Vishal Kampani, Non-executive Vice Chairman, JM Financial, says the breadth of recovery is very strong in India and people feel that India really has a global position. If you are relying on a part of a country or a part of a sector, a part of an economy, then you will not see breadth grow. India is now a major part of the global economy and you are seeing that in corporate aspirations.”
Kampani further says: “Markets are a big fan of earnings, but look at earnings from a very short-term perspective, how is this quarter, next quarter, year and two years because all recent reports are focussed on that quarterly earnings momentum of two years. But I think the real growth in India is going to come from top line growth over the next three to four years.”
Can we expect the US Fed to cut rates next year and the Indian central bank to follow?
If you go back to last year, no one frankly expected that rates would be higher for this long. There was a similar feeling around June, July, when people expected a faster rate cut, and that did not materialise. Having said that, in the last six quarters or so, the US economy was still expanding despite higher rates and one could see very strong job additions and there was no glimpse of consumers slowing down.
But in the last couple of weeks, there is a very distinct feeling and data supporting it very strongly that there is a slowdown which is very visible now. That is raising hopes for a large sort of rate cut. Personally, I do not anticipate that the rate cut will be as deep and it will be down to 200-250 bps. The revision in rates downwards will take a longer time, but the direction seems to be set that you would not have too many further increases.
In six months to nine months from now, sometime in July or August next year, there could be a very distinct change in the talk and body language which is supporting the current rally that you see.
While in the last few quarters, the US as well as many parts of Europe have been struggling and we all know what is happening in China, India has demonstrated good strength as far as the macros are concerned. How are you reading the strength of the economy? You speak to the top corporates all the time and is there any sign which you picked up?
Going back a little earlier, I think India went through a deleveraging cycle because of IL&FS, the real estate credit crisis. We went through a clean-up in terms of almost Rs 5-6 lakh crore of assets being sold on the wholesale side from wholesale portfolios of banks. A lot of those assets went to good corporate houses. Brownfield expansions were done and they were very profitable assets. So India had a low leverage and was not dealing with a leverage crisis domestically when Covid hit us.
Secondly, the government behaved exceptionally prudently. They did not give any sort of freebies. There were literally very few errors in their planning; giving a guarantee scheme which never got used but gave confidence back to SMEs and smaller corporates. Also in India, the consumer leverage is very low. Secondly, India has very low external debt.
All these factors push and put India into a position where it is one of the most attractive markets. And when you see growth at 6%-7% and now at a high base right 10 years back, people would say, oh, India would grow at 6%-7% but 10 years back, the GDP was very different from where it is today. If you ask me, the two most attractive markets in the world where any investor would allocate their capital would be the US and India, undoubtedly.
Today, there is stability. I am very confident that our prime minister will come back even more victorious next year.
Let us scratch that point a little more because when we speak to a lot of market participants across the world, I was in London recently speaking with some friends and 90% of the conversations were around political, how things can shape up. What are your thoughts on state elections? Markets are pricing in one or two states in BJP’s favour. The popular narrative among the market community is that Mr Modi will come back. You are very confident that he will return to the thumping majority?
Yes, I think I am very confident and I am even gutsy enough to put it out that I think he will come back with a thumping majority. I think he will do even better than what he has done in the last election. I also think that most people feel that the Indian voter is a very dumb voter. But I do not think he is really a dumb voter. He is actually a pretty smart voter. He knows what he wants locally and he may choose what he wants locally. But he also knows that Modi is the best thing for our country today.
Is that in the price yet? Stock market wise or not yet?
No, I think when he comes back with a thumping majority, India will see the mother of all bull markets for the next five years.
What is corporate India telling you – the boardrooms talk and talks on earnings trajectory and top line growth?
Today across the board, we see positive vibes from all corporates across sectors. India used to be a market where a few industries did well for a few years and then it moved to other industries. When I looked at my pipeline 10-15 years back, I would tell my team, okay, this year focus on IT or next two-three years you are going to see great momentum in pharma. But today when we see that in every single sector, we are seeing corporates discussing growth.
Are you indicating that the breadth of recovery is very strong?
Breadth is very strong and people feel that India really has a global position. If you are relying on a part of a country or a part of a sector, a part of an economy, then you will not see breadth grow. India is now a major part of the global economy and you are seeing that in corporate aspirations.
Obviously, a lot of your clientele up till now were major India players but now their global play is going up.
Absolutely correct and we see startup companies which have successfully launched, even if they are kind of me too businesses in the US, they are operating those me too businesses at one-tenth the cost of the US in India and they are taking those models to Southeast Asia, Middle East, Africa, so many countries and growing.
So, the feedback is growth and earnings does not seem to be an issue at this juncture?
Yes, see, I will tell you. See, of course, the markets are a big fan of earnings, but markets look at earnings from a very short-term perspective, how is this quarter, next quarter, year and two years because all recent reports are focussed on that quarterly earnings momentum of two years. But I think the real growth in India is going to come from top line growth over the next three to four years. See, earnings can always fluctuate. You may have some issues in terms of rates going up. If you are a financial company, rates are going up, you are going to squeeze your margins but credit growth in the country is expanding at 15 plus percent and it is going to keep doing that over the next five years.
So, that is the right way to look at growth for the next three to five years?
Absolutely! Look at peak to peak, India has expanded very well and if GDP is going to grow at 6-7%, good corporations will be growing their earnings in the teens over the next five or seven years. Now, look around the world; barring the US, barring India, and maybe barring some companies in China, there are very few countries that offer broad-based sectors, lots of choice, lots of breadth and many companies will be growing our revenues in the teens for the foreseeable future.
So, one is good earnings and then durability and longevity of the earnings…
Absolutely. No, there are more revenues. Earnings can fluctuate and earnings will create that volatility in the market. But if you tell me today, okay, Nifty is almost 20,000, where is Nifty going to be, four years down the line? Nifty will grow. Okay, Nifty may not have performed in the last two years or one year, that could be because the earnings growth in Nifty companies could have been limited, but revenue growth is clearly visible. Are you seeing revenue growth slow down? No, you are not. So, I think you will see that expansion with breadth. You will see that expansion also in the core indexes.
Since you brought up Nifty, what are your thoughts on valuations of the market, on aggregate, and maybe midcap, smallcap versus the largecap basket? The argument is midcap is frothy, smallcap is definitely frothy, largecap is where the value lies. What are your thoughts on valuations?
I do not disagree that there are certain stocks in the small and midcap space which will be expensive. But again, it depends on the time horizon. See, at the end of the day, when you are investing, if your time horizon is going to be one year, you may find things expensive. But if your time horizon is three to four years, it may not be expensive, especially if you are very confident about growth.
But having said that, yes, there are pockets of exuberance that we see in small and midcaps. I am happy to say that at least we are not seeing that exuberance in the IPOs that we are doing and a big thank you to that is the domestic investor community. They are being extremely disciplined. The mutual funds in India are being very disciplined. They are really valuing things more fundamentally and not getting carried away and therefore, we are seeing good, sustainable valuations in pricing coming into the IPOs.
I do not think largecaps are overvalued. They are fairly valued and maybe even in some cases, undervalued. Two of the best player if one has to buy are HDFC Bank and ICICI Bank. These two banks will probably compound earnings at 15% easily over the next five years and they are lending all of their loans. Their yield on their loans is in single digits.
So, when the yield on your loans is in the single digits, that means you have the best customer base of India. The quality of customers is brilliant. The chances of you having any sort of big NPA cycle is very low and you are compounding earnings at 15%. If you are compounding earnings at 15%, why is a forward 20 PE expensive? It is not expensive.