What is your assessment of the current slowdown?
My sense is inventory correction is more or less done. The correction which you are seeing is the actual decline in the consumer demand. What is happening is that it is a situation where negativity is leading to further negativity. Nobody is talking good but if you ask a lot of people, their businesses are not doing so bad. Ultimately, we have to see from the tax collections. Last month was not so bad. It may not be meeting the targets but there is nothing like a collapse. The economy is growing but not at 7-8 per cent. In the March quarter, it was 5.8 per cent.
What phase of the bear market are we in?
Maybe, it is an early stage. The index (Sensex, Nifty) is just about 10 per cent from the top. The All Cap index is down 12-13 per cent but the intensity of that 13 per cent decline is a lot more in the mid- to small-caps. The index is not hurt right now but I am more disappointed with the pace of corporate earnings. I don’t see many companies growing at 15-20 per cent. That happens when the economy is on the boil. You see almost everything is growing at 15-20 per cent. It is rare phenomenon to see 25-30 per cent growth.
What are your foreign clients telling you about their outlook for India?
India is unique but there is a need for stability in laws. The positive side is the opportunity in India; there are only one or two countries like this. That’s why they keep flocking here. But, they feel let down by the way they are treated. In China typically after one year you don’t have capital gains tax or dividend tax. Corporate tax is 25 per cent. There is no STT. It is stable. In India, valuations are high around 22-23 times. Earnings growth is uncertain, while regulations have been unstable.
Is the worst over for NBFCs?
The RBI is releasing liquidity, keeping the entire system much more in liquid form and rate cuts have happened. They are trying to see that there is no major default. So, all sorts of firefighting are on. This crisis has its own proportions. Unless you are part of it you will not be able to appreciate the severities. The NBFC business was nothing but re-lending, reselling of liabilities from banks and mutual funds to the last mile. Now, nobody wants to lend to NBFCs. Everybody is in safety mode, whether it is real estate lending or even housing finance.
Is the current slowdown in auto the worst that you have seen?
It looks like one of the very severe ones. It is not only about the financing. It is something else. The squeeze in the credit flow has become widespread. One year ago, the situation was very different; the industry was in good shape. And, it’s not that everybody has gone into EVs (electric vehicles). Whenever there is a fall in economic growth, there should be slowdown in auto demand but 25-30 per cent collapse is very significant. I was talking to one of the companies which had digital marketing. They were saying that the aggregate Google search for a lot of durables is down by 15-20 per cent and he is saying that if something is not done very quickly, it might nosedive.
In terms of risk-reward, it is a good time to look at some of the auto companies?
Confidence is low. Even my confidence is low. Right now, we are talking about first year of decline. My experience is if you run 25 years of data, recessions typically last for about two years. We are in a classical business cycle downturn. It depends on how fast the government responds. A lot of businesses are out of action. People have lost jobs. So it is better that you have a clear signal.
What is your advice for hardcore equity investors?
Long-term prospects of the equity markets continue to be the same. This government has taken up several reforms like GST. They have controlled inflation; we are seeing more formal economy. Clean companies, which adopt healthy business practices, pay their taxes on time and comply with all regulations, are trading at high premiums.
What is your view on corporate banks like ICICI Bank and Axis? They aren’t finding level the market is expecting.
Axis Bank and ICICI Bank have doubled in the last few years. What more do you want? It is also about perception. With the episodes like IL&FS in the recent past, the perception hasn’t been very good. Currently, there is talk about slowdown. These lenders are in a very good position currently since NBFCs are going through crisis. Whatever 10-12 per cent credit growth is happening, responsible debtors are coming through these 5-6 private lenders.
What’s your view on consumption sector where valuations haven’t come down despite slowdown?
If you don’t correct, returns will be low. You cannot buy a low growth company with high valuations and make a lot of money.
Do you think the existing companies are strong enough to lead an industrial recovery?
If you buy companies that are least impacted by a slowdown, the same winners of the downturn should lead the recovery. What is the bottom of the downturn is still not clear. Previously what was happening was with the emergence of China and surplus global liquidity, everything was on fire. In such a scenario, you could produce and dump anything into the global market. The situation isn’t same any longer. For recovery, you would need revival in demand and that has to come from domestic level and supplemented by global factors. My sense is it will be led by domestic demand and it has to start with government expenditure.
Are fears of a real estate collapse valid?
This is a large sector and lot of money is stuck in it. Something is going to happen in the sector; either it could be a complete collapse or something else. The current situation is unprecedented. There is huge inventory piled up, no fresh buying by anybody. My sense is that the prices will continue to slow until at some level of low interest rate and sustained liquidity, consumers will start buying again. Real estate is at the heart of the current slowdown across the country. It is all interlinked since NBFCs are also linked. Lenders will have to take haircuts and the government has to be an enabler. Lenders, who cannot take the haircuts or downturn or stress, will be eliminated. The worst thing is that the stress is still not on their books but I don’t know when the books will show up.