Informist, Friday, May 31, 2024
--Bandhan AMC's Gunwani: Earnings trend of FY24 to continue in FY25
--CONTEXT:Bandhan AMC equity head Manish Gunwani's views in interview
--Bandhan AMC Gunwani: Domestic mass consumption may revive a bit
--Bandhan AMC Gunwani: Expect corporate margins to be flattish in FY25
--Bandhan AMC Gunwani: Cos' capex up but no froth in capacities so far
--Bandhan AMC Gunwani: Positive on domestic-facing sectors
--Bandhan AMC Gunwani: Positive on auto sector, industrial cos
--Bandhan AMC Gunwani: Underweight on IT, textiles, export sectors
--Bandhan AMC Gunwani: Not too overweight on financial sector
--Bandhan AMC Gunwani: See CASA deposits becoming an issue for banks
--Bandhan AMC Gunwani: Expect Fed to cut interest rates in next 1 year
--Bandhan AMC Gunwani: Still see pockets of value in small cap cos
--Bandhan AMC Gunwani: Small cap cos can do well in 3-5 years
--Bandhan AMC Gunwani: May launch 2 new equity funds by end of FY25
By Rajesh Gajra and Kshipra Petkar
MUMBAI - The current financial year will likely see a repeat of the trend in corporate earnings in 2023-24 (Apr-Mar) that saw a strong performance from domestic business-to-business companies and weak showing from export-oriented companies and those providing information technology services, Manish Gunwani, head-equity, Bandhan AMC, tells Informist in an interview. He also believes that mass consumption, which was patchy in 2023-24, may revive a bit but still not match the growth in capital expenditure and infrastructure.
On the profitability front, Gunwani expects average corporate margins to be flattish in the current year as analysts believe the low input costs that many companies benefitted from last year will not be available. He is on the same page as market participants on the US Federal Reserve starting its rate cut cycle this year but theorises on the risk of the US central bank raising rates instead of cutting them due to inflation or geopolitical issues. But Gunwani shied from forecasting the outcome of the Lok Sabha elections.
Gunwani joined the asset management company in January 2023 when a consortium of Bandhan Financial Holdings Ltd, General Insurance Corp of India, and ChrysCapital were in the process of acquiring IDFC Asset Management Co for 45 bln rupees. The acquisition was completed soon thereafter and IDFC Asset Management Co was renamed as Bandhan AMC in March that year.
EARNINGS QUALITY
According to Gunwani, in 2023-24, the earnings of domestic business-to-consumer businesses, and export-oriented and information technology service companies were weak. B2C companies targeting urban consumers did well but "mass consumption was very patchy, with two-wheeler sales being good but FMCG (fast moving consumer goods) and cement sales being quite weak."
However, the earnings of domestic business-to-business companies were "very strong", and "slightly bottom up sectors like pharmaceuticals" did well, he said. "Broadly, I think these trends will continue and FY25 will be similar," according to Gunwani. He also believes that given the macro economy drivers following the investment shortfall cycle of 2010-2020, B2B companies will do well. He added that consumption "may revive a bit but may not match the growth in capex and infrastructure."
Will this lead to overcapacity? According to Gunwani, "it's a boom and bust cycle... I mean, 2000-2010 was capex, then (2010-2020) was consumption, then again capex will happen (in 2020-2030). Maybe in the end there will be a bust again, but we don't know." He doesn't rule out overcapacity issues but said that "at this point, when you see a sector like power there are massive shortages. I think unless there's a big pickup in capex (in power sector), we may head out for blackouts." "So clearly, as of now it doesn't look like froth... There are genuine demand-supply gaps in power, roads, metros, auto sectors," Gunwani said.
Companies benefitted the most from falling input costs in 2023-24, and according to analysts those benefits may have peaked out and won't be available in the current financial year. Gunwani concurred and said that "margins will be flattish." He added that the outlook on crude oil, a key driver for a lot of commodities, is that the prices will vary between $75 a barrel to $85 a bbl, and given that crude prices have been broadly stable in the long term "you can't say it will go down to $50 (a bbl)."
With most of the input cost benefits already factored in margins of companies, the expectation is that of flattish growth, said Gunwani. However, he said there could be exceptions. "We may see margins go up, for example, in a bottom up sector like telecom, where a lot of people are expecting tariff hikes to happen."
Gunwani also highlighted the foreign currency dynamics that play on the margins of export-oriented companies. "The rupee has been flat for around one and a half years and my feeling is that it may be flat for another year. There is no reason for rupee to depreciate. The dollar itself is unlikely to appreciate," Gunwani said. "What may happen is that if the exporters' dollar-linked realisations are flat and their domestic wages and other fixed costs go up 7-10% then there will be pressure on margins," affecting exporting sectors like IT services and textiles, he said.
Some sectors like cement came under demand pressures in 2023-24 causing them to use low prices for volume offtake, and this led to margins being hit. According to Gunwani, in the last two years, government expenditure had been below nominal GDP which contributed to the slowdown in mass consumption. He said he doesn't know what the new government is going to look like in terms of economic policies.
"The growth in volumes for, say, FMCG and cement may have bottomed out (in 2023-24). But are we expecting a very sharp reversal? We're not," Gunwani said. He emphasised that the consumption cycle is generally weak at this point and whether it will revive or not will depend on the monsoon, the budget, and what the new government's policy is. The industrial sector seemed okay, Gunwani said, but on a high base the year-on-year growth in top line and operating profit may be lower than the last couple of years.
SECTORAL VIEWS
Gunwani said the fundhouse currently likes domestic-facing sectors "because domestic economy right now seems to be in very strong momentum relative to the global economy." For the world-linked sectors, he said it was hard to predict.
"You don't know how China's economy will fare, whether it goes up or down. In the case of US everyone has been predicting it will go into recession," but hasn't happened yet, Gunwani said. "So, in general, we are underweight on IT, textiles, and other export-driven sectors, and we are positive on domestic-facing sectors--auto, industrials and to a certain extent financials," he said.
Gunwani said the fundhouse is not heavily overweight on the financial sector due to certain concerns around the inability of banks to mobilise current, savings account deposits. "Particularly for banks, what we are seeing is CASA is becoming a big issue, especially savings accounts. Now, I think this might be cyclical to a certain extent. When term deposit rates are high, you move to term deposit, but I also think it's structural," he said.
Gunwani said that with rising financial literacy, depositors are moving away from low-cost deposits and moving to higher yielding products such as mutual funds, insurance and the equity market. He also said that the market has factored in low credit costs, moderation in systemic credit growth, so he does not expect any positive surprises from the financial sector. "If your CASA doesn't grow then your margins are unlikely to surprise," he said.
MARKET RETURNS
To a question on what returns investors can expect from a diversified multi-cap fund in the current financial year, Gunwani said he preferred to look at the long term. "I do think that India's nominal GDP will probably be less in next 5-10 years versus last 10-20 years because inflation has come down and I also think that global growth is coming down structurally. So, very roughly, I think nominal GDP trend line growth for Indian economy is now 10-11% versus 13-14?rlier," Gunwani said. The Nifty 50 should probably mirror this 10-11% growth in economy in the long term, while mid- and small-cap indices should deliver a bit higher, he said.
On the issue of rate cuts, Gunwani said his view is similar to that of the market. The Street expectation is that the Fed will cut rates by the end of 2024. Currently, the CME FedWatch tool shows that 10.2% of Fed Fund Futures traders expect a rate cut by the US Federal Open Market Committee at its meeting in July and 44% of them expect a rate cut by September.
However, Gunwani is concerned on what the risk would be if the Fed, instead of cutting rates, goes for a hike. "Let's say (because of) geopolitical issues where oil goes up or, due to some reason, the interest rates or rather the inflation doesn't come down, and the Fed, instead of cutting (rates), has to hike," he speculated. Such a scenario, according to Gunwani, will be a disaster for equities globally and for the Indian stock market.
WORRIED SEBI
The Securities and Exchange Board of India recently voiced concern on the build-up of froth in small and mid cap stocks. According to Gunwani, unlike in large and midcap space where the number of stocks are very restricted to 100-150 each and the pricing discovery is quite strong due to high liquidity, in the small cap space the number of stocks is much larger, 600-700, and not all of them behave the same in earnings and valuations. Gunwani still sees pockets of value in small cap stocks but from a 3-5 years perspective.
As per SEBI's guidelines, large-cap stocks are the 100 largest listed stocks by market capitalisation, midcap stocks are ranked between 101 and 250 by market capitalisation, and all stocks ranked 251 and onwards by market capitalisation are considered small cap stocks. The market regulator had also recently asked fund houses to consider restricting inflows into small cap funds.
"I agree that at an asset allocation level you have to be careful, because maybe 400-500 out of 700 small cap stocks are highly overvalued," Gunwani said. But because of the large difference in valuations among small cap stocks, he differentiates between a good small cap fund and small cap index. "I think a good small cap fund can still do well in 3–5 years, but that need not be true of the small cap index," he said.
On Bandhan Mutual Fund's strategy of selecting a good small cap stock, Gunwani said, "you look for something which has a steep valuation discount, but the management and business model do not deserve that kind of discount. The other theme is when a sector emerges from a very small level like electronic manufacturing, or if there's a mega theme globally and a company is into that."
To a question on whether Bandhan Mutual Fund carries out any forensic accounting analysis in stock picking which weeds out a stock in existing equity scheme portfolio, or which avoids getting into one, Gunwani said that there was no special team for such a purpose but the analysis gets covered in the internal investment processes of the fundhouse. "I also think that as much as forensic accounting is important, the softer factors in terms of reputation and grapevine is also important in weeding out companies because sometimes it's not just the written down number or what is stated by the company," he said.
Gunwani said there were various ways, including grapevine, to do the soft checks, and that was built in the regular investment process of the fundhouse. To a question on whether such soft checks resulted in concrete action in the last one year, Gunwani said that most of the fundhouse's equity investments are in top 500 companies which are very well known. "I don't think you can say that this is one sole factor on which we've acted upon," he said.
He added that even when regulatory action from Central Bureau of Investigation, the Enforcement Directorate, and others takes place, the fundhouse leaves it to the fund manager to decide if it is serious enough to sell the stock or whether it is already priced into the valuation. "But there are no fixed or rigid criteria," Gunwani said.
NEW SCHEMES
The fund house plans to come out with at least two new fund offers by the end of the year, potentially from manufacturing, consumption, healthcare or business cycle themes. In April, the fundhouse launched Bandhan Innovation Fund. Bandhan Mutual Fund had 511.90 bln rupees of assets in the equity fund category in April. End
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