Bullish on capital goods, infra and private corporate banks: Mahesh Nandurkar, CLSA

Take a slightly longer term view of 12 months and beyond and focus more on the investment plays such as banks, the housing market etc rather than to go in with consumption plays, says Mahesh Nandurkar, India Strategist, CLSA. Excerpts from an interview with ETNOW.

What are you telling your clients to buy now because this is the last bell; if you miss the bus now, you will miss it for a long time?
It is good to see the smiles coming back on the faces of fund managers and stock market players. There is clearly a big change that one must acknowledge and I would welcome that step because the economy needs a growth push. A big bang push like the one that the government has given on Friday is really welcome.

The second point is also very clear. The direction in which the government wants the economy to grow is clearly investment because if consumption was really the end motive, they would have easily taken a larger cut on the GST. But they have chosen to cut it at the corporate tax level rather than the GST level. That clearly shows the direction in which the government wants the economy to move.

Frankly speaking, we have seen a large move on Friday and today as well but that just takes into account the potential EPS upgrades. At a market level, very simplistically speaking, we were looking at about 7% to 8% EPS upgrade. Obviously, it is a function of what the companies end up doing and what kind of benefit they pass on to the consumers or invest back to drive growth etc.

At a simplistic level, it is about 7% to 8%. But I feel that a big change in sentiment has still not been captured. What we have captured with the last two days’ movement is the EPS change. The PE change, which is also warranted, has not happened as yet. So, there is clearly some more upside here.

Can you identify the next set of gainers for us? Do you think the mega caps will continue to outperform or is it time to take a deep dive and say that corporate India will take a risk? Does the portfolio approach need to change?
Oh certainly. I would definitely feel so. We have seen the consumption stocks doing pretty well over the last four-five years. My own sense is that the consumption as a share of GDP has peaked and investment as a share of GDP is at the bottom and from here on, it will be going up.

I would like my portfolio to be skewed more in favour of the investment cycle plays which is something that I would like to play through the capital goods names, some of the infra names and the lenders which is basically the private sector corporate banks.

One can take a selective bet on the state-owned banks as well. I would probably also like to take a look at the four-wheeler space because that is the space which has got battered down. On the low-ticket consumption items, I have seen the stocks doing pretty well but that also shows that at this point in time, the risk appetite on the domestic investment cycle is still not back. The investors are still looking at buying some of those expensive names as we speak, but the time has come to take a look at some of the names on the investment side.

The corporate tax rate cut comes with its share of fisc burden as well. How do you see RBI moving now? Could the easing scenario by RBI get challenged now or would RBI maintain status quo or even hike rates perhaps?
The RBI policy outlook which is primarily based on inflation, which is the legislative change that was done a few years ago. RBI is still going to base its monetary policy on what’s happening with inflation. My view is Friday’s developments are unlikely to change the CPI inflation trajectory. The inflation in India is still at structurally lower levels. I would say that the CPI outlook will be between 3.5% and 4% and the reason for that is the farm productivity in India has improved significantly and that is the key reason why the food inflation is low.

Therefore, the broader inflation is also at a lower level. If we go by the assumption that the CPI is going to be between 3.5% and 4%, I still feel there is enough room for RBI to cut rates. I am still expecting a 75 to maybe even 100 bps type of a rate cut.

Would you be willing to expand the basket at this point or would you continue to build positions when it comes to some of those frontlines stocks you like?
Financials is one space that we like but within financials, we have been looking at non-lending financials as well. Within that, life insurance companies do not really get any benefit out of the corporate tax cut, but the non-life and general insurance companies definitely get significant benefit and that is an attractive part of the portfolio as well.

We continue to stay quite optimistic on the housing market recovery. We like the leading mortgage company as well as the property developer in that space. My sense is that while the government has announced a big bang policy announcement on Friday, that may not be the final word and I am still hopeful that something might still come out on the housing side.

Disinvestment is the other thing. The government has formed a roadmap on privatisation. Is it going to be a merger of some of the energy companies into one? Would you find any investment themes out of the entire list of PSUs under the government’s umbrella?
One thing is for sure, that the government’s focus is clearly on reviving the economy. They are clearly not afraid of taking bold steps. The Friday’s step was one of the boldest steps that the government has taken. In that context, I would say that strategic disinvestment within the PSU space is something that I would have attributed a low probability to till a few days back. Now it has become a high probability event.

The second thing is a strategic disinvestment that will also help the fiscal because while the government has given a large bonanza, it would still be mindful as to how to minimise the impact of this on the broader fiscal. If the government were to undertake strategic disinvestment that clearly improves realisations, that definitely is going to be one of the themes.

We will need to watch out for possible candidates under that space who can undergo that strategic disinvestment. There could be a few names on the energy side, on the gas transmission side and on the oil marketing side. That space now begins to look more interesting. Gas transmission looks more interesting.

In terms of PE rerating, it cannot happen in consumers, staples, in private sector capex dominated companies like the L&T of the world or in gas transmission or oil companies which are PSUs. Where do you think there is scope for PE rerating of PSUs or private/cyclicals?
It is possible in select PSUs. Clearly given the investor experience over a longer term, with the private companies versus the public, I would still consider it safer to go with the private banks and a few other companies. But yes, select PSUs also began to look interesting. Some of the names can be the strategic disinvestment candidates as also, some of the large state-owned banks.

What are the chances that whatever excitement we are currently experiencing both in terms of viewpoint and also on the stock market screen, may just be short lived. I am not talking about domestic factors, crude is on a boil, trade war fears are real, the 10-year paper in the US has started misbehaving. India maybe a great story, but the global cues may completely ramp it down. What is your view?
Absolutely. We had to be mindful that we do not go overboard because ultimately the impact of the Friday development has the possibility or the capability to take the markets up by say about 10-12% or so. A large part of that has already happened as we speak.

But over a medium to longer term, what happens globally definitely means a lot. I would essentially be watching out for two events here; one as you rightly alluded to the possibility of the US China trade war which way it is going to move. That i think is going to be a big driving factor behind the FIIs flow in or out of the emerging markets in general and therefore in India.

While the news flow seems to be there on both sides, given the fact that we are heading into the US elections, which is about a year from now, my sense is that keeping the political situation in the US in mind, there is a greater probability of some kind of an easing of the trade war tensions between the two rather than the other way round. It could be a positive factor going forward.

The second important factor to keep in mind would be what happens to the rate cut expectations in the US. As of now, the market is broadly factoring in one more rate cut by the US Fed in the current calendar year. If the commentary over there changes or if the US economic growth begins to show more signs of weakness or worry, then the market will begin to think that there is a possibility of more US Fed rate cuts and therefore there will be a possibility of US dollar weakening. That kind of a situation will be ideal for inflows into the emerging markets, Asian markets and of course, India. So yes, that remains a factor.

As of now, there is no clarity. The investor believes that the US dollar direction is not really very clear, it could move either ways but my sense is on the former the US China thing there is more possibility of easing rather than worsening.

From that perspective, my view on the Indian markets with a 12-month view would still be optimistic and I would be looking at 10-12% returns at the broader market level over the next 12 months.

Is there scope for autos now to come back?
It is possible and since potential buyers know there is not going to be any GST cut, that could bring back the people who would be sitting on the fences. Going forward into the December quarter and beyond, the base effect will begin to be more benign and therefore the year-on-year growth numbers will look much better.

As for whether I am going to go all out into autos at this point, my answer is “no” because I do not really see any fundamental improvement as such beyond the base effect and all that but I do not really see any fundamental improvement as such, especially in the near term.

I would advise investors to take a slightly longer term view of 12 months and beyond and focus more on the investment plays such as banks, the housing market etc rather than to go in with consumption plays. Yes, select auto names can actually rebound, there is always that possibility, but I would not really be buying those names with a longer term view.