Slowdown could last for entire FY20, earnings growth may fall to mid teens: Girish Pai
- Earnings growth likely to fall to 6-6.5%.
- There is worry about a very drastic slowdown in growth in the US.
- Fear of domestic and global slowdown colliding in H2 of FY20 and early FY21.
Is this the beginning of a prolonged decline and a prolonged reversal in flows given that in India, growth is not there, valuations are stretched and the post tax return suddenly are not that promising after the budget?
If you are talking from a 6-12 month perspective, I would agree with you. Earnings growth in my opinion is going to be marked downwards starting this quarter. We have already seen quite a few sectors which have disappointed the street. We believe that the sectors which typically give credit to the economy, are pulling back on that becoming more risk averse. The managements of DCB, on HDFC Bank are basically stating that they are trying to pullback on lending. That indicates we could go into a situation where economic growth could be 6-6.5%. Earnings growth will probably come off from the 20-25% that market is currently anticipating for FY20 and veer towards mid teens.
If you look at the earnings for FY20, a lot of the delta is coming from corporate banks whereas the expectation was that the other sectors are kind of holding on. My view is probably changing. The other sectors are not going to deliver as much growth as expected and the corporate banks will also see some asset quality issues arising at the margin.
The whole NBFC crisis, the consumption slowdown, the fact that banks like HDFC Bank and the others are not going to lend very much could mean that there could be some asset quality issues that may pop up over the course of the rest of the fiscal year so those are some of the things that one needs to watch out for.
The bigger thing from an FII perspective is while we have seen lower yields abroad and there is a case for shifting money away from negative yielding territories to markets like India, there is also this worry about a very drastic slowdown in growth in the US. That is probably weighing on the minds of investors globally.
What is the outlook on HDFC Bank? There has been a mild deterioration in the asset quality and growth has moderated a little bit. Given that it has been a very steady performer, when an HDFC Bank is talking about caution, do you think things could get a little worse?
Yes, to some extent. If you take a long-term view on HDFC Bank, it is one of those steady compounders in the market. It is one of those solid stocks which have delivered year on year growth both from an earnings perspective and book value perspective, it should be one of the core holdings in your portfolio.
But having said that, in the near term, there are issues. There is collateral damage that is probably visible from the NBFC and the IL&FS crisis. The fact that certain parts of the economy are not getting the kind of credit that they used to get in the past, is resulting in slower growth and probably some asset quality problems developing out there.
It is logical that a bank like HDFC Bank which is fairly cognisant of the risk in the economy is probably holding back in terms of going out and lending on the auto side and some of the other parts of the market. There could be a little bit of a problem from a growth standpoint in the immediate term. If you take a slightly longer term standpoint, it is a core holding that one needs to have to ride through some of the volatility that HDFC Bank may see in the near term.
The bond yield is currently at 6.2-6.3%, What does it mean for banks and borrowers? When do you think this crack in bond yields will start revitalising consumption and demand?
Bond yields have come off from about 8.2% levels to almost like 6.3-6.4% levels and it can potentially go to 6%. The deposit interest rate as well as the lending rates have not actually come off to that extent. To some extent, I would blame the government for the small savings rate not having come off that much. It was brought down by just about 10 bps whereas my economist tells me that if it were to be benchmark to the yields, it should have come off by almost as much as 80 bps. I think there is an issue there in the sense that government needs to borrow from the market to satisfy some of its obligations. This whole transmission is going to take a while. I would not lose hope but I think it is going to take a while and the whole slowdown situation is not going to change overnight.
It could run through the entire year of FY20 and the key thing to watch out for is we will see a situation where a domestic slowdown collides with a global slowdown and because we have not seen a serious slowdown in the US for a while, that could happen now and it would be the big event that one needs to watch out for going into the second half of FY20 and early FY21. That is the kind of thing one needs to watch out for but specifically when the yields will come off, I think one has to give it a little bit of time.
Would like to get your thoughts on the DHFL deal development.
Yes, it is going to be a positive development if it does happen. One of the biggest beneficiaries could potentially be Yes Bank because they were looking at a situation where they need a capital of about a $1.2 billion which they are trying to raise from the market and if their Rs 4,000 odd crore exposure to DHFL does come back, that would mean the bank would be in a far more comfortable position to do without it and to that extent, the bargaining power vis-à-vis potential investors into the company could become a bit better.