HFCs dispersing loans approved back in FY11, FY12, FY13: Mahesh Nandurkar, CLSA

In a chat with ET Now, Mahesh Nandurkar, India Strategist, CLSA, says the bulk of the slowdown that we have seen in the property markets in the last three years is not reflected fully in the numbers of housing finance companies as yet. Edited excerpts



ET Now: We are talking about beginning of a new cycle. We are talking about markets sitting at a record high for 2016. Two days ago a mail from CLSA hit my mailbox and the headline says lacking trigger, the second line says benchmarks are now trading at a premium. There are no triggers and the upside is capped.

Mahesh Nandurkar: Yes. I think you have seen our radar views already. Just to put things in perspectives with the recent run, what we are looking at is that the Nifty is now trading at more than 16 times one year forward earnings whereas the last 10-year average has been about 14.5. So there is a 10-12 per cent point premium. Also keep in mind that the forward earnings estimates of 16 plus is based on an expectation of earnings growth of 23 per cent for FY17 which is still very optimistic. More realistic numbers will be closer to 15 per cent in my view. So if you take that into account, the multiples are actually closer to 17.5 or so. Clearly as far as the market valuations go, there is not really much room for rerating. As far as triggers are concerned, over the last few months we did see a lot of positive triggers. We had a good fiscal deficit, a good budget, we had good news on the monsoon side, the RBI rate cut and more importantly the market also received the anticipated comment from the Fed that the pace of rate hikes this year will be much lower. So all these things have kind of led to a kind of rally that we have seen in the market so far. Now going forward, I actually see a couple of headwinds or a couple of sentimental dampeners, one is that the local economic indicators things like the power generation growth, cement demand etc. has actually seen a reasonable improvement over the last couple of months but if you dig deeper you will see that there are some non-fundamental factors which has driven that one is that we had a very low base effect from the February, March, April of last year that has helped. Secondly being a leap year the month of February had one extra day so one extra day of production, so all these kind of non-fundamental factors have led to this improvement and as we get into the month of May and June where these factors will cease to exist we might see the excitement around the economic pick up to kind of begin to fizzle out so that is one dampener that I am looking at over the next couple of months. Also I believe that the earnings growth expectations is on a higher side so you will continue to see some moderation into that as well so net-net perfect on valuations, lack of triggers over the next few months so that makes us believe that the market gains are unlikely in the near term.

ET Now: So what could go wrong at this juncture and to what degree would you say the global risks are still very much at play just this morning we have been reacting to status quo from the Fed, they have held fire but so have the BoJ and that has not gone done well with the markets that is getting a little bit of irregularity in the dollar Yen parity as well and more importantly their GDP prediction of guidance for the Japanese economy is not very enthusing.

Mahesh Nandurkar: True so I think there are risks from the global side definitely, I mean you have highlighted a few and I see a chance that for the last almost eight years we have lived in a world where a bad economic news if considered good from the equities market point of view because bad economic news meant that the central bankers would do QE or cut rates or some kind of not so common monetary measures but I believe that the investors will begin to question at some point in time the efficacy of the central bankers action. For the last eight years we have not really seen any big global growth revival despite these unconventional monetary policies and my biggest risk or my biggest concern going into the remainder of the 2016-2017 is that the market might begin to question the ability of the central bankers to revive growth and the market response to easy monetary steps taken by either the US Fed or BoJ or ECB might not be rewarded with an optimistic reaction from the global market side or from the equity markets side. So that is what I fear and that is the single biggest risk going forward.

ET Now: I am just looking at your reports and the one that was titled The Same Old Feeling. Now let us talk print. Let us talk about what has happened as opposed to guessing what could happen. From amongst the indicators that you are monitoring and I see in your report that there are some that you are bullish on. Some that you believe need to show a lot of promise. What is that biggest bet on the domestic indictor’s front? Is it non-railway companies? Is it port companies or is it something else that you believe are already showing in print the recovery?

Mahesh Nandurkar: I think in print where we are seeing clear signs of robust numbers for an extended period of time now is in commercial vehicles. We have seen almost two years of pretty robust volume growth over there so it is not just a case of low base. We are reporting good numbers on the back of good numbers. I would say something similar is happening with the airline traffic passengers -- whether it is domestic or international. So there are a couple of these indictors which are kind of looking quite good. There has been an improvement. Do not get me wrong there. There has been an improvement on some of the other indicators as well like cement demand growth which has picked up a little bit -- a few percentage points. Same goes for electricity generation. But the point I made earlier is that some of the latter are kind of overstating the extent of recovery, this is what I meant. So yes, as far as the ground activity is concerned, we are positively encouraged by the thing that we are seeing on the road side. We are also getting very positive feedback from the railway side as well. So there are some parts of these economies which are doing pretty well. One very big type of economic activity that we closely monitor and where we are not seeing any sign of pickup is the real estate side or the property side. That often gets ignored because there are not that many large listed companies in that space. So a lot of equity investors tend to kind of ignore that data point but even if it is not well represented on the stock market, the contribution to the overall economy is huge -- whether it is creation of jobs or whether it is cement demand and so on. So in terms of on the ground activities, the one part that we are clearly monitoring very closely and which can actually make us bullish or bearish going forward is what is happening in the property markets.

ET Now: A very differentiated call from CLSA has been that you are underweight HFC. The sector continues to grow but you are of the view that HFC stocks may not be market outperformers. So far this call has worked. HDFC is down. Housing finance companies have gone nowhere. Most of them are off their recent lows with the exception of a Can Home Finance that is a small one. But structurally, do you think the best of the price appreciation is behind HFCs?

Mahesh Nandurkar: Yes so the thing is this call very much correlates with our view on the property markets. We have been seeing weak trend in the property markets for last three years now and it is not just in the metro cities but our channel checks on the smaller cities like Jaipur or Varanasi or Nagpur or Nasik. It is pretty much everywhere. The property markets in volume terms and in price terms are pretty weak and if the property markets are not doing great, it is difficult for mortgage companies to do well. Also remember the fact that the mortgage industry has reported loan growth numbers, reacting to the property market movement with a big lag. So housing finance companies today are dispersing loans that were approved back in FY11, FY12, FY13.

The bulk of the slowdown that we have seen in the property markets in the last three years is not reflected fully in the numbers of housing finance companies as yet and so that is one point to keep in mind. The second point to keep in mind is also the increasing competition with the asset quality pressures on the corporate side. The competition is intensifying on the retail side of the business for the banks and mortgage is clearly one of the most attractive territories. So it is a combination of our view which is weak on the property market side as well as the increasing competition. But having said that, some of these stocks have corrected quite a bit. So tactically speaking, we have turned neutral on that space but you are right structurally we would continue to hold negative view on the housing finance companies.

ET Now: The other aspect to the story is what is the outlook on currencies? Now the dollar finds its level at roughly about 95, you know you are looking at the Yen strengthening further today and that is clearly not very good. We have been discussing that the Bank of Japan does not really want a stronger Yen. Their efforts have been to keep the Yen weaker because that helps their exports, but for emerging market currencies and India, is it a range bound trade because you would see the dollar also get impacted with the way the Euro and the Yen moves as they constitute a large portion of the dollar index?

Sudhir Agrawal: So I will say for the time being, it might be range bound till we get further cues on the US data points. So the close range of around 66.25-67.25 looks like might be the immediate trading band on the INR side but I think it should move in either direction in big way only if you get some surprising data on the US Fed front. So I think we will have to wait for that data and probably you know two, three more months and then see if Fed is deciding to move as per market expectation in June or not. So I think that will drag our currency further.