Consumption theme to dominate in next 12-24 months: Vinay Khattar, Edelweiss
Vinay Khattar, Head of Research and Senior V-P, Edelweiss, tells ET Now that many themes based on consumption can pick up across both rural and urban India.
Today the story is really around IT, and not just Infosys completing 25 years. There is the mega TCS board meet tomorrow, hopefully mulling a sizable buyback. Could IT be headed for a pause considering how heady the run-up has been in IT as a sector over last four months?
IT has been moving up due to multiple factors. One of them is rupee depreciation and that obviously has a very positive impact on the sector. Second, if you look at the overall US scenario — one of the primary markets for most of the IT companies providing 30-40-50% of the revenues – the unemployment numbers are at an all-time low.
Our conversations with people tell us that the economic traction continues to be very high despite the yields flattening out and there being a talk of inverted yield curve. But there is no talk of any kind of slowdown on the economic side.
The growth numbers are going to be very good and so overall ITs core market appears to be doing so well and that is one reason why we have seen such strong uptick on the IT side. That scenario does not change any time soon. Maybe, you will have price consolidation and correction after such a large run up. But the overall trend should continue. As far as companies like TCS or Infosys are concerned, any kind of buyback announcement is seen very positively by the market as the return of the capital. Our sense is this trend should continue going forward.
What is the story developing with oil? Is there still a lot of concern about the impact it can have on macros and more importantly for the oil and gas business?
Oil is always going to be a hanging sword over India, especially the high oil prices. If you were to look at just this years government numbers, we factored in more like $64-65 oil price. The blended basket was about $74 or $10 up. A lot of excise collection was done towards the early part of Modi regime when the oil went down and that excise and higher taxation led to flow through into a lot of government schemes.
Now that excise collection has come under threat. If petrol pump prices go up to Rs 80 plus or Rs 85 plus, the political cost is so high that at some point, the government would have to reverse that. Given the fiscal scenario, it would have been very difficult to do it
A rupee cut in excise would have an impact of Rs 13,000 crore on government finances. A Rs 3 to Rs 4 cut could be very significant for government finances. So, they are not in a position to cut, the political costs are so heavy, you get impacted on the fiscal side, the subsidy as well as the current account deficit.
Oil is one of the biggest factors to play out on the Indian macro scenario and it will continue to do so. There are going to be hard choices and very limited ones if the situation has to be brought under control but it will have a profound impact both on economy as well as market as far as India is concerned.
A part of this emerging India conference that you have held is also associated with the return of rural economy. Is that a key theme that you are pushing for on the back of an expectedly good monsoon and which would be the sub-segments that could directly benefit from that argument or that thought process?
Rural has been one of the key areas where we are seeing significant economic pickup. Two-three years ago, in the first couple of years of the Modi government, the focus of the government was significantly in controlling inflation. That was the bugbear for UPA-2 and when the Modi government came in, then also the focus was to bring down the food and fuel inflation.
Fuel inflation happened automatically but on the food side, the government brought control on MSPs, exports were controlled. So, export surplus at the end of UPA-2, towards 2014 was about $40 billion plus. Today that is down to less than $25 billion. So, agri exports were controlled. Now, all that has led to inflation coming down pretty strongly but the side effect is that rural economy suffers.
The real wage growth in the last three years has been less than 2%. In some years, this number has been negative. As we head into 2019, we think the government will try to re-inflate the economy probably to re-fix the MSPs to more healthier levels which farmers as a politically sensitive body could accept more realistically.
Some of those things are beginning to happen and we are likely to see upticks on MSP, some of the good numbers on the farm side are beginning to flow through into the demand. If you look at high frequency numbers, two-wheeler sales have been doing very well. The non-discretionary component of FMCG has reported a double-digit volume growth this quarter.
A lot of that is led by the strong numbers on the rural side. Overall, the rural economy appears to be coming back quite vigorously and that trend should now percolate into non-discretionaries as well as on the urban demand side.
Having said that, what are the themes that one could play? There could be many themes which are going to be based on consumption. If it gets picked up across both rural and urban India and that consumption played through two-wheelers, auto space and through segments like milk, through branded apparel etc. The consumption theme is likely to be a dominant theme in the coming 12-24 months.
The cement space has been a spot of bother for this market though it may not have too much of weightage to move the needle. In the cement space, not just midcaps but also largecap stocks have corrected time and again. What is your opinion over here?
Cement had a reasonably good runup in the last two or three years. The stocks which had become very cheap over a point of time have caught up a lot of lost ground. The prices are not necessarily cheap. Second, there has been significant capacity utilisation at the lower level and there is an increasing talk of almost about 30-40 million tons of incremental capacity coming online over the next 12-18 months. This is a large sum to absorb given the overall supply and demand scenario in the market.
Now having said that, last quarters volume growth numbers of almost 17-18% were one of the real good ones to have come in a really long time. Cement volume growths could clock high single digit or maybe even double-digit growth over the next 12-18 months aided by various schemes of the government on the infrastructure, housing side and so on.
So, excess capacity in the near term is what is causing some degree of pressure but as the prices correct and value begins to emerge, bottoms-up stock picking will return.
Cement is not a sunset sector. This is a sector which is going to be in demand and overall is likely to be a key contributor as economic growth picks up. For the long-term investors, some of the ideas could give fantastic returns even from the current levels with a one to two-year investment perspective.