ET NowIn an interview with ET Now, Sandeep Dhingra, Ashiana Capital, shares his outlook on equities for 2016. Excerpts:
ET Now: 2015 has been a difficult year, where fixed deposits have performed rather better than equities. When we started the year, there was a lot of hope and hype. Unfortunately, we are about to end the year on a disappointing note.
Sandeep Dhingra: You put it rightly. I think from our perspective, the way we look at 2015 was really a year of reset in expectations. We were hoping for a quick recovery in capex and economic activities, which did not pan out. We also had global issues relating to metals and mining industry, which witnessed a major setback in 2015. So I think expectations as we go into 2016 have been revised lower in terms of the earnings outlook for next year. I think people are looking at about 12-14 epr cent earnings growth for FY17 and given the scope of disappointment is lower than what it was last year and since lot of the expectations are baked into numbers, we are definitely more optimistic about India in 2016 as compared to 2015.
ET Now: If I look at the global environment, it is still very noisy and India is now paying price for being in a bad neighbourhood. We have seen $80 billion of outflows from emerging markets (EMs) this year and that may really continue in 2016. If indeed EMs continue to suffer, what will happen to a market like India which is expensive as well as crowed?
Sandeep Dhingra: We have a slightly different view to that. From our perspective, we believe that we might have seen the worst of the fund outflows, so to speak. We may probably see more outflows, but the intensity is probably going to be lower because there was a lot of positioning change running into the Fed decision and the liftoff of US interest rates has played its role through the course of 2015.
That is why when we look at 2016, we are not as negative on fund flows. It must not be read as you are going to see massive inflows coming through, but the intensity of selloff should definitely be lower from what we have seen. Having said that, there are global issues which will continue to plague the market; growth scares will go along. But incrementally, markets would tend to move on earnings. One of the big stories in India was the extremely weak delivery on the earnings front.
If you just look at the aggregates of 4,000-odd BSE listed companies for the September quarter, profits were down about 3.5 per cent. People were were expecting 10-15 per cent earnings growth for the same quarter. So that has been probably the biggest disappointment. So as you go into next year, you need to look both the positives and the negatives. On the positive side, the macros are still supportive in the form of lower commodity prices. On the bottom up side, earnings disappointments will probably be lower. So overall we would be better than we were in 2015.
One really cannot predict fund flows, but the case should not be as bad as in 2015. Put all these things together, we are looking at a relatively better scenario for India. Now how much upside do you see on the index is hard to tell because as I said earlier as well never looked at the index level because the index is a mix of domestic-driven companies and companies which have rely on global earnings. So, it is hard to put a number on the Nifty50 for that matter.
Sandeep Dhingra: Yes issuances are always good for the market overall. As long as good companies keep coming to the market at reasonable prices, it is never a bad thing. IndiGo is a good example. It is into a good industry. We particularly like the aviation space. Those kinds of areas will always be of interest. I do not have a specific comment on which IPO I would look more actively. But it is part of the market, which should be of keen interest depending on what comes through.
ET Now: I think imbibed in that question was an attempt to find out what to your mind could be a nice, new age theme for 2016 because a lot of these IPOs have been established themes. Manpasand Beverages was a different kind of an IPO, so was VRL Logistics. I think Dr Lal Pathlabs and IndiGo also fall in that category. To you mind, what is that emerging theme for 2016 within India?
Sandeep Dhingra: At some stage, we have to get some of e-commerce and internet-related companies listed. There is a lot of private equity money that has gone into that space. That is clearly a growth area. Now who comes first and in what form and valuations remains to be seen. But that would be a space, which one should keenly watch out for.
ET Now: A lot of people are now looking to buy into distressed names. I hear arguments in favour of Biocon and Sun Pharma started many years ago. At a market cap of Rs 10,000 crore, Biocon still got stuck there, but Sun Pharma is where it is. Sugar has been a dud for the last seven-eight years, but the sector might now make a comeback. Power because of UDAY scheme and infrastructure too may make a comeback. Do you believe in the revovery that I am talking about? Within the said themes, which would is your favourite?
Sandeep Dhingra: You were not very clear on that.
ET Now: What I mean is a lot of people are now trying to buy some of the distressed names which hitherto have not really done too much. But now, they might make a bit of a comeback. Is there a comeback favourite theme that you have?
Sandeep Dhingra: Not really. To be honest, those themes always have too much risk associated with them. So I am more focused on more solid. For example the downstream oil and gas or the oil marketing companies is still a story which should do very well in 2016. Within that, IOC probably stands out for us because it is extremely cheap and you have got plenty of headwinds from strong refining outlook for the next year or two. We probably play through things like power sector. Clearly our assessment of power sector is that there has probably been too much capacity addition on the generation side. That really is the place that we need to look at. In the power space, we have to look areas like transmission, where the infrastructure build up has been probably behind the curve, compared to the power generation sector.
So we like Power Grid. If we can buy Power Grid at 10 times earnings, them it is really not worth chasing a lot of hope stories. Recently, we looked at a company called Adani Transmission, which is probably the largest private sector transmission company. From numbers, it is looking like something like seven times normalised earnings. So you may find opportunities of this type everywhere. We are more earnings-focused and we want to see companies which can deliver earnings because buying the hope stories do work for a little bit, but then they turnaround and then you do not really know what to do with them. So that gets a very hard investment decision for us.
ET Now: One comment that I want from you is on financials largely. At the start of 2015, consensus was bullish on banks and NBFCs at large and some of that trade has not worked out well. For the right reasons, not to blame anybody, do you think 2016 could be an antidote of sorts, wherein large banks or mid-sized banks could make a bit of a comeback?
Sandeep Dhingra: If the market needs to do significantly better, then banks need to perform better. I hope you are right but from what we see right now is the facts that banks are getting clearly segregated into corporate lenders and non-corporate lenders. What we have learned through 2015 is that there is no quick fix for the whole NPL problem that the banking system in India has.
It will resolve itself, but it is going to take its due course of time.
Now our sense is that we are probably 40-50 per cent or maybe a little more through with the problem. But we still have more work to do. You do not know what happens when you start cleaning up your books. It is a good thing. It does mean that you can have a lot of earnings shocks and some of the banks will run out of capital at some stage.
So at this stage I would not put my money on corporate banks. We can find the retail-centric banks still doing fine. But that number is very small. So at this stage I would not bet on the big corporate lender banks. My sense is that if these banks were to take the pain upfront, and come out with how bad their books look like, that is what we need to do to correct it.
Probably, the market will like that than seeing lingering pains of one or two banks every quarter. Just bear in mind that the banking sector as a whole has been a very poor performer in the last few years globally, where you look at European banks, Chinese banks or DBS in Singapore. So investors are a lot less willing to pay big multiples for banks anymore. Somewhere I think if some of the big problem assets get properly recognised and move things forward, then these banks will become much more interesting. But till then, it is a tough call.
ET Now: Fair point. If there is one learning experience from 2015, it is that the evidence will always triumph hope. There is no point in trying to ride that hope bandwagon because hope bandwagon rarely has delivered in the past as well. But I would not want to understand why you do like SKS Microfinance. The company is not out of the woods and there is still a lot of hope here. The hope is that the rural economy will pick up; there is a hope that eventually will become a bank.
Sandeep Dhingra: We have tracked this company for a long period of time. There are two parts to it. One is the addressable market. If you look at microfinance as a market, believe it or not, Indian market is still smaller than countries like Bangladesh, which are one-tenth or may be one-twentieth of the size of India. So there is clearly a big runway for growth out there. We always felt that converting into a bank was probably kind of a 50-50 choice because it may be good for the longer term but that is not proven sort to speak.
Also in the short term, it would create a lot of issues. Look at IDFC. It is probably the best infrastructure lender out there. But the whole conversion process meant that the stock is going to die for three-five years. So our sense is, if you can run it in the form of NBFC in the current context, it would probably be a better position than to convert into a bank as there are complexities that comes with running a bank. As said, there is a clear runway for SKS to grow its business the way it was doing it for next couple of years, with a lot lesser competition. Given the recent RBI regulations on the average ticket sizes, which is one of the key drivers, the argument for the stock is that you can see a pretty large operating leverage because just think about it if you just double the size of your average ticket size of the loans for the same cost structure the operating leverage is pretty massive so what we like in the company is there is a clear visibility for the next few years and we think they are going to beat the earnings estimates which are out there and we think not converting to bank is really not a bad thing for them.
ET Now: 2015 has been a difficult year, where fixed deposits have performed rather better than equities. When we started the year, there was a lot of hope and hype. Unfortunately, we are about to end the year on a disappointing note.
Sandeep Dhingra: You put it rightly. I think from our perspective, the way we look at 2015 was really a year of reset in expectations. We were hoping for a quick recovery in capex and economic activities, which did not pan out. We also had global issues relating to metals and mining industry, which witnessed a major setback in 2015. So I think expectations as we go into 2016 have been revised lower in terms of the earnings outlook for next year. I think people are looking at about 12-14 epr cent earnings growth for FY17 and given the scope of disappointment is lower than what it was last year and since lot of the expectations are baked into numbers, we are definitely more optimistic about India in 2016 as compared to 2015.
ET Now: If I look at the global environment, it is still very noisy and India is now paying price for being in a bad neighbourhood. We have seen $80 billion of outflows from emerging markets (EMs) this year and that may really continue in 2016. If indeed EMs continue to suffer, what will happen to a market like India which is expensive as well as crowed?
Sandeep Dhingra: We have a slightly different view to that. From our perspective, we believe that we might have seen the worst of the fund outflows, so to speak. We may probably see more outflows, but the intensity is probably going to be lower because there was a lot of positioning change running into the Fed decision and the liftoff of US interest rates has played its role through the course of 2015.
That is why when we look at 2016, we are not as negative on fund flows. It must not be read as you are going to see massive inflows coming through, but the intensity of selloff should definitely be lower from what we have seen. Having said that, there are global issues which will continue to plague the market; growth scares will go along. But incrementally, markets would tend to move on earnings. One of the big stories in India was the extremely weak delivery on the earnings front.
If you just look at the aggregates of 4,000-odd BSE listed companies for the September quarter, profits were down about 3.5 per cent. People were were expecting 10-15 per cent earnings growth for the same quarter. So that has been probably the biggest disappointment. So as you go into next year, you need to look both the positives and the negatives. On the positive side, the macros are still supportive in the form of lower commodity prices. On the bottom up side, earnings disappointments will probably be lower. So overall we would be better than we were in 2015.
One really cannot predict fund flows, but the case should not be as bad as in 2015. Put all these things together, we are looking at a relatively better scenario for India. Now how much upside do you see on the index is hard to tell because as I said earlier as well never looked at the index level because the index is a mix of domestic-driven companies and companies which have rely on global earnings. So, it is hard to put a number on the Nifty50 for that matter.
ET Now: Would one of those themes be the new entrants from the primary market? Of late, we have been talking about how IndiGo has made investors take a relook at aviation sector. While the pharma sector has seen an overhang and perhaps more coverage by the USFDA in recent times, you still had a niche business like Dr Lal Pathlabs and Alkem Labs doing fairly well. In bits and starts, are you looking at new papers very closely and is anything from the recent issuances that you like?
Sandeep Dhingra: Yes issuances are always good for the market overall. As long as good companies keep coming to the market at reasonable prices, it is never a bad thing. IndiGo is a good example. It is into a good industry. We particularly like the aviation space. Those kinds of areas will always be of interest. I do not have a specific comment on which IPO I would look more actively. But it is part of the market, which should be of keen interest depending on what comes through.
ET Now: I think imbibed in that question was an attempt to find out what to your mind could be a nice, new age theme for 2016 because a lot of these IPOs have been established themes. Manpasand Beverages was a different kind of an IPO, so was VRL Logistics. I think Dr Lal Pathlabs and IndiGo also fall in that category. To you mind, what is that emerging theme for 2016 within India?
Sandeep Dhingra: At some stage, we have to get some of e-commerce and internet-related companies listed. There is a lot of private equity money that has gone into that space. That is clearly a growth area. Now who comes first and in what form and valuations remains to be seen. But that would be a space, which one should keenly watch out for.
ET Now: A lot of people are now looking to buy into distressed names. I hear arguments in favour of Biocon and Sun Pharma started many years ago. At a market cap of Rs 10,000 crore, Biocon still got stuck there, but Sun Pharma is where it is. Sugar has been a dud for the last seven-eight years, but the sector might now make a comeback. Power because of UDAY scheme and infrastructure too may make a comeback. Do you believe in the revovery that I am talking about? Within the said themes, which would is your favourite?
Sandeep Dhingra: You were not very clear on that.
ET Now: What I mean is a lot of people are now trying to buy some of the distressed names which hitherto have not really done too much. But now, they might make a bit of a comeback. Is there a comeback favourite theme that you have?
Sandeep Dhingra: Not really. To be honest, those themes always have too much risk associated with them. So I am more focused on more solid. For example the downstream oil and gas or the oil marketing companies is still a story which should do very well in 2016. Within that, IOC probably stands out for us because it is extremely cheap and you have got plenty of headwinds from strong refining outlook for the next year or two. We probably play through things like power sector. Clearly our assessment of power sector is that there has probably been too much capacity addition on the generation side. That really is the place that we need to look at. In the power space, we have to look areas like transmission, where the infrastructure build up has been probably behind the curve, compared to the power generation sector.
So we like Power Grid. If we can buy Power Grid at 10 times earnings, them it is really not worth chasing a lot of hope stories. Recently, we looked at a company called Adani Transmission, which is probably the largest private sector transmission company. From numbers, it is looking like something like seven times normalised earnings. So you may find opportunities of this type everywhere. We are more earnings-focused and we want to see companies which can deliver earnings because buying the hope stories do work for a little bit, but then they turnaround and then you do not really know what to do with them. So that gets a very hard investment decision for us.
ET Now: One comment that I want from you is on financials largely. At the start of 2015, consensus was bullish on banks and NBFCs at large and some of that trade has not worked out well. For the right reasons, not to blame anybody, do you think 2016 could be an antidote of sorts, wherein large banks or mid-sized banks could make a bit of a comeback?
Sandeep Dhingra: If the market needs to do significantly better, then banks need to perform better. I hope you are right but from what we see right now is the facts that banks are getting clearly segregated into corporate lenders and non-corporate lenders. What we have learned through 2015 is that there is no quick fix for the whole NPL problem that the banking system in India has.
It will resolve itself, but it is going to take its due course of time.
Now our sense is that we are probably 40-50 per cent or maybe a little more through with the problem. But we still have more work to do. You do not know what happens when you start cleaning up your books. It is a good thing. It does mean that you can have a lot of earnings shocks and some of the banks will run out of capital at some stage.
So at this stage I would not put my money on corporate banks. We can find the retail-centric banks still doing fine. But that number is very small. So at this stage I would not bet on the big corporate lender banks. My sense is that if these banks were to take the pain upfront, and come out with how bad their books look like, that is what we need to do to correct it.
Probably, the market will like that than seeing lingering pains of one or two banks every quarter. Just bear in mind that the banking sector as a whole has been a very poor performer in the last few years globally, where you look at European banks, Chinese banks or DBS in Singapore. So investors are a lot less willing to pay big multiples for banks anymore. Somewhere I think if some of the big problem assets get properly recognised and move things forward, then these banks will become much more interesting. But till then, it is a tough call.
ET Now: Fair point. If there is one learning experience from 2015, it is that the evidence will always triumph hope. There is no point in trying to ride that hope bandwagon because hope bandwagon rarely has delivered in the past as well. But I would not want to understand why you do like SKS Microfinance. The company is not out of the woods and there is still a lot of hope here. The hope is that the rural economy will pick up; there is a hope that eventually will become a bank.
Sandeep Dhingra: We have tracked this company for a long period of time. There are two parts to it. One is the addressable market. If you look at microfinance as a market, believe it or not, Indian market is still smaller than countries like Bangladesh, which are one-tenth or may be one-twentieth of the size of India. So there is clearly a big runway for growth out there. We always felt that converting into a bank was probably kind of a 50-50 choice because it may be good for the longer term but that is not proven sort to speak.
Also in the short term, it would create a lot of issues. Look at IDFC. It is probably the best infrastructure lender out there. But the whole conversion process meant that the stock is going to die for three-five years. So our sense is, if you can run it in the form of NBFC in the current context, it would probably be a better position than to convert into a bank as there are complexities that comes with running a bank. As said, there is a clear runway for SKS to grow its business the way it was doing it for next couple of years, with a lot lesser competition. Given the recent RBI regulations on the average ticket sizes, which is one of the key drivers, the argument for the stock is that you can see a pretty large operating leverage because just think about it if you just double the size of your average ticket size of the loans for the same cost structure the operating leverage is pretty massive so what we like in the company is there is a clear visibility for the next few years and we think they are going to beat the earnings estimates which are out there and we think not converting to bank is really not a bad thing for them.
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