Opinions

Bank stress coming from agri side, won’t stay long: Taher Badshah


Taher Badshah, CIO for Equities at Invesco Mutual Fund, says while reasonable inflation has always been positive for FMCG companies, the challenge in the current market comes from high valuations. Excerpts from an interview with ETNOW:


Given the kind of recovery seen in pharma names, with the index up about 4% year to date, and the comments coming in from auto companies that the worst is perhaps over, are you feeling optimistic that we are on the road to recovery, or are you still cautious?
For five to six months now, we have been holding this view that the market will see a gradual recovery. More than the market, we will probably see a better situation in the economy in 12 to 18 months compared with what it was in last 18-24 odd months. This is largely predicated on steadily improving global macros, decent liquidity situation in global markets and a gradual recovery in the Indian context from a liquidity standpoint, especially in the banking system, and supported by broader market valuations being relatively reasonable.

We have been holding on to a relatively positive view for some time. We do not really speculate on the extent of the recovery, but we feel the market is more about reality versus expectation. If we were to move from 5-odd per cent GDP growth to 5.5 or 6 per cent over next few quarters, the market will heave a sigh of relief and take it positively and build in more optimism. That’s the way we are positioned ourselves going into 2020.

Some would say the market has already priced that in, so where is the upside? We are right now focusing on contraction versus stability. Nifty is already at an all-time high. What could be that trigger for the market to go higher from this level?
It will be a combination of improving micros, overall liquidity situation and a return of growth in NBFCs. There is a fair bit of excess capacity in the system. As we start seeing utilisation of that, it will be difficult for the market to immediately anticipate what kind of operating leverage will play out. We may probably have an earnings cycle running a little ahead of what the market estimates are. That may provide the necessary fuel for the market to stay up.

In last three-four years, we have just been looking at Nifty valuations and dismissing the market. That has never really paid off, and the market has done what it had to do despite where the Nifty PE multiple has stood. So, opportunities are there in the wider market, and that is what the market has already started to appreciate in last three-four months, when we have seen the broader market perform or outperform Nifty or Sensex. This proposition, to my mind, will get a little wider in the course of 2020.

To my mind, the agriculture space will look a lot better as we get into the later part of the year. We have seen food inflation actually being pretty positive.

-Taher Badshah

Is it a concern what we have heard in terms of asset quality from an HDFC Bank or a Kotak? Do you fear that it could rub off on some of the other corporate-focussed heavily-owned banks like an ICICI Bank or an Axis?
The asset quality-related pressures seen in a couple of banks that have announced their quarterly numbers are mainly stemming out of agriculture, as one, and maybe MSME to some extent.

To my mind, the agriculture space will look a lot better as we get into the later part of the year. We have seen food inflation actually being pretty positive. In the initial phase of rise, the food inflation we have seen over the past few weeks should probably be a little positive rather than negative, simply because it will lead to better farm income and more spending power in rural markets. So, the problem that some of the banks faced in last few quarters due to the agri stress should get alleviated as we go along. They have expressed caution and tried to control their loan growth enthusiasm last quarter, but that is just a matter of precaution. Some of the stress will probably fade away, as we get stronger results out of the rural markets. That is an additional factor we would look forward to in terms of the overall macro recovery. It will be a slow process; we will have bumps along the way. But when we look at a confluence of factors, it suggests there is a reason to believe some seeds of recovery are being sown for next four to six quarters.

What do you do with Bharti Airtel? The sector seems to be headed for a duopoly, but Bharti has got that FDI approval and a 100% quotient at that. The stock, of course, is just points away from its all-time peak. It is already at a 52-week high. What is in store for the telecom sector per se?
We have not yet heard the last word on whether it is going to be a two-player or a three-player market. We have been positioned in telecom across a couple of names for more than six months now. Our view has been predicated on potential recovery in tariffs. Most of the players are sub-par in terms of returns on capital and it is not a business where capital intensity is going to fade away anytime soon. So restoring a healthy level of return on capital beyond a particular point is going to be paramount. We did not really expect it to play out because of the AGR issue, but it has started playing out. We are now at a stage where the telcos’ ability to take more tariff hikes is still in place, given the essential nature of the telecom activity as a utility.

So, we still have a long way to go in terms of the operating leverage that can play out, because this is a highly fixed cost-oriented business and a small delta in rates can bring about a significantly large delta on earnings. I think that story still remains. To that extent, the journey could be pretty exciting from here on. We have seen a sharp appreciation in stock prices in a very short period. So maybe they will probably be some kind of calm-down, settle-down for a while. But directionally, we are pretty positive about the way the sector is shaping up.

What about FMCG? Reports suggest the worst is over, but are we really looking at some kind of dramatic improvement there? We have seen a lot of stress on the rural side, and there are expectations from the Budget. What should be the strategies for some of those stocks?
We are underweight on staples, as such. But that is primarily because of the high valuations, which have been deterring us from being overweight. We are currently underweight FMCG stocks across most of our strategies. We have some stray positions, as the return of consumer strength in the rural areas — as I mentioned earlier – and inflation should benefit the FMCG names. Typically, food inflation or overall inflation being reasonable has always been positive for FMCG companies. The challenge there is of valuation.

The other way to look at it is, the return of the same rural benefit or rural growth can benefit other businesses, either on the consumer discretionary side or other sides that are rural intensive. One can try and see whether there could be other businesses that address the bottom-of-the-pyramid in some ways. We are trying to see whether we can build positions and benefit from the same proposition through other businesses.

What is your big call then? Banks, some would argue, cannot grow at this rate — 5 times book for Kotak, 4 times book for HDFC Bank! The 15-20% incremental growth is here to stay, but will shareholders make money? Great businesses may not always be great stocks.
Yes, you are correct. We need to differentiate between good businesses and good investments. But some of these banks that trade at relatively more expensive valuations have not lost their ability to grow as and when the market becomes conducive for better growth. They have done it in the past, and in the more recent past as well. Their longer-term growth potential is not impaired. It is just a matter of caution and return of a better economic growth cycle which we probably did not have in last 18-odd months.

I think they still retain that option to always come back with better growth characteristics compared what we have seen in last one or two quarters. They are best equipped even in the current circumstances to come back to growth in terms of adequacy of capital, in terms of not having stretched themselves significantly as far as asset quality goes and still riding on very strong liability franchises. That still remains the key proposition over there. So yes, they are expensive in the short run, no denying that. But this expensiveness can be overcome very quickly with return to growth.





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