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Even as the world grapples with multiple challenges from the Russian invasion of Ukraine to high inflation and rising interest rates, stock markets in India have relatively held up; the BSE Sensex has re-scaled 61,000 levels and the NSE Nifty 50 is trading above 18,300. Hiren Ved, the co-founder and chief investment officer of Alchemy Capital says THE WEEK, the Nifty could even climb 20,000 levels by the first quarter of next year as the broader markets play catch up with the earnings recovery. The equity market veteran expects banks to do well and is extremely bullish on the revival of domestic manufacturing.
Q: On the one hand, we have the Russia-Ukraine war, on the other, we have rising interest rates and recessionary fears in the developed world. How does all of this play out now as you look at the markets in 2023?
Some of these risks are quite well known. We are seeing the impact of some of these disruptions due to the war in terms of higher energy prices, and higher prices of raw materials. Already we are seeing this in company margins and profitability.
The last two quarters, we have seen many businesses affected by higher raw material prices, higher logistics costs and supply chain issues. Obviously, companies need some time to manage some of these things. It takes two or three quarters for them to take their prices, etc.
From a broad perspective, the Nifty EPS (earnings per share) in March 2020 was Rs 441. In March 2022, Nifty EPS was Rs 741, and if you take any estimate that most brokers have on the street, March 2023 will be somewhere. in the region of Rs 860. So, you are talking about 95 percent growth, almost double in three years.
But if you look at the markets, in February, before COVID hit us, the Nifty levels were 12,200. Today we are at over 18,000, which is 50 percent higher, while overall revenues are almost double. So, the markets have to catch up with this increase in income. My feeling is that some of the margins lost in the first half, companies will be able to recover at least some of that in the second half, because by that time the price increases would have taken effect, commodity prices have also softened since then.
If you look at the next 2-3 years from today, it would be fair to say that earnings can compound at least 15-18 percent. And therefore markets can also compound somewhere in that region.
Q: In the current geopolitical and economic context, India seems to be in a favorable position?
Today, at least relatively speaking, China has become uninvestable due to huge political regulation of some of the fastest growing sectors, zero COVID policy and the geopolitical tensions between the US and China. China’s weight in the Emerging Markets Index was more than double that of India.
Typically and historically, when global interest rates have risen, money has flowed out of emerging markets. We have seen that last year, between September-October 2021, and June, July to August, FIIs at least took out $34 billion. But now, the question is that even if interest rates rise in the US, there will be a movement of money from China to India.
India is also one of those few countries that has natural growth, you don’t need to stimulate the economy to get growth. Although it is not 8-9 percent, can India grow at 5-6 percent? I think In a global context where most economies are slowing down and India is still growing, there will always be a premium for growth.
For growth in any economy, you need credit growth. Whether it’s private sector banks or public sector banks, we start this cycle with clean balance sheets, which means there will be credit growth.
It took us 7-8 years to bring down the corporate sector. Now the corporate sector is weakened, the banks are clean and the government is now encouraging manufacturing. Land and labor are available in India, unlike the US where labor markets have become very tight. Capital is also available because banks want to lend again, and we have a great policy with PLI (production-linked incentives). And then do you call it China plus one, Europe plus one; Indian companies will enter the global supply chain. So if you put all of this together, I think we’re in a very good place.
Despite the challenges (geopolitical tensions, inflation, rising interest rates) our markets held their own. There is greater confidence in our economy. And finally, the capital investment cycle begins. Order books from capital goods companies are at an all-time high. I am absolutely sure that by the end of this financial year, or maybe by the first quarter of the next financial year, I would not be surprised if our Nifty is in the 20,000-21,000 range.
Q: If you look at this quarter’s earnings, we’re seeing the kind of K-shaped economic recovery that some economists are talking about…
The recovery is uneven. What happened was that the bottom of the pyramid was really hurt, because of the two years of COVID, because there were job losses. The SMEs struggled. In addition to that, in recent months, we have also seen higher inflation. So it was a double whammy. The rural economy is struggling because people have lost income, their expenses have risen and inflation has hurt their purchasing power. In my mind, it will take another 12-18 months for the bottom of the pyramid to rebuild their income.
The wealthier the population, their income was less affected, plus the assets they held increased such as gold, stocks and real estate. So for the guy who buys an SUV, now whether he pays 18 lakhs for it, or 15 lakhs, it doesn’t matter. But, selling two-wheelers struggled, especially entry-level, because the entry-level guy couldn’t afford it. His income also went down and two-wheeler prices rose 20-30 percent.
This (2022-23) is the first full year where you will not have any downtime. All these guys, some of whom are daily, weekly wage earners, will get a full 365 days to earn for the first time. They need to rebuild their earning capacity. And at the same time, inflation must also moderate. Then the purchasing power will return. So you are absolutely right about the K-shaped recovery. This Diwali season has been very good. This is the time to rebuild their income again. We are already seeing that effect in those companies.
Q: In this kind of scenario, how do you pick up your investment themes?
Companies that sold more in the rural basket, we basically avoided investing. As I said, our view is that it will take another 12-18 months for that to pick up.
In consumption, we have stuck to things where premiumization happens. Wherever companies sell higher-quality products, higher-priced products, more urban-oriented, consumer companies, such as hotels, or, for example, alcohol companies, where people now buy more expensive alcohol or restaurants because things have opened up. Those guys are fine. We shifted our investments to more urban-centric, higher quality consumption.
But the time will come, perhaps in the next six months, when the bad news about rural demand will be priced into these stocks. And it is not that forever rural demand will not increase. So there may come a time over the next few months when we want to go back into some of those names.
Q: You talked about banks and the good shape they are in. We have seen PSU banks also doing very well and they have rallied over the last few months. Does this rally have more legs?
BFSI (banking, financial services and insurance) will do very well. But, there will be a battle for deposits. If you look at most banks, credit growth is faster than deposit. The public sector banks have some edge because they have branches everywhere and can garner cheap deposits. For public sector banks, it is a great time where you have access to deposits. But, at the same time, lending is growing. But, if you have to fight for deposits, which means you have to pay higher interest on deposits, then your net interest margins will be hurt. So even within BFSI, I don’t think everything will increase. Whoever is able to harvest cheap deposits will be a winner.
Q: If you look at the next five or 10 years, where do you see opportunities?
With five and 10 years (horizon), everything in India is investable, We invested in technology, banks, consumer, we invested in pharma we invested across the board in 6-7 sectors. But if you were to ask me and single out a sector where I generally think I see a big opportunity, that’s in manufacturing, which is reviving in a big way in this country.
Also, two global industries are going through a massive transition at a global level. One is energy. We are all moving from traditional sources of energy to renewable energy. And that transition is a multi-year transition, likely to start a major global capex cycle. Even more, because of the Russian-Ukrainian war, people realized that you have to be energy independent. The second industry that is going through a massive transition is transportation, where we are moving from traditional fuels to electric vehicles, and hydrogen, which means that the entire auto industry will have to be remade. That itself will create new capex.
In India, you will have two other industries that will drive capital. One is defence, where there is a greater push towards indigenization and manufacturing locally. We’ve seen that usually when this happens, it’s not just 2-3 companies, but the whole ecosystem develops. The second is electronic manufacturing. Again there is an urgent need, we cannot constantly import air conditioners, washing machines, televisions and mobile phones from China. So we will see a whole ecosystem of home manufacturing in electronics that will emerge.
These four industries together will drive the great renaissance of manufacturing over the next 5-10 years. You also have the opportunity in exports, because of China plus one, whether it is specialty chemicals, whether it is pharmaceutical intermediates, APIs or car companies. So, that will also drive capex and manufacturing. We, in addition to everything else, are looking to invest in many of these capital goods and components, and opportunities that feed this thesis.
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