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Current scenario very scary, the slowdown will be brutal: N Jayakumar, Prime Securities

ET Now|
Updated: Jul 19, 2019, 01.06 PM IST
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N Jayakumar-Prime Sec-1200

Highlights

  • This could be a massive catharsis. Corporates will die and new ones born.
  • Taxing the FPIs is like biting the hand that feeds.
  • Let credit availability be enhanced to select sectors.
Having been branded as a permabull, I find the current scenario very scary. The NBFCs have been virtually accounting for a third of the entire credit, which is no longer available. People have been clamouring for interest rate cuts but there is no transmission, says N Jayakumar, MD, Prime Securities. Excerpts from an interview wih ETNOW.

This has been one of those patches where no one is interested. The bulls are saying they have lost enough money and have no capital. The bears are saying how much short can we go because there is a limit to which markets will go down.
It is much more than that. The reality is large trader interest have been completely driven out of the markets. For the first time, the Nifty is so far removed from reality -- be it the economy or the market as a whole or portfolio valuations of any kind -- that the interest levels have just dwindled. Today, the dissonance is even higher in Nifty because one is 5% away from life-time high. You expect if not exuberance, some degree of wellness or well being. But the portfolios are not reflecting it and this difference is only getting even more intensified as the days go by.

Once that kind of interest goes out, stocks are just finding any levels of any kind. There is no relationship between value and what stocks can go to. But it is also reflecting the underlying malaise in the economy, which is that for the first time, you are going to see quarterly earnings that are going to show de-growth in many sectors.


When you have large FMCG majors announcing profits, you almost know that they are trying to keep that growth going. This is a serious problem. Many pillars of the economy have been badly beleaguered. Everybody has talked about NBFC. I do not want to be a broken record early in the morning but the reality is everything in life -- be it credit markets or equity markets -- depends on two factors, willingness and ability. Ability is when you actually see money in your pocket and you want to spend and willingness is you feel like spending. That willingness to spend is not there today because there is no feel-good factor and the availability of credit is just not there.

Even if you want to spend it on credit, in the corporate space, industrialists rarely differentiate between equity and debt. If money is generally available, their ability to re-invest further whether in terms of marketing or capex or whatever continues. Today we are having pullback across all fronts. Debt has become a terrible word in a scenario where debt rates are going down.

What you are saying is that bad will get worse before it gets better because we have just started slowing down. The slowdown has hit autos, consumer and now we are looking at more bad news, more slowdown, more crack, perhaps lower prices before they start going higher.
I have prided myself in being a permabull and…

But these are different circumstances…
But the tax sort of comes back to bite you as it were and one almost feels terrible saying this. But I think the good news if any is that the bad news is coming very quickly. If you want to take solace from something, it is that this is not going to be a protracted four-year kind of slowdown. This is going to be very brutal, as indeed it is. If you see the corporate space, liquidity ultimately drives sentiment and it drives a lot of things.

Today the midcap icons are in trouble. In that kind of scenario, how do you engender confidence? This is a much more deep-rooted problem. It is almost an exercise in psychology as much as it is an exercise in real life cash flow. I would like to see silver linings, having been branded as a permabull but the reality is it is a very scary scenario.

The NBFCs have been virtually accounting for a third of the entire credit, which is no longer available. People have been clamouring for interest rate cuts but there is no transmission. So what is happening is the government can conceptually borrow cheaper and cheaper but the actual corporates who need money is finding it extremely challenging getting money. You could say that the two HDFC twins and the two Bajaj twins are fine and the market share will be taken up. But an economy like India are you telling me that the entire slack of the entire NBFC space will be taken up by four people? I avoid these kind of comments to justify valuation of some of these companies. Maybe people can use any logic to justify but flow of liquidity is the ultimate thing that justifies some of these valuations. But really speaking, the slack has to be taken by the banking sector as a whole. The real issue is transmission.

I go back to the same example of the TARP in the US where toxic acids were bulled out, liquidity was given to people notwithstanding how they were created in the first place and that liquidity started moving through the economy. Today the same willingness and ability argument -- go to the banking system, go to PSU space. Do they have the willingness to lend? No. Do they have the ability? Yes. They are awash in liquidity. There are PCA banks which have got liquidity of Rs 45,000 crore in their balance sheet which means they have got the ability to lend. But there is no availability.

We have discussed bad news, we know the cause, we know the symptoms. There are two ways to look at it. Like you said, this is not a prolonged slowdown. So what will change?
I thought the actual change would come through foreign capital rushing in to find solace in distressed assets. Of course, this tax has been more than just a speed-breaker on a highway, it is much more than that. When you are trying to get capital from outside -- which is the capital that will come in, they are not afraid of stressed situations. As my dear friend Rashesh says in India there are not stressed assets, there are stressed promoters. So you need to have situations where the money can come in. Now have we, in some sense, narrowed or made the conditions even more difficult for money to come in with this tax treatment.

Is there some thinking that India is the place to invest in? Do people have a choice. When these questions are asked, I get a little bit worried. It is almost as if somewhere along the line, the commentators from overseas came in and said maybe this was unintended. This tax, the fine print, sort of covered them when it was intended to. When that happens, then you feel there is something wrong that you are attracting capital. At this time, the government turned around and said all foreign money can come in at 5% cheaper tax rates.

I would have said: Wow! That is bold. Are you pampering them too much? But that is where the capital is coming from and we would have lived with that. But to say we are going to tax higher and we were aware of it if indeed that is the argument, that is like biting the hand that is going to feed you. So there is something amiss and maybe this will be one massive catharsis, corporates will die and new ones will be born, maybe that is the sort of brave new world that we are staring at, who knows?

The stress that we are seeing is now coming through even and people do not realise that when the same sector you have been lending to you stop and say I will do no further lending, it will mean projects, residential complexes are left incomplete. Then you are actually enhancing the NPA even more and exacerbating that situation. There is no option but to continue this thing and maybe if there is something called a gradual slowdown, you need to get there. But today if you ask me, maybe the horses have bolted.

I appreciate the fact that you are being so upfront about the situation as you see it…
Well there is no other option. If I said anything else, I would be doing disservice to myself. never mind to a few people who will care for you.

Our common friend Rakesh Jhunjhunwala says he has made 98% of his wealth by being bullish. You have to buy bad news. But the problem is that every time people have rushed out on bad news, they have only lost more money. What we are trying to understand from you is in a three-year timeframe, if somebody takes a brave and a contra step to buy more or even to hold on and not to sell, what is upside and what is the downside?
The answer could be yes, individual stocks have gone to bankruptcy pricing. It is like IL&FS moving from AAA to D in two months. One day you are everybody’s darling, the next day you defaulted for the single day, the one-day default made you a candidate adequately positioned to be a D.

Similarly, these one-day delays which typically happen when corporate cycles go bust, does not mean that businesses have gone. It means there have been delays. Now delay does not mean you put a bolt and key and shut down the shop tomorrow morning. It means that there is a protracted period of restructuring, etc, Markets tend to price them at bankruptcy almost instantly. I dare say that in the spaces that where people are hiding which is the consensus trade of 60 PE stocks or 70 PE stocks, the feel-good two tech companies, a couple of FMCG companies and such, I do not think you are going to make super normal mone.

Yes everybody is being painted with the same brush. If you had capital that you can put away from a four-six quarter kind of perspective -- forget four-five years, it is too long -- returns could be interesting. But then do I have the willingness and do I have the ability? I think both have been impacted and therein lies the issue. So the other way that markets bottom out is where nobody has the ability to buy and the willingness has been smashed to bits. Today we are very close to that climatic bottom in terms of large number of midcap stocks that potentially have bottomed out. But time wise, could take a lot more effort before they sort of show traction that is the way I would like to look at it.

The natural question is where do you see that opportunity?
I will come to that in a second. Is there something that the government can do? I go back to another comment that I have actually made which is that no favours, no hand me downs. Can the government merely instruct every single government agency that deals with a private sector party to make their payments on time? That means state electricity boards, the NHAI, the various tax refunds. Tax refunds by the way is a huge amount. Even if that amount came back without the kind of loops that one has to go to for want of a better euphemistic word, if some of the monies that the various public sector counterparties pay you on time, all will add one-fourth of a potential quantitative easing!

Today the problem is people are jammed. Even when the IL&FS thing first happened, the first thing they said was Rs 15,000 crore is owed by NHAI. NHAI said no, no we have to give them only Rs 1,500 crore. Now let us assume for a moment that there was a settlement and the number was Rs 4,000 or 5,000 crore. That liquidity that could have saved IL&FS.

The biggest borrower in the system today is the government, it gets the best rates in the market. Can they at least transmit that to the various counterparties? To me, that would be the number on quantitative easing you could do because it is your money coming back to you.

You have said that we are going into a lower interest rate situation but we are not seeing that transmission of rates. What do you think really needs to change on that front for the situation to improve for banks. Is it a virtuous cycle?
The one thing that has happened is that if indeed the government is stepping out of the domestic market for borrowing up to $10 billion, is it right that there is more money now available to the system here, even more than it was available earlier? Somewhere along the line, risk has to come back. You need one or two banks, maybe the biggest in the business to turn around and say we are restarting NBFC lending, maybe we are restarting xyz sectors that we pulled out of. Why cannot the biggest banks in the system go out there and lend to those real estate projects that are about to be completed? Let credit availability be enhanced to at least selective sectors.

So there is a way out for these NBFCs?
It has to be the willingness to do it. If they say my sectoral caps are full for NBFCs, my sectoral caps are full for real estate, then where is the money going to come from?

But post the Budget, post everything that has already been asked for in the wish list, this is what we have got. What have they done in terms of monetary easing?
I do not think the Budget was meant to give any of this.

Y ou are still hopeful or expecting that we may see something...
I am not hopeful. I think the question asked was what can be done. I am scarcely suggesting that any diktat comes from Delhi that this should happen. I personally think the only way it can move forward, please understand the entire lending to the NBFC sector it is a question of the weak ones fall first, the strong ones fall later but everybody will fall, if this scenario continues.

I mean nobody is Cassandra the Prophet of doom but you have to restart lending. This cannot be overstated. If you do not do it, it is a recipe for greater NBFC NPAs and that will have an absolute cataclysmic effect in the market.

Maybe I am using stronger words than I need to but the reality is everybody needs to smell the coffee. This is getting much worse than it has been. There are big private sector banks today that are struggling for capital. I think the situation should not get out of hand. We can say the real estate is a problem, everybody says it. It is going to be a self-fulfilling prophecy, if it not already is.

Let us be realistic for a minute here because those who have the ability, they do not have the will and for those who have the will. they do not have the ability. We have not seen very pronounced slowdown in FMCG, we have not seen a pronounced slowdown in consumer durables, autos barring this six month patch. The farmers are not making money but I guess the Uber and the shared economy and Swiggy walas are making money?
Are they?

Well they are making money in terms of creating jobs.
Today it is very clear that recruitment follows wealth and prosperity. If the corporate sector feels good, they recruit. We are going after every company that has a default without even determining necessarily whether the default is because of business reasons or otherwise. You hear of SFIO probes and the ED and regulatory agencies getting involved to see if there is a problem, and now people to cover themselves are calling everything wilful or they may call just to cover their own positions as it were. Bankers will take that stance.

Were that to happen, you are talking about industries that will actually lose jobs. One airline collapsed, it is not just the 16,000 -18,000 people who worked there but probably 1,50,000 people who worked in industries like catering, engineering, support staff who all got affected. So, the impact is huge. Maybe this is a cleansing. In 2050, you will back and say this was the period we cleansed and hats off to thay! To an extent, the will that the government is showing is incredible, that there is pain that we have to absorb in the short run.

None of us have seen this happening. It is the first time since independent India that there is this kind of a cleanliness drive. In my mind, this is the true Swachh Bharat abhiyan where you are attempting to clean India.

It is good on paper but the point is when you are cleaning, the entire supply chain gets disrupted?
But it is happening. That is what I am saying so are we supposed to carry a moral cross for everybody who has not been, quote unquote, “clean” and therefore we must decimate them. The jury is still out on that approach.

If you are an investor, can I safely say now buy market leaders in the disrupted sectors?
I do not think so. Flight to safety, if it is a flight of consensus can never make you money. Today if there are 100 people in the market and 90 are feeling the way we are, 8 are not putting their money to work and two say I am going to go out and invest selectively in stocks that people are not looking at, take a guess three years from today who will make money -- those two or the 90?

Now there is a period when you have to have capital conservation but there is also some risk taking. The two who are taking the risk to invest are actually acting completely contrarian and therefore need to get rewarded for their risk as it were. I am not saying everybody can do that, the fact is people are not doing it and to the extent you can you have a greater chance to make money because the markets may have factored a lot more in the short run than you.

Is it very easy for me to say where is it that you can make money? People have talked about infrastructure. The entire private sector spending is now being replaced by public sector spending. So where are they spending? They are spending on a bunch of things notably that which links the rural economy to the cities etc which is things like roads, highways physically to improve ability of people to travel for jobs and so on.

So water and transportation of water is a big beneficiary industry as it were because it can actually reach the masses. So that is one industry. Companies that are in the water and pipes etc could be big beneficiaries of orders that could come through. Whether it is profitable or not, depends on individual balance sheet.

We are extremely bullish on road building companies because we can see activity happening but my contra to that is will the NHAI pay on time? Will banks help in financial closures on time? So, somewhere you need to take the call and say where real assets like real estate are, let us go out and take a step forward. It will break the logjam, that is important.

Also Read

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How companies can manage the ‘brand slowdown’

Six sectors that defy the slowdown theory

Severe slowdown: When will the Indian economy recover and how?

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