“Economy is well placed despite external disturbances”
Commenting on the current market construct, Tawakley said the view on markets must be anchored to the economic outlook.
“So, the way I see it, the view on the market has to follow the view on the economy. And while there is some stress because of the situation in West Asia, overall the economy is very well placed. Demand is picking up and there is still some spare capacity. So, cyclically the economy, aside from this disturbance from West Asia, the domestic setup is actually very-very good because when you have demand picking up, you should get good revenue growth and as capacity utilisation improves, in most sectors you should see some pickup in the margins. Having said that, valuations are not super cheap, so one has to be selective. I personally prefer domestic cyclical stuff like financials, cement, automobiles, capital goods selectively.”
Financials: preference for private banks and insurance
On the financial sector, Tawakley clearly differentiated between segments, cautioning against capital market-linked plays while favouring banks and insurers.“So, let us break it up firstly into capital markets-driven plays and the others. Capital markets are probably at peak of the cycle, so I would avoid the capital markets space. What I like are banks and insurance companies. Banks eventually volume growth will pick up, particularly if there is some easing, some correction in the stock market, the volumes which is deposit and lending in the banking sector should pick up and then the large private banks are very well placed. Also, insurance companies have taken a lot of beating on account of regulatory risks. My view on insurance is that look even if there is some regulatory tightening, a lot of that burden will be passed on to the distributors because insurance companies are not making supernormal profits and if there is some regulatory tightening in terms of expense ratios, etc, those burdens will be passed through to the distributors.”PSU banks: cycle likely peakedOn PSU banks, which had recently outperformed private peers, Tawakley suggested caution going forward.
“I think that trade has played out quite well, but I would not put in fresh money into that trade. A lot of the growth came because the PSU banks were sitting on very low LDRs, so they were able to ramp up their LDRs and therefore lend more because they had surplus deposits, but now LDRs have kind of peaked and from here expecting further moderation in credit costs would be unlikely. So, I am not that positive on the PSU banks from here on. I significantly prefer the large private sector banks.”
He added that private banks now appear more attractive on valuations after underperforming for some time.
“No, they have underperformed quite a bit and therefore valuations are far more palatable.”
Consumption: inflation misunderstood, FMCG under pressureOn consumption, Tawakley downplayed concerns around inflation, calling it largely transitory, but expressed caution on FMCG margins.
“See, this inflation is a little bit misunderstood. This is not recurring inflation firstly. It is a one-off step up in prices which is different from recurring inflation. Recurring inflation happens when demand is very strong, that is not the case here. So, once this oil price hike has been passed through and those numbers are in the base, the inflation picture will moderate.”
He remained constructive on autos but cautious on FMCG.
“So, the question really is like if the domestic economy does well, it is always these sectors where there is spare capacity and demand is healthy that do well, which includes auto by the way. Where I am cautious on the consumption piece is the FMCG pack. The problem there is not that demand is not good, the problem there is that margins are too high and these companies are not investing enough in their businesses whether in terms of new product launches, marketing, A&P, and why we see their demand looking weak is because they are not creating enough excitement in their products, lower-end competitors are taking advantage of the very high margins they are offering and taking market share. So, I do not think the problem with the consumption piece is the economy, it is more that their own margin profile is way too high for them to sustain growth.”
On margin trajectory, he expects gradual adjustment.
“I think some of them have started doing that, I have acknowledged it, but there is more to go. And these companies are actually very good companies fundamentally, but they do need to reset their margins downwards and invest more in the businesses.”
Capex: demand will lead investment cycleOn the private capex debate, Tawakley argued that investment always follows utilisation, not sentiment.
“See, capex always follows capacity utilisation. When capacity utilisation picks up, capex happens. There is no point talking about capex if there is still spare capacity in the economy.”
He pointed to ongoing investment in core sectors.
“You look at which are the heavy capex sectors in the economy and see whether they have done capex or not. Cement has added capacity, power has added capacity although power has added capacity with lower spending because renewable capex is more capital efficient. Steel has added capacity. So, steel, cement, power, auto all four heavy capex sectors have added capacity. So, why do we say that there is no capex?”
IT sector: structural shift and margin pressureOn IT services, Tawakley struck a cautious tone, noting a divergence between overall exports and listed IT performance.
“See, IT I am struggling with. The reality is that the Indian listed IT companies are not doing well, but if you look at overall IT services exports from the country, that data is still pretty healthy. So, I do not think there is a problem with Indian IT if you include in that all the GCCs, all the back offices of global IT services providers like Accenture, Capgemini.”
He added that structural shifts and competition are reshaping the industry.
“So, what we are seeing is a change in the competitive environment… As these global banks, the users have become more and more comfortable with India, they are setting up their own shops as GCCs and that is the new reference cost base there.”
He also flagged weak hiring trends as a concern.
“So, if you look at the Indian IT companies, the staff count numbers are still flattish at best, so that does not suggest to me that the companies themselves are particularly confident about demand.”
