High-Impact Industries Key To Job Creation, Says Nivalis Partners' Ayaz Motiwala

Ayaz Motiwala: Let me start off by saying that I think the first thing that on an immediate basis comes to focus from an investor’s perspective is a potential that the government has to do something in the Budget in terms of tweaking a little bit of the income tax rates, maybe corporate rates as well, which is being talked about...

So I think the pointed answer to your question is, hopefully there's something in the Budget for the common man or the tax-paying common man, so to speak one.

And then the broad based taxation that is indirect taxes such as GST, there could be some tweaks and reliefs there as well. Indeed if the states get together on the fuel side of it and then once they have a rationalisation there, that could be, you know, meaningful cash potentially in the hands of the average consumers. That I think is now sort of an immediate thought.

I think in the longer term, the provision of employment through high impact sort of industries, which provide a lot of jobs, such as the creation of infrastructure, which you talked about, and capital investment and then services industries such as tourism, which is a big agenda on the part of the government, where the employer or the employment multiple is quite high. Those are some of the thoughts that we have.

Ayaz Motiwala: Absolutely. A little bit of that is being sort of indicated even in the stock movement, if you were to notice. So it seems. I speak for ourselves, but I think other participants too have done an early round of a little bit of allocation. And maybe, potentially, this kind of hopeful situation translates into actual numbers, talk about the sort of rural recovery.

Talk about volume growth coming back for industries and a more steady environment in terms of raw material situation and thus pricing and inflation—if you combine all of those, it seems the outlook on a 12–18 month basis seems to be getting better, even before any of these potential, sort of actions (are undertaken) by the government to further jumpstart the consumption side versus the investment orientation which has been the case for the last three five years.

Ayaz Motiwala: This goes back to even a three-five year situation, if you were to look at that. So it's not that the PSU banks, the other sort of defence-related PSUs largely and some private companies—and then the capital investment that you talked about—have come about in the last three-six months or a year.

So, I think, the exact opposite where the investors have chipped away from let's say, telecoms, IT services, consumption, a decent amount from large-sized financials such as corporate banks, etc, and tweaked their portfolios.

So I guess it will be more of the same, as investors go by and where they sense the opportunity to build their portfolios with a forward perspective on a potential recovery in consumption while the investment arguments are continuous.

So it will be a little bit of a chop and churn, rather than sort of a massive replacement in the next 12 months as well. I think the evidence of this will not be at the press of a button and suddenly all consumption and all companies will recover and start probably posting 10% volume growth and 17–20% revenue growth. I think we're fooling ourselves by thinking that way. But it'll be, you know, clearly bottom up from a single stock perspective. As a sector, I think the sense will be of an improved outlook, and an optimistic outlook, where the numbers will play out I think going easily 18–20 months out.

But as you know, stocks would probably run a little ahead, investors will position themselves a little ahead and that would probably start in the next 6–12 months from now.

Ayaz Motiwala: While we focus on always, let's say, like the conversation this morning about, say potential rural recovery, etc, as you know, over the last three, five years on an extended basis, most consumer companies have talked about premiumisation, discretionary, starting from cars, to vacations, to travel, have all done quite well on a low base, from an all India perspective. So that is quite sort of contrary and contrasting to what we're talking about this morning.

Now, that being said, most companies have 30–50% of their business and rightly so, because the way India is positioned, coming from the so-called rural as we define it... So it's not as if the business is tilted 70–80% towards one particular geography or the type of consumers that we're talking about, which will change course dramatically.

But a consumer which was just doing a base level consumption, not adding volumes or moving up a little bit of the value chain for say, a Unilever buying better soaps or better detergents or better shampoos, we will see those kinds of positions happening.

So the short answer is, I don't think there is any sharp way to play the so-called sort of rural recovery. There is really a lot of money that is there in rural India. You probably could talk about two-wheeler companies, tractor companies, which I think have a far more impactful recovery, when the sentiment across the farming community or the rural community improves, both in terms of employment or in terms of getting MSP prices, volumes and those kinds of subjects.

The urban-centric, 7% predominantly urban and tier-II, tier-III city kind of consumer companies like Godrej, Unilever, Marico, Britannia, etc, will have their fair share of sort of recovery trade. But it's not going to be dramatic, unless you're very positively surprised where probably the rural part of the business is close to 80% for the next four, six quarters. In my current sort of sense, that doesn't seem to be on the horizon.

Ayaz Motiwala: So I think one thing that you and your viewers should reflect on is I think the share of the mutual funds in the total deposits. And I was obviously pleasantly surprised that the number which is to hover it about 10% has reached nearly 25%.

What that transmits into is what people are wary about these banks, which is the competition for deposits, because the consumer is getting slightly smarter and parking marginal savings and time deposits in the form of mutual funds.

Obviously, corporate treasuries were very, very focused and smart as is in the past. So these marginal consumers added to this tipping point, where the 10–12% system number has probably gone up to nearly 25%. So I think that is a point worth reflecting on, in the nature of the business.

The technicalities apart of this MSCI, etc, I mean, it went down because of the merger and you know free-float argument, etc, the stock went to 14-1,500 that kind of handle and now we are at 1,780. So I think it's attractively priced. The business is too large to ignore and we remain quite positive on large financials.

Ayaz Motiwala: I would say banks.

Ayaz Motiwala: I think people will find their way around. You know people have never talked about things like brokering commissions which are headed to zero and beyond actually. So I guess we'll find some sort of floor.

I don't think the business model is damaged. It could alter a bit for the discount brokers and the full-service brokers as a model is being adopted with wealth management and other services, wealth management, wealth planning, estate planning, etc, to give them more sustainability beyond the zigzag of the stock market.

So I think we've seen the better part of it in the last four years in terms of trading commissions both on futures and options and pure equities, but I think brokers who align themselves to wealth management, biggest being Angel One that you flash and you see the journey, you see ICICI Securities which is probably getting merged. But that is the kind of direction where pure brokerages are heading to and help facilitate consumers in their journey of wealth management.