Do you think that banking as a sector will have a problem to grow? Could there be reason for underperformance in some of the midsize banks?
I do not think so and I will give you some historical reasons for that. We have seen this story a number of times. Even in 2000, there was a big upsurge when internet boom was happening through the late ‘90s. The idea was Microsoft and Amazon and Apple will be the new banks and the banks will be finished. Look at what has happened. After 20 years, the banks will buy out these fintechs.
‘Buy now pay later’ is becoming a huge trend. Amazon, Flipkart are giving interest free EMIs. I do not know if these guys understand credit that well, so there will be a price to pay. The PE guys have very deep pockets. They are only looking at the gross merchandise values and the valuations that concomitantly come with it. They are not bothered about it but banking is not that easy to come in. It is a very highly regulated segment.
We have seen the China case where peer to peer lending at one time was a $200 billion market cap segment. Now it is wiped out in China. Same thing we saw with Ant Financial. We are seeing it with the wealth products, that Evergrandes and the others were selling to non accredited investors. So there will be a pendulum switch. What is welcome as customers is that the banks have very fat margins. Try to send foreign exchange or receive it. Look at the amount you get charged. Look at the delays that happen. The government mandated that SBI will handle all FCRA accounts of the country.
Look at the mess SBI is creating on that and it takes at least a week to see any funds. So those margins will get under pressure and hoping Revolut comes in, which is a stronger version of Stripe or PayPal. It is domestically spawned but one of the big guys will buy it out. It is not that they will eat the banks for lunch. The banks will survive and grow but they will have to work with thinner margins, fewer branches, less footfalls and more digitisation
Will midcap banks face the heat? Yes they will. The lower capitalised companies across segments and the non market leaders across segments will get squeezed out.
One change that has happened in the last one and a half years is probably in the mining and the manufacturing sector. Do you believe it is time that one should be overweight on infrastructure and metals as well as the manufacturing sector?
Fundamentals and earnings are supportive. The metal pack has been able to deleverage very significantly and the pricing has come back allowing them to enjoy good margins with the commodity prices going up globally. We foresee this will stay for the next few years at least. It is the turn in the commodities cycle that we are seeing after about 12-13 years. We continue to be very positive on metals.
On the industrials, given the infrastructure build out that is coming and that is happening already in the government sector, it will follow up in a year or two in the private sector as well. As the output gap reduces in the economy, industrials will do very well.
The third segment is anybody supplying into the real estate story. The cement players, the materials, the tile makers are suffering now because of the gas prices going up but that will reset. They will be able to pass it back to the end segment eventually. Like the paint players have been able to do over the last few years, it will happen on that segment also.
So the cables, all the suppliers into the real estate will do well because the real estate cycle is coming after nearly about nine years of underperformance. Probably the market will price the next two years growth very shortly. So, it is a small window which we have to catch.
Will there be a limited upside then or because the energy crisis seems to be global, there is still opportunity at play?
The demand is very much there. So the fundamentals are there and these stocks will continue to do well. Right now, the shortages are because of various reasons. But the fact remains that the demand is there. If you look at the IEX, the marginal rate of energy exchange went up on an average to Rs 4.4 and in some pockets, it hit Rs 16 per kilowatt over the last week, especially on Friday the trading was happening as high as Rs 16. So there is clearly an upswing in the demand for electricity but the supply is constant and does not come overnight.
The second big thing is the commodities have under invested in new capacities for the last 12-13 years since the last cycle peaked in 2008. So it is not that the existing players will be challenged in the short term.
Third, we normally used to get coal from South Africa, from Southeast Asia and Australia but those prices are prohibitive and except for NTPC which is on a cost plus basis. We are seeing NTPC going up but the other generators are mostly locked into pricing and unless the CERC comes in and gives them some benefit like it happened in China where government allowed higher prices when the generators were nearly bankrupt.
Let the market take over, allow higher prices as the input cost of both gas fired as well as the coal fired plants have gone up hugely, nearly 100% in some cases. We have to allow them to charge more to the consumers. Otherwise, they will go bankrupt or will just shutdown the plant. They do not want to produce something and sell it at a huge loss. So it is also economics apart from all the factors that we spoke about. These stocks will continue to do well. It is the start of the cycle and the huge infrastructure spend, the huge electrification happening, huge demand coming in and all the suppliers into that segment will do well.
