What could be the trigger now for the market? Earnings are good. Inflation is benign. Macro will keep on getting ups and downs here but in general is steady. Flows have been decent. The outlook by corporate India is not that bad. So for markets to move higher, what is next?
If I have to pick one positive trigger and one negative trigger, the positive trigger is the China play because the scale of China’s unwind is such that I find it hard to believe that it will not trigger broader connections in commodity prices and then on to on to inflationary numbers both for America and for India. So, that is the positive trigger to look out for; a Chinese unwinding leading to deflationary impulses the world over which then leads to abatement of concerns around interest rates.
The negative one in India’s case is that we have got so many elections ahead of us. We got five assembly elections through the winter and then obviously the big one in the summer. The foreign investors are asking us questions around the election piece and it is what it is. We will have to deal with that. I keep emphasising to foreign investors that ours is a robust democracy and we go through elections, every 12 months we go to some sort of major elections and all. But all of that being said, there will be a degree of concern as we go through the election cycle in India.
Does the underperformance in HDFC Bank intrigue you? I know it is part of everyone’s core portfolio, the best compounder and you are not going to touch it. But why this underperformance now that the merger has done and dusted?
Firstly, it is worth emphasising that HDFC Bank is only underperforming compared to its own stellar history. F I look at the two-year compounding in HDFC Bank and it is a large holding for us, two-year returns have been around 15%. Now, compared to HDFC Bank’s history of 20-21% compounding over 35 years, it does feel that 15 is a weak number. But it is at one level not that bad a situation.
Secondly, the merger is the largest we have seen in the financial services sector and all said and done, they do have to add 1500 branches a year to keep up with the liability ask. Sashi and the team have been very clear about how hard they are working to raise liabilities. They want to replace HDFC Limited’s wholesale market funding with CASA funding. People like us believe that they can do it. We have seen them deliver on the 1500 branches rollout number over the previous fiscal and we believe they can do it. But there are other people out there who perhaps do not know HDFC Bank so well and have not understood the sheer muscle of this franchise as well, they are probably waiting and watching and we do not mind that, it just gives us that much more opportunity to keep building a big position here.
But that is the big unknowns of the market. Can you pull off this sort of liability ramp up? I do not think any other lender in India, any other bank in India can but we have seen HDFC Bank do it. Just to remind people who missed the stat — in the quarter ending March 23, a full 25% of India’s incremental liabilities went to HDFC Bank, that is the scale at which these guys are ramping up. When you add up the two numbers — HDFC Bank and HDFC Limited – you will get a company who will account for 11-12% of the entire country’s profits. It is a colossal company now and perhaps the scale of what is transpiring is not easy for people to understand.
I would like to draw your attention to the talk of the town and that is Jio Financial Services. I know you do not own the stock, but you own a stock which is in the mutual fund distribution, Prudent. If a large business house is looking at creating a financial behemoth which would be based on technology, it will have an edge on distribution, it will have the advantage of skill and scale. What do you think will be the disruptive impact of that on banks, Prudent which are in the distribution business and companies like India Infoline which get a large part of their business from wealth management?
When you raise the question in the context of the mutual fund and mutual fund distribution piece, I believe that is exactly where Jio’s disruptive impact will be greater. I do not think Jio’s disruption will be as profound on the lending side but a combination of Jio and BlackRock and you put that on an app and give them Jio’s well-known muscle in telecom, there is hope for disruption there.
The reason we are not losing an enormous amount of sleep on it is as follows. There are broadly three segments in which the whole wealth management industry operates. The first is the affluent people, people who say they have got a crore or more to invest and the wealth managers, the wealth management houses or the banks or the specialist wealth management houses, 360 ONE, Motilal, etc, they cater to that, that is the one crore plus segment.
Then, there is a kind of middle segment where people are saving from Rs 5 lakh to say, Rs 50 lakh. The middle class, mass affluent segment is where a Prudent is very powerful. They have got 100,000 mutual fund distributors, advisors who are catering to that Rs 5 lakh to Rs 1 crore segment. Then there are a billion people below Rs 5 lakh. That is where Jio will be super powerful. Nobody else has found a business model to get those guys to put in 5,000, 10,000 a month into the stock market and I am hoping that is the segment which is basically financialised by this incredibly powerful model of Jio plus BlackRock plus telecom.
The income tax data shows a 50% growth in the number of Indians filing one crore plus returns compared to four years ago. So, three different strata and therefore I am not so sure the player should lose too much sleep. The Prudents of the world should not lose too much sleep. But for mutual fund distribution, this could be a complete revolution that is lying ahead of us.