Growth may get short-circuited if the banking system collapses: Akash Prakash
According to Akash Prakash, chief executive and managing director of Amansa Capital, earnings for the fiscal fourth quarter are set to witness a 'positive surprise'
Corporate earnings are starting to come through, and the past quarter was the first one in four-to-five years where earnings were not disappointing, Akash Prakash, chief executive and managing director of Amansa Capital, said in an interview.
According to him, earnings for the fiscal fourth quarter are set to witness a “positive surprise”, and this, in turn, would see the country move to an earnings upgrade cycle.
Prakash, however, cautioned that as India transitions from a weakening macro to a strengthening micro phase, it may witness volatility, and added that earnings would have to kick in to see the markets through its next leg of growth.
“The market is catching a breath now to see how the transition from strong macro to strong micro happens,” he added.
Edited excerpts:
With the recent developments in India, has the corporates’ view of the Narendra Modi-led government changed? For a considerable period, for companies, it was hope and all praise—now, most of them appear to have gone silent—what is your reading of the situation?
It is not to do with Narendra Modi. Part of corporate India is stuck with debt restructuring and cleaning up their balance sheets, and that is taking time. Many of the big capex- intensive companies are stuck with balance sheet issues, and the reality is that this government, with the insolvency code, and the RBI (Reserve bank of India) with tightening its recognition and provisioning norms, it has become much tougher on defaulting corporates. It now appears that some promoters are going to lose their assets for the first time.
There is a part of corporate India that is stuck with NPA (non-performing assets) issues, and are now fearful of losing their assets. There is also one part of corporate India that feels it is difficult to take a long-term bet on the country at this moment because a lot of companies have gone through pain, and that is not entirely their fault. While promoters have been at fault in many cases, in some, it is government policy changes that have been responsible—like coal mines being taken away or licences being cancelled. So, generally, there is no mood to do large capex-intensive projects at the moment.
But in smaller companies, for the first time, we are hearing about capacity shortages. Some of the tyre companies we spoke to are planning capacity expansion—cement firms have begun talking about new greenfield projects. There are two sides to this—companies that have balance sheet issues, or are in sectors that have significant government involvement, have problems; but others are seeing a revival of sentiment and starting to feel a little bit more bullish and starting to look at capex.
The investors’ community had all along assumed that political stability was a given—especially considering how the Bharatiya Janata Party (BJP) was sweeping state elections. Is fear creeping in now that 2019 won’t be as easy as it had been assumed?
Not yet. The election, at least on paper, is still 12 months away, which is a lifetime in politics. But the mood has shifted from six months ago when people automatically assumed that Modi will come back. Now there are some question marks if Modi coming back is guaranteed—there is a recognition that this is not a done deal by any definition, and that it won’t be a cakewalk for the BJP in 2019. But in the minds of most investors, 2019 is still too far away to take a call. Anything can change in the next six months. Over the next few months, as you have state elections coming, it may give a better sense on which way the wind is blowing. During the second half of this year, there may be some concerns on political stability, but not right now.
If it is not political instability, is weak capex a bigger worry for the markets now?
The market is transitioning from marco to micro. You had a phenomenal macro environment for the past three-to-four years in India—interest rates were declining, inflation was declining, RBI had its inflation targeting framework in place, the rupee was steady, the current account deficit was declining, and it was a very positive macro. The micro—the corporate earnings—for past three-to-four years have been disappointing for various reasons.
I don’t think that anyone would have thought that after four years of the new government, we would still have weak corporate earnings. We are starting to make the transition now, and I believe that corporate earnings will now start coming through.
Last quarter was the first one in the past four-to-five years where earnings were not disappointing, and this quarter, you will see earnings being a positive surprise. Then, we will have an earnings upgrade cycle, which is very positive, and investors will be enthused by it.
But you have the weakening of the macro now in the sense that fiscal deficit is rising, inflation is rising, current account deficit is rising—so we’ve probably peaked out in terms of PE (price-to-earnings) multiples, because the macro was as good as it could get. We need to see earnings growth kick in to see the markets through its next leg of growth. That will happen—but, as you transition from a weakening macro to a strengthening micro, it will not be seamless. It is not necessary that the handover will happen without any volatility. There could also be some scepticism around earnings coming back because in the past three-to-four years, they have been disappointing. There may be investors who say, “let me see the earnings first before I give value to that”.
The second part is, we’ve had an environment where investors have had significant returns in the midcaps and smallcap space—there were some elevated valuations, which is now slowly getting ironed out. The market is catching a breath now to see how the transition from strong macro to strong micro happens. On top of that, we are seeing increased volatility globally—rising interest rates and possible trade wars.
You are of the view that once we get over the current uncertainties, investors will return as India is the only long-term growth story—but how long do you see the current uncertainties lasting? Every time we hope to have turned a corner, a new crisis seems to be in the making.
In the past two-to-three years, the market has delivered strong returns. From the markets’ point of view, it needs to see corporate earnings come back, and you need at some stage to see the next government.
My simplistic point is that for the $2.5 trillion economy that India is now, we will remain one of the fastest growing in the world, there will be a strong translation of gross domestic product (GDP) growth to corporate earnings growth in India, and the corporate earnings growth transitioning to stock market growth is also quite strong—so, in the long term, a large economy with a bunch of interesting companies that are growing quite rapidly—investors will come back if earnings come back.
It is too big a market and too much growth for investors to ignore it permanently.
How big a risk is this banking mess? What happens if banks don’t continue to lend? Won’t this impact the country’s growth prospects?
With the economy starting to accelerate and corporate earnings starting to accelerate a bit, all this could get short-circuited if the banking system collapses.
But, over the past couple of years, the entire incremental credit growth in India has come from private banks and NBFCs (non-banking financial companies).
The public sector unit (PSU) banks, except SBI (State Bank of India), have actually shrunk their balance sheets over the past two years. The reality is that, over the past couple of years, it is private banks—except SBI—which have had a good quality management team, and have capital; and the government is fully behind them, and culturally, they are much better-run compared with other state-owned ones—and NBFCs and corporate bond markets that have funded the Indian economy. So, to the extent that if it continues, it is not very different from what we’ve seen in the past two years. Is this sustainable?
No. You can’t have a system where 50% of the banking system is not lending at all. The fact that the government has infused capital into these banks will at least ensure that PSUs will do basic lending.
While I do think that this is a concern, you don’t want PSU banks to freeze, as part of the whole implication of the Nirav Modi episode. Frankly, that has been the environment for past two years anyway. The economy has been able to grow at 6-7%, despite that. But this concern is relevant as we are expecting an acceleration of growth of the economy, and that will depend on the PSUs being able to lend little bit at least.
Is crude a concern?
Of course.
At $70 (a barrel), it is manageable—it does not hurt enough to create a problem. But beyond this, if it gets to, say, $75 or $80/barrel, it will start hurting the fiscal, it will start hurting inflation—this is something to watch and be careful about.
Hopefully, we are at the high-end of the $60-70/barrel range, and it should not go much beyond this.
Are rising interest rates a worry, especially with macros taking a knock? Or do you think that we are in for a long pause, as far as interest rates are concerned?
There is a risk that RBI will hike it this calendar year or this financial year. The commentary was more dovish in the last meeting—but still, the reality is that interest rates going up is a possibility. I would expect RBI to hike interest rates at least once in this financial year—maximum, it could be two hikes this year—but that won’t derail the economy, or the recovery or the earnings growth coming back. If they hike more than that, it is a problem, because you are then implying that inflation is accelerating—I don’t expect that to happen.
When you meet clients here, and other investors, big picture, what are they asking you about India? What are their concerns? Are they worried about the latest news and developments coming from India, or is it still business as usual?
At the moment, it is still largely business as usual. Most people remain bullish over the long-haul and expect the situation to improve.
Most are very clear that over the next 5-10 years, India’s economy will accelerate, and we will see significant growth.
If you look at the past five years, India was accounting for 10% of the incremental global growth, and China was at around 30%.
Going forward, in the next decade, assuming that China’s growth slows systematically to 5% and below, and India accelerates between 7% and 7.5%, then, over the next decade, India and China will have similar rate of contributing to incremental global growth.
So, people do recognize that we are a large economy that is growing rapidly, getting more relevant in terms of its contribution to global growth and, therefore, it is a place where they want to have exposure. That broad framework does not change at the moment.
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