“In the runup to the elections, employment is going to be the biggest factor and the real estate cum housing sector is the biggest employment generator in the country and the government will in as many ways as possible support it,” says Sunil Subramaniam, MD & CEO, Sundaram Mutual.
Would you stay far away from FMCG? Godrej Consumer has been talking about double digit volume growth; Hindustan Unilever’s Sanjiv Mehta is also talking about how inflation might impact volume growth temporarily and it will be a short-term phenomenon. Would you stay away from this pack as consumption returns?
The issue is not that I doubt the demand forecast. The fact is that if Omicron spreads, the first impact will be on this sector.
Second, the supply costs and how far they can pass it on to the consumer in this period remains and so there is margin pressure.
Thirdly, because they are part of a safety pack, liquidity tends to favour that pack independent of the results. The valuations tend to get a bit stretched and rich. Temporarily I would say yes, I am underweight on the FMCG pack. I would like to wait and see how things pan out.
In the case of consumer durables, within the consumption pack, we are slightly more bullish on the discretionary part of it. We have lost two summers. The first lockdown and the second wave so this summer could be a return for the consumer durables pack. So within consumption, I am underweight only on the FMCG pack.
What about banks, we have all been waiting for banks and saying banks ka time kab aayega so how are you approaching the financials especially when we head into the New Year?
For me, the banking system is a four pack system; there are the private sector banks – good quality private sector banks which are largely retail oriented; then there is the PSU pack which is largely corporate oriented but always suffers a discount to the private sector banks; then there is the NBFC pack which is in last mile lending and the fourth pack is other financial services which are not necessarily lending, but wealth management, asset management companies and insurance. I am bullish on the last pack – the services pack because I believe that India’s growth story in terms of the demographic dividend will play out. We are seeing that in the mutual fund inflows, the SIP flows, the stock market entry. So I think that is a good pack to be in.
I will still be cautious on the PSU banks because I think that unless real growth comes back they are not going to be able to translate their lower CASA into real earnings. So I still remain bullish on big private sector banks which are retail oriented and the NBFCs which are well capitalised at the top.
Read Also: Can Santa Rally extend till Budget?
The correction that is happening there is because they enjoyed a large part of the liquidity rush because they are about 30-35% of the indices and so any ETF tracking them has to buy the banks. So, when there is pro liquidity, the banks tend to get a reasonable share of that liquidity and hence their valuations go up irrespective of the business outlook and when the liquidity pulls off, the reverse happens. But from a perspective of the next 18-24 months, I see economic recovery definitely on track for India and that cannot happen without support from the banks in terms of lending.
So for me, banks remain a buy where you consistently acquire banking stocks right through the space. Every correction is a buy on dips for me and ultimately banks will be the winners in the capital markets because at a time when lending is at fixed rates and borrowing is at floating rates, the banks essentially do a very limited 10-year fixed rate borrowing, but the lending is generally fixed because of the soft money they have got and a lot of them are using this to lock on to rates for a longer period.
The net interest margins of banks are set to widen as the economy recovers. So I am overweight on banks especially with the quality filter in terms of capitalisation and good provisioning norms for NPAs.
What about the realty rally? Is it close to peaking out or would you say good times have just about begun because inflation is impacting the real estate sector as well? There’s been a spike in cement, steel and even labour costs.
I think that they can pass this on. I know input costs are going up in real estate but fundamentally the government support for housing and real estate sector is going to continue and in the Budget, I expect it to give a lot more sops to that sector because of employment generation which is a key election issue.
In the runup to the elections, employment is going to be the biggest factor and the real estate cum housing sector is the biggest employment generator in the country and the government will in as many ways as possible support it.
Secondly, with the pandemic itself, many people want to buy a second home just outside the city; also, people who are working from their hometowns in rural India because of the pandemic, are buying houses there. So apart from the big metros like the NCR region or Bangalore, we are going to see real estate development widespread across the country.
I still feel that from a consumer perspective, real estate is in a very sweet spot and so if one is going to take a 20-year housing loan at 6.5% and is in the 30% tax bracket, the post tax cost for a house is only 4.5% whereas rental yields are 2-2.5%. So just by putting 2% extra from the monthly salary or otherwise, one can acquire a new asset.
Real estate is perceived in the consumer’s mind as an inflation protected asset class because generally over the long term, real estate prices keep pace with inflation. So with that in mind, demand is going to be strong for housing and real estate and even in corporate real estate, we will find that a lot of the FDI that is coming in.
So new corporate office space has been in demand. The initial fear that because people are working from homes there is going to be excess capacity in the corporate space has been belied now because all the PLI scheme and everything and the new things that are happening has created a fresh avenue of revenue for corporate real estate.
So to sum it up, I expect demand to exceed supply and in such a situation, any input cost price can be passed on to the consumer. So I am not too unduly worried about the blip in the supply cost for the real estate. In this way, the cyclicality of the real estate sector will lead to a positive EPS growth and hence wealth creation will happen in the sector.