CashNews.co
One lead indicator of economic growth is always car sales and PV sales now are in the range of 3% to 5%, which is even lower than India’s GDP. So, as always, auto has been a lead indicator to predict the direction of consumption cycle. Auto indicator do you think this time also it will be no different?
Sanjay Mookim: Unfortunately, that could be a conclusion. We were hoping that we will start to see some momentum in car sales into the festive season. Again, channel checks a bit too early, there is still a few weeks to go for Diwali, let us say. But it does not look like there has been a significant pickup. One sort of hesitance we have in overly relying on that metric is there has been a significant inflation in the pricing of entry-level cars. And all of us are familiar the first car that you buy was priced at X, now it is priced almost 3X because of steel price inflation, the regulatory changes that we have been seen. So, the momentum in PV sales has been missing because of the absence of the first-time buyer. So, there is also a specific issue in the industry, to my mind, and as incomes rise and the inflation in car prices becomes palatable, I hope to see this dynamic improve.
Let us discuss the word capex extensively, first with private sector capex and the government sector capex. I will start with the government sector capex. The data was out in the open that the government is lacking their capex or the expenditure targets. Do you think they could come back in the second half of this year and if they do, what it means for the markets?
Sanjay Mookim: Yes, mathematically, the central government, let us say, has 11.11 trillion capex target for the full year. They are on run rate way behind in the first, the data released until August is behind run rate. There is little reason to believe that the government will have to cut back on that Rs 11.1 trillion target. Yes, there is some slowdown in GST collections, but there are other avenues of revenue for Government of India. And as a result, I do not see too much risk in achieving that 11.1 trillion aspirational capex target.
And that means that for the remainder of the year, the seven months remaining in the data from, let us say, September to March, there should be a significant improvement in the monthly or quarterly run rate of spending coming out of the government.And that YoY pickup will be very significant and this will impact, let us say, the cash flows for the companies and sector, the orders given out to companies exposed to government capex, etc. There should be a noticeable YoY improvement. This is, of course, tactical. I think the bigger question is, where does this 11.1 trillion head in FY26-27? Our expectation is that it probably grows hereon in line with nominal GDP growth and there is perhaps no more room to grow it faster than government revenues in the forecast two- to three-year period.
What do you think it means for basic sectors like steel, cement, defence, railways, because they are dependent on the government capex. Now, if the government capex gets pushed back from first half to the second half, could that lead to de-rating in some of these stocks?
Sanjay Mookim: We have seen some of it. Some of the sectors that you named have been under pressure recently because of a lack of momentum perhaps on the order outflow, perhaps simply under the weight of performance and valuations. It remains to be seen whether the market will give them credit when the government starts to spend in the second half.
But at least at fundamental dynamic, we can mathematically model, I mean, government’s spends on capex in second half will improve. Some of the pressure, therefore, that has been on these sectors could abate technically.
What about private sector capex? There is data which indicates that the private sector capex is not picking up yet. If one looks at the total capacity utilisation, it has inched up, it has not shot up. Is there a genuine concern centred around private sector capex?
Sanjay Mookim: We kind of lump a lot of things together when talking about private capex. If you think of the major heavy industries in India, whether it is the steel, cement, power, infrastructure, these are the sort of projects that employ billions and billions of dollars of capex. And let us say this is juxtaposed against building a consumer foods factory, which barely consumes any capital investment, to be honest.
The major heavy industries, utilisations are actually higher. Whether it is steel, whether it is cement, we are seeing a lot of announcements of new capex. Similarly on power, the power sector utilisations have gone up to the extent where we almost ran into deficits in the previous summer season.
So, on the heavy industry side, utilisations appear supportive of capex and frankly, we have seen announcement by a lot of companies in the sector in growing spending. What we sort of debate when we talk of private sector capex is the broader universe.
Will the thousands of companies listed and unlisted in India take up spending? And that does not really seem to have too much momentum yet. And one of the things I think holding people back is a recent aversion to leverage. Indian corporate balance sheets are very clean, companies are very under-levered, perhaps given the experience in the 2017, 2018, 2019 sort of periods on the bankruptcy processes.
I do not think that leverage is coming back in a hurry. The last point I would make on aggregate investment of capex in the country, the total number is not that bad, at 32-33% of GDP, this is a fairly healthy rate of investment. If you exclude the pre-GFC and the 11-12 bubble that we had in overspending in the economy, it is not like we are undershooting on total investment to GDP at the moment.
So, if there are traces of a mild slowdown in the economy, if the government capex is slowing down and if the word leveraging which you used, the corporate sector is slightly averse to leveraging, then what makes a case to buy into banks because banks are a proxy on economy, they do well when either retail balance sheets are leveraging or corporate balance sheets are leveraging up.
Sanjay Mookim: Well, the simple answer to the question is first, this is the one largecap space in India and that becomes a very good starting point to examine the investment case.
And these stocks have not re-rated in the entire rally that we have seen post-COVID, especially in the largecap, let us say, financials. Momentum on earnings was very strong, 22-23, but the stocks did not perhaps track the earnings delivery.
Now, the momentum is slowing. I do not think you will get any debate from people arguing that the YoY growth rates for financial earnings is likely to be weaker now.
But they still tend to be relatively inexpensive and relatively cheaper than the rest of the market. So, if you have an investment case or investment horizon of, say, two, three, four years in India, the banks and financials, despite the near-term possible deceleration, still appear as the best-case investment ideas.
I like to specifically talk about manufacturing renaissance because it forms a prominent mention in your India strategy report. What is the best way to understand manufacturing? Is it all about EMS? Is it all about the semiconductors in the new sectors which are getting created or it is just beyond this one sector?
Sanjay Mookim: There is a saying, I do not know who, it is attributed to many people on the internet, which is that we over-expect changes in a two-year horizon and under-appreciate changes that will happen or occur in a 10-year horizon. And I think India’s manufacturing renaissance sort of fits that bill that we because of the various policy initiatives or the measures that have been taken in the economy, we are all looking at the numbers now and saying, oh, look, what has changed?
And if you actually do that, it is not very apparent. Manufacturing intensity of GDP has not really moved up. India’s net merchandise trade number has not, again, moved as much as you would have hoped. These things will matter. They will matter on a longer time frame than perhaps the market has patience for. And to your direct question, this is far more broad-based. In a variety of industries, there has been an incentive to manufacture locally.
There has been a tangible improvement in the business environment, I would argue. And the comfort that companies in India have in setting up manufacturing facilities in India has improved significantly. So, yes, the market is familiar with the sectors you name because there are stocks listed here. But across industries, we are seeing a greater incentive for businesses to produce locally.