- 3 months ago
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00:00to you live from the JP Morgan conference right here in Mumbai and who better than Sanjee
00:05Mukhim himself to kickstart the discussion on these very hectic two days up ahead.
00:10Thank you for having me. Thank you for having us. So what's the agenda? A lot of news flow
00:17and a lot of debate I guess. What a time to have this conference. It is you know and I was a bit
00:22hesitant to begin with because the market's been like last year let's say it's been flagged for a
00:27year but it's a massive vote of confidence. This is the largest ever conference we've organized.
00:33Over 1300 delegates joining us. The number of clients joining us is up more than 30% why we
00:39have a greater number of corporates. The buzz is really strong and like I said that's a big vote
00:44of confidence. Investors saying that look we don't care about daily volatility all this noise that
00:50you're referring to but India does present that long-term opportunity and people's interests are
00:56little bit more permanent that noise might otherwise entail.
00:59Good to hear that there is still excitement about it.
01:01There is.
01:02But you know it's kind of a juxtapose because on one hand you still have uncertainty on tariffs over the
01:07weekend you had all that H1 videos coming out and then from today onwards GST 2.0 one of the biggest
01:14reforms in the last few years again kicks off. So what are investors really feeling about India right now?
01:21Well if I roll this back to a few months call it late March to June period there was a sense of
01:29despondence in conversations that we were having with investors oh nothing's happening and it's all
01:35looking very gloopy and the corporate sector were sort of echoing that as well. That has improved to my
01:41mind and the setup for a bounce in Indian equities looks very very strong to me. I want to talk a few
01:49reasons for this. Our earnings expectations have already been cut quite a bit actually. Typically
01:55earnings are cut in the later part of the fiscal year but we've done it ahead of time this year
01:59because of that sense of despondence that I was talking about. On valuations stuff looks very expensive
02:05or on absolute basis but relative to global equities we are now at a better position. So
02:11it's just I've written research on this many times the India valuations tend to track SNP more than
02:17they track EN okay. Historically the charts are the same the SNP PE and R is the same now we are like
02:23a 10 percent discount to the SNP. So you've got right size earnings expectations you're trading at a
02:28discount to global equity valuations and you have potential domestic catalyst which is the GST you referred to.
02:34Now you may not get a great September quarter out of it because people held up purchases in
02:39anticipation but the December quarter could turn out to be better. So with that a little bit of a
02:46bounce in the market does look like a recent probability to us. What are the kind of questions
02:51that investors are now asking you in that sense? You spoke about earnings because we went for an early
02:57earnings cut normally it happens in second half but we and now I think most of the street is now
03:04looking at FS 27 earnings and not 26 because they were almost written off for 26 in that sense.
03:09So what are they looking at in terms of valuation when you speak when you're telling us that you know
03:14that we are mapping ourselves to S&P 500 price to earnings and we're at the discount to that. So
03:20how are how are we looking at and how are global funds looking into it? First as a word of caution we
03:26should not dismiss FY 26. Quantitative correlations suggest that stock prices respond to 12 month
03:32forward EPS not let's say the next fiscal. The 12 month forward still relies on some outcome in FY 26.
03:39There is still 6 months to go really right. So quantitatively the FY 26 number still matters and
03:44in another sense if you cut your FY 26 further you will be forced to cut FY 27 as well right because people
03:49then to track these in terms of growth basis. So I do think that the FY 26 outcome is still relevant
03:55to stock performance. So I personally wouldn't you know ignore them and look forward. So if I am now
04:00able to beat or even beat the FY 26 numbers that will be a vote of confidence in my corporate earnings
04:07outlook. But to your earlier question of what people are asking about predominantly it is what or which
04:14sector can have proper response to price cuts right because you see the initial risk reaction to stock
04:20prices. Several sectors have already caught up. What next? Some sectors do I still chase? Where do I get
04:28real world impact on volumes for companies or what's the elasticity really to price cuts for my companies?
04:36That's the discussion. That's the groundwork everybody's trying to do to stay on top of your
04:40channel checks to stay on top of these micro trends in the industry to see which sector stroke companies
04:47will now really start to deliver better outcomes. So where is that room for expansion in terms of
04:54volumes because if we just go by what the market is doing right now it seems like everyone's just
04:59going to make a dash to two wheelers. Well the discretionary as a broader sort of category does
05:06intuitively have greater elasticity to price cuts right more than let's say staples and probably far more than
05:12commodities and we I agree with the market is also reasonably rational now whether it is two wheelers whether it is
05:17entry-level cars that's the debate we will have now but a discretionary cohort is conceptually more
05:25uh let's say or starts to gain more from the price cuts that we expect will happen.
05:31So the consumption theme will be broken down into you know where is it coming from right in the
05:37other the base level which is the entry levels for many of them or premiumization and we saw that
05:44in the last 12 to 18 months you know stationization of premium brands which is coming in so do you see
05:51that kind of trend to continue or you know you're going to see some base level uh you know consumption
05:58now coming in because of the kind of money which is there. The hope is for the latter and I'll tell you
06:03why because it's not just the cut in GST you also have to look at the impact of the reduced borrowing
06:09costs as rates have come down and the tax cuts that were implemented in February. So if you add up all
06:15of these three and look at the monthly EMI payments for an entry-level car that's actually come off quite
06:22a bit so you could sort of argue that the affordability of an entry-level car has been pulled up
06:28by a year or two okay and that's a meaningful change for a household that was on the edge that was debating
06:35okay look should I borrow some and should I start to you know buy my first car and there is an argument
06:42that these changes will tip it over. Because the inflation that happened in the last 12 to 18 months
06:48have eaten into the savings of households and now this cuts whether it's a tax cut and RBI rate cut
06:54which has brought down EMI or now the GST cut you know is bringing in that you know buffer for them
07:00so is the household now going to invest into consumption or into capital markets or going to put the money into
07:08bank empties. So I'll refer to RBI consumer sentiment data right now this is soft data they
07:16and it's based on a small sample but I find it very instructive. So what the urban consumer sentiment
07:21data says is that household sentiment which was let's say 100 pre-COVID fell to 60 during the lockdowns
07:28went back to 100 in the reopening and then fell down to 96 or 97. That subsequent collapse is what
07:33caught all of us off guard. So why has that happened? Sentiment on incomes is flat which we can all relate
07:39to right so post the reopening there hasn't been that much of wage growth or income growth. Cost of
07:44living has gone up. This is the RBI data again and cost of living includes your rentals, the school fees,
07:50healthcare costs, the inflation but it doesn't include the consumption cost of lives. It's your basic cost of
07:57living goods and as a result the ability of people to spend on non-essential goods is now subpar. So the
08:05weakness in consumer spending is essentially weakness in non-essential spending okay. So our argument
08:11therefore is that when the government provides this kind of a stimulus, multi-pronged really,
08:16it is that variable which should start to move up. The pressure on the household's budget was that we were
08:22tightening our belts. So now that I have a little bit of relief, that area should ideally see a bit
08:28of an update. But Sajid tell me, just those GST stroke consumption fillip, is it enough to bring
08:35the FIIs back? Okay, that's a slightly more complicated question I would argue because a lot of
08:41this is in context of what's going on globally, right? All global assets are doing very well. In fact,
08:48I spent some time over the previous weekend to try and look for equity assets which are
08:52below highs on PE. Did you find any? No. That's the point I'm making.
08:58That's, it's probably only the, amongst the large cap is probably India, right? Everything else has
09:03rebounded so sharply and is doing so well that the impulse for a global asset allocator to suddenly
09:10step up and say okay now I'm going to add a lot more to India is not very high. A catalyst could help,
09:17which is let's say if we did get a trade deal with the US and those overhangs were removed,
09:21the threat of sanction or oil purchases etc. went away. Then you may get some impulse to
09:27foreigners coming in but I think this is a bit of a circular problem. The market needs to find its
09:33feet before you get the flows. The flows need to come in before the market finds its feet a little bit.
09:38You know, the foreign investors as a whole, they've been selling for the last couple of quarters there
09:44but it's been supported by the domestic investors who've been buying on a daily basis. In fact, they're out
09:50smarting them in terms of buying and, you know, the reason was that India is overvalued or richly
09:56valued at that point in time. The valuation has almost remained the same. The earnings have come
10:00up a bit there but they're still richly valued in that sense. So, how is the foreign investors now
10:06looking at it? They expected a correction in the valuation to come back into the market and that's not coming.
10:12The relative valuations have gotten better. That's the point I was making. Because global equities
10:16have caught up, our valuations do not look as bad as they did. And more importantly, if we now split
10:22it into sectors, right? Let's take the financials cohort. Our banks even in a slowing economy will
10:28still deliver a certain degree of earnings growth with a high degree of confidence for the next three
10:32years. But look at what's happened to global financial multiples. All global banks have been on a
10:37secular rally this year. And if you look at India financials, premium to global financials. It's
10:43actually come off quite a bit, right? So, in contrast to what's happening in the rest of the world,
10:47our valuations do not look as prohibitive as they were, let's say, early 2024.
10:52But will that lead to money coming in?
10:55Again, it needs a spark, I would argue. So, now when you have rest of EM, rest of Asia doing so well,
11:01and people are engaged more in looking for opportunities in markets which have momentum at the moment,
11:07there is no real impulse immediately. So, the first precondition would be for the rest of EM,
11:12rest of Asia to lose some momentum before, I mean, the focus shifts back to India.
11:17We've seen momentum going into China, you know, Taiwan, Vietnam and Korea. But is there
11:25going to be a reversal from those countries to come back to India? I wish I could be so precise,
11:29to be honest. I would be sitting here. So, also, my question is also with respect to tech. And
11:38that's a theme which has come over the weekend. You know, the tech has been slow since last September.
11:46Discretion has been falling off. Then, you know, Trump coming in, tariff wars, you know, multiple headwinds for
11:54this sector. And the final one coming in with the visa. How do you see the tech sector as a whole?
11:58I think the development of the weekend is still evolving. And we'll figure out
12:04exactly the details of it and how companies respond to it. Maybe some on-shoring is possible,
12:10but like I said, we do not have enough information here to take a very hard view on this outcome.
12:15But let me make a slightly broader comment. See, what's happening globally is that the whole
12:20trade structure, the integrated supply chain, is now being dismantled to a degree. Countries that
12:26relied on export or that trade will lose drivers of growth. And growth globally will become more
12:33scarce over the next few years, right? India is a country which actually has endogenous growth
12:39drivers. Even though my growth will likely slow because my linkage to the world is not zero,
12:44I still have exports and those exports will likely come under pressure. But I am not entirely reliant
12:49on it. I still have a lot of very strong domestic growth drivers. So the alpha on growth in India
12:56structurally for the next three years will actually improve because countries which are more dependent
13:00on exports will actually run out of steam faster. So on a relative basis, India will be one of the few
13:05large economies which will still have some visible growth over the next three years.
13:09So as an investor, if you were to make a portfolio fresh based on this premise about the domestic
13:16story being so strong on India and lesser reliance on export-oriented economies, what should be my
13:22biggest sector overweights and underweights?
13:24So let me answer that question in two ways, right? If you are a three to five-year investor,
13:30you look for compounding growth. The growth expectations will need to be watered down a
13:34little bit, right? One, because the economy itself is a little bit slower. Just take the stark contrast
13:39in nominal GDP growth. It was not of 20 percent FI 23. It is now probably going to be 8 percent.
13:45And there isn't a view that this 8 is going to 12 very early in a rush. It probably goes to 9 or 10
13:50over the next three years. But we are in a more subdued economic growth activity, which will
13:55therefore dampen the earnings growth and therefore possibly equity returns. The other argument we
14:00make is that shorter-term returns are made on earnings surprises, not growth. We have done a lot of
14:05quant work on this. And if you are an investor for 12 months or less, you are looking for companies that
14:11are going to beat expectations of growth. Right now, that appears difficult as well. Because
14:18yes, things have got a right size on the forecast. But do I have enough momentum for a large set of
14:23companies to surprise your earnings? I don't see that yet. So my suggestion is, it is still a better
14:30asset to own in the India context, especially given the tax structure that we have locally. But do not
14:36expect a high double-digit compounding return from an India equity portfolio over the next three years.
14:43If I make 9 percent in equities in the index ETF, I should be happy with it. It is a good return.
14:48And what should my vector composition be?
14:50We prefer financials on that, like I said, because there is a high confidence of even, let's say,
14:56subdued growth relative to history. And I am getting these stocks at a much better valuation relative to
15:02what financials are trading elsewhere in the world. We like the consumer space. We have talked a lot
15:06about it so far, because there isn't enough of a stimulus. A couple of sectors we like on the side
15:12is, we like real estate, we like power, we like the defense stocks. So we have those idiosyncratic
15:17bottom-up picks as well. But on a core basis of financial stroke consumer, consumer discretionary
15:23makes a lot of sense. Sanjay, a lot of new money has not come into the secondary market,
15:28but new paper which is coming, whether it's IPO, whether it's block deals or PE exists, everything.
15:33Do you see this trend continue in this year as well?
15:36It must, because that is the function of market.
15:39Because that's not bringing the momentum in the secondary market. It's just absorbing the liquidity
15:44and then, you know, the momentum that needs to…
15:46But we don't need momentum. Why should we? It is not an imperative, right? The function of the equity
15:52market is to take savings and provide it to corporates who will use those savings to grow assets,
15:57right? And the equity market is discharging its function because there is money coming into
16:01mutual funds or through retail. And it is being transferred to corporates through all these
16:06listings and IPOs. Now, some of which are exits, but again, that's recycling of capital. So what is
16:10happening is exactly what the market is designed to do. And as long as there is supply of money,
16:17there will be a demand of money if the market has to balance out.
16:19And the secondary market function where trading, where the FI volumes come in
16:24in the secondary market as a trading volume, that's something which is much lower today compared
16:30to maybe a year or two back, right? In that sense.
16:32See, again, if you step back and again, we return to research on this. On a daily basis,
16:36the net flows are zero, right? There's many buyers, many sellers, right? Why does the market go up or
16:41down? It's on the impulse of the buyer. If the buyer is more aggressive, the market goes up. If the seller
16:45is more aggressive, the market goes down. So I think a lot or too much of an excessive focus is
16:52put on this flow analysis. If I may be a bit harsh, that's like changing your tail, right?
17:00We cannot invest on the anticipation of flows. We have to invest slightly more fundamentally.
17:05And like I said, India looks, it's much better in the context of where global equities are today.
17:09And how does it change your coverage platform? Because
17:11India in a few years that had 80 stocks, now 160 stocks. The expansion of stocks which are coming
17:19in, foreigners now looking at more alpha in many new stocks which is there. How does it change your,
17:26how as a brokerage, how do you look at that actually?
17:30Well, thank you for the question. It gives me an opportunity to plug myself a little bit, right?
17:34Because JP Morgan has invested a lot in its equity franchise in India. A few years ago,
17:39we were covering somewhere around 125 over 30 stocks. I'm within short of being 190 stocks now.
17:46Because the impulse is right. The market is growing. The expansion of liquidity is durable. It's here to
17:52stay. And it is imperative upon me as a brokerage to say competitive. We are, if I remember my number
17:58right, a top three foreign broking house in terms of stocks covered now. And there is a clear emphasis
18:04from all the senior management at JP Morgan to continue to stay invested in India, to grow our
18:09investments and increase our footprints in the economy.
18:11India will always be a stock picker's market anyway, right?
18:16Again, to be very harsh, India used to trade 3 billion a day in 2019. Even though the market's
18:22soft now, I'm still trading 3 billion a day. There's 200 odd stocks which have FNO, a lot of
18:26liquidity, a lot of hedge fund interest. So things have structurally changed. The economy will go up,
18:31it will go down, the market will be flat and then not flat. But there is a structural change in the
18:37size of the equity market. And it is imperative for us as participants to respond to it.
18:42But for this is still here, you're expecting new highs, right? Better than the previous high.
18:47Logically, it should go up every year, to be honest. Our target is 26,500.
18:52And over next 12 months. Next 6,500.
18:55And you'll have short-term peaks coming in, volatility. Because you have a couple of events
19:03coming in, India-US trade, and other resolutions that come in. Is that going to bring in some kind
19:09of, you know, impulse into the market, as you say? I do think markets tend to be mean reverting.
19:16So the premise might prove to be correct. But again, it's impossible to be precise.
19:19Okay, Sanjana, we'd like to go. Thanks for your time. Thank you.
19:23Great being here. Thank you.
19:24All the best for you.
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