All of us in the last 15 days have spent a considerable time in understanding this China comeback and sell India trade. Is that a real trade? Do you think that is a multi-year trade or that trade is already over?
Rana Gupta: Well, it depends on whether the Chinese policymakers go down the path of a large fiscal stimulus or not. In our view, China was export oriented economy, which got its savings and invested in real estate. The challenges were too much reliance on exports, which is right now getting a bit more problematic and excess savings. Now, export part, which is dependent on international trade, it will take time to repair.
But the excess savings will continue. So, someone needs to dissave. So, whether the fiscal incentive comes or not, that will determine quite a few things. And of course, if exports were to revive, then it can become a much better trade. But these two has not happened yet and in the absence of these two, China remains more of a tactical trade.
Now, China comeback is that bad news for India or indirectly that is good news for India? Because if China comes back, economy has to do well. If economy does well, then the world will do better because we are talking about second largest economy in the world. So, why is everyone saying China come back is bad news for India?
Rana Gupta: Well, that depends on the time horizon and perspective. China coming back can be a bit of a challenge for Indian equities if someone has a three months kind of a horizon because FIIs who have been underweight China to our understanding they can take some profits in India because Indian markets have been the standout performer so far and put some in China.
But over a longer time period, I do not think it is negative at all. Having said that even if China were to do well, FIIs were to take profit on India and to buy China, one of the key reasons why Indian markets have been holding up continues to be the local inflows. So, we need to also focus on that.
What has been your India strategy? Are you also part of that FII club who has been selling India down? You can tell us honestly. FIIs are getting a bad name in India, what to do?
Rana Gupta: See, we take a pretty medium to long term view on Indian equities, we have been quite constructive because of the trends that we see in India. We can talk more about it. We have been bullish for a long time on the digitalisation trend, on the local manufacturing picking up, add to that now the financialisation trend, all that makes us pretty constructive over the longer term and also this the local flows phenomenon.
I mean people see this but how long term it can be and what kind of demand for equities can create, I think is still not very clearly understood. It is a very big opportunity for the longer term.
We have just about warmed up into the earning season and, of course, this week alone you have more than 22% of the index weightage come out with their numbers. Reliance, HCL Technologies, few other IT and more importantly FMCG quarterly updates out of the way. How do you think this earning season is going to actually pan out at a broad basis?
Rana Gupta: On a broad basis, we are not like super optimistic on the quarter two earnings. See, in quarter two earnings on a broad basis I am talking about, not specific to any theme or sectors, on a broad basis the fiscal spending was on the lower side due to the elections and other things. The monetary policy was relatively tight and there were weather related disruptions. So, put all this together it is not very conducive for earnings growth.
Also, the base is now getting a little stronger. So, therefore, this quarter it is possible to see some downgrades, although we are not of the view that downgrades will be very much. So, currently let us say the earning growth is supposed to be 14-15%, you can see 1% to 2% downgrade for the current year.
What is your view on IT because we are just discussing that the large IT stocks with the exception of Wipro are at an all-time high. For a sector which is growing at 7-8%, why are these stocks trading at an all-time high because there are a lot of other sectors which are giving you 12%, 13%, 14%, 15% earnings. Why IT stocks are all-time high despite growth concerns?
Rana Gupta: All-time high, yes, they are. But if you look at their cash flow yields, they are one of the better cash flow yields stocks in the Indian markets. So, think about the IT stocks this way, it is yielding you 2.5-3% and that yields itself growing at 10% or higher because that is the minimum earning growth rate of this kind of companies.
Moreover, IT companies whatever the guidance that they have given for the future coming years, their view is that the spending in BFSI, spending in manufacturing is picking up. So, overall that means that near-term earning growth rate can also pick up.
So, all that justifies that because of all that the IT stocks are all-time high. The price may be all-time high but the PE is not. In fact, IT stocks the PE have seen some sort of de-rating because the earning growth slowed down. So, now is the time that earning growth can actually bounce back into the next year.
What is the outlook when it comes to telecom and electronics? Today, incidentally you have the Prime Minister as well who will be inaugurating the International Telecommunications Union in India. You have got the India Mobile Congress as well with a lot of policymakers as well that will be meeting. Any expectations from these events or how you are looking at the sectors as a whole?
Rana Gupta: Sure, I think let us take the electronics bit first. This government’s the focus, the area that they are focused, electronics is one of them. The reason is that India used to import a lot of electronics. They wanted to reduce the import dependency, so thus focus on domestic manufacturing. So, that is going to make sense. And in electronic manufacturing, you would have seen that from India the electronic exports became one very big way.
World’s largest mobile phone makers manufacturers are increasingly sourcing from India. This is one segment where truly China plus one is happening. We like the sector and to make mobile phone, the accessories, there are a lot of machinery required, so we like that segment. Also, there are initial signs that some of the parts of the mobile phone exterior will start to get made in India. So, we like those opportunities as well.
As far as telecom is concerned, telecom large companies, they have consolidated. There are largely two players left. The 5G capex is coming to an end and at the same time there are signs that ARPU is picking up. So, in telecom one can expect for pretty accelerated earnings growth as well as ROE improvement, so that is also one sector that we like.
There is a lot of excitement in this entire new energy transition theme. Some are buying EVs, some are buying solar, some are buying wind, some are buying machinery companies, some are buying wire companies. At Manulife have you taken a bet in this energy transition theme in India?
Rana Gupta: Again, energy transition is also a very big theme and again if you look, if I just follow on from what I said on the government’s incentive electronics, energy transition is also (6:18) receiving a lot of incentives. If you follow really that the government policy has been to reduce dependence on electronic import as well as reduce dependence on fossil fuel import, therefore get the current account deficit down, savings up.
Having said that the renewable energy is one segment which has been in flavour for quite some time and the renewable energy if you look at the wind equipment stocks or the solar equipment stocks, they have done phenomenally well. They are up multiple times in a one-time horizon.
Utility stocks they have also done very well over this enthusiasm. Now, these companies will continue to do well but the valuations are now quite steep. There will be execution challenges in terms of land availability and in terms of connection, connecting to the grid and so on and so forth.
At a very high valuation these challenges may not be priced in, so that is one area that one has to look into. However, renewable energy will also mean that there has to be a lot of investment in the grids. So, to that extent wires, cables, and the downstream, the grid equipment that is one segment that we will continue to be bullish. But the utilities and the power equipment side, they have run up quite a bit and the near-term challenges on execution are not in the price.
Is the party in PSUs over? I mean, do you think the best of the gains in PSUs whether it is metals, utilities, power, power financiers is that over?
Rana Gupta: See, the PSU stocks had a fantastic re-rating and PSU stocks it is hard to say it is over because they tend to do well in a certain time frame. So, PSUs are also in a way that way becomes a tactical trade, it is only that time horizon is longer, probably a year or so. But if you take a step back the PSU trade were also due to the fact that government focused on cutting fiscal deficit and within that segment, within that construct increasing public spending. So, they spend on railway, defence, power, and so on and so forth which led to very good performance of the PSU and rightly so.
However, the government capex at 3.4% of GDP it can continue but there it is very unlikely that it will go to 4% from here. It went to 2.5% to 3.5% and probably peaks out here. So, that additional impulse for the PSU stocks could be missing and again when the PSU stocks something like in the defence, in the railways, in the power segment when they are going to like 30-40 times, at that valuation you need those impulses which may not be there. So, therefore, it looks like the PSU stocks the trade could be over, but again it depends if the stocks get cheaper, some sort of incentive comes back, then we will have to review this stance.