of sorts for such a long time,
05:49has started to make a move, and may not
05:52be as much of a value as it was maybe a couple of months ago,
05:57but still not egregiously expensive.
06:01Yeah, that's a very good question, Neeraj.
06:03And if you look at the pre-COVID period till now,
06:08the only sectors where valuation actually has contracted
06:15to what they were pre-COVID is the whole financial pack
06:18within the NIFTY, if you take it as an example.
06:22And energy stocks, they remain quite cheap overall.
06:28But the other angle to this, the growth angle,
06:32is while the market has completely embraced the idea
06:36that there is a big capex cycle coming, which
06:39is shown in industrials, the capital goods companies,
06:44and others, the valuations really flaring up,
06:48the clarity is not there in terms of how much
06:53re-leveraging will happen.
06:55But from a framework perspective,
06:59we haven't seen any economy rise in terms of investment rate,
07:03manufacturing, construction, and all really
07:06picking up without a re-leveraging effect.
07:09So I think it is imminent, the re-leveraging effect.
07:12I think market is kind of sniffing it out
07:15in the current context and missing
07:18some kind of outperformance.
07:20But if you are bet on the industrials
07:24saying that there is going to be a big capex cycle,
07:27I don't see the financials which will fund this capex
07:33or channelize savings into funding this capex
07:37remaining underperformance for too long.
07:47The last four years, we've seen a resurgence
07:50in the valuations of the public sector banks,
07:54public sector financiers at large maybe,
07:56versus the private sector financiers.
07:58The last five days have been the first instance
08:00of how private ones are outperforming PSUs.
08:03My question to you, rather, is that when
08:05people are talking of a convergence in valuations,
08:08private sector has started to outpace on the valuation
08:12front the public sector entities once again.
08:15From here on for the next 24 months,
08:19if indeed capex has to pick up, which will probably
08:22go to both PSUs as well as privates,
08:25would you bet on PSUs continuing their outperformance?
08:28Or would you believe private sector players will now dominate?
08:38The corporate capex has predominantly been the area
08:44for public sector banks where they are focused.
08:48Private banks obviously participate wherever
08:51they find opportunity.
08:53But the overall theme, if I'm betting on a corporate
08:57deleveraging cycle, I would bet that corporate banks,
09:04no matter if they are, what I should say,
09:07I mean, the banks which can focus and which
09:10have exhibited in the previous cycle,
09:12that they have the capability to lend to corporates.
09:16I think the distinction will move from PSU to private
09:20to corporate and retail.
09:25Any bank which can lend to corporates in a way
09:32that it doesn't result in high NPAs,
09:37so I think those will show higher demand.
09:42Because on the retail side, we have seen some stress
09:47and RBI also kind of flagging it off.
09:52And a lot of players have entered retail,
09:55so it's getting a crowded place.
09:57While you can see the corporate side,
10:00very few are participating.
10:01And the demand itself has not picked up significantly,
10:04which I think will pick up.
10:06So the distinction will be like we used to have earlier,
10:08corporate banks and retail banks.
10:12That distinction might start coming back,
10:15rather than PSU versus private.
10:18OK.
10:19And any impediments to any kind of lending?
10:22Because the other aspect that happens
10:24is that the regulator off late, right?
10:26And it's good, by the way.
10:27I'm not saying that the regulator is doing a bad job,
10:29but I'm just saying that the regulators or regulatory action
10:32on financials, both lending and non-lending financials,
10:36has been fairly swift in the recent past.
10:39Does that impact multiples at all, you think?
10:42No.
10:43So one is multiple, but it's not that it's
10:46So one is multiple, but the underlying cycle,
10:50which I talked about, it actually
10:51extends the cycle, because you see,
10:55in any economy, when the re-leveraging happens,
10:58finally, we'll have accidents at the top of the cycle.
11:00You cannot avoid it.
11:01That's the nature of economic cycles.
11:04What the regulator is doing, while being a little ahead
11:08of the curve, is trying to, because they
11:11have learned from the previous cycles
11:13that where the hazards are.
11:15And they are safeguarding some of these issues,
11:19which means that you won't have early accidents
11:22in this economic up cycle.
11:24And this may be a little more prolonged.
11:27But eventually, every cycle goes through that boom and bust.
11:33I think we are in a mid-cycle.
11:35It will boom at some point, and there will be
11:37some issues at a later point.
11:41OK.
11:42Well, since you're talking about financials and entity profit
11:45exclusive, banks have hit a pause on fresh project finance
11:49and seek clarity on RBI's draft rules.
11:52Vishwanath Nair joins in with more details on this.
11:55Vishay, this seems a very extreme step.
11:57Tell us, what are you learning?
11:59Right, Neeraj.
12:00So yes, there is a decision amongst bankers,
12:03at least the majority of the bankers,
12:05that they want to not go out and do fresh project finance,
12:09specifically loans that are linked to special purpose
12:12vehicles in these projects.
12:14They don't want to do that, unless, of course,
12:16the parent, which might be a well-rated company,
12:19takes those loans on its own balance sheet.
12:21What the lenders are saying is that if these RBI guidelines
12:24come into play in the form that they were proposed,
12:27in fact, in May, then these old projects
12:30might get pulled into the framework.
12:33And lenders will have to then, later on,
12:35add about 5% provisioning, upfront provisioning,
12:39on these projects, which will be a pretty
12:41big hit on the balance sheet.
12:42So they have sought some clarity from the RBI.
12:44They want, firstly, public sector projects
12:49and private projects to be treated differently
12:51under these norms.
12:52They also want some more clarity on how exactly this 5%
12:55will come into play.
12:56Remember that the RBI is saying that this will be spread out
12:59over a few years, but they still want further clarity.
13:02Lenders also want the RBI to rethink that 5% number itself
13:05and probably come up with a slightly more realistic number
13:08because, currently, the upfront provisioning
13:11is only 0.4%.
13:12So 5% is a significant jump on the provisioning
13:15from the current norms.
13:16So banks are saying that, listen, give us this clarity.
13:19That's when we will go out and start lending aggressively.
13:23This is also a time when project finance is actually taking off.
13:25Companies are going out and willing to set up
13:28green projects.
13:30So if they are going to slow down,
13:32if the banks are going to slow down on that lending,
13:34then those projects get hit quite a bit
13:36because banks are a major source of financing
13:38for these projects in that.
13:42Okay.
13:43Vishay, clearly, we do not have any timelines around this,
13:46right?
13:47I mean, as of now, it's a pause.
13:48They'll take things as things unfold, I presume.
13:52Yeah, so June 15th was a date when the banks
13:55and the other stakeholders in the economy
13:57had to submit their responses to RBI's project financing.
14:01The government has only done that this week.
14:04So there is a significant delay even on the government's part
14:07on giving feedback.
14:09Once this feedback is in, the RBI goes through all of this
14:11and typically it takes about 30 to 60 days,
14:14anywhere between that, before the RBI comes out
14:16with a final set of guidelines.
14:17So we may not see something emerge clearly
14:20till end of July or maybe August.
14:22Got it.
14:23Vishay, thanks for that.
14:24Vinod, quick thoughts on this one before we hit that break.
14:27I hope you heard.
14:28I mean, I believe you would have heard
14:30what Vishay has brought in.
14:32Yeah, so this is an extension of what we were discussing.
14:34The regulators this time have,
14:37they want to ensure that we don't get into a situation
14:40that we got after 2012-13 when the NPAs started ballooning
14:44in the corporate side due to a lot of infra
14:48and other project plans like that.
14:51So this is just an extension.
14:53What one should note in this is that
14:56it actually is more of an actual thing.
14:59We are providing more.
15:01So if you have lent carefully,
15:04then obviously these provisions will be written back.
15:06So it's only about timing issues
15:10rather than absolute losses, basically.
15:14So why should you fear if you have lent prudently,
15:17then these provisions won't be required.
15:20But the point is, if you provide early,
15:22then obviously you see the cost,
15:27I mean, the impact on P&L immediately.
15:29So cost would be an issue.
15:32But on the overall, it's more of a safeguarding measure,
15:37I would say, from me.
15:39In a recent note, they've written that
15:42the listed corporate capex has swelled
15:44beyond the nine trillion mark,
15:47and that one, there are new age sectors
15:51which are additional accelerators in the current cycles.
15:55And while the uptick is strong,
15:58it's still short of the lofty budget goals.
16:00So question is, Vinod,
16:02you would expect a bit of a lull in a period
16:05around the election season.
16:07Would you expect strong capex now?
16:11And what would lead it?
16:13Would it be private capex leading the capex charts now?
16:18Yeah, so the reading is coming out
16:20that if you have been observing the GDP prints
16:25time and again over the last couple of years,
16:28the GDP has been driven by the gross capital formation
16:31growing faster than private consumption expenditure,
16:34which is reflected in the whole stock market,
16:39reflecting that same thing where the cyclical companies
16:43have been significantly outperforming
16:44the expensive staples companies.
16:48IT, which is another issue.
16:49But the thing is the private capex
16:58is nudging up.
16:59So first of all, the reading is that it's bottomed out.
17:03It's rising.
17:05But if you compare it with the central government capex,
17:09you know, in a scenario where private capex
17:14is doing really well, this is significantly higher.
17:17So just to put things into perspective,
17:19the central government capex was 9.4 trillion in 2024,
17:25against that the listed corporates did 9.1
17:28as per our analysis.
17:31So this is almost no, I mean,
17:34the private guys are not significantly higher.
17:38At the peak of the cycle,
17:39we have seen this ratio being at almost five times.
17:42So I think this is, and this was in a period
17:47where we were going into election, general elections, 24.
17:51So I think post that, and in fact,
17:54yesterday itself, I saw one media report
17:58about a large industrial conglomerate,
18:01significantly hiking their FY25 capex guidance
18:06to one of the largest, I would say.
18:07So I think it's showing up.
18:10We heard the SBA chairman talking about-
18:13Vinod, sorry, can I come in?
18:15So the larger ones are not a problem.
18:17Maybe the top 10 are doing the capex.
18:19Maybe newer sectors are doing it.
18:21But the widespread capex spend
18:23on the private side is not happening.
18:24So one, could that happen?
18:26And two, I'm just asking for a viewer
18:28who's listening to this right now
18:30and wanting to understand how to play it
18:31by the equity theme.
18:32What would you recommend?
18:35So for my SME segment,
18:38if you look at the entries coming in,
18:42I think this is the purple patch for SMEs,
18:46simply because the growth in the economy
18:48is coming from the investment side,
18:50real estate development, infrastructure,
18:52manufacturing, construction across the board
18:55and this new age.
18:57So the SME order book swells up in this environment.
19:01So I don't think there will be a lot of capex requirement
19:05or capex demand over there.
19:08So I think there will be a broad-based capex growth overall.
19:15In terms of playing this capex theme,
19:17the market is way ahead.
19:19We have been seeing for the last couple of years
19:21that the capex is showing signs of improvement.
19:24But if you look at the industrials, capital goods,
19:26I mean, they already made the move significantly
19:29before these numbers are coming in.
19:32That's what we have been signaling
19:33that you cannot wait for the numbers to confirm
19:38and then say, then I'll take a position.
19:41By that time, the whole, I mean,
19:43markets are always forward-looking.
19:46You know, so in fact, if there is any weakness
19:49on the investment theory,
19:51these same companies will actually show signs
19:55of significant correction
19:57way before the numbers start showing.
19:59So I think, so that's the thing.
20:02So the way, indirect way to play,
20:04I think is through the lending side
20:08because that in fact has re-rated valuations
20:12over the last five years.
20:14Their valuations, whatever they are,
20:15the large banks and financials,
20:18their valuations were pre-COVID.
20:21I think that the current valuations are in fact lower
20:26than what they were.
20:28So it's not completely reflecting
20:30this whole investment theory.
20:32So I think the best way to place indirectly
20:35through the corporate re-lending cycle
20:37and maybe some industries, large industries,
20:40which are not significantly overvalued.
20:44Just to name, for example, L&T,
20:45I don't think it is,
20:48I think the P is around 30, in their 30s, I think.
20:51So, you know, so I think that's a bellwether.
20:54I mean, it gets positively impacted
21:00from the overhauling of the cycle.
21:02So, you know, just to give you an example,
21:05but the point is you have to dig through,
21:07but where their valuations are not significantly higher.
21:12So those cases, I think, should be good to do.
21:14And I think playing it through the lenders is better,
21:19right now, from a risk-reward basis.
21:22Got it.
21:23Okay, we are out of time completely
21:24on this leg of Talking Point.
21:25We're not afraid we'll have to leave it at that.
21:27Very interesting note.
21:28I'd love to talk more, but time's up today.
21:30Thanks so much for taking the time out and being with us.
21:33Thank you, Neeraj.
21:34Always a pleasure.
21:35Likewise, and viewers, thanks for tuning in
21:37to this edition of The Talking Point.
21:42We'll see you next time.