How have you looked at the overall earnings trajectory so far?
The numbers so far have been pretty decent. There have been some minor dips here and there, but broadly they have been pretty healthy and very much in line with expectations. There have been some positive surprises as well.
ICICI Bank surprised big times over the weekend in terms of the numbers they reported. The incremental NPAs are much lower and the provisioning was also much lower and they have given a very healthy outlook going forward to the next year. Likewise, we have seen a pretty healthy set of numbers from IT companies and more importantly the guidance for next year.
So I think the numbers have been pretty decent so far. We are looking for a very healthy earning season. This quarter Nifty companies probably would show about 30% growth in profits on a year-on-year basis. Part of it is because of a low base last year because Covid disruption did impact last year’s March quarter’s numbers. But from here on, we are looking to build on earnings growth going into the next year.
Are we likely to see this sort of trajectory continue? How have you read into the optimism in the markets despite the Covid situation?
The Covid second wave has turned out to be far more vicious for India but now probably all of us have a much better understanding of the nature of the virus. The virus has its own evolution curve. Some of the other economies are going through the fourth wave and so the virus will have its own evolution where it will go through a cyclical process. So probably post the second wave, we will have the third and fourth wave. Japan currently is undergoing the fourth wave. It is all about our ability to deal with it more effectively. Probably India could have done a far better job in dealing with the second wave. This wave is expected to peak out sometime in the next week to 10 days and then in another four weeks time we should hit some sort of a normalisation.
The final answer to this is how fast we can achieve herd immunity, which effectively means we have to get to a stage where we would have vaccinated about 65% of the population. Markets are looking beyond the next four weeks when they are taking a view on markets realising that the second wave is just a passing phase.
In context of that, markets are looking closer to fundamentals and striking longer term fundamentals in respect to earnings that you trust upon. After a very long period of time, I feel very excited about earnings growth across corporate India and for the leading companies in the Nifty. In the last four years, earnings growth has been absolutely missing in India. We have had lacklustre earnings growth of about 7% at the Nifty level. Over the next two years, we are looking at 22% CAGR earnings growth for Nifty which means in absolute terms, Nifty earnings will rise by 50% over the next two years. That makes us very bullish on markets for the next two-three years.
How are you looking at the defensives’ basket?
A lot of these businesses which you call defensives — be it IT services or healthcare — have been extremely resilient in the last 12 months, in the middle of the worst worst that one has seen. These companies have continued to grow and deliver growth and in fact, some of these businesses have seen acceleration in growth. But having said that, our portfolio is more biased towards consumer discretionary and the unlock stories.
Wherever economies have achieved a meaningful level of vaccination — whether it is in the US or in the UK or some of the smaller countries like Israel — as economies open up, we are seeing strong resurgence in consumer demand and a very strong growth. We expect to see something similar happening to India once we get through the phase two of the Covid wave. So our view is that the growth in the economy and resurgence in demand will actually surprise us in the second half of this year. We are more positive on companies and businesses which have to do with discretionary spends rather than just being defensives.
What are you betting on within this entire space?
We are betting on everything starting with autos. Within autos, the commercial vehicle segment can do a 40% CAGR growth over the next two to three years because where the sector stands, the volumes are down by about almost 60% from the peak. As economies open up, we will see a strong rebound in demand for commercial vehicles. We are positive on consumer discretionaries across all the segments — be it retail or retail consumption, be it hotels or other segments including apparel manufacturers and consumer durables.
The consensus is that within the hospitality sector, the diversified portfolio of Indian Hotels is one of the best placed stocks. Do you agree? Also how are you looking at the hospitality, aviation industry?
We are extremely bullish on these sectors. A disclosure, we have ownership in Indian Hotels and we are extremely bullish on the names from a slightly medium to longer term perspective. In hospitality, retail, aviation, the downturn in the Covid-induced lockdown has been so vicious that we are seeing massive consolidation where the strong players are emerging stronger and some of the weak players will probably not survive. This effectively means that some of these stronger players like Indian Hotels will emerge from the crisis in a relatively stronger position. We are extremely bullish on hotels as a sector and I think Indian Hotels presents a very compelling investment case from a two-three years’ time frame.
Where do you think there is a sizable opportunity within the platform companies?
We are living in extremely interesting and challenging times. I think the coming wave of AI and machine learning is a Tsunami in the making. No business will remain untouched by this wave. I am saying this from my experience of having seen the IT bull market and as an IT analyst in the late 90s and the start of this decade.
In some form or other every business will undergo massive transition and transformation and there will be a huge amount of disruption in traditional businesses. Businesses which will be quicker to adapt to newer technologies will probably survive but many will not be able to do so. While some of these platforms are being used for vaccinations, I see them as short term opportunities which can be growth accelerators for some of these platforms over the next 12-18 months.
What really excites me are opportunities from a slightly more longer term perspective. These opportunities exist in unlisted space. I have started using CRED as a platform for the last few weeks and realised that CRED is trying to do to the credit card space what Bajaj Finance did in the consumer finance space 10 years back. CRED is trying to consolidate credit card spends and use that as a leverage to negotiate with the vendors and the service providers or product manufacturers.
In each and every segment in the ecosystem that you look at, there is a huge amount of disruption in the making. Most of these companies are unlisted at this point of time but I am very sure over the next five or seven years, all of these companies will get listed and will probably create a very large internet economy in India. India’s internet economy probably should be the second or third largest in the world after the US and China.
