Attended a talk yesterday by Prashant Jain,ED & CIO of HDFC Mutual Fund.
This talk was organised by the SK Group.
Here are the key takeaways from Prashant Jain’s talk:
His take on the Budget:
- Its a no-nonsense Budget
- Once GST is passed,Budget will become a simple boring affair
- For first time in 25 years,he was able to leave office by 7-30 pm on Budget Day as there is no major policy changes in the Budget
His take on the Modi Govt:
- It is a very purposeful and determined Govt
- The Govt has a few priorities and all its actions can be seen from this framework:
- Reduce the fiscal deficit: This will result in low inflation,low interest rates and more resources for the private sector
- Increase tax revenues: Demonetization and GST leaves a trail that will widen the tax revenues
- Stopping wasteful expenditures: Direct Cash Transfers using Aadhar and Bank Accounts have reduced siphoning off of funds
- Improve service delivery to common man: Every scheme now has an “outcome based” approach instead of “outlay based” approach.For example,outcome of all villages electrified,133 kms/per day of roads,10L ponds under MNREGA etc
- Simplify: Using Technology to simplify processes and doing away with redundant laws, policies and practices
- Environment: Supporting sources of energy like wind,solar etc
- In the coming years, India will definitely reap the benefits from all the work done by the Govt
His take on Demonetisation:
- Short term pain for medium and long term good for the people of India
- No impact on this in the next Quarter
- Full effect was not realized due to collusion of Bankers
His take on the India Growth Story:
- India is a secular growth story
- It’s gowth increases every year irrespective of domestic and global conditions
- The reasons are as follows:
- Demographics
- Change from Joint to Nuclear Families
- Low penetration of products/services
- Faster and shorter product cycles
- Real growth in India can cross 8% in the coming years
Why some companies are not growing despite GDP growth:
He gave example of Unilever.Said three reasons why it’s sales are stagnant:
- Penetration levels are high.Soaps are there is most households…there are no new customers to be acquired
- Aspirations levels are high.As the consumer’s income increases,he is not going to buy more soaps…he will use the money elsewhere
- Competition-As new players like Patanjali come in,they take away market share from existing players as the size of the pie cannot be increased much
Two Sectors of the Economy Doing Badly:
- Real Estate-There is a tremendous demand for real estate but high prices makes it unaffordable. Suffers from high demand,low affordability syndrome
- Private Capital Expenditure- India does not require a power plant for the next 7/8 years.Private players in infra have been burnt badly
Macro Indicators of India are excellent:
Between FY2013 to FY 2016:
- GDP Growth increased from 5.6% to 7.6%
- Fiscal Deficit reduced from 4.9% to 3.9%
- FDI as % of GDP increased from 1.1% to 1.7%
- Current Account Deficit reduced from 4.7% to 1.1%
- CPI reduced from 10.2% to 4.9%
- 10 Year GSec Yield reduced from 8% to 7.5%
For the first time in the history of India ,FDI is more than CAD.
His take on the Sensex:
- Sensex is a very simple animal-it is a slave to earnings
- Short term moves are unpredictable
- Long term it has given a return of 15% CAGR in line with growth of economy
- Foreigners understand Indian equity markets better than locals.
- Their shareholding% of BSE 200 Companies has increased every year.In March 2001,it was 12%.By March 2016, it stands at a whopping 25% !
- Feels Indians should hold equities like they hold gold-for 10-20-50 years
His take on market cycles:
- Indian markets operate on the basis of cycles with clear sector leadership
- Between 1995-2000,IT was the Sector leader.Infosys’s PE went from 15 to 300 !
- Between 2000-2008,Capex.Banking and Commodities were the Sector Leaders. Jaiprakash Industries and Unilever India had the same market cap !
- Between 2008-16, Pharma and Consumer were the Sector Leaders
- When one sector takes leadership,all the money goes there and the rest of the markets become very undervalued
- Now the time is ripe for beginning of a new market cycle
- This new market cycle is characterised by:
- Low inflation
- Falling interest rates
- Rising Capex
- Peaking NPAs
- The sector leaders for this cycle would be Corporate Banking,Metals & Mining and Industrials
His take on the Stock Market:
- The Stock Market is very undervalued.
- The Marketcap to GDP ratio is the lowest in 10 years
His take on various Sectors:
- Corporate Banks-Bullish-NPAs are peaking,Banks are able to recover (e.g. Essar Oil).Makes an interesting point “Don’t confuse NPAs with losses.NPAs are an accounting entry,Loss is permanent erosion of Capital.”
- Metals-Bullish-Feels cycle is turning.Both Tata Steel and JSW Steel have announced fresh capex plans
- FMCG-Bearish-Feels low inflation environment does not favor them.Also,they are expensive
- Pharma-Bearish-Feels they are expensive
- Two Wheelers-Bearish-Feels their penetration is v high.Already 50% of Indian households own a two wheeler
- Auto-Bullish-Increasing incomes,increasing aspiration and low penetration
- Telecom-Confused-Not sure how new entrants will further act.Not possible to get multi-baggers from here
- IT-Confused-Not sure how this sector will play out considering various headwinds
- Insurance-Bearish.Three reasons:
- Expensive valuations
- GST may increase tax rates for insurers
- India is not under-penetrated as far as insurance is concerned
- Consumer/Lingerie-Bearish-Says super expensive trading at peak valuations
All in all, a great & candid talk by one of India’s most respected fund managers.
