“There is a segment of the market which is reporting good numbers and we at Tata Mutual Fund believe that numbers are likely to continue to be on the stronger side. So we are optimistic,” says Padiyar.
How are you analysing the quality of earnings so far? Some tend to be saying that the kind of weakness in earnings could actually lead to an overall big cut in Nifty EPS going forward; others are saying the earnings are resilient. Which side of the argument are you on?
Well, to answer your question, if you look at the Q4 FY23 numbers that are being reported right now, around 40% of Nifty companies have already reported numbers and the interesting point to note is that till date, average profit growth for the Nifty for businesses that have reported till now is around 20%.
I belong to that camp which says that businesses in India continue to do well. There are some pockets of businesses which have slightly lower growth or profit margin impact but largely and when you talk about largecaps, it is mainly banks and they continue to do extremely well. There is auto, which is doing very well, telecom. There are quite a few sectors: capital goods, industrials. So there is a segment of the market which is reporting good numbers and we at Tata Mutual Fund believe that numbers are likely to continue to be on the stronger side. So we are optimistic.
Let us also talk about some of the specific commentary from companies but I am only taking the name of these companies for reference sake. Hero Motor, for example, is talking about a host of new launches on the premium side gaining market share, etc. Two-wheelers have been laggards. Passenger cars are doing well. CVs followed on, but two-wheelers were hurting because of the K-shape recovery. Can this be reversed in the next coming months?
In two-wheelers, volume growth has been a challenge for some years now. However, most of these companies are reporting very strong profit margins and they have passed on cost increases. In fact, now that commodity prices are correcting, profitability is better. You have to be selective about what you own.
For example, there are two-wheeler companies that I know of where stock prices are at 52 week highs, in spite of volume not doing well because their margins are better and they are reporting better profitability or profit growth is continuing to be on the stronger side. So if you choose the right business, in every segment of the market, there is opportunity for better performance or better returns. But in two-wheelers specifically, there are still some challenges on volumes. So within our portfolios, two-wheelers do not form a very large part.
What is your take on some of the very large financial, private sector banks and even very large private sector mortgage companies. FII flows may be lower than what the Street was estimating. How are the fundamentals of large mortgage companies in India and very large retail-oriented private sector banks looking irrespective of the news flow?
When you talk about large mortgage-focussed institutions, there are a very limited number of names available to choose from. Our focus is more on financial institutions and in that category more on banks. We have larger exposures to banks and that too in private banks. There are two-three things that we think make sense from a private bank’s perspective. One is obviously valuations. They continue to trade at lower than average valuations. When I say average, last 10 years, 15 years averages. So, there is room for valuations upside.
Two, on a fundamental aspect, credit growth continues to be at 15-20% for most private banks. There are profit margins; net interest margins are stable incrementally, likely to be stable incrementally and credit cost. So, when you look at zero DPD, 30 DPD which is the borrower default ratios that we look at, they are at an all-time lows or closer to all-time lows for most banks actually and return on equity for most banks are likely to be anywhere between 15% to 18% over the next 12 months.
So, keeping that in mind, it makes sense to look at banks and especially private banks and within PSU maybe we have one or two exposures in some PSU banks as well. Generally speaking, we think banks are a better bet to play in the financial space rather than looking only at one segment of the financial space which is mortgage only.
How are you looking at industrials and cable companies, industrial cable and even retail cable companies or midcap industrials because though the ABB, Siemens and Cummins variety came out with good numbers, good commentary, valuations over there according to some are slightly on the higher side. But there are others in a wider, broader market where growth, earnings and valuations are falling in place. How are you playing the capex beneficiaries?
It is quite interesting to see that most of these capex plays or manufacturing products, capital goods manufacturing companies, their visibility of growth is extremely high. This is a global trend which we can see in India as well. Capital expenditure by corporates and governments across the world including in India is picking up, especially in India. We are finding that the likelihood of order books for most of these capital goods companies continuing to grow at 20% plus. is pretty high. Yes, valuations are high. So, the way we are playing is we are choosing to go slightly down the curve.
You mentioned largecap capital goods companies; we are looking at some select midcap capital goods companies as well and the smallcap space. Actually, you will find a lot of opportunities in the smallcap space in segments in the manufacturing space. They are multinational companies as well as Indian companies which are pretty strong in their respective segments where visibility of growth is high and ROC, capital employed, ROE, all those ratios are good and valuations are attractive. We are playing a combination of growth with reasonable valuation and there is enough opportunity for everybody to do well.
If we talk of the last say a quarter or so, in which parts of the market are you finding appealing ideas even to add from current levels in terms of earnings quality, valuations and the relative visibility in the space?
I will start with manufacturing as a theme. Lots of opportunities are available in that theme. Manufacturing is a wide theme. There are lots of sub-segments of that theme. And keeping that in mind, manufacturing is something that we are playing in a very big way. Apart from that, private banks look attractive to us. There is room for valuation re-rating there as well. That is something that we are playing in a bigger way. Then, there is auto ancillary where we are playing both midcaps and smallcaps.
Apart from that, there are chemicals, specialty chemicals, select pharmaceuticals and telecom and lastly, logistics. These are the select segments where opportunity is strong and that is where we are positive over the long term.