Apart from consumption, manufacturing is firing now; look for dips: Pankaj Tibrewal

“From a medium to long-term perspective, I remain a bull. But from a short- term perspective, there are some concerns and we need to be cognisant about that. The global risk rally started around mid of June and from there, most of the markets have reversed back to their June lows or lower, whereas Indian markets are still up by 12-13% from June lows,” says Pankaj Tibrewal, Executive Vice-President and Fund Manager, Equity, Kotak Mutual Fund

Can I say you are a bull or are you confused about the market set right now?
From a decade perspective, which will be summation of everything short term and medium term, I am extremely bullish on India and the last 30 years have shown that despite of all the odds, chronologically if you plot from 1992 to 2022, every year, some or the other event has happened in the country which has made you nervous and despite that, India has been the fourth best performing market in the world with dollar return of more than 7-7.5%.

So going by history, from a medium to long term perspective, I remain a bull. But from a short- term perspective, there are some concerns and we need to be cognisant about that. The global risk rally started around mid of June and from there, most of the markets have reversed back to their June lows or lower, whereas Indian markets have been isolated to a larger extent and we are still up by 12% to 13% from our June lows.

Incrementally, a few of the macro indicators are flashing red. After a long time, we are seeing that the banking system liquidity has been drained out and that will weigh on inflation, rupee and growth at some point of time. There is a very high correlation between banking system liquidity and market cap to GDP over longer periods of time. So liquidity is extremely important.

The yield curve has flattened out in India and the earnings minus bond yields are more than negative 2%. There are some concerns in the near term but what the market is reflecting is the optimism on growth and sustainability of growth in India compared to the rest of the world from a medium to long term.

The British pound has depreciated 6% against the rupee in just the last two trading sessions and has come crashing down. There is clearly an increased risk-off sentiment in the UK. For Mastek 68% of revenues comes from the UK, for TCS 15%, Tata Motors because of the JLR business at 14%. Then there is Happiest Minds, Tata Consumer Products, MindTree, Tata Comm, eClerx, Hindalco. Would you be a little wary of these companies with exposure to the UK?
Leaving aside the last few days, the Indian currency has been one of the best performing currencies in the calendar year to date. The British Pound is down by more than 20% compared to the dollar. Yen is down more than 20% versus dollar.

So, we have been relatively insulated from that currency depreciation side. However, the last few days’ events bring in the question of cross currency headwinds of various companies and over the period of time, we will come to know what are the impacts but more than the cross-currency headwinds. I am concerned that IT demand side momentum is slowing down.

Though the commentary is still positive by most of the IT companies, if one looks at the global macro situation, my sense is that moving into the third and fourth quarter, we will see IT budget cuts by most global companies and that will weigh on the demand momentum and revenue growth of Indian IT services. The second leg of downgrades is still awaited in the IT services and then we should have a fresh look at this sector again.

Would you be wary and bearish across the market cap categories when it comes to IT? Is it alike for largecap and midcaps or is there a specific pocket?
Midcap IT companies are still high on valuation relative to history and some optimism has been built in in terms of growth. Post the correction, largecaps have adjusted in valuation terms and there are still some which have started to look attractive. But let us wait and let the earning downgrade cycle play out before taking a fresh look in this sector again.

Would you be looking at changing the basic core of your portfolio which was centred around manufacturing, cement, home improvement, real estate?
No, compared to the world, India still stands out. Let me give you some data points. Despite all the global mayhem that is happening, our sense is that India will contribute one-fourth of the incremental GDP growth globally next year and we will contribute about 28-28% incremental GDP growth to the Asia part. And that is a substantial number and probably India would be the engine of growth for the world.

When you look at some of the themes where we have been positive, we continue our positive bias on those themes, especially manufacturing. We did an entire survey of SME and listed corporates across the belt and the kind of positiveness we are seeing after a very long time across the value chain, is unprecedented.

It is seen across auto ancillaries, light engineering, precision goods, capital goods and the order inflow seems to be very strong. The country has been talking about China plus one for the last couple of years but my sense is that Europe plus one could be a bigger theme to play out over the next few years.

The energy crisis which is playing out in Europe is unprecedented, from 3$/MMMBTU the gas price two years back, they are at 50$/MMBTU. A large production base which is in Germany and Italy is having problems in competitiveness and they are looking to outsource a large part of manufacturing starting with low value addition to India.

For India, the biggest advantage is the one million engineers which we produce every year, the skilled labour which is our strength and my sense is that across many industries, which require skilled labour, one will be positively surprised by the growth and this momentum we are seeing after a long time.

When the Indian entrepreneur does not complain, take it for granted that the business is running very well. Across the sectors, we are sensing that whether it be SME, whether it be medium size, whether it be large corporates all companies across the value chain are saying that the demand momentum is extremely strong. So manufacturing remains a medium to long-term theme and after a long time, apart from the consumption engine, the manufacturing engine is firing in my view.

There are enough signs to say that probably this time around there would not be a false alarm and manufacturing could surprise us on the upside. When I look at the entire core economy sectors, though in the near term, there are concerns about liquidity, interest rates and inflation, if one takes a slightly medium to long term view, any dips in these themes and sectors and stocks will be an opportunity to increase the allocation.

Given that you are talking about a long term theme, how would you be playing the manufacturing theme?
Across the value chain, the capital goods catering to the high precision light engineering consumables on the short cycle are linked to production.

The second one is the entire auto ancillary space which is looking very strong, led by both domestic up cycle as well as outsourcing by most of the large global players to India.

The third one would be the chemical sector which we have been positive for a long period of time, the demand momentum still looks very strong and some of the other manufacturing where there is an import substitution.

Over and above that, do not forget defence. The commentary coming out from most of the defence companies – whether it is PSU or private – the sense I am getting is that the cycle has been completely compressed. Anything which used to take seven-eight years from concept till commercial production, has now been coming down to 3.5-4 years.

There is urgency by the government to indigenise most of the defence manufacturing in the country and when you combine the entire basket together, that is what our view will be on the manufacturing side.

What about the outlook when it comes to financials? Do you believe that there is merit in banking on the entire financial space as a whole?
We remain positive on the entire banking pack, mostly the large private sector banks and they are very well positioned. Over the last seven-eight years, the banking sector has provided enough from NPA provisioning perspective, asset quality remains in control and credit growth is picking up . All that bodes well for the earnings growth of the sector. I think from a next 12 to 18 months perspective, financials is one area which we like and it is a great way to play also the capex recovery in the country.

What sort of sector rotation is taking place? We were just looking at some data within banks as to how money is moving out of ICICI Bank and finding its way into IndusInd. Within banks, what do you like?
Our preference is for private sector banks. We are not so much excited about the wholesale funded NBFCs or banks. In this cycle, for retail-oriented banks, a granularity of deposits probably will do well because if you look at the credit growth, we are at more than 16% now but the deposit growth is not keeping pace and hence there will be some push up on the rate side on the deposits and banks which are more granular on the retail deposits are expected to do well as we believe that the wholesale funded rates will move up faster than the retail rates. My preference lies in banks which have very strong retail franchises on the deposit side.