Why Sanjeev Prasad doesn’t expect manufacturing to be a big theme in the current market

Sanjeev Prasad, MD & Co- Head, Kotak Institutional Equities, says at this point of time, there are not many manufacturing plays which can play directly and even going forward, he does not see interesting manufacturing companies getting listed.

Prasad further says that probably two to three or four quarters down the line, we will start seeing some recovery in demand for consumer discretionary items. He is more hopeful about consumer staples given the fact that we are seeing job recovery as far as lower income households are concerned. With some gross margin expansion also, the consumer staple names should do better from the current levels.

What is your outlook on the entire manufacturing theme? Clearly it seems there is a lot of potential within this space. Is there anything specific that you would look at when it comes to the earning season or within the entire gamut of capital goods, railways, defence, stocks or even infrastructure as a whole?
Again, it is a very broad-based thing that you are referring to. You will have to look at things again on a very bottom-up basis. We do like the manufacturing sector as a theme going forward. But having said that, how many manufacturing stories are available in India? So, that is one problem.

Hopefully as the supply chains develop in India for manufacturing more and more components going forward, some of the new technology plus as the development starts taking place will start seeing more investment taking place and that is when one can start getting more ideas. As of now, when we look at manufacturing, the focus immediately shifts to capital companies, that is not really manufacturing-manufacturing. Hopefully, over time, given the government's thrust on domestic manufacturing, PLI schemes and so on, we will start seeing more actual domestic manufacturing starting to take place for the domestic market and hopefully for exports also.

You will probably get much better ideas going forward. As of now, we are playing the manufacturing themes with the usual suspects like Apple goods, Facebook or ABB companies, but they are not really manufacturing companies in the true sense of the word.

Do you think that manufacturing after a period of 13-14 years is finally showing some uptick, some changes? Companies have learnt a lot in terms of debt, how to bid, not be very aggressive in acquisitions or acquisitions of land. Do you think all of this will lead to a small structural recovery for companies that are disciplined?
You will see a fairly long-term cycle as far as manufacturing is concerned. I do not dispute that theme at all. In fact, we have been quite positive on this for the last two and a half years or so. All that will happen. The question is what is available in the manufacturing space to play this as of now?

One of the worries which I have is a lot of manufacturing could be in the listed space from a public market perspective. If you look for example at the whole Apple ecosystem, it develops in the country going forward, it could well remain in the listed space and that is where the challenge will come. Yes, factories will get built, jobs will get created, manufacturing, GDP share as a proportion for the GDP will increase and all the good things will happen. It could eventually result in more consumption and so on and so forth.

But that is an indirect benefit as far as the stock market is concerned. I am not too sure whether at this point of time, I have had enough manufacturing plays which you can play directly or even going forward you will see interesting manufacturing companies getting listed.

Look at China. They have so many manufacturing companies, like Italy has three-four large very big battery manufacturers. We do not have anything like that in India at this point in time. The growth rates are absolutely phenomenal. The numbers are quite insane.

One, is manufacturing and the second is construction and real estate. Do you think that is also an important part of the GDP and those sectors have also learnt a lesson in terms of how to operate going ahead?
I would agree. Most of the companies have deleveraged over the last 3-4 years the balance sheets have become a lot healthier and thankfully, the macro tailwinds are there. Again, this is a theme which we are quite positive on. This again could be a multiyear investment cycle. So far, the housing demand seems to be holding up reasonably well despite the increase in interest rates, which we have seen and if interest rates have peaked then maybe the cycle could sustain for a longer period of time.



It is a simple story, I guess when people start moving to cities, we will see more and more housing demand coming through which will result in some of these housing companies doing well over a period of time. So it is a very simple story, but in the last 10 years, things have not really played out the way it was anticipated. But now, the affordability index is quite favourable. If the job situation keeps on improving, as India does more manufacturing, outsourcing of services, etc, hopefully this theme will sustain for a longer period of time.

You just talked about the banking earnings, I want to deep dive into it a tad bit because now the street is a bit worried that probably the net interest margins etc have peaked, given the fact that the cost of funds are likely to go higher. Do you see that as a big worry for the entire NBFC space? And how should one approach that?
It is a given that NIMs will compress from the artificially high levels of FY23 and I do not think any analyst really doubts that now. But you know it is okay, you know, that was something which was unwarranted, the kind of NIMs which we saw in the second half of FY23 but I do not see why that should be a big concern, to be honest with you. It is not as if you are seeing a sudden collapse in credit growth or a big NPA cycle looming in front of us.

NIMs will be lower on an year-on-year basis and profit growth will obviously be pretty muted in FY24 versus FY23. But having said that, most banks will still deliver fairly high ROAs in the range of 1.5-2%. Some of the better ROAs seem to be in the range of 12 to 16% for most of the banks now for some of the better quality ones.

We will still see compounding in books and valuations are very reasonable. Most of the banks are still two times price to book if you leave aside HDFC Bank and ICICI which are both trading roughly about 2.4 times adjusted book. All the others are well below two times as of now. So yes, there is compounding possibility, even if you do not see much of the rerating in multiples.

Any view as far as the consumer durable space is concerned? On Tuesday, we are seeing a reaction on Crompton Consumer due to the leadership change but overall for the sector, what is the view?
The demand conditions seem to be fairly muted as of now. I guess it is simply a problem to start with. Prices in India have gone up a lot across the board for most household goods. In the last four years, in most cases, prices are up 6-10% CAGR and the four year CAGR at about 10% is a very big impact as far as prices are concerned.

So, yes, affordability itself is a big problem. The hope here is that over time, as income levels continue to rise, prices hopefully do not go up much more than they have only gone in the last few years, the affordability situation start becoming better and that should hopefully result in demand coming back. Having said that, I do not see this changing very swiftly,

It is probably two to three or four quarters down the line when we will start seeing some recovery in demand for discretionary items. I am a lot more hopeful about consumer staples simply given the fact that we are seeing job recovery as far as lower income households are concerned. They were forced to cut consumption during the Covid times. Hopefully, we will see a rebound in the consumption patterns of the lower income households for consumer staple items. Then with some gross margin expansion also, the consumer staple names should do better from the current levels.