Gurmeet Chadha CEO and Co-Founder, Complete Circle Consultants, cautions that global dollar liquidity is tightening. On the contrary, India would see more liquidity as general elections near, he told ETNow.
Edited excerpts:
What exactly do you believe is going to be the outlook for the markets, going forward? What would be the silver lining because while everyone on Street does seem to be expecting a decent amount of volatility and uncertainty? What do you think could provide a decent amount of respite to the equity market?
First half of 2019 too probably could be a bit of an extension of 2018, with some range bound movement. What is being ignored and missed is the tightening global dollar liquidity. The Fed in terms of contraction will remove about $400 billion this year and even the ECB will stop expanding.
And if you look at the three-month LIBOR, it is inching up. So a global dollar liquidity coming down with a high short term market determined rates like LIBOR is not a great combination for equities.
Domestically, the ruling BJP saw a loss in state elections. India would see more liquidity. Now this could come in the form of farm loan waivers, it could come in the form of some universal basic income, could be in the form of some interest free loans. We are yet to see how it unfolds.
Just to give you an idea, we have waived more than Rs 2.1 lakh crore loan across various states in the last three years. That amount is equal to the PSU bank recapitalisation. That is how big it is. There will be a bit of a trade-off between the two.
The near-term trigger to me would be some earnings growth led by banks, especially the corporate facing banks with good CASAs. And so far, the earnings growth has been around 10 per cent if you take H1, which is the case for the Nifty. We could see a little better than the H1 figure. That is what our base case is.
Look at the trend in IT all across. Given the kind of concerns with regard to growth in the US geography, do you think the best for IT is now gone? In 2019, we are not going to see IT maintain leadership as it did all of 2018 and also because of the rupee reversal now?
You are right. Probably, you will have to take it day by day. And see what is happening. In IT, most of it so global because if you see Nasdaq, if you see the FAANG stocks, they are already in the bear territory.
We saw what happened to Apple on Thursday. There is a pressure there and as I said global growth will be a tad lower than what it was in 2018, not that 2018 was a great year. But if you talk about the domestic IT names, if you see the hiring data of Nasscom in November, the hiring was up 8 per cent.
If you see demand environment in their traditional verticals, which is banking and telecom, that is better. We are seeing an increased digital share of revenue in the top 3-4, which is your TCS, Infy and HCL in particular. So I am not too worried on IT, there could be a short term impact because of the currency.
The tailwind which we had last quarter could become a bit of a challenge, but I am not too bearish on IT. This is more of a period where probably it will consolidate and then probably take the next chart.
Wanted to get your take on how you have read that overall PSU bank consolidation and merger of the big three. Incidentally, Dena, BoB and Vijaya have lost nearly a billion dollars in market valuation since the merger announcement came out. What do you believe are the dynamics of a step like this? Do you believe that the structure is fairly complex and how do you think shareholders of each of these banks should be positioning themselves?
On the margin, it is prima facie positive for BoB if you look at the swap ratios of the deal announced. Initially, the BoB reacted because it is a stronger bank and we had two relatively weaker banks which got merged into it.
My sense is that in the PSU space, the top two picks for me would be SBI and BoB. As for BoB, there will be a 50-60 bps gain on the treasury because of the yield falling from 8 per cent to 7.4 per cent.
So the investment provisioning which they did last quarter will reverse. We are seeing reduced slippages. I also expect some writebacks to happen. If you see the combined entity now which is BoB, Vijaya and Dena on advances, their market share would be around 7.5 per cent.
Now to me, that is the third-largest in terms of size and a formidable entity and I have regards for the BoB chief, who happens to be an ex-Citi banker. A good management and the fact that the valuations are cheap may not be a bad call.
But I would still think PSUs will be more tactical rather than being fundamental for a long term.
Do you think that this economy or the earnings would be great for the next 4-5 quarters and corporate banks would do well?
The order would be ICICI, Axis and SBI. ICICI, for example, is 50 per cent CASA, which effectively means that it can return to NIMs of 3.5-3.6 per cent. At a leverage of about 11-12, you are possibly looking at an ROE which will be closer to maybe 17-18 per cent.
I expect a lot of writebacks to come because of the NCLT. While we keep discussing the larger names which are Binani, Bhushan and Essar, there has also been a lot of small ticket resolutions. If you see the first six months, it is Rs 70,000 crore NCLT recovery and if you look at Axis and ICICI their provisioning is almost 70-75 per cent, which means that there will be writebacks that will come.
Also, if you see the loan mix, in ICICI, let us say the retail loans were 35 per cent and the corporate loans and SME loans were higher. Now retail loans are now as we speak is more than 50 per cent. Last quarter, the slippages have reduced. I am making a case of higher treasury income, improvement in return ratios, improvement in cost to income ratios and the fact that you will see better NIMs at that leverage.
The world is positioning for a slowdown and so inversion in yield curve is the lead indicator. The five-year rates in the US were below the Fed target. A pause by the Fed would be one trigger that would probably will lead to a bit of a global upside and that is more likely to happen now instead of rate hikes.
What are you making of the prospects for the auto space as a whole. We can write off December as a pretty abysmal month gone by for most of the auto companies, but there is still hope as we were discussing rural rebound, new launches and the like. Do you believe that the road ahead for the auto companies does look quite promising?
They are going through a transient phase, starting from the Kerala floods and then the festive season getting delayed. I think the numbers, especially for car makers, were not encouraging. Within that space if I were to pick some sub-segments, I would probably pick two-wheelers with Bajaj Auto being the top pick. I would also pick some M&M purely on valuations and the beating it has got in the last few sessions when we had flattish number for December.
We should not confuse this lower monthly numbers with a slowdown. There are a lot of transient phases, there is this rumour in the market that the GST rates can come down. Also, with model changes in December, people typically do not buy before 15th of January that is when the new model comes in.
I have been speaking to a lot of dealers, a few of them happen to be our large clients. They seems to be in a transient phase but if I were to pick I would probably pick Bajaj Auto and M&M on the tractor side, again focussed more on the rural recovery.
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