Corporate earnings growth can moderate in fiscal 2025 and the markets will adjust valuations accordingly, said Sridhar Sivaram of Enam Holdings Pvt.
"We've had very strong earnings growth till now. We think earnings growth will moderate in FY25 and the markets will take some time to digest that," Sivaram, an investment director at the company, told NDTV Profit.
The veteran fund manager does not foresee a major correction in equities, even if "a time correction will be good for the earnings to catch up". Once election-related volatility is taken out, markets are where they were going into the phase, he said.
Wind energy is among the sectors that Sivaram is upbeat about, for opportunities in the coming years. He said fewer players in the space will translate to a profit pool that gets divided as a fairly large pie.
In the near-to-medium term, healthy credit growth and earnings makes private and PSU banks attractive, according to Sivaram.
On the other side, he is bearish on information technology, as disruption by artificial intelligence and a lack of appropriate talent supply, takes a toll on performance.
Watch the full video here:
Edited Excerpts From The Interview:
Did last evening (ministry allocation) surprise you, because the markets were bracing for a tougher conversation? Is policy continuity, at least among the key portfolios, a net positive from an investor's mind?
Sridhar Sivaram: No, I'm not very surprised because the key portfolios were expected to be with the BJP and it's good to see there is continuity. So broadly, we have the same ministers continuing. So to that extent, I think it's positive. There wasn't too much of a surprise. So I think there was speculation on the finance ministry post, but good that is settled.
What do you think now drives market sentiment? With so many things happening—the US election in November, the Fed commentary and the Reserve Bank India—what drives your attention for the next six months?
Sridhar Sivaram: I think inflation, both domestically and globally. My own personal view is that inflation is becoming very sticky, especially towards the last leg of it. So for the US to bring it down below 2%, for India to bring it down below 4%.
I don't see India's inflation below 4% in the next 12–18 months, not because of the core inflation but because food is becoming very sticky and that is resulting in the inflation number being higher.
We've had some policy related discussion at the ministry level and we have highlighted that maybe this is not the right benchmark to look at, because 55% is food, which cannot be controlled by monetary policy.
Now it's up to them and Reserve Bank to finally make a call, because if you see, WPI has collapsed, literally telling you there's no pricing power and it has achieved the purpose which is 275 basis points of rate hike and you've got the result, but no result with food. Obviously, you don't expect food to get impacted by policy decisions. But that's how we are right now.
Let's see if there are any changes to that. If not, we'll struggle to bring inflation below 4%. So that's how I see. Higher for longer and even for the US, I think it'll be very sticky. It'll be very difficult for the Fed to actually cut substantially and that has its own challenges as far as equity markets are concerned. I think it's a challenging next 6–12 months.
If indeed the hypothesis is that inflation doesn't come down and rates don't move, then do the markets just amble along? Is there a higher probability of a downward bias, as opposed to even the markets maintaining the valuations and levels?
Sridhar Sivaram: Yes, I would say amble along, possibly. I don't see a major correction. I could be wrong, but my broad framework is that we could see a time correction. Obviously, markets, as they move there's always a 4–5% correction. I don't see like a 20% correction or something like that.
But a time correction will be good because it gives the earnings to catch up. We've had very strong earnings growth till now. We think earnings growth will moderate in FY25 and the markets will take some time to digest that.
Given so many other challenges that we have, I think it'll be great if the market takes a pause and it stays here for a while. But normally what you wish doesn’t happen. So we'll always see irrational exuberance, both on the upside and on the downside. So let's see how things play out. My base case is that it ambles around for a while as earnings catch up.
Is that a good outcome, because there are a lot of specific sectors, which can do well, if the market isn’t downward trending? So maybe it will be good if the markets, the Nifty or the benchmark, stay as they are, but individual sectors because of policy, earnings, or a combination of both, show some traction.
Sridhar Sivaram: So if you see here, today, the Nifty is up 4–5%. We've had enough volatility in the interim, but the net result is that we are up but nothing spectacular. So I think, the same will continue, in my view, for some more time because there are some sectors which are struggling and there are some sectors which are doing well. The market will try to digest all the information that we have.
We had a massive election result which has just come and gone, which had its own set of volatility but if we remove that one week, it looks as if the market is exactly where they were. So I think we've learned to live with a little bit of volatility.
On the balance, I think, it's a phase where market is trying to digest all the new information and possibly the earnings that we will see now and then it will take a view from there on. That's how I see it.
People wonder if the government will bring any fiscal stimulus-led measures to boost rural or consumption, or continue to focus on capex. What do you think about this? Is there a resultant impact on how you think about investing within those buckets, per se?
Sridhar Sivaram: So I think for the current year, the government has possibly Rs 1 lakh crore extra, because of the RBI dividend, which could go towards trying to boost consumption. So I don't see any change as far as capex is concerned.
Keep in mind that there's only that much capex that the government can do. Even last year, Rs 10 lakh crore. They just barely managed to spend the entire amount.
Our amount is about 11-11.5 lakh crore. The absorptive capacity is not that much. You cannot just say I'll do Rs 15 lakh crore and you will be able to do it, because these are long gestation projects. You need land acquisition. There are many other challenges to it.
I don't see the government being extremely benevolent as far as consumption and giving out doling money is concerned. I think they're committed to the fiscal deficit number for next year, which is around 4.5% and I don't see that changing.
Within the constraints, I think they will reallocate some resources to ensure whatever they can from their side to boost consumption. I don't see anything major.
No populism? But even if they were to do it, can capex and populism coexist?
Sridhar Sivaram: I don't see. That's how I look at it.
As I said, for the current year we have Rs 1 lakh crore extra. So we could easily use that Rs 1 lakh crore for the so-called populism.
For the next year, we'll have to see how the Budget numbers play out. Our taxation growth has been extremely buoyant. So given that, if your taxation is buoyant, to that extent, you can use it for consumption.
I doubt it will be extremely populist. That's how I feel. We will get a sense when we get the final Budget. I doubt if there's going to be any major change. That's how I read it.
Private capex, to an extent, has been elusive with only 5–10 groups doing it. Will private capex come in only when the government steps back?
Is it something else? Were they waiting for this election outcome to be out of the way? Is it a business cycle decision that needs something to happen for that capex to come in? Will that happen? Is there a way to play it by the equity markets?
Sridhar Sivaram: I think it's a combination of all these factors. I think from the government’s standpoint, they've done everything that they could to spur private capex—from a tax cut to all sorts of incentives, PLI schemes.
So, I don't think you can question the government's intentions, which is to give a push to the capex. I think it's left to the corporates, and normally that happens when your capacity utilisation crosses about 80–85%, which we have right now.
And the last time the big private capex came in was in 2007-8-9. We had a massive power capex, which boosted the capex for the private sector. I think we're reaching somewhere similar right now. If not on the thermal side, surely on the wind and on the solar side, we will see a lot of private capex coming in, plus the capex coming in for normal business because your capacities are running into 80-85%.
So I think it will come. The election was an excuse, which is now behind us. So hopefully, in the next one year, we should see some positive news flows and the actual implementation of the capex. We remain optimistic that the private capex would come in.
Would it be in specific areas with maybe power and a few others dominating, or could it be widespread?
Sridhar Sivaram: It will be widespread, unlike say last time, because thermal capacity requires a lot of capital. And last time, that was in bulk. You know, even a media company was setting up thermal capacity. So I guess that sort of craziness is not there right now.
People are a bit more mindful of capital discipline. Rightly so, because markets punished them a lot. So I think it will be a bit more spread out. People would implement capex in the areas of their expertise rather than get into areas which are of fashion at that point of time. That's how I would put it.
Non-thermal, I remember our last conversation, you were constructive there. So do you do power generation companies or distribution T&D etc, or ancillaries and thermal versus non-thermal? How do you play this?
Sridhar Sivaram: Just to put some numbers. Wind capacity is roughly 45 gigawatt. It will roughly double in the next 4–5 years. Our solar is around 70-75 gigawatt and will triple in the next 4–5 years. Our thermal is around 220 gigawatts and we will add about 40-50 gigawatts here in the next five years.
All this is substantial and all this will require power evacuation. You will need T&D. You'll need wires. You'll need transformers. So I think the entire ecosystem will do well. It's left to individuals to figure out what they want to play.
I think their entire ecosystem has a lot of opportunity from here on, if these numbers were to play out. It looks like they will, based on the commitment that the government has, based on the commitment that the private sector is showing in some of these.
So I think this looks like a very exciting space for individuals to decide whether they want to play safe with the utility or whether you want to be a bit more ambitious, with some of the private sector ancillaries. I think there's enough and more. That's how I will put it. The sector looks very exciting.
So what is this individual betting on?
Sridhar Sivaram: I think, as a combination, we like wind as a space, because there the number of players are very less. So the profit pool that gets divided between 2–3 players, is a fairly large pie. So that's how we look at it. I mean, in some of the others, the number of players are large. So the pool of profits gets distributed. So that's how I would say.
There is a set of investors saying that as Indian corporates don't have to go to financiers or bankers to fund the capex, credit growth will not match capex growth. Therefore, banks may not be the best way to play capex.
There is another school of thought that India can’t achieve 10% GDP growth without financials. They are necessary in the portfolio. What do you think?
Sridhar Sivaram: Corporates will not put 100% of the requirement through their surpluses or through equity. They would obviously borrow, because that's how the economics of the project works far better. So I don't see that changing.
The question is, how much they will borrow and what are the ways and means. Today, for an AAA corporate, you get some of the best rates. So I don't see that being a big issue. Whether banks will make substantial money out of lending to corporates is a larger question, given the competitive nature that we are facing.
But given that there's hardly any NPA coming, because corporates have burnt their fingers in the past cycle, they're very careful about what they're investing in. Risk-adjusted, ROAs may be reasonable, because if you don't get NPAs, then you can still make money.
I think there is a place for banks to make money in this entire corporate cycle. But I agree that the loan growth may not be, you know, high teens as we have seen in the past. The loan growth in the system may be somewhere between 12% and 14% and that is the new norm. And even for the private sector that will be roughly in that range—plus or minus 2% more.
So, maybe, the private sector banks have got derated maybe for the right reasons.
If Sridhar Sivaram is an individual investor, not necessarily managing third-party money, doesn't have to meet the benchmarks, can do even without having banks in the portfolio at all, does he bet heavily on private sector banks currently or is his Rs 100 getting split?
Sridhar Sivaram: I think banks are an integral part. So if you're looking at say, 3–6 months, and you're looking at say 3 years, 5 years, then these banks are giving you very attractive entry valuations right now. So why would you want to stay away from them.
I'm not worried about the next 3–6 months. They have some challenges. The CD ratios are not the best and RBI is pushing them to bring the CD ratio down. So it can have an impact. In their near term, you know, credit growth earnings, but over the medium term, they will come back. So I like private sector banks. I like PSU banks also.
Among the private sector banks, all of the large ones have come off. Are you going down the ladder in the second rung, third rung?
And, kudos on that call over PSU banks. They have run in the last 3–4 years, ahead of the private sector banks. Can they continue to do that?
Sridhar Sivaram: I like the large ones.
So I'll just put some numbers in perspective. In FY21, the top seven PSU banks profits were around Rs 30,000 crores. Last year, they ended at Rs 1,40,000 crores profit. I am talking about profit after tax. These banks, their profits grew faster than the stock price. Each and everyone including SBI. The profits grow faster than the stock prices.
So, effectively, what it means is they've got derated over this last three-year period. Now, how do I see this? I mean, obviously they have done well. So now we are a bit more selective. So we still find PSU banks, which are, you know, reasonably sized, which have 20% plus ROA and trading at one-time book.
So I don't see any reason to sell some of these, because they're giving me extremely good numbers. Will they get more re-rated from here? Possibly not, but if the profit grows at say 15–18% roughly, I should get that sort of return from the stock.
Obviously, the starting point in you know, November or December of 2020 was so absurd for us. I mean, we bought them at 0.3 book. Those or once in a lifetime when you get opportunities like this and you have to be brave to buy them. It is easier said than done.
I know so many of my fund manager colleagues, who said you guys are making a big mistake. And now, a lot of them have PSUs in their portfolio. I'm not complaining.
All of us make mistakes. But it's just that these banks have come a long way. I mean, when you meet some of these chairmen, you just feel that wow, they're talking like HDFC Bank used to, you know, in their heydays. They want to give quarter-on-quarter profit growth, and they want to have YoY profit growth. So they make contingent provisions to ensure that the profits don't look absurdly high. So I think they've come a long way. We are still bullish on some of them, but not all.
Is there any other sector in the space that PSU banks were in 2020?
And, is there anything you believe is a strict avoid and the market is getting it wrong? You were so right about life Insurance. Is that still the one or is there something else that the market to your mind is misreading in its optimism?
Sridhar Sivaram: Very difficult to find such deep value. Very difficult, but looking at the markets I would say the power sector, because the opportunity for growth is so much that if you push it by a few years, they will still look interesting.
I'm personally bearish on the IT sector, because I think they're getting disrupted by AI. Especially, as I said in the past that 30% of the Indian IT sector is in the 1–3 year experience band, which does the basic coding work.
Look at the number of people that left the IT sector last year. Almost 10%. If you take Infosys and all the others and this is telling you that that bottom segment is getting disrupted. Companies don't want to accept it.
But the experts and all the other research that I do, tell me that this is getting disrupted. It's not good news for India, but unfortunately that's the reality.
Off market, you're a big wildlife enthusiast. Is there any place that you have come across for people to go to, which may be unexplored and does justice to that place, because tourism could go up?
Sridhar Sivaram: I was in Dudhwa in UP. A very unexplored place. Not too many people know about it. People don't even know that UP has wildlife. Possibly one of the most beautiful jungles because it's a terai region and it is green throughout the year.
I got a massive tiger sighting. I think but more than the tiger sighting, the jungle is so beautiful. I would recommend people to explore Dudhwa as a wildlife destination.
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