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Srinivasan Subramanian on Moody’s downrating, state of the economy and more

For growth at a reasonable price, one should look at India, says Axis Capital MD

ET Now|
Updated: Nov 08, 2019, 11.19 AM IST
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Srinivasan Subramania-Ais Cap-1200
While the rating agencies are talking about us today, the markets are looking ahead and talking about tomorrow, says Srinivasan Subramanian, Managing Director, Investment Banking, Axis Capital. Excerpts from an interview with ETNOW.

What do you make of the Moody’s downgrade of India’s outlook from stable to negative? India is in the same bracket as Bulgaria, Colombia, Indonesia and the Philippines?
We all know that the rating agencies do their job a little later and look into the rear view mirror while markets are looking ahead. That is the fundamental difference.

So, you will not pay too much attention to what the rating agencies have to say?
I am not being flippant and I am not downplaying the gravity of the situation in India now. The situation is reasonably dire as the first quarter GDP numbers came out. The second quarter numbers are going to be broadly in the same range as the first quarter numbers. However, what the market is looking at positively is that the government is responding at multiple levels across the entire spectrum and not just in terms of corporate rate cuts or what they announced the day before in terms of getting the real estate sector out of the jam. It seems the government is saying that the economy is important and they will focus on it. It may take a couple of quarters for the effect of all these measures to come through. While the rating agencies are talking about us today, the markets are talking about us tomorrow.

But in the near term, do you feel there are challenges or would you say that we are out of the woods, those August slows are way behind us and we will not get back to those kind of lows in the near term at least?
The bottom has been made. It will take a couple of quarters for us to completely get out of the woods. On the consumption part of it, we would expect the auto companies to pass on some of the tax rate cuts they will benefit from. They have been having excellent ROEs over the longer term. On a core ROE basis, many of the companies are in the 25-30% plus. If they come to 20% levels, they can pass on further price cuts and that is going to help revive demand. The bottom is done. I do not think we will go further below this, however, it might take a couple of quarters for everything to gather stream.

The high frequency data is still mixed. I can argue about Amazon and Flipkart sales doing well, but car companies are saying they are feeling the heat because of the BS IV emission norms and there is a drop. Mall footfalls have been strong but apparel and food companies are complaining of a very muted Diwali. Which data point will tell us the true picture of where the economy, earnings and the markets are headed?
The data point to look at is the sales across different industries. Flipkart alone does not give you the sense; neither does the Maruti sales alone give you the sense. In broader market you will see consumption staples moving up a little quicker and pricing falls come through.

How should one understand what is the right price to pay for some of these great businesses like a Bajaj Finance or Asian Paints or an HDFC Bank? These are the companies where growth is. They have done exceptionally well in a difficult environment. What is your view on this very popular debate on D-Street right now — value versus growth, quality vs premium?
It is not an either- or scenario. The Indian markets, over a long period of time, has paid for growth. So growth at a reasonable price is what one should look at. It is easy to talk about HDFC Bank and Bajaj Finance and say that they are very expensive. Bajaj Finance. post the fundraise is around seven times current year and probably six times in FY21. However, on a PE basis, both Bajaj Finance as well as HDFC Bank are at less than 1x PEG and that is an important element to look at it. Have these companies been able to grow their earnings and keep the quality of assets intact? I would not look at earnings for companies in the financial sector, if the asset quality was not good. But these two companies have been able to show that irrespective of market cycles, they have been able to contain risk and the asset quality to the best of their assets. So, I would look at that.

Asian Paints on the other hand, on a PEG basis, is significantly higher than 1. Therefore I ask myself, if I invest in Asian Paints, what is my ROE (and not the company’s ROE) on the price I pay? I am starting to ask myself those questions and for us, the good quality private banks, companies like Bajaj Finance are all still in the buy zone, However, if you take a company like Asian Paints, Nestle or HUL, in the long term, does it give me an IRR at the level from where I invest or in the next five years-seven years even if it take a longer turn?

Unless the revenue jump is going to be significantly larger, I might end up getting a single digit IRR and do I want to own companies, however, good are, if they have single digit IRRs? But in Bajaj and HDFC, I see double digit IRRs — 15, 17, 18% stock price IRRs over the next three, four, five and even a longer horizon.

Isn’t there a similar concern with some of the insurance plays as well? The growth and the price multiples that these stocks are trading at, are just not coinciding. Is it time to take chips off the table when it comes to insurance? There has been a very strong runup in the entire cluster and can these kind of growth multiples go on in the near term?
The reason why the market is extremely positive about the insurance sector and I should caution you that right now — as Axis Capital we cover only SBI Life Insurance, we do not have coverage on the others — but on a generic basis, the runway for growth for the insurance sector is extremely strong over the next 10-15-20 years. The same is the case with asset management companies.

On paper these look highly valued but is there is an extremely long runway for growth for these sectors and companies? Definitely, yes and that is the price which the market is willing to give for growth. The Indian market is a growth-oriented play, it is not necessarily a value play, For growth at a reasonable price, one should look at India.

What is your thought when it comes to the auto space? Would you prefer auto ancillaries or prefer to look at the sector in a different way?
I would rather play auto through the auto ancillaries because there are some good quality auto ancillaries which are able to get an increasing wallet share. While auto growth is cyclical and will pick up after the disaster in the first six, eight months, I would rather play it through the ancillaries because I am still not sure over a five, seven-year period how the EV is going to impact the existing ones. The ancillaries that are not going to be impacted by the IC engines going off are the ones I would like to be working with.
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