Rahul Arora On India's Competition With China & Why He's Overweight On IT, Banks & FMCG | NDTV Profit
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00:00Rahul Laroda is joining us now, CEO of Nirmal Bang Institutional Equities.
00:03Rahul, great to have you on the show and you know, we were keen to talk to you because
00:08no one knew what was going to happen over the weekend.
00:10It was, it's one of those situations that you have two days of markets shut and anything
00:15happen with, can happen considering what's happening in the world right now.
00:18Thankfully, it's turning out to be perhaps a decent morning.
00:23What's the play?
00:24What's the strategy here?
00:26Or there is a lot to worry about right now in terms of FII outflows, Q2 numbers.
00:32What has you worried, if anything?
00:35Morning Tamana, thank you for having me on the show.
00:40So I think Tamana, broadly, it's a very welcome correction.
00:44I think, you know, it was long overdue.
00:46I don't even know if you can call it a correction because, you know, when the pandemic started,
00:51I remember that the Nifty had fallen down from about 12 and a half thousand to seven
00:54and a half thousand.
00:56And then from there, it's pretty much been a one-way rally to, you know, 26,000.
00:59So no, you know, the new investors that have come into the market say post the lockdown
01:03really haven't seen much of a correction.
01:06That being said, I think while valuations have reset a little bit in certain excessive
01:11pockets on the market, it's not meaningful enough for me to make a very convincing buy.
01:16I think, you know, maybe another 10, 15% fall in some of the frontline stocks or other the
01:21overvalued stocks would be all right, which also implies that if the Nifty itself was
01:25to fall another 5, 10% from here, it would be a little more comforting.
01:30Liquidity as we've discussed often on your show, Tamana, is pretty much running out to
01:34be a bane of valuations.
01:36You know, you're either having to stretch valuation multiples or stretch your time horizons.
01:39But, you know, let's see how the markets span out today.
01:43There's been a spike in crude of almost about $8 or $9 in the last 10 days.
01:46It dropped down to about $65 and now it's almost $73, $74 or maybe even inching higher
01:51as we speak.
01:53But all things considered, I think the one thing to test, Tamana, would be how liquidity
01:59reacts to this.
02:00And if liquidity does not react in a very adverse manner, I think all corrections will
02:03be very shallow lived in this one.
02:04Rahul, hi.
02:05It's also Samina joining in.
02:07And for some reason, while FIs have not really been overweight India in 2024, everyone and
02:13anyone seems so concerned with the fact that FIs are buying China now.
02:16I mean, they were never aggressive on India in any which ways, right?
02:19We've talked about and harped about the fact that our market is now a DII market.
02:24Should we be worried?
02:25Well, I think, you know, anything incremental always helps, Tamana.
02:30And as you rightly pointed out, I think it's been such a DII centric market that, you know,
02:35whatever little you saw in terms of an FI top up over the last month or so has only
02:39aided the Nifty in its journey to about 26,000 and beyond.
02:43Now China is a bit of a concern because, you know, in less than a month, the US also goes
02:48into elections.
02:49And I think it's, you know, whatever debates we've seen from the two presidential or vice
02:53presidential candidates, it's been more rhetoric than actual roadmaps in terms of how they're
02:58going to tackle the deficit and what their policies are going to be.
03:01So I think as we enter 2025, we are going to compete for capital with the US and China.
03:09And that's not going to make it very easy.
03:10And which is why I went back to the previous point, you know, whether this liquidity can
03:15actually sustain in the wake of a correction.
03:17Because I think if you keep getting 20-25,000 crores of SIP money every month, I think we
03:22should be okay.
03:23Now, that is, of course, you know, goes back to the earlier point I was making.
03:27It's going to make valuations unreasonable for a very sustained period of time.
03:31But, you know, as somebody, you know, a very famous one said, markets can remain irrational
03:35longer than you can remain solvent.
03:37But I think anything incremental is all right, but I wouldn't be too perturbed with FI monies
03:43going here or there.
03:45My bigger concern would be if the rate of SIP inflows was to drop down to, say, 15-18,000
03:49crores, that would be the real test for the Indian markets, in my opinion, rather than
03:54tracking FI flows as closely as probably people in China would.
03:57Fair enough.
03:58Fair point.
03:59And then, of course, what the quarterly numbers looks like also becomes important.
04:04At one segment which is in focus is IT and very quickly we are going to get Harsh in.
04:08He talks about the top brokerage report at this point in the morning.
04:12Harsh, what do you have on your list today?
04:14Very interesting note coming in from J.P. Morgan, they've in fact upgraded LTI, Mindtree
04:18and Emphasis.
04:19They believe BFSI is turning a corner in terms of segment.
04:23And these two players have a large chunk of their revenue coming from BFSI, to be absolutely
04:28precise.
04:2935% exposure is what LTI, Mindtree has to BFSI.
04:34And Emphasis has roughly 59% exposure to BFSI.
04:38BFSI is Banking, Financial Services and Insurance.
04:41That's the space which likely is where tech spends will start to inch higher.
04:47And these two players are poised to benefit.
04:49They believe that acceleration is going to be driven by tech spend pickup.
04:53U.S. bank earnings expected to improve in the first half of calendar year 2025.
04:59And that could drive up tech spends is what J.P. Morgan is really breaking down.
05:03They have a 13% upside on LTI, Mindtree, target price 6,900.
05:08They have a 19% upside on Emphasis, target price 3,400.
05:15One more stock to look at is Keynes Tech.
05:17Nomura has a buy on it with a target price of 5,969.
05:22So the reason is they are acquiring 100% stake in this company called Iscarmeco, I hope I'm
05:28saying it correctly.
05:29It's present across Middle East and Europe.
05:32And there is a Jeffrey's note also, which has not such an exciting view on it, downside
05:37of 13%.
05:38But Rahul, I want to quickly get your view on IT.
05:41Is IT going to be the positive surprise of this result season?
05:46Well, I think it's, it's been an overweight sector for most institutional investors, to
05:51be very honest.
05:52I think, you know, the last six months, if you've seen, let's say going back to pre the
05:56general elections as well.
05:57I think the trade probably started somewhere around March, April, where people sort of
06:01started moving out into banks and IT and FMCG.
06:04I think, you know, specifically for TCS, I mean, our own expectations, which is the bellwether
06:09that comes out later this week is about a 1.1% kind of growth that we're looking at
06:14on the top line with about a 10 basis point improvement in margins.
06:18But valuations are not entirely cheap in the sector.
06:20I was just listening to one of your colleagues talking about an upgrade from one of my competitors
06:24on LTI Maintree.
06:26That's been our topic for quite some time now, I think since we initiated a couple of
06:29months back, re-initiated rather after a change of analyst.
06:32But I think, you know, the way to look at IT services, frontline IT, and I'm not talking
06:37about ER and DS players, like a persistent KPIT, CoForge, et cetera, or other kinds of,
06:42you know, niche IT players.
06:43But I think the more mature IT services players and FMCG players in India, the way to look
06:48at it is an average 5% kind of growth in terms of a regular year.
06:53In bad years, it'll probably drop down to between 1 to 3%.
06:56In good years, it'll probably head up to about 8, 9%.
07:00These are never going to be double-digit compounders on the top line, is my sense, because they're
07:03very, very saturated.
07:04Now, the question is, for those kinds of growth rates, what valuations do you want to pay?
07:09The way we valued these companies two months back when we re-initiated was we did anywhere
07:14between 0.5 to 1 standard deviation above the three-year mean.
07:17And that gave us about 15% to 20% kind of upsides on the stocks that we were a buy on,
07:22which was basically pretty much the frontline IT pack.
07:25I'd say maybe if the IT index weight is about 12%, I'd say about 50 to 100 basis points
07:31overweight at this point may not be a bad strategy.
07:34And I think the stocks to probably be in over there would be, you know, I'd say LTI Mindtree,
07:39TCS, and Intel from the large caps.
07:41I think you could look at a CoForge from the mid-caps and Birla Soft from the small cap
07:45space.
07:46So you may not get the returns that you've got over the last six, eight months.
07:50But I think the way to look at it is this quarter's results is probably a 1 to 1.5%
07:54kind of top-line growth with margins by and large for most of the frontline IT companies
07:58expanding by between 10 to 20 basis points.
08:00So not very gung-ho, but, you know, just marginally overweight would be my view.
08:05Rahul, and this is Samina joining in.
08:08Do you expect any surprises from the monetary policy on Wednesday?
08:15Not really, Samina.
08:16I think, you know, the Fed has sort of laid out its path on where it's going to be this
08:21year and next year.
08:23In India, we actually don't see a very, how should I put it, a very deep rate cut cycle.
08:29It's probably going to be a very shallow one.
08:31I think 25 basis points at best, and I think that too, if it comes through, will probably
08:36be in the December of the Fed policy.
08:37I don't think it's required right now, and I don't even think the Reserve Bank of India
08:41needs to do it right now.
08:42I think, obviously, there's a new monetary policy committee in place, and it'll be interesting
08:47to see, you know, what their views are when the MPC minutes come out.
08:50But look, we had actually done a study, and my economist had actually put out a report
08:55some time back, you know, where she studied U.S. recessions that were essentially led
09:01by the U.S. Fed when they were tightening interest rates.
09:03And I think right from Paul Walker's time till now, if you see, these recessions typically
09:09last two to three quarters.
09:11So they're not very deep.
09:13So maybe the Fed has over sort of guided for its rate cuts as well.
09:17They may not follow through with such aggression, I think, you know, between now and the end
09:21of 2025.
09:22But particularly in India, our base case is that, you know, more than a 25 basis point
09:27rate cut in this fiscal year, not calendar, is not really warranted.
09:30And that too, if it comes, may probably come through only in the December of the Fed policy.
09:34Rahul, just want to get your take on what's happening with your FMCG majors and the consumption
09:41space.
09:42I mean, Titan was a bit of a surprise, Titan, Kalyan.
09:46But even the pain we're seeing in an actual Nestle, ITC is an outlier for today.
09:52Is there a concern about the kind of demand that we're going to see going forward?
09:59So I think, Tamanna, you know, this much talk about K-shape recovery has only accentuated
10:04over the last two or three years.
10:05And I think the disparity between consumer discretionary and consumer staples has been
10:10quite stark.
10:11I think the trade that you saw the last six months that we were talking about before the
10:14markets opened was probably a time and price correction that you saw in consumer staples.
10:19But I think in terms of company performances, if you see consumer discretionary is actually
10:23doing far better.
10:24And that's not just restricted to jewelry, as you were discussing Titan and Kalyan before
10:28the markets opened.
10:29I mean, just look at hotels, you know, they've not dropped ARRs at all in the second quarter.
10:36And now you're getting into the wedding season and the festive season in the October, November,
10:40December quarter.
10:41So it's going to be another strong quarter for them there.
10:43I think AlcoBev is doing really well.
10:45I think, you know, if you look at consumer as a basket over the last 12 to 15 months,
10:49whether it's a United Breweries, you know, United Spirits, Radical Global, Sula Wines,
10:54they all had a remarkable run.
10:56Stocks are between 70 to 100%.
10:58So I think consumer discretionary continues to do well.
11:01Probably the softest piece of this puzzle has been the quick service restaurants.
11:05But I think even there, the stocks like Jubilant Foodworks that have seen time and price corrections
11:09are starting to sort of, you know, look up.
11:11We ourselves did some channel checks on the ground for quick service restaurants over
11:14the last one month.
11:15And we found out that the trends month on month are actually improving.
11:19And you may actually land up in a situation where some of these, if not all, may actually
11:22land up giving you low single digit positive same store sales growth for this quarter.
11:26So I think if you're looking at consumer as a whole, I'd still be relatively more positive
11:30on consumer discretionary names like AlcoBev, selectively QSR and, you know, leaders in
11:35jewelry and hotels, of course, as opposed to consumer staples.
11:39That rally lasted about six months, but I don't think there's too much juice left there.
11:43That being said, if you do get a correction in names like, say, a Britannia or a Tata
11:48consumer or a Darbar, we would look at buying these names at about 10, 15, 20% kind of dips.
11:54But there again, valuations are not too cheap at this point in time.
11:57Therefore, I'd wait for a little bit of a correction because like I said earlier, I
12:01don't think these are companies that are going to compound top line at 10%, whereas discretionaries
12:05will be growing at 15, 20%.
12:07So I'd be, you know, even though I'm paying a little bit more for consumer discretionary,
12:10I'd be, you know, sleeping a little more at least knowing that growth is there to back it.
12:14And it seems like at least we've got eyes on the ground when it comes to local consumption names.
12:20Rahul, we've seen what China has done and we've seen how the metal index has responded
12:25to that. The nifty metal index is up over 10% having its best sort of month since May.
12:33What are the bets? Are you buying steel? Are you buying aluminium? What are the stocks
12:38you would seem to believe that have a good risk reward even after the recent rally that they've
12:43seen? Look, I think there's a lot happening in that sector. I think, you know, one is,
12:48of course, as you rightly said, if the metals index and if China continues to be a huge producer
12:54and consumer of commodities, we are price takers. So from a macro standpoint, going back to your
13:00earlier question on the MPC, this could actually end up being inflationary for us if we have to
13:04import commodities and commodity prices are going up. That being said, I think for companies and
13:09sectors in India that have pricing power and are able to use that to their advantage, we'd be,
13:14you know, more comfortable looking at those kinds of stocks and sectors. Now, just to put it into
13:18perspective, price hikes in India are not a very sustainable thing. And we've seen that in the
13:23case of cement as well. There are always price hikes and rollbacks. But I think all things
13:28said and done, I think steel is not a bad place to be considering all that's happening in India
13:33with respect to CapEx and, you know, the kind of demand that we're talking about with respect to
13:38infrastructure, with road sports and all of that. I think steel may not be a bad place to be. I
13:42think, you know, Tata Steel has tried to do what it's doing with in terms of deleveraging its
13:46balance sheet over a period of time. Of course, the debt number is still very, very high, but
13:50they've been trying to do what they can. But I think that this is probably not a bad pocket of
13:54the market to be playing in. So, if I was to be on the commodity side, I'd be more on the
13:57ferrous side at this point in time. But like I said, I think from a macro standpoint,
14:02having commodity prices under control actually helps us, you know, because so many of our sectors,
14:08you know, going back to cement, our consumers are pet coke, coking coal. So, the lower these
14:12prices, they're actually better. But like you said, you know, the stimulus, if it revives
14:17China's infrastructure building in a material way, then we could have a slight problem. But
14:22I think in India, on a relative basis, I'd be more inclined towards ferrous than non-ferrous
14:26at this point. Are you staying away from banks and auto right now? Are you seeing opportunity here?
14:33No, I think banks is that one elephant in the room that wants to dance, but it's not getting
14:36a chance to dance, right? I think most of the private sector banks, I think if you look at the
14:41valuations from Indecent Bank to say ICICI Bank, most of these guys, and if you throw an SBI in
14:47the middle as well, they're all going at one and a half to two and a half times price to book.
14:50I don't think that's demanding at all by any stretch. I think at the peak, these banks have
14:55traded anywhere, barring SBI, of course, they've traded anywhere between two to four, four and a
14:59half times. So, is there room for these, you know, banks to reiterate on the way up? Of course,
15:03there is. But I think what's happening in the system is deposit mobilization is still a challenge.
15:08I think, you know, you're still seeing banks on a case to case basis that are actually raising
15:12deposit rates, even though we've been discussing rate cuts. Rahul, if you're talking about the
15:17elephant that is not able to dance, does HDFC Bank have two left feet?
15:23Well, you know, it's our biggest buy call and we have almost, what, a 30-35% upside on that name.
15:29And I think ever since the merger, obviously, there have been operational, you know, synergies
15:33and things like that that have played themselves out, but nothing that HDFC Bank had not guided
15:37for during this process. Maybe some of it was a little more accentuated than analysts expected.
15:42But, you know, at what, it's been trading at between two, two and a half times for some time
15:47right now. I think it's still a bank that's going to grow at 20% on a blended basis for
15:52the foreseeable future. If you just start seeing, you know, structural evidence of, you know,
15:58probably a 20% kind of growth along with margin expansion, I think, you know, the trade will
16:03probably shift back. I think people want to own this name. It's been a darling of the market.
16:08And like I said, you know, both HDFC Bank or HDFC Life Insurance, which has traded as much as four,
16:13four and a half times price-to-embedded value at its peak, are to us screaming buys right now.
16:18It's just a question of under-ownership and when the price, when performance returns to match
16:23market expectations. I mean, you were discussing DMARC a few minutes ago, Titan. These stocks
16:28are priced to perfection, Asian paints. You really don't have too much room for error. HDFC Bank
16:33was that kind of a stock when it was trading at four, four and a half times. But at two,
16:37two and a half times price to book, if you're going to have an entity that's growing at 2%
16:41or 20% with margin expansion and not too many concerns on asset quality, I think it's just a
16:46time, it's just a matter of time before money finds itself, not just to HDFC Bank, but I think
16:50the sector at large, I think there is a case for about a 20, 25% valuation reset. It's just a matter
16:57of time before it happens. And I think, you know, the problem with this, I mean, is when it'll happen,
17:01it'll happen so soon. So if you're not owning these names at that point, you'll probably miss
17:06the rally. So I'd say it's better to be a little earlier in banks because these are
17:09very high quality franchises, then try and catch the up move because these stocks will probably
17:14move 20% in a week, 10 days. And if you're not owning them, you'll probably feel left out. So
17:19from our vantage point, we'd probably be ascribing an overweight on this sector,
17:23not just large caps. You were discussing Federal Bank. That looks like an interesting one. We'd be
17:26buying on dips and even some of the housing finance companies, gold finance. I think we like
17:31something like Muthoot, you know, we've recently initiated a couple of months back on housing,
17:35urban development, cooperation. So there are lots of these names in the entire BFSI sector
17:39that look interesting where valuations are not demanding. And that I think will be probably
17:43our number one overweight sector in the market as of today. Thank you, Rahul. Good talking to
17:48you. Have a good week and we will see you soon.