Clipped from: https://economictimes.indiatimes.com/markets/expert-view/we-are-basically-chasing-money-betting-on-household-capex-ganeshram-jayaraman/articleshow/81053823.cmsSECTIONSWe are chasing money, betting on household capex: Ganeshram JayaramanLast Updated: Feb 17, 2021, 04:52 PM ISTSynopsis
Electronic space is a big multi-year theme. PLI impact can be felt in pharmaceuticals sector.
What is your view on the technology space on the listed side?
We believe that we need to be a little cautious in the IT sector. We are underweight in that space. Our portfolio bias is decisively tilted towards domestic cyclical recovery. We are still a little cautious on the Street’s expectations of earnings next year. We are expecting demand recovery and pricing to be strong and margins and cost benefits to sustain. The profit growth and earnings assumptions are a little too optimistic. We believe that it will be either demand or margins, not demand and margins. We are decisively lesser than consensus on expectations going into the next 12-18 months. In the shorter term, the Street is more right than us, but we are looking beyond the horizon and with that in mind, our caution may pay heed as we go from the second half of FY21 into FY22.
Among domestic cyclicals, you like financials and especially big ones and mid cycle ones names like LIC Housing and vehicle financiers like M&M etc. You also have a good basket of corporate and retail banks. Which category is better placed in your view?
The bias is definitely towards loan books which have a corporate bias tilt, especially if those corporate assets had seen stress build up over the last many years. We think inflation in the form of commodity prices will lead to working capital demand reviving which means credit growth should pick up as you go into next year.
The banking sector has also got consolidated and we are seeing six banks driving 70% of the growth which means to that extent, there will be some amount of calibration on how much interest rates gets passed on to the end consumer which basically means margins will be quite stable. So a combination of credit growth recovery, stable net interest margins and improving asset quality which is a combination of both corporate NPAs being lot less and Covid provisions which are more than even our worst case scenarios. That means return on assets will expand for banks. The ones with the maximum uptick or delta are the ones we are preferring more. These also were the ones who were impacted more and those stocks got impacted more so.
We also are positive on the recovery in the real estate cycle. Real estate has various parts to it — developers, financiers, building materials companies and consumer durables and housing finance companies as well. We have gone for some of them. It is a very bottom up understanding of the company and the management. We have also gone for one or two names which are real estate proxies in the way we are evaluating and building our financial portfolios.
Overall, we have been overweight on financials for almost 11 months now, from late March when the stocks corrected heavily. Back in March, this stance was heavily contrarian but today it is more widely accepted and in line with how the market sees it but we have held on to it through thick and thin.
How are you really playing this cyclical theme via the manufacturing side, PLI beneficiaries and deep cyclicals like capital goods?
There are two pockets of manufacturing that we are very positive on. One is the electronic space which we think is a big multi-year theme and not only the companies which manufacture electronics but also the whole supply chain around them.
The second is pharmaceuticals where potential impact can come from the PLI sector. Apart from these two, we need to wait and watch which other sectors can be material beneficiaries. Auto is being spoken about. We still want to watch out for the ones which can benefit most.
The Budget has given us more confidence in terms of how government spending will be a tailwind and so we have added one infrastructure stock in our model portfolio. It is a large construction company, which also benefits from government spending on infrastructure. But till a month back, among the cyclicals, we preferred cement, building materials or even companies which were oriented to real estate capex or automobile.
So basically, we have been betting on household capital expenditure. We are basically chasing money. During CY19 and during the pandemic year, tax collections have suffered. Which means the government has lost a lot of tax revenues. Corporates’ top line has got impacted. But where has the money gone? Forex reserves have jumped up by $120 billion last year and even the year before, it had gone up about $40 odd billion. The money has gone into households’ bank accounts.
If you study the savings bank balances of banks, it has materially jumped up. As interest rates come down, the next phase of spending will be driven by household capital expenditure. It is in the form of real estate, consumer durables and automobiles. So our preferred cyclical beneficiaries — both direct and indirect — are in that pack.
Banks will be inherent beneficiaries as they are a broader reflection of all these. So, it is banks, automobiles, consumer durables, cement, real estate developers and the whole ancillary space around them including discretionary consumption.
We are cautious on IT, life insurance and consumer staples which are extremely overvalued. There is nothing wrong with the companies and they will continue to show their early teens or maybe late single digit top line growth and maybe even EBITDA growth. Earnings growth might be a little more but valuations are so expensive that we think outsized return potential is unlikely. We have also been cautious on oil and gas.
Coming to industrials which are capital expenditure proxies, we think that is at least 18 to 24 months away. We have seen government spending pick up and as household capex picking up that should lead to more capacity utilisation and eventually lead to private capex. That space is something which we are avoiding for now.