Does it appear that calm is returning to the market in line with global cues and would you wait and watch till the Jackson Hole commentary is out of the way? Or do you think that the valuations had got sombre to an extent that some value buying was expected?
We need to reflect on the big move that has happened in Indian equities over the course of the last 15 months and while we all keep fixating on earnings etc. that have come through in a very strong way in India. There are three broad similarities with the global cues and two divergences and the reason why I spell this out is as you said, today it seems some calm is returning primarily because of the sentiment across the world and therefore it is also important to view the Indian equity unfolding in light of what is happening across the world.
I think there are three broad similarities across the world and that has played through in Indian equities. The first is that of earnings; from a patch of very poor earnings growth in pre-Covid times, earnings seem to have come to life post Covid. Just to put it in context, India Inc. had close to Rs 1,25,000 crore of quarterly profit in pre-Covid days. It has gone up to about Rs 2,50,000 crore. So we are basically talking about a doubling of profits from the lows and markets have broadly reflected that in terms of either overall market cap or in terms of index levels; so that is point number one.
However, it is not only in India that this earnings growth is coming through. Look at Japan, look at Europe, look at the US. Everywhere, earnings surged significantly and in certain cases even higher than 100% kind of gains have come through during Covid times. So Indian earnings need to be viewed in that context.
The second similarity that I see with the rest of the world is that across the world, corporate balance sheets have been in the best of health and that augurs very well for the investment climate as and when corporate chiefs get a sense that demand is here to stay and it is not a transient demand.
The third similarity is clearly that of non-institutional participation in markets be it Robinhood, be it Zerodha, be it in Korea. Across the world, we have started seeing these three similarities coming through.
Coming to divergences, the key divergence is in terms of interest rate scenarios across the world. While in the first 12 months post pandemic, everybody was in the same state, wanting to help stabilise markets, over the last three-four months, we have seen massive divergences. Year till date, we have seen about 45 rate hikes across the world and India is also going through its own motions in terms of wanting to normalise from the cycle that was before.
The second key difference is the consumer health while across the world consumers are doing very well thanks to the fiscal checks that were given through. In India, I would think that the top 5%-10% of the households are doing exceedingly well whereas the bottom of the pyramid is where all the pain is. So, when we look at it in this kind of a format, my sense is we are joined in the hip when it comes to the global cycle.
While we keep fixating on the Indian micro, I sense that we have had a 15-month kind of a one-way street. I would think that over the course of the next 18-24 months, we would be beset with more volatility coming through. It could be triggered by global reasons and in that light, one needs to reassess asset allocation, the portion of midcaps, small caps that one needs to have and then to get into better quality run franchises. That is broadly the outlook that we share at this point of time, notwithstanding the daily movements that are happening.
Today is also a momentous day in a way that the fourth $100 billion company has taken birth which is . How do you see the tech space overall because it has got rerated for sure?
The same company which was available at whatever 10-15 times about four-five years ago, currently is going at close to 25 to 30 times. So that is essentially the journey, along with very strong earnings growth. I would look at Indian IT services as one of the biggest beneficiaries of both what is happening because of Covid as well as the resilience that they have demonstrated even in the past and more so during Covid times.
Across the world, I see companies digitising. Not having a digital option or digital strategies is no longer an option for any brick and mortar industry around the world. Secondly, we have seen that while the whole world seemed to have got impacted by Covid, the Indian IT sector was very resilient. Even during complete lockdown that we saw last year, we saw significant improvement in delivery so much so that clients have now started to embrace that. Can we actually offshore far more than what we had because clearly there was a business as usual kind of a case where there was a certain component which was getting offshored? It appears that a lot more can be done. Thirdly, the Indian IT industry to its credit is shedding the tag of IT coolies. The kind of programmes that most of these companies have, in terms of reskilling their workforces, is indeed commendable and we are talking about companies which have got half a million workforce.
It is not easy to have that kind of talent at your disposal, knowing the latest skills can help the client. So it is a journey of both demand being strong as well as companies reimagining businesses to capture more and more of the opportunities on the supply side. Covid will be an accelerant for demand. Of course, if they were growing at 10-12%, it is unlikely that the Indian IT industry which is so large, close to about $200 billion, can grow faster than that but that is a significant achievement that the Indian IT industry has demonstrated and I would think that there is lot more to come over the decades as they progress.
What are your thoughts on the way the passenger car market in India is getting a complete makeover? There is a very sharp trend of SUV-isation. SUV sales across the categories — mixed, small, compact SUV, large — all are growing very sharply? A company which has dominated over 50% market share in passenger cars has witnessed crimping of their market share in urban areas. How do you see things shape up in the medium to long term for autos?
As far as SUV-isation is concerned, it is a global trend. Across the world, people want either crossovers, 4x4s, off road capabilities etc and in India it seems to be manifesting more in the form of crossovers as well as the lower end of SUVs, given the affordability. This is a trend that has been coming for the last 10 years. It would be naive for us to believe that companies which have had such dominant market share in the past, have lost their mojo just because this trend is something that they could not foresee.
Trends like these are much long lasting, they transcend decades and even if you are late to the party by next six months or the next one year, as long as the management is seized of the matter and the trend, I would think they would come back equally. These are the same companies that had such strong model lineups pre Covid every year launching two, three new models. I would think that they would have it in their DNA. Is there something that is so chalk and cheese that a company which is good in sedans or in small hatchbacks cannot compete in the SUV market? I do not think so.
So yes, there is definitely a need for a slight differentiation in brands but companies which have been strong would come back equally stronger and this to be therefore a phase where that adjustment phase is being priced.
