Transcription
Mahesh Nandurkar, head of research and MD Jefferies India, joining in. Mahesh, we always love our conversations with you. So, thank you for your time to us here at NDTV Profit. I want to start with a bit of an overview of how you're seeing the situation unfold right now from an Indian perspective. There are, it's a tale of two markets, really. If you see it externally, a lot of gloom and doom, West Asia crisis, crude, etc. All of that looking very difficult. If you look at what you're hearing from the ground from companies, especially in the mid and small cap space, they're talking about a different story. What are you seeing?
>> Yeah, first of all, thank you for having me here, Tamanna. Always a pleasure. So, looking at the overall market, yes, I mean, I think you hit the nail right on the head. The macro environment doesn't really look that great. With, yeah, I mean, as you mentioned, the higher crude price, Iranian war situation. But also one other emerging worry, which is actually a global worry, but applies to India as well, which is that of this El Nino and what it means for, yeah, the inflation, the global inflation, the Indian food inflation, etc. as well. So, yeah, so the macro situation is not really that great. But at the same time, the bottom-up numbers, the result season that we have just seen concluding, um, for the March quarter was actually, actually quite good and much better than what many people were fearing. And as you mentioned, some of the mid-caps and small-caps have done well, but also broadly speaking, I would say the, the old economy, the asset-heavy sectors, the hard assets have generally been doing well. So, while the macro situation may not be that great and therefore the market outlook as a whole may not be that great, but there are always a lot of good opportunities in specific stocks and sectors.
>> Mhm. You know, where are you seeing those opportunities, Mahesh? There is a broad sense that, you know, sooner or later this West Asia crisis will end. There will be some kind of an agreement between US and Iran, opening of the Strait of Hormuz. Is that going to see a huge upsurge in the Indian markets, or that's not really a situation that you see happening?
>> Yeah, so the thing is, I think the market is already building in to some extent that the possibility that you spoke about, that is the consensus expectation. That's what everybody expects. And that's also what the oil market is expecting as well, and that's the reason why you're seeing the oil prices, you know, hovering at about $93, $94, you know, as we speak. Also, the markets are, you know, have have, you know, also, I mean, the global markets have actually been doing reasonably well. Indian market have, you know, been weak, but they have from the recent bottom, they have moved up. So, what you mentioned is really what everybody's expecting. And and and so to that extent, when let's say a formal conclusion of an agreement happens in the West Asia, you will probably see the crude falling from the current levels as well. We should see some rupee appreciation. We should see the Indian markets also moving up. I'm not so sure there will be like a huge market upsurge, because as I mentioned, to some extent that optimism is captured in as, as we speak. You know, definitely a few percentage point of uptick should happen, you know, for the broader market. And what should be encouraging to see is that even the rupee, you know, in my view should also see a bit of a pullback up on the positive side.
>> Mahesh, good morning. Neeraj here. What we are also seeing is that individual news flows are now really taking markets or specific stocks higher because there's no market-wide push coming in and therefore specific themes are being played out, right? I mean, Zomato is a case in point, but that's relevant. But the the the belief that, for example, that the US issues for the Adani group will get resolved led to the benchmark stock moving from 1,800 to 3,000, but a lot of others have rallied 50% at a point of time and the Nifty has remained flat, right? Where are those cohorts where you see pockets of opportunity in India, keeping in mind that FIIs may not necessarily come in in the next few days, weeks, months?
>> Yeah, that's correct. I'm not so optimistic about the FIIs coming into the markets in any meaningful way in the near future because I think, yeah, you know, we might see one trigger in the form of the West Asia resolution, but beyond that, I think what really is weighing on the minds of global investors is this whole AI narrative and the AI trade that is still the most dominant global investment theme and which is driving money into some of the AI specific stocks and countries such as the US, Korea, Taiwan, etc. And unfortunately, India doesn't really feature, you know, in that list, you know, as of now. Where are those pockets, Neeraj? As you rightly mentioned, um, you know, so
>> [clears throat]
>> I mean, a several of the large companies, I'm sorry. A several of the large caps are not really, you know, performing. In fact, I would say that there are certain sectors like the IT, the consumer staples, you know, I would say, you know, some other sort of large cap names in the telecom space, etc. have also not been doing well. And, you know, there are some obvious concerns. You, you, in all of this. Rather surprisingly, banks, which I think, you know, from the bottom-up perspective looks like a pretty reasonable sector, but that's, you know, also not doing that well, you know, from the market perspective. And once again, I would say the primary reason is the continuous FPI selling. Because from the valuation-wise and from the bottom-up fundamental perspective, the banking sector actually is looking pretty good. So I would look to be in a position into that sector. But to your other broader point, Neeraj, on the mid-caps and small caps, I think there are several of these bottom-up ideas that are looking very interesting. I, you know, we've we've been extremely positive, you know, on this whole power sector chain of power sector team, which starts right from the electric sort of utilities, but then the equipment suppliers and, you know, then the finances and the whole solar equipment chain. So there is, you know, a whole bunch, you know, of stocks and sub-sectors that fall within that theme. And that theme is also seeing a positive trigger in the form of the power sector demand, you know, going up. And my sense is that the El Nino, which is, while it's going to be a bigger concern from a macro standpoint, but that's a huge positive for power sector demand. And therefore, I feel that this whole power sector chain, which is already done well on the markets, but I think it can continue to do well even from here on for the rest of the year. And I do see a possibility of a power demand actually surprising on the positive side. And while the current numbers that people are expecting are maybe like 5 to 6% demand growth for this year, but it could be much higher than that. So that is definitely one space and which has a lot of large caps, but several of the mid-caps and small cap ideas as well coming in from, you know, this theme. And as I said, the other theme that one should be focusing on is this, you know, whole hard asset as the theme, which is which is also to some extent a global theme as well, because in the environment where the global inflation, the inflation in India is likely to go up from where we are. That is usually is also considered to be, you know, a great news for some of these hard assets because and when I say hard assets, apart from, you know, the power theme, I mean, there are, you know, players like the the ports, the airports, you know, I would say even real estate for that matter, hospitals, you know, those are the kind of, you know, names where the businesses are built around, you know, large physical assets and some of those stocks and sectors should also be doing quite well.
>> Mahesh, the other standout but actually okay, no, let me not talk about the other theme. I just want to probe you a little bit on the power thing, the energy thing. Now, it's a very wide ecosystem, right? There are, uh, there are power producers, there are ancillary suppliers, there are green energy companies, there are transmission and distribution companies. Uh, multiple ways to play this. Which is the best way to play it because not everybody's got the capital to like a mutual fund to distribute amongst 10 names. So, what's the best, where is the best bang for the buck?
>> Yeah, I, I mean, so as I mentioned, you know, I like this whole chain. So, to be honest with you, I, I would be positive on, you know, see, basically, if even if you put all of these subsectors put together, this is actually not more than 5 to 6% you know, of the index, right? So, while while there are lots of stocks and subsectors, there to be fair, but I think if you look at on a cumulative basis, it's still, you know, from from the benchmark indices perspective, not more than 5, 6%. You know, of of the benchmark weight. So, in that sense, it is actually possible to be to be positioned in maybe all of the subsectors. But you'll ask me, you know, what is it that is looking, you know, particularly attractive? I would say power utilities or, you know, the generating companies where the valuations are actually pretty reasonable in certain cases. I mean, there are certain stocks trading at about 12 to 15 times on one year forward EV by EBITDA basis. These, I'm talking about the power utility companies, you know, power generating ideas. You know, most of these are like, you know, solar based power generation. There are some of the names in the same space which have got re-rated towards, you know, 18 times to 20 times on one year forward EV by EBITDA. So, not as cheap as it used to be, but I think given given what I mentioned, I'm expecting the power demand road to surprise on the positive. So, even those look good. So, that is one sub-sector, the power generating companies, the IPPs or the utilities as we call it. I would also say the utilities belonging to the transmission sector and and the distribution sector as well. Now, the equipment suppliers, well, that has been an extremely, you know, extremely strong theme in the last 6 months and many of the stocks have done very well. Probably they feature among the best performing stocks year-to-date. But, the valuations in many of these names have gone up to like 50 times, 60 times, 70 times already. So, I would I would, you know, basically maybe look to kind of take a step back on those. But, then, you know, the other names, you know, the whole solar equipment manufacturing, you know, that's also a chain by the, there also a several stocks there and I think given the fact that the government is clearly trying to focus on domestically generated sources of energies and giving an impetus to the local manufacturing sector, I think this solar equipment chain as a whole also looks very interesting.
>> You know, Mahesh, I'm going to come to something which you guys put out a few days ago and it became a big topic of conversation, went quite viral, and there was this whole thematic narrative that it is the SIPs, which is, in a sense, this wall of money coming from domestic investors, which is the culprit for the rupee as well as the FIIs exiting. Um, first explain that thesis, and then did you expect that kind of reaction to what you guys put out?
>> Okay, so I don't, you know, intend to single out any one specific type of domestic flows like SIP, but the broader idea that we have highlighted in that theme, you know, in that note, you know, is that if you look at the overall domestic flows that are coming into the equity markets for the last two, two and a half years, they are unprecedented. I mean, on a total basis, we're looking about 8 to 10 billion dollars a month coming into equity markets, and that's not just mutual funds, and that's not just SIPs, but also a large amount of flows coming in from the provident funds, large amount of flows coming in from the NPS schemes and the insurance schemes, you know, etc. Um, so these 8 to 10 billion dollars a month coming into equity markets is a number that we've never seen before. I mean, prior to CY 24, that number used to be, you know, much less than half of that, or in fact, even 1/3 if you, you know, look at it historically. So, you know, we believe that, you know, these 10 billion dollars per month coming into equity markets has has really, you know, in in our view, made it easy for the foreign investors, and these are not just foreign investors. You know, when we're looking at the foreign money that is exiting the markets, it's not just the foreign portfolio investors, but we are seeing foreign promoters. I mean, large consumer companies and, you know, Korean sort of, you know, auto makers and, you know, also the US companies are exiting, or maybe reducing. Not exiting is not the right word. You know, reducing their stakes in the Indian companies through stock market. We are also seeing a large numbers being put, you know, through by the private equity investors as well.
>> No, so so fair enough. I mean, you're explaining it well, but it, what is the harm if domestic investors are finally coming in? And okay, let's not talk only about SIPs. Fund the fundamental reason behind this is that Indians are now saying that we want to invest in Indian equities finally. They want to make money here. Why, why is that being seen as negatively? That was the question that was posed.
>> No, it is not to be seen negatively. What I'm trying to sort of, you know, explain is that it is actually allowed. So, so in the last two years, we've seen the foreign investors including those two, three varieties of investor that I just, you know, mentioned have sold about 80 billion dollars, you know, in equities. And if you actually look at the, you know, the balance of payment and if you actually look at various drivers driving the rupee, it's not the current account deficit which is a problem. It's actually the capital account is the problem and a large part of that capital account problem emanates from this 80 billion dollars that have exited, you know, through the stock market route. And in the in the olden days, you know, let's say pre, you know, pre-COVID times, if such kind of selling would have happened, you know, we would have seen the markets correcting in a big way and the selling would have stopped because a lot of this selling is actually valuation sensitive. But because these large tens of billions of dollars per month coming into the equity markets despite the heavy selling by the foreigners, the valuation has not corrected the way it would have historically. And therefore, the historical, you know, mechanism of foreign flow correction, which is in the form of, you know, the valuations going downwards and therefore the selling, so that that correcting mechanism hasn't really played out.
>> Just, just one more, just, just one more question on this. Is this a negative for Indian domestic investors? What should they do? Is there any reason for them to stop doing what they do? Because finally, you have that stability and depth in Indian markets which was the biggest grouse for the last 20, 25 years.
>> Yeah, that's correct. So, I'm not saying that the investors should stop investing. That's, I mean, that's definitely not, you know, what I'm saying. You know, all I'm saying, you know, is that that has allowed, you know, the foreign investors to exit and that has basically taken the process of valuation correction, you know, over a much longer period of time. So, I think what, you know, the domestic investors will have to contend with, you know, is that the process of valuation correction, which has happened to some extent, you know, as we speak, can actually prolong for some more period of time and therefore the market as a whole may not, you know, really give, you know, a strong returns which we have seen in the last 5 years. We should not be expecting that in the next 5 years because the process of valuation correction has not yet happened. That's, that's basically, you know, the key message in my view. But having said that, there are always certain themes and certain sectors which can still deliver a very strong returns.
>> Mahesh, 5 years out, it'll be great for Indian investors to own a lot more of Indian equities than what, uh, they traditionally own, isn't it?
>> That's correct.
>> That's correct. But in the meanwhile, the investors will have to show patience.
>> And, you know, investors, you know, will need to, you know, believe in the long-term story. So, while the returns have not been that great for the last couple of years and may not be so in the next couple of years, but I think the investors will need to show sort of patience and their patience will be tested in my view.
>> Okay. Mahesh, lovely talking to you as always. Thanks so much for taking the time out and being with us. Really appreciate your time.
>> Thank you, Neeraj. Thanks, Tamanna.
>> [music]