Some sort of monetary stimulus may be expected: Amit Premchandani, UTI MF
Fiscal policy stimulus unlikely given the precarious fiscal situation, says the fund manager.
The entire consumption basket -- be it automobiles, FMCG or consumer durables are witnessing extreme sluggishness at this point of time. Do we see things looking up any time soon?
Over the last five to six years, there have been four large slowdowns. It started off with the capex slowdown after 2012-13. That has stabilised for the last 1-2 years. We are seeing capex volumes turning positive in terms of growth.
The second slowdown was on the real estate sector and that has also played out for the last six to seven years. Last year was the bottom in terms of launches. Launch volumes of real estate have again turned positive although the sales data of real estate is still subdued and inventory is also going down.
Real estate is one sector where again we have seen slowdown over seven years and that is now bottoming out. FY19 was a year when consumption which was the driver of growth over the last four years gave up a lot of the growth. It started off with auto sector and we are yet to see the bottom of the slowdown in the auto sector.
You have seen a slowdown in passenger vehicles. The latest numbers are 16% negative. You have seen negative growth in two wheelers. Tractor which was growing double digit till first half of last year has now turned negative. Commercial vehicles, a key indicator of underlying industrial demand, has again turned negative although BS change related activity will drive volumes in the second half for the CV sector and for some of the auto sector.
But overall, consumption-led auto demand has significantly gone down. Till last quarter, the FMCG space or the staple space was showing robust volume growth. There were companies reporting double digit volume growth but this quarter we have seen the commentary of even the staple sector changing. Till last quarter, there was comment that rural growth is higher than urban growth and the slowdown was limited to urban India.
This quarter, the commentary has changed in many of the FMCG names and they are saying that slowdown has now percolated down to the rural areas also. So, there is no large difference between rural and urban growth. This is the latest trend in consumption slowdown which was triggered after the NBFC crisis in September and that has some more legs to go.
In terms of policy prescription, we think fiscal policy stimulus is very unlikely, going forward given the precarious fiscal situation. We are already running at high fiscal deficit and if you add back the government entity which raised money from the market, you will see that the fiscal stimulus has gone up significantly over the last two years.
So what we may have coming is some sort of monetary stimulus. CPI have been running -- below 4% for nine months now and core CPI which has peaked at around 6-6.25% in October has now trended down. It is now at around 4.5% and with this slowdown in CPI, we have not seen any monetary stimulus.
Other than the fact that you are a bit cautious on consumption theme, what is making you bullish on IT and pharma?
Pharma is largely a valuation play. Over the last three years you have seen significant price erosion in the generic market in the US which has led to sharp decline in profitability of the pharma companies. But over the same period, you have seen that domestic share of revenue and domestic share of profitability of Indian pharma companies go up.
We have many pharma names in our portfolio where domestic as a percentage of profit is anywhere between 30% and 70% and we also believe that the pricing pressure in US generics have kind of bottomed out. In terms of valuations, many pharma companies are now available at valuation of less than three time price to book which we consider to be cheap, relative to history.
From a 10-year perspective, pharma is one of the large sectors which is trading at significant discount to 10 years valuation.
Even in this quarter, we have seen revenue momentum continuing in the IT sector and most of the companies are reporting strong deal pipelines as well as momentum in revenue growth. Margin is one thing which has surprised negatively for the IT sector but we are still comfortable with the holdings, given that there are 6% dividend yield buybacks.