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HPCL GRM for H1 at $2.87 was better than last year’s H1 at $2.58: MK Surana

“We are trying to ensure that we are able to supply the fuel to the end consumers at the most reasonable prices at the same time keep it aligned to international markets,” says MK Surana, CMD,

HPCL

.

Q2 witnessed quite a few disruptions in terms of shutdowns. What are the trends that you are witnessing on the GRM front and what is the reason for the sequential decline in GRMs?
Our Q2 GRM was $2.44 and the first half H1 of FY21-22 was $2.87. So H1 at $2.87 was better than last year’s H1 which was around $2.58.

One of the reasons for GRM being low is because our Mumbai refinery was in a shutdown for a major revamp and expansion. The Mumbai refinery expansion has got a few new revamped units. We did one very complex and major revamp during the first half of this year. It coincided with the corona second wave. Now the good part was that we could take the shutdown at a time when the margins were low and the demand was also low. But at the same time, it also had a little bit of spillover because there was some restriction on oxygen used for industrial purposes. But we have completed it.

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What is the trend you are witnessing in marketing margins? How do you see the performance going forward?
We were not in the practice of providing marketing margins as such. There was a faster pick up in demand and a slower pick up in supply due to restricted supply from OPEC plus countries and the hurricane in Gulf of Mexico called Ida as also some disruption in the pipeline in Libya. So there was a jump in crude prices. Parallely the product prices were also high.

We are trying to ensure that we are able to supply the fuel to the end consumers at the most reasonable prices at the same time keep it aligned to international markets.

How have the volumes picked up given that we are seeing recovery now? Do you see any reasons for worry going ahead as there has been a pickup in the pace for EVs?
Demand has picked up very smartly. In October, petrol was up 5.83% month on month, month on month diesel was up 20%. ATF was up 15.8%. So there is smart recovery in all the major products that are visible if you go outside on the airports, on the roads, on the shops. So demand is coming up without any doubt.

Q2 disbursement up 68% over Q1: PNB Housing Finance MD

“We saw an increase in NPAs in the first quarter. However, we have reduced our NPAs significantly by 50 bps and the collection efficiency is back,” says Hardayal Prasad, MD & CEO,

PNB Housing Finance

Are you witnessing improvement in collection efficiency and asset quality? What kind of trends do you see shaping up from here on?
In terms of the asset quality, this has been a reasonably good quarter for us and especially if you look at the retail where the push is coming. We have been able to reduce our NPAs by almost about 50 bps and the net NPAs in the retail standard is less than 2.5. That is a very good story.

In terms of the collection efficiency, we are at 98.6% which is almost pre Covid levels and far better than last quarter which was 96.6%. This company is unique in terms of the profiles of its customers with a strong push on the self-employed. In April and May, Covid 2.0 wiped off some of the businesses and a lot of people lost their lives. That was why we saw an increase in our NPAs in the first quarter. However, the journey has started. We have reduced our NPAs significantly by 50 bps and the collection efficiency is back.

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The only thing that we would have liked is in the corporate book. One of the accounts that has slipped in this quarter is one which we had identified and we had told everybody that there are three or four significantly risky accounts where we expect to slip. We have allowed only one account to slip and therefore the net effect is the reduction of only about eight on the gross NPAs. However, in retail, the story is very good and going forward. The way our machinery is working, the way legal channels have opened up and the administration is supporting, it is going to be a very good story going forward.

Lending in the mortgage finance sector is improving. How are the trends shaping up at your end? What is your observation on the disbursement side?
We have done a fairly good job in the disbursement with significant increases. We disbursed almost about Rs 3,000 crore during the quarter which registered a 68% quarter-on-quarter growth. We will only continue to improve and we have seen quarter-on-quarter and month-on-month improvement on the disbursement. So the disbursement engines have started. We have a strong distribution network and are present in 65 cities with 95 branches and almost 17-18 offbeat centres. The affordable piece is also shaping up well.

So that is a very calibrated and cautious decision that the company has taken. In terms of the disbursements, the company has done a good job. Secondly, we have arrested the de-growth that was happening in the last nine quarters.

How are your borrowing costs shaping up? Is it likely to be a pressure point on your margins going forward?
This is the first time our incremental cost of borrowing has come below 6%. You must compare apples and apples and we are an AA rated company. Within that, we have been able to negotiate with all the lenders. Below 6% incremental cost of borrowing is very good.

In terms of overall cost of borrowing, there is a decline of almost 68 bps which again is a good sign. So we are seeing an improvement in borrowing cost. We have also made some changes in the way we do business with almost 47% of the acquisition coming from the digital side. We will see a decline in the cost of acquisition going forward.

This is all going to help the company in improving its numbers but it is going to take some time. One can expect it to start delivering immediately. There is a lag effect of the investment that you have made on the IT side which is going to fructify and start delivering and the ability to get very high number comes in because of the digitisation that we have done.

We have utilised the last eight quarters to improve our IT stack and that is very critical from our perspective on all the things we are going to deliver on.

Capital adequacy is hovering around the 20% mark. I think the rights issue is going on. What is the thought from here on?
Obviously raising Rs 4,000 crore is not all that easy. While the company stakeholders like PNB, Carlyle and many others have been extremely supportive of the way the company is growing as well as its future projections and what it wants to do

They were supportive and we came out with that issue. Unfortunately for whatever reason, we have continuously issued press releases as well as stock exchange releases in terms of what happened and why we had to decide to pull back. More importantly, the company wants to grow and move forward. Presently, we are comfortably capitalised with CRAR at 20.66 and the tier I is also at 17.82.

The very fact that we have decided and we are continuing to lose on our corporates, gives us the ability to build assets because risk assets are almost three times that available on the retail book.

What is your business transformation plan?
There are two things. One is on the digital side. The company took advantage of the Covid situation in the last two years and has actually improved its IT. It continues to look at the digitisation and what all opportunities that are there, new openings, new areas where it can automate. Any area in the acquisition side to the underwriting side to the risk side or the servicing side, where we see friction, we want to automate it and have started doing it.

In terms of the interventions that we are doing on the project IGNITE, which is the transformation journey of the company, in the first few months we finished off the diagnostic study which was important to understand where the gaps are. Then comes the second journey, We wanted to look at was on the underwriting and the risk piece; how we underwrite, whether there are changes, whether new engines are required and what all is required for quick decision making with technology available with us with more information available, with surrogate information available.

The third piece was on collection which we wanted to strengthen. Any company which wants to grow and is a lending company must have its collection strategy very clearly laid down.

Time to rebalance asset allocation and invest in a staggered manner: Harsha Upadhyaya

One needs to rebalance the asset allocation based on how profits have been made in the equities. Over the next two-three years, there is going to be reasonably strong earnings growth ahead. The question is how much of this is already discounted in terms of current valuations. I would say that at least the immediate term is well discounted, says Harsha Upadhyaya, CIO-Equity, Kotak AMC.

This Diwali, you know investors’ portfolios are sitting on very handsome gains compared to last Diwali. Will it be prudent to take some profit off as you are also of the view that valuations on average are higher than the 10-year average and bulk of the positivity is in the price? Or is the scenario not so frothy now to take some money off the table?
We continue to have a neutral view on the market which means that one needs to rebalance the asset allocation based on how profits have been made in the equities. For example, those who invested x percentage in the last year would have seen a significant increase towards equity in the overall offers simply because equities have outperformed other asset classes significantly over the last one year.

While from a medium to long term perspective, we still believe that the corporate earnings cycle is turning up and we are in the nascent stages, over the next two-three years, there is going to be reasonably strong earnings growth ahead. The question is how much of this is already discounted in terms of current valuations. I would say that at least the immediate term is well discounted.

So to that extent one should not extrapolate the kind of returns that one got last year to repeat next year. If the horizon is longer term, of three to five years, and if one is okay to bear some volatility in the interim, these are also the root levels to keep investing in equities. But we are telling investors not to make lump sum investments at these points of time and go for a staggered and disciplined approach over a period of time.

How important would the Fed meeting this week be in terms of cues? How would the tapering start? How much would be the amount of taking off from the market in terms of liquidity and is there a possibility that some part of that taper is already in the price?
Yes, the kind of commentary that has been coming from Fed in the last few meetings is quite clear. We are going to see tapering very soon. Also it is likely to extend until the middle of next calendar year. More or less, markets know that it is likely to start by the end of this year and will continue for some time. The US 10-year yields have moved up now. How much of is that because of the inflation concerns and how much of is it because of the taper concerns, we really do not know. But at least the fixed income market is already pricing in withdrawal of easy liquidity situations from here on. However, equity markets have shrugged off all the nervousness and there has been some minor correction but until now, there has not been a very big concern coming out of the likely taper.

But at these valuations one needs to be cautious. As and when taper begins, there could be another round of nervousness coming in. FIIs over the last one month have been on the selling side in India to take profits. Secondly India still continues to be at a premium to all emerging and global markets in terms of valuations.

In CY2021, emerging markets have largely remained flat but as there is nervousness in the global market, there could be some more selling from FIIs and Indian investors as well.

What are your thoughts on the real estate space? Deepak Parekh recently said that the best time for real estate in many many decades is starting.
We have taken a slightly different view. While we are bullish on the real estate space, we like home improvement and home building sectors rather than just playing through real estate companies. Yes we do have the real estate companies in our portfolio but to play the entire uptick in real estate, we are also betting on cement, various other materials required in home improvement and home building such as tiles, ceramics, paints, pipes like electricals and so on.

So depending on the investment mandate of the fund and the kind of liquidity that is available in the various different sub segments of home improvement, we have build our positions but clearly after a gap of maybe 10-12 years, we are seeing an uptick in real estate. The inventory levels have gone down, the sales momentum has picked up and one could reason out saying that it is because of consolidation in the real estate industry to regulation of RERA or through some symptoms given by various state governments in terms of reduction in stamp duty registration. There has been a better momentum and we also believe that the consolidation that has happened in the last several years is going to help some of the established and large players.

Which to your mind is the most ignored space right now where risk reward is very attractive?
We still believe that the cyclical sectors have more room in terms of possible rerating. We are just seeing economic momentum coming back. If that continues, we definitely see possibilities of an earnings upgrade in some of the cyclical sectors including financials. So, financials, industrials, many manufacturing areas, cement and construction are the pockets where there could be earnings upside as compared to what the current estimates are and if that were to happen, then there is a possibility of rerating in the entire space.

However, when one looks at IT, FMCG or even consumer durables, one can see that most of the upside is already captured in the current valuations and they are historically at high valuations. Also as compared to the market, the valuations levels are quite high and so the possibility of rerating in some of the sectors which have done so wonderfully well in the last 12 months seem limited.

We believe that most of the cyclical pockets should focus areas from here on if you believe that economic momentum is going to sustain and gain from here on.

Morgan Stanley’s Chetan Ahya says that we are in a 2003 to 2007 kind of a scenario. Do you agree?
That statement is partly true but there are some dissimilarities as well. One such dissimilarity is clearly in the initial stages. The entry level valuations were relatively much more attractive as compared to where the valuations are today. The second difference is at that point of time, there was a large scale investment cycle beginning to unfold but today when we look at the economy, we see that while there is a requirement of large scale investments, we really have not seen a large investment cycle becoming visible. I would say that this is slightly different from the 2003-2007 era.

But on the other side, there is a higher retail participation and higher institutional investments happening. There are some added positives and dissimilarities when you compare it to the old cycle.

Don’t see end of bull market within the next 12 months: Shankar Sharma

Parabolic returns belong to the really unloved areas of the market; real estate is one such area. DLF and the others have done phenomenally well. Building materials is another big theme. If real estate does well, one may have a stock like

Kajaria Ceramics

. The liquor and underwear stocks are the other two areas for slum to penhouse returns, says Shankar Sharma, Vice Chairman & Jt MD, First Global.

ET Now: Same time last year we were debating whether a new bull market has started. Now everyone is convinced that a new bull market has started. Last one year has been nothing short of a year of dreams both in terms of wealth creation and also in terms of how we are now finally at the right side of the corona war. What are your reflections for the year gone by and how much of the good work what we have seen this year is likely to carry forward to next year?
I had tweeted that I do not see too many concerns. We can always squabble about valuations and markets have gone up and that is a permanent concern. As market analysts and investment folks, we should always be concerned about something or the other as otherwise it appears too easy.

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But the point is when investment bankers start to make so much money, that is usually correlated very well in India at least with some kind of intermediate market tops. The number of issues hitting the market and the amount of capital that companies are looking for does raise the question whether a lot of the secondary market liquidity will get sucked into the primary market and which will create some kind of void in the secondary market. Usually, the secondary markets precede a primary market rally by like maybe 12 months or so so. The bull market starts in secondary and then the primary market boom starts maybe 8, 10, 12, 15 months later. We are exactly at that point from April of last year and about 14-15 months into this bull market and the slew of offerings is staggering to say the least.

So if I were to look at even a remote problem area that would be the huge rush of QIPs as well as of the primary market issuances. That apart, we are still on a very good wicket on the basis of two-three factors. I do believe we are due for some degree of correction or at least not a correction in terms of price, at least in terms of time. We have gone up phenomenally in a very short span of time. The markets are taking a breather and quite rightly so. But one should not think that it is the end of a bull market or anything of that sort. That day will come but definitely not in the next 12 months at least. It can best or it worst be a sideways to a slightly down market in which still plenty of money will get made on an inpidual stock basis.

Let us analyse where there is risk versus where there is opportunity in the market. If I were to ask you to give me three buckets and categorise sectors or stocks within that market cap agnostic, where do you think there is no return? Where do you think there is going to be a volatile return and where do you think there is going to be parabolic return from here onwards?
The no return is pretty simple and that is the guys that we have studiously avoided for the last 15-18 months which is the Levers and the Nestles and ITCs and the Asian Paints of the world which are no doubt great companies but they are not great stocks, at least they have not been great stocks for 18 or 24 months.

They had great times in 2018-2019 when the rest of the broad market was not doing too well. These were the stocks that did reasonably well relative to the rest of the market and that created a story in the market that one can buy these companies at any point in time and one can make 20% per year or whatever. This is total nonsense. You have to go back in history and see that there were long periods of time when they did not deliver any returns at all. I think we are right in that middle of that period when these stocks are not going to make any significant money.

In fact that is what I had said to some other journalist that a Lever or Asian Paints is not the kind of stock that is going to get you a penthouse in South Bombay. If you live in that pent house, it will prevent you from going down to the street level. So the first question is easy. Parabolic returns belong to the really unloved areas of the market; real estate was one such area we bought quite a bit in the March-April period. In our schemes, DLFs and the others have done phenomenally well.

Building materials was another big theme that we thought would again be in line with real estate which was bombed out for a very long period of time. Some of the money made in the stock market seeps into the real hard asset economy, which is real estate. If real estate does well, one may have a stock like Kajaria Ceramics. They have done very well for us as well.

When people make money, they start drinking quite a bit. So we bought the liquor stock that has done very well for us as well. So, yes we have been unconventional in the last four-five months buying multiplex, real estate and a few liquor stocks. We have also been buying a few underwear stocks. When people stay at home, they do not buy that much underwear right but when they start going out, one can assume that they are going to be wearing more underwear than in the last 12 months. So let us just say that we have been a little unconventional in our strategy and that has done very well for us. Rupa and Dollar have been decent stocks for us. Those are the parabolic return areas of the market.

Other than that, the steadier returns are obviously from the pharma pack. They have corrected a bit in the last few months but they have done very well in the preceding 12 months. But again from this point, they will not get you from the ground floor to the penthouse yet.

Copper, zinc, lead, nickel, lithium are going to be future metals driving the new world: Vedanta Group CEO

“We have designed a path for all our businesses and committed that we will release all our fresh waters and we will be net water positive company by 2030, ” says Sunil Duggal, Group CEO,

Vedanta

.

Can you talk about the record quarter with the strongest EBITDA that we have seen coming in for the company in Q2? Can you give us some highlights on that?
We had a very happy quarter with record revenues at Rs 30,000 crore odd, record EBITDA at Rs 10,000 crore odd. So we are in a very sweet spot. We have been able to deleverage by around a billion dollars and so net debt EBITDA ratio has come down to 0.5 which is one of the best globally. We are in a very happy situation as of now.

The deleveraging across metal companies has gone up. Can you talk about this deleveraging trend and will this continue going forward?
Substantially, all across, global majors have all reduced their debts and this is the opportunity everybody has encashed.

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In terms of metals seeing demand growth across the world. Do you think the capex will now pick up?
Globally people are readying for the investment. The commodity cycle is such that you pass through low and highs and good companies are those who keep investing and looking at the high cycle when they pass through the low. At Vedanta, we have always been looking at making our asset low cost profile.

We have been looking at all the opportunities of brownfield expansion, digitisation, technology adoption. Now when the new era is coming, when everybody is talking about net zero, in that direction, it will become a mineral intensive industry. I would give you the example; the EV car requires about six times more minerals than the usual car, the renewable power requires about nine to 10 times more minerals than the usual coal or gas based plants.

Looking at the opportunity going forward, minerals like copper, zinc, lead, nickel, lithium metals are going to be the future metals which will drive the new world.

Could you tell us about the cost guidance that has also gone up across the spaces in all the segments whether it is zinc, aluminium, oil and gas?
The margins are going up a little. Suppose I predicted the margin of say $400, $500 for a minimum at the start of the year, today margins are crossing $1000 per tonne so naturally there will be commodity headwinds. Similarly in zinc, if the margins have gone up by $700, $800, $900, naturally the cost will also go up by $150.

But that does not bite us because it is driven by commodity prices, by coal prices and we have to see what is the global trend. But it is a happy situation for us.

ESG has been in focus. What is Vedanta doing to improve its ESG score?
Vedanta wants to play its part. In the last 10 years we have been trying to run our sustainability journey but we are trying to give the new birth to ESG. So in the space of ESG we want to play our part and we have travelled our journey in the last 10 years in a way that we have come in the bracket of the top global natural resource companies.

From here on, we have made big commitments like we want to be net zero by 2050 or before. We also committed that by 2030 we will increase our renewable usage by 25% and we will reduce our carbon footprint by 25%. We have also decided that we will not put up any new thermal or coal based power plant and the existing plants will live to the end of their existing life. Similarly in hydrogen, we will see how we to facilitate our facilities to ensure that we are ready to use the hydrogen as a fuel.

But we will also be thinking about how to set up the hydrogen research and manufacturing facility and play a part in the hydrogen energy transition for India as a whole for which the country has taken a mission.

We have also decided that by 2030 we will be a net water zero company. Our

Hindustan Zinc

is 2.4 times water positive already and they have mapped out a path to be five times water positive company.

Cairn India

is also a net water zero company. We have designed a path for all our businesses and committed that we will release all our fresh waters and we will be net water positive company by 2030.

Sit on the sidelines in IRCTC; bet on 4 PSU stocks instead: Chakri Lokapriya

“One can consider

Canara Bank

or Union Bank or State

Bank of India

among PSU banks,

Concor

in transportation and Bharat Electronics in defence,” says Chakri Lokapriya, CIO & MD, TCG AMC.

As a fundamental investor, it is very clear that the government will do nothing to shake the apple cart of IRCTC. Would you be tempted to be a contra buyer in IRCTC?
The government acted quite quickly in reversing the fee sharing and now the question goes back to the basics in terms of whether it will become a platform company which is what is driving up the valuations.

Platform companies revenue growth will happen over time and for that one needs clarity. We will stay on the sidelines until there is some more clarity on whether IRCTC as a business model will evolve into a platform company which will grow the valuations.

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What do you make of the Reliance Jio phone launch? For the first time, Reliance is not trying to be a disruptor in the market and it is evident that based on the pricing that they have announced, telecom tariffs have to go higher?
Indeed and that is a very prudent well thought out strategy. Given that 5G will come down the road, the tariffs need to go up because data intensive traffic cost more for an operator and from that perspective, India has one of the lowest rates whereas the spectrum rates are one of the highest. So until this mismatch is corrected by the tariff going up, it is a very prudent move. We should expect more of the same in the coming quarter and a more realistic level of pricing given that now penetration of both data and call usage are at a high level by global standards.

Dr Reddy’s managed to beat margins. What about the pharmaceutical pack — Sun Pharma and Dr Reddy’s?
The FDI inspections are routine for the pharmaceutical industry. Pharmaceutical companies have underperformed this year but their growth remains intact going into the next year which is largely normalising the company’s revenue growth rates and product announcement. We will also see a slightly more stringent FDA action. But the industry itself has geared itself well to meet FDA inspections standards than before and the valuations are very reasonable. So Dr Reddy, Sun Pharma, Cipla all are positioned well.

What are you making of PSUs as a pack and not just IRCTC?
There are enough companies within the PSU where the valuations was never questioned. PSU banks is one. If one looks at banking as a sector — be it Canara Bank or Union Bank or State Bank of India, the largest ones have actually outperformed the other banking private names over the last one year or so.

The year to date returns are far stronger and despite the runup, the valuations are still pretty much in their favour, the books are cleaner, the provisions coverage have improved, the NPAs have come down thanks to an improvement in steel and other commodity related sector which was and real estate which was a source of concern for many of the PSUs. Suddenly those are not likely to be NPAs anymore.

Second is in the area of transportation — Concor.

Third is in defence — Bharat Electronics. It is one of the less known stories. They also have software as a service as a pision. It all comes down to execution. The company’s beat expectations, the valuations are in line and the growth is very evident. There are enough pockets where a good amount of money can be made.

Vikas Khemani’s 3 stock picks for Samvat 2078

IT has done very well over last one year and many stocks have become 3x to 5x from their lows and demand environment is very robust and has changed structurally from the next three to five years’ perspective, says Vikas Khemani, Founder, Carnelian Capital Advisors

What are the learnings from this year and should people extrapolate these returns or should return expectations get normalised from here on?
Last year around Diwali, the fear was probably high and expectations were very very low and down the line, the situation completely reversed. We have high expectations and somewhat low fear. Last year, the pace of recovery surprised everybody. But there was a second negative surprise in the form of the second Covid wave but net-net, some of the sectors like IT have done phenomenally well. Many manufacturing ideas have done very well. There were multiple themes at play in this period. Real estate has done very well over the last 12 months. Many sectors which were considered otherwise untouchable, have come out and done very well.

You are one of the first people who have identified the Nifty midcap IT theme. Is there more steam left over there going forward in Samvat 2078?
IT has done very well over last one year and many stocks have become 3x to 5x from their lows and of course there is no doubt that demand environment is very robust and it is not going to be only a short term demand outlook which has changed; it has changed structurally from next three to five years’ perspective.

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Stock score of LIC Housing Finance Ltd moved down by 2 in a week on a 10-point scale.

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You always like IT and banks. Which is your first pick this time around? Could it be from the banking space?
Among our larger portfolio companies, I like ICICI Bank. Banking is expected to do well over the next 12 to 18 months specifically given the fact that the NPA cycle is behind us, the credit growth is picking up and both these factors are very good for banking. Also, a mild increase in interest rates always helps banks or lending institutions.

What is your second pick? I see the infra space coming in. What is making you so positive on L&T?
The capex cycle is picking up in the country across private as well as public sector. We are seeing big spending on infrastructure, real estate, factories across the board and this is a one company which is leveraged to the country’s infrastructure building again in private as well as public. I think there is no company which comes close to L&T’s capability across various segments.

L&T is an obvious beneficiary of infra spending. if you just adjust for the market cap, there would be subsidiaries in the IT space. L&T’s market cap is lower than or similar to what it was in 2008. So it has significant value which is still not captured. If the Indian economy has to do well, there is no way L&T cannot do well and more importantly, it is also leveraged on the IT sector through its subsidiary which hit larger value.

The risk reward of remaining invested in L&T is significantly in favour of investors at this point in time.

What is your third pick and the final pick for our viewers?
I would say I would go for

LIC Housing Finance

again you see stock has not done really well again it is backed on totally in the real estate, credit growth on housing finance side and I think this is one of the company which have the lowest borrowing cost on the liability side like it was for HDFC. But if you look at the valuations, it is very much close to one time book so NPA cycle. I personally think that as the credit growth picks up and starts showing up in numbers, it will not again deliver 15%-20% returns. It has almost 2.5 lakh crore of credit book versus the market capital of the company around 20000 crore. I think you know there is a huge potential from here to get rerated as the concerns around NPA which helped in the past in last couple of quarters which has been bottomed out.

It has significant risk reward safety as well as potential of high returns.

Why Morgan Stanley is betting on India’s sustained recovery

We still think that there is scepticism about sustainability of India’s growth story and that is the reason why we put this note out and we are taking the other side of that debate that India will actually deliver, says Chetan Ahya, MD, Morgan Stanley

Where is the Indian economy headed vis-a-vis the global economy, given that we are in a strong growth patch? Why would you bet more strongly on India versus the rest of the world?
India’s GDP growth will accelerate to 7% over the next four years. The debate was whether the initial V-shaped recovery that we have been talking about globally as well as in India has come through. Is this recovery just the pent up demand or it is going to be sustained and that is why we are arguing that it will be sustained and we will see 7% growth over the next four years.

In contrast with the rest of the world, there are issues related to income inequality that has been catching the attention of policy makers and they are having to respond so we are seeing policy actions being taken in the US as well as in China where they are taking measures to compress the corporate profit to GDP over the medium term whereas in India because the government still has to ensure that there is enough job creation and the investment to GDP needs to go up, the government is trying to take measures which is incentivising corporate profit to GDP to rise and therefore it is a different backdrop that India is in right now relative to rest of the world.

How do you see the fabric of the global economy changing with what China is trying to do? China is consciously trying to slow down their economy. If the changes which the Chinese government is doing are far reaching and impactful, how will that change the equilibrium?
When you are thinking about the external environment for India, what you have to remember is that in this cycle, the US has taken the role that China took post 2008 and when we compare the debt to GDP delta, which should be measuring the aggregate fiscal and monetary stimulus impact on the economy, we are seeing a bigger rise in debt to GDP in the US in 2021 and 2022 compared to what China is going to take up.

The first is that it is an important point and it is not just the US but even the Euro area and other big parts of the world are seeing a very different recovery in this cycle. If we take the global picture in aggregate, we are going to have a pretty strong export trend for India and for the rest of the region. One other thing which has changed in this cycle is that Covid has triggered greater focus on outsourcing and so India’s software services exports has also got a boost much similar to what we got after Y2K in the 2000s.

When both these points are taken together, we are still quite confident that India’s exports will be relatively strong in this cycle versus what we have seen post 2008. Just to give you the backdrop of global trade numbers where 6% on an average in 2000s and post 2008 almost over a nine year period global trade average was just 1.2% whereas right now it is expected to be in the range of 5-5.5% over the next two years. That will be a very different external demand backdrop for India.

If you are seeing India entering a new virtuous cycle when it comes to capex, when are you expecting a new profit cycle in India? In a recent note you talked about the disappointment over the last 10 years, but how does India stand out now?
At this point of time, investors are paying attention to India as you can see from the way the capital markets are but we still think that there is scepticism about sustainability of India’s growth story and that is the reason why we put this note out and we are taking the other side of that debate that India will actually deliver. So there is an active debate going on amongst investors about sustainability of this recovery which India has seen already.

What are your expectations from the new profit cycle in India?
Effectively what will happen is that with the recovery in external demand, initially operating leverage will benefit the corporate sector and boost their profitability. But as capacity utilisation improves, they take out investment growth and that will be the next leg of the corporate profit to GDP improvement with capex helping, also improved productivity growth and that is essentially going to lead to us to an environment where GDP growth will be averaging around 7% over the next four years. These would not be exactly the same numbers that we saw during 2003 to 2007 but the overall direction and the dynamic in the economy will be similar to what you saw in 2003-2007 for India.

You were talking about how the policies of this government stand out unlike the matured economies because we are consciously trying to raise income. One of the mega trends that has been talked about is the comeback of the manufacturing sector. How is this a part of the new virtuous cycle? Have you started seeing that and have investors started to recognise that?
We are seeing early signs of it in terms of manufacturing investment coming in from the foreign side and FDI in India has been relatively strong. But to see a major shift where India becomes a more active manufacturing base is yet to happen. But we would see that trend evolve over the next two-three years. Remember that domestic demand in India has also been weak for all these long number of years as domestic demand picks up and the domestic opportunity also becomes more attractive, we will see a pickup in manufacturing investment from the multinationals and the domestic corporate sector will also be more confident about investing. We see sustained increase in sales growth for them with GDP growth remaining high in 7% range.

Your recent note comes at a time when inflation globally is high and interest rates going up is a matter of when and not if any more. This is a time when cheap capital actually runs away. Isn’t that going to be a challenge for developing markets like India?
So if you are trying to compare this situation with 2013, there is a lot that is different in this cycle. Firstly, the Fed itself is tightening at a much later stage or rather withdrawing accommodation at a much later stage of the business cycle. The US unemployment rate is much lower right now versus what it was during 2013. So the strength of the US economy is in a very different position when the Fed is deciding to take the decision to taper its purchases.

More importantly. emerging markets including India have a very different macro stability position. India’s inflation has been well behaved. During the last quarter of 2012, India was running a current account deficit of over 6%. Right now, we have a current account balance on a four quarter trailing basis running around surplus. So, we have a very different macro stability dynamic that is in place.We we do not think that the tapering decision taken by the US Fed is going to have significant impact on India or emerging markets and when the Fed does decide to take up rate hikes and the Fed futures are currently pricing in that by December 2023 US policy rates would be in the range of 1.4% even when it is at 1.4% underlying inflation will be around 2%. You are talking about Fed still operating with negative real interest rates so we think that as long as the Fed decision to take up rate hikes is done in a gradual manner and not in a disruptive manner India should be able to manage in this environment. Again I would like to draw the comparison with 2003 to 2007 when the Fed was constantly hiking and you still had India’s growth story well maintained we did not have a challenge when the Fed was tightening and this cycle is in that sense very similar to 2003 to 2007 because what is different is you have a very different external demand backdrop. So as long as exports are doing well, one can take it for granted that the current account balance will be well behaved and therefore we would not have too much pressure when the Fed starts to taper.

Given that the RBI Governor Shaktikanta Das has now got an extension of another three years, do you think the Indian central bank will retain an accommodative stance? Will it continue to be a growth propeller or will it turn into an inflation warrior? When will India start moving on rates?
The central bank will begin to hint that they are withdrawing accommodation. They have already taken one decision to make the adjustment to the asset purchase programme but we are expecting that the RBI will probably hike reverse repo rate in December and hike the repo rate in February 2022. So we are expecting RBI to begin to move in that direction because currently, the effective policy rate is in the range of around 3% and inflation is at around 5%. We have 200 bps negative real interest rates and that was needed to get the economy back up on a good path. But now we have enough evidence that the economic recovery is strong and therefore we think that the RBI will begin to move in the other direction and withdraw accommodation and so we are also expecting them to take a policy rates up by about 150 bps in 2022 which is somewhat higher than what the consensus is thinking right now.

But our approach on this is that even with the 150 bps rate hike that RBI takes up in 2022, we would just still be barely getting to zero real rates. So that is a path on RBI’s actions that we are expecting and as long as this is done in a gradual manner, India or the economy will be able to take these weight increases that we are forecasting.

Rural recovery helped led to huge profit jump in Mahindra Financial in Q2: Ramesh Iyer

Good monsoons are good for rural market sentiments and as everyone hopes for infra opening up, the two together are driving the rural sentiments, says Ramesh Iyer, MD, Mahindra & Mahindra Financial Services.

What led to the 237% jump in profits in Q2?
I would take you a little back to the first quarter end when I had made this comment very clearly that once the rural sentiments return to normal and the commercial activities begin to happen, we would see a sharp recovery and a very smart recovery from that market. That has been the truth of that market. It does fall faster but also gets up much faster. Between July and September, things were getting to be normal. Lockdowns were opening up. Our branches were beginning to start their activity and consumers were back on the street running their vehicles, using the product, etc.

Clearly their cash flow is what has led to this and the recovery from the delinquent accounts which was provided for in the first quarter, has reversed. Our collection efficiencies have been very good in the three months, 100% being the highest in September. That has helped reduce the gross NPA by close to about 3%.

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Also we saw good demand for vehicles. While, all of us know short supply of inventory was a real problem in the marketplace, demand was not and we saw a good disbursement growth of about 65% over the first quarter of last year. So collectively good disbursement, good collections, reversal of delinquent accounts, consumer sentiments remaining positive and the branches all opening up and being able to meet customers were the reasons for the outcome.

In the second quarter we have seen disbursals for most NBFCs clock at an all-time high. Economic recovery clearly is led by strong rural sentiment which is what you alluded to just now. Help us understand the pockets which are witnessing growth and how the overall credit demand is looking like.
Without exception, we are seeing good demand in all products, whether it is for tractors, auto, cars or pre-owned vehicles. Only in the case of heavy commercial vehicles, single truck operators, self-driving driver owners are currently still refraining from adding vehicles but otherwise, every segment has seen demand pick up and across the geography it is without exception.

So overall the economy in the rural market has revived. It should also be important to understand good monsoons are good for rural market sentiments and as everyone hopes for infra opening up, the two together are driving the rural sentiments.

You had guided to the improvement in the quality of the book, the improvement in the NPA picture for your company. But assuming a little bit further, what areas are you seeing improvement in?
Without exception, every geography is showing signs of improvement and yes the NPA reversal has been a good story for us and we believe that going forward it would be exactly this way and we would see declining NPA trends. The reason why we are saying it is because normally the second quarter is not the best quarter for rural areas, given monsoons activity levels normally are not very high. In spite of all of that, this is what we have seen in the marketplace and it is a very clear signal of things getting back to normal out there. Also with good monsoon, we expect the farm cash flow will be very healthy; also, infra will open up which will drive cash flows in that market and the festival season, the marriage season will get normal. Tourism is opening up, schools are opening up and in every segment, we will see the operations of the vehicle and therefore their revenue will go up.

There could be a little dampener around diesel, petrol price which has gone up but I also believe that there would be a repricing of the freight rates as well as the passenger fare which would happen over a period of time. That should settle the issue. Put all of this together, we think that the trend is of declining NPA, good collection efficiencies and growth of business.

A lot of people look to companies like yours to gauge the sentiment in the rural economy and quite a lot has been said about the recovery in that sector. What are the specific trends that you are witnessing?
One thing that we have seen over the past and now is that people are keeping back some of their earnings for future emergencies. This is their learning from the first round of Covid or the second round of Covid when they were suddenly stuck with a problem and they had to meet emergencies, possibly they did not have sufficient funds etc, etc. So now people are not investing all that they have or spend all that they have. That is one trend that we are definitely seeing.

The second trend that we are seeing is that a lot of first time buyers of vehicles, first time takers of credit in the market are getting a little more cautious and saying that should we really acquire more assets in this round or should we wait and watch for some more time? Other than that, as I said, the excitement is up there.

You have seen a big uptick in your disbursements when it comes to pre-owned vehicles. It has gone up from 6% to 17% year-on-year. Where did you see this loan mix concentrate progressing, how will it pan out?
The percentage change is also an outcome of and if other products do not do so well, the percentages within the product mix start to show different numbers but nevertheless pre-owned vehicle is a growth engine for us and we see a lot of demand for pre-owned vehicles especially with the new vehicles not being available. People want vehicles and therefore they are willing to go in for pre-owned vehicles. In case of pre-owned vehicles at the mid-sized to low-end segment, the supply is a major constraint. Not too many people are coming and exchanging their vehicles.

NBFCs have gone slow on requisitions during the last one year and so the stock from NBFCs are not coming up and therefore the demand is very high as compared to the supply even in pre-owned. But that is a growth engine for us but overall as things settle down, as vehicles start becoming available and market becomes more normal, our mix more or less would remain the same with auto about 30%, tractor about 17% odd, the car segment about 25-27%, pre-owned vehicle about 15% and commercial vehicles 6-7%.

What is your outlook when it comes to funding cost and margins?
Funding cost for us has been one of the best. This time, sufficient liquidity was available. We are able to raise money through the PSL route. All instruments, even our fixed deposits in spite of the rates having come down, we see good traction on the deposit side. So the overall funding cost has definitely remained low.

We believe that going forward it will be stable, we do not see much decline and at the same time, the lending yields have also remained constant. That has helped push up the margin because the borrowing costs had come down for us, especially when we changes our old liability and the new borrowings got done, the rates got corrected for us and we see the margin improvement happening. But going forward, I believe the margin would remain stable. We do not see a major drop in the borrowing cost and expect that the lending rates to go up substantially.

Reversal of IRCTC revenue sharing plan positive for market: Hemang Jani

The initial announcement of the railway ministry had given a huge blow and rattled investor sentiment. I am really surprised by the fast response that the government has shown to address investor concerns, says Hemang Jani, Equity Strategist & Senior Group VP, MOFSL.

Better sense prevailed and it was a good decision by the DIPAM secretary to very categorically say that railways is going to withdraw their decision to share IRCTC convenience fee?
I definitely think so. The fact is that after the OFS, if there are any critical steps that investors need to know, that should have been clarified. It would not have gone right if overnight the government came up with ideas where a large part of the revenue will be given away to a group entity. Though the government is a promoter, keeping in mind the fairness and the interest of the minority shareholders, it should have been dealt with in a much better way. But if there is a reversal of that sharing arrangement, definitely it will be taken positively by the market.

This is also a matter of messaging. Traditionally this is exactly why investors have shied away from PSU stocks. IRCTC was a benchmark, completely breaking away from the traditional PSU performers and it had given investors handsome returns. So has the rolling back of the 50% revenue sharing decision sent the right message not only to minority shareholders but even from a global or DII participation?
Absolutely I think the government has been the biggest beneficiary of the entire rerating that has happened across PSU names partly because of the pestment progress, partly because of the way the government has gone about Air India pestment and there is definitely a sense that this government is out there to clean up the legacy issues and go ahead in terms of privatisation. In such a situation, the initial announcement of the railway ministry had given a huge blow and rattled investor sentiment. I am really surprised by the fast response that the government has shown to address investor concerns.

That is telling us that this government is far more quick when it comes to correcting any decisions that they have taken which are not taken by investors in the right way.