Why are PSU Banks, Autos Seeing Outflows? | NDTV Profit
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00:00 We have a special guest this morning, Vinod Karki, Senior VP, Equity Research of ICSE Securities,
00:05 joining in on a recent report put out by ICSE Securities. Vinod, firstly, a very happy birthday
00:10 to you and thank you for taking up the time to be talking to us on your birthday.
00:14 Thank you so much. Thank you for the kind words.
00:17 Vinod, let's start with what the biggest talking point on the street has been for the last couple
00:22 of months. FPIs have turned net sellers, FPI holding Indian equities at a decade low.
00:29 Those are largely headlines. At the same time, the nifty of course trades close to its life highs.
00:34 So you would imagine that with FPI selling, the markets would be under pressure, but that's
00:40 actually not happening. Give us a sense of what FPIs are feeling, what is the reason for the
00:44 selling, what are you picking up? Yes, so if you look beneath the
00:50 subsoil headline, it seems that current year till date, we are I think more than 2 billion
00:55 negative outflow. But when you look underneath, what you realize is some of the, what you should
01:03 say, excesses of the past, some of these private sector banks where FPIs had a significantly higher
01:12 leverage, I think that is reversing. So typically when you look at FPI selling and the risk of
01:23 environment, which is called, you have to look at which sectors are getting sold off.
01:28 So the association is very simple. If you have a risk of selling by FPIs, what gets sold off is
01:34 the high beta stocks like PSU banks, industrials, autos, real estate, capital goods. These are the
01:42 typical high beta sectors which get sold off during a typical risk of selling. But if you
01:49 see currently CYTD, all these sectors which I just named actually have been bought by the FPIs.
01:56 What has been sold by the FPIs is the opposite, which is the defensives, which is IT, FMCG,
02:04 global commodities, and these, the few private banks where bulk of the selling is actually
02:11 concentrated. So which doesn't give me a sense that the FPI selling is something which can be
02:18 a signal of a risk of selling by FPIs. That absolutely is not there in my mind.
02:23 So it's, Vinod, so if it's not risk of, it's very sector specific. So like you said,
02:29 banks are seeing some selling, but anything that's domestic consumption facing,
02:33 potentially is seeing an inflow. Does that mean that once elections are behind us,
02:38 if fresh money and new money is going to come back in, it will be focused on these sectors itself?
02:43 Or do you think banks and other sectors such as that, which have seen an outflow, may see a return
02:48 of funds? Yeah. So let me clarify. So within banks, the PSU banks actually have seen buying.
02:55 So they are the more cyclical domestic assets. And within the domestic companies, as I said,
03:05 it is more to do with the investment cycle, the capital goods and other sectors, industrials,
03:12 auto obviously is high-end discretionary consumption. But when you say about low-end
03:16 mass consumption, FNCG, there is selling. And there is selling in the other defences,
03:21 which is related to global economy, which is IT and global commodities. So that seems to be the
03:28 colour of where FPIs are taking a bet and where they are withdrawing money.
03:33 Vinod, birthday greetings to you. I hope it's a fabulous one. And thanks for speaking to us on
03:41 this day. Thanks. Just wondering, Vinod, if all of this is not an indication, there's a lot of
03:46 buy-side fund managers who are talking about how their conversations with fund managers based
03:56 abroad indicate that people are waiting for the event to get over before they deploy the remaining
04:04 5%, 10%, 15% as the case may be that they have. It's not a question of valuations, but a question
04:09 of that event going. Do you sense the same as well in your conversations with your clients,
04:14 or is it different? Yeah. So first of all, the action itself. I mean, as I said, if the FPIs are
04:22 buying domestic cyclicals, at the same time going into an event risk, what I feel is happening is
04:29 some amount of hedging may be happening. That's why on the derivative market, you're seeing
04:36 significant short positions. So it's a classical case where you have built cash positions in
04:43 cyclicals, but then there is a risk of an event happening, which can be adverse. I mean,
04:49 if you look at past data, it is very clear that any adverse neglections precisely hits
04:55 these kinds of domestic cyclicals. So I think there is this, which is happening that,
05:02 okay, on the cash side, domestic cyclicals are being bought, but there's a hedge sum,
05:07 I mean, significant amount of hedging is happening, if at all there is some kind of adverse
05:12 seems like that. Right. Vinod, let's quickly shift focus to domestic institutions.
05:20 Where is DiyaBuy sitting? Because what we've seen is that while the expectation is that FIs usually
05:27 like the large cap part of the market, it's the DIs that prefer the broader markets.
05:31 And currently, that's largely the trend. What have you noticed with larger mutual funds,
05:36 sort of flexi cap fund, multi cap fund, even a large and a small and mid cap? Are they increasing
05:43 their allocations to the broader markets? Or are you seeing more buying, which is value buying
05:47 on some of the large cap names right now? So if you look at the domestic mutual fund
05:53 action for April, it's very clear that we haven't seen any, in any category, be it mid, small,
06:00 or any of the other categories where we have seen outflows from these funds or selling.
06:06 There have been some, I mean, whatever it is, there's incremental buying.
06:09 But on a larger scale, because if the FBIs are selling large portions of private sector banks,
06:20 select private sector banks, obviously, the only entity which can absorb that huge amount of
06:26 selling is the domestic mutual fund. That is reflected, you know, the highest buying is
06:31 absorbing some of the sectors, which, as I said, the FBIs have been selling, you know, so that
06:38 automatically translates. I mean, these are two big institutions, which trade with each other.
06:45 So that's what we have seen. But overall, the flows remain positive from domestic mutual funds
06:53 flows into their schemes continues to be at record high, and their deployment continues to be positive.
06:59 Okay. You know, very quickly, before we wrap up, are you doing any kind of positioning ahead of
07:08 the June 4 event? There are multiple notes from multiple houses, which are saying that we are
07:13 even doing a strategy ahead of the June 4 verdict and then for post. Are you doing the same? Are
07:20 you doing something, anything before the June 4 event? So two things, Raj. One is the tendency
07:28 over the last several elections. The election-related volatility has only dipped over the years.
07:33 Right. So that is one point. But that doesn't mean that it will continue.
07:38 But in the larger scheme of things, between... So we believe that the investment cycle is on its way
07:46 up, basically. And the profit cycle has reached 5% of GDP. The ROE is at 16%, which is the highest
07:52 after the US. That's rising. So in this scenario, if you look at the past data between 2023 to 2007,
08:00 when the index went up 7x, basically, the election-related volatility, which was created in
08:08 2004, was one of the few big entry points because the economic cycles were on their own, rising
08:17 significantly, despite political uncertainty. So the larger picture is that if you get high
08:24 volatility, I would say one should buy into the dips, right? Because I don't see any cracks in
08:32 the economic cycles. And in my view, that is a bigger factor than just some amount of political
08:39 uncertainty. Having said that, what we have observed is that actually, the volatility has
08:46 been reducing. So I don't see volatility rising much more than what it has been over the past.
08:53 I don't see any factor which can increase this volatility significantly. That's what I feel.
09:01 Got it. Vinod, much appreciate you taking the time out and being with us today. Have
09:05 a fantastic birthday and a great year ahead. Thanks for taking the time out.