“The structural story in case of India and this equity flows coming in from the domestic investors, is the strongest part of India story,” says Mahesh
“The structural story in case of India and this equity flows coming in from the domestic investors, is the strongest part of India story,” says Mahesh Nandurkar, MD, Jefferies.
What is the call that Jefferies has for the Indian equity market? Are you going to rerate it? What is the advice that you are giving your clients?
The Budget has definitely come in at a juncture where the global backdrop is very tough. We are looking at the Fed tightening, we are looking at in the Indian context and India’s own current account deficit is rising to an eight year high and there is clearly a need for fiscal consolidation.
So the government and the finance minister had to keep all these things in mind before presenting the Budget and in the current circumstances, they have done an excellent job because it is very difficult to put forward an expansionary budget at this point in time. The government has done the right move by going in for a fiscal consolidation which basically means that the overall expenditure growth is going to be muted. That was an expectation.
The overall expenditure growth is just 5%, if you exclude the interest cost, then it goes down to 2%. But that is what was really needed at this point in time. But within those constraints of just 2% total expenditure growth, the government has made it very clear as to where they want to put their money. They clearly want to support the capex growth which is something that is badly needed for the economy as we await the revival of the investment cycle. So in those limited constraints, the government did an excellent job.
The cues from the bond market however have been on the negative side. We have already seen the bond yields going up by 15 bps yesterday and 40 bps today and if this trend continues, that cannot be good news for the equity markets. Ultimately, the risk free rates are going up and that cannot be good news for the equity markets in general, especially in the context of what we have been seeing globally. But yes, on a relative basis, clearly there is a thrust towards capex and there is a push for investment cycle recovery.
The finance minister said multiple times that the government’s intention is to get the public investments to crowd in private investments and that is definitely the way to go in my view. So yes, we are recommending that one should be overweight in the domestic cyclical sectors. We like banks and autos. From a medium to long term perspective returns on the capital goods stocks also would be good. Although I must highlight that the overall capex growth if you adjust for some of the things that we need to look at in the Budget is much lower at about 12-15%, but in the context of a 2% overall expenditure growth, even at 12-15% growth in the overall capex is a very welcome step.
Keeping in mind the high crude oil prices, the inflationary pressures as well as the US Fed signalling multiple rate hikes, what are you expecting RBI to do in the upcoming policy? Are some calibrated rate hikes on the anvil and will that continue to push yields higher?
Yes, I do expect that there would be rate hikes by RBI. Many other emerging markets, other Asian markets have done the same and so India cannot really be living on an isolated island. Clearly the bond market is telling us that the rate hike is imminent and maybe RBI has the option of deferring it by a couple of months but we don’t have an option but to raise the rates.
What is the turning point at which you would say that multiplier impact will also be visible in rural facing businesses? It will also come back into consumer categories which have exhibited anaemic growth because of a slowdown there?
The government is trying to spend on infrastructure and there is a simultaneous boom that we are seeing in the property and housing market as well which is also a large guzzler of rural labour. All those things point towards an eventual recovery from the rural consumer and rural demand side as well.
But that recovery might be six months down the line because all these things take time to reflect and the initial spurt in the job creation on the rural side may go towards building some of the initial reserves than immediately translating into demand right away.
Secondly, from the stock market perspective, many of these stocks are still trading at a very high PE multiple and with the lack of capex cycle recovery, there was no visible growth in some other segments of the market. But if capex spending picks up, corporate capex picks up, infra spending happens, then for an equity market investor, many other options which were ignored for quite a period of time will begin to look more attractive.
I do not think that the expensive consumer names which are currently seeing the pinch of weak rural demand will outshine in a big way even if the rural consumption comes back because then the equity investors will have many other options which will offer better growth prospects at lower PE multiples.
How do you see things settling in terms of the average premium for India? The favourite anti-India equity thesis is that Indian markets are trading at a premium to historic averages and the gap between India and China is very high and so the risk reward ratio is favourable for China. Can we say that the premium in India will sustain because of earnings, corporate governance and a sustainable tax regime?
The single biggest driver for Indian premiums to sustain or stay at an elevated level is the strong support that we are seeing from the domestic equity investors. We are seeing close to about $25-30 billion annually are coming into the equity market from the domestic retail equity investors. That is going to be the most important and the strongest support, which I believe has the capability to keep the Indian multiples at an elevated level.
There will be times where investors will try to play that valuation arbitrage between India and China and maybe in the near term that looks like a possibility especially because while rest of the world including the developed world and India, etc, will be tightening, China’s policies will be loosening and that might attract some of the global investors to that market.
But I believe that India is a much better structural story. So, while those valuation arbitrage type of flows may happen in favour of China as compared to India in the near term, the structural story in case of India and this equity flows coming in from the domestic investors, is the strongest part of India story.