Vikas Gupta, CEO & Chief Investment Strategist at OmniScience Capital
There is value in sectors like defence, railway infrastructure, digital banking, fintech, power, and digital transformation (IT), Dr Vikas V Gupta, founder of OmniScience Capital, told Moneycontrol in an interview.
He believes these are all exposed to long-term, secular, robust growth vectors which are likely to last for decades and have huge TAMs (Total Addressable Market).
He feels RBI will be optimistic on growth as well as inflation and benign on interest rate hikes. FIIs are the only factor that might prove to be a downer if the US Federal Reserve (the Fed) is hawkish about the future.
With the likely 75 bps hike in interest rates by the Fed in the September policy meeting, the RBI will be left with no option but to raise rates by at least 50 basis points (bps). It is also possible that the RBI might reduce the FY23-FY24 growth forecast by 25-50 bps, says Gupta.
Per the consumer price index (CPI), inflation inched up to around 7 percent in August, while the wholesale price index (WPI) eased to 12.41 percent. Do you expect the RBI to hike the repo rate by 50 bps in its September policy meeting, and then pause?
On the back of the higher-than-expected US CPI, the Fed is going to raise the rates by 75-100 bps in the September meeting. The Rupee will depreciate if there is no action from the RBI. Thus, the RBI is left with no option but to raise rates by about 50 bps.
Ideally, the RBI might not want to raise the rates too much since India inflation figures are relatively benign. Both the WPI and the CPI show that the inflation is largely driven by food prices, which should cool off in a few months. Thus, the RBI would not like to raise rates and the focus will be on supporting growth.
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But it is likely that the Fed might be forced into another large rate hike in their November meeting, and a smaller one in December, assuming that the US CPI figures start to cool off significantly by then. The RBI Monetary Policy Committee (MPC) isn’t scheduled to meet in November, but may be forced to announce an out-of-turn rate hike to match the Fed, or hike rates in the December meeting.
Do you see any possibility of the RBI lowering its growth forecast for the current and next financial year?
India’s growth is driven by consumption and government and private sector capex, and thus quite robust. While government capex is unlikely to be deterred by interest rate hikes, marginal private investment and consumption are likely to get impacted by higher interest rates. It is possible that the RBI might reduce the forecast by about 25-50 bps for both years.
Do you think the momentum in banking stocks will continue and do you expect leadership changes in the sector?
We are scientific investors and hence do not think the near-term price action matters. What we can say with confidence is that the fundamentals of the banks are quite strong in terms of clean balance sheets and liquidity ratios. This gives them a lot of lending capacity.
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While the trailing return on equity (RoE) of a lot of banks looks weak due to provisioning, going forward the RoE is likely to increase significantly as lending and profits increase. Increasing assets, revenues, profits, and thus RoE and earnings per share (EPS) are likely to make the markets chase them, driving the price-to-earnings (PE) and price-to-book-value (PBV) ratios, and then re-rate them since higher RoEs would justify higher multiples.
Where do you see the value among sectors and why?
We see value in defence, railway infrastructure (bullet train, metros, modernisation), digital banking, fintech, power, and digital transformation (IT). These are all exposed to long-term, secular, robust growth vectors which are likely to last for decades and have huge TAMs.
In defence and railways, the companies have large, 2-7-year-long order books, large TAMs based on the vision and capex and revenue plans laid out in the DPEPP 2020 and National Rail Plan Vision 2030.
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In the power sector many generation companies have large capital-work-in-progress which is likely to start generating revenues in a year or two. This will improve the profits and RoEs of these companies. Further, these companies have very large capex plans for the full decade and are available at low valuations and very high dividend yields.
There are specialised finance companies which focus on lending to the railway infrastructure and power sector, which are available at attractive valuations.
In IT and digital banking / fintech, there is secular demand from digital transformation, movement to the cloud, and other related trends in AI / ML (artificial intelligence / machine learning), etc., which expose them to large growth opportunities. These two sectors are available at attractive valuations given their future growth opportunities.
Do you expect the US dollar (USD) index to hit the 120 mark in coming months given the elevated inflation and expected interest rate hikes? Also, what do you expect from the Fed’s September policy meeting?
Given the latest higher-than-expected inflation figures, the Fed is clearly going to hike rates by at least 75 bps. There is an outside chance of even a 100 bps hike. With the Russia-Ukraine war, increasing food and energy prices, there is a higher likelihood of a recession in the European Union (EU).
Under these circumstances, the European Central Bank (ECB) will find it difficult to match the Fed’s interest rate hikes. The Bank of England (BoE) is also in the same boat. While both will be forced to hike interest rates, the hikes are unlikely to be large enough to contain the depreciation of their currencies against the USD.
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The Bank of Japan (BoJ) is unlikely to increase its interest rates by any significant amount as already seen in its earlier meetings. Under these circumstances, it is possible for the USD index to go higher.
Do you think the primary market will be strong in the coming months given the improved sentiment in secondary markets?
It is too early to say what the primary market situation will be. Interest rate hikes by the Fed and the narrative for the future remain important factors that can trigger FII action and thus the secondary market sentiment.
India’s growth remains strong and the RBI will be optimistic on growth as well as inflation, and benign on interest rate hikes. The bias is clearly positive vis-à-vis domestic hard factors as well as sentiment. FIIs are the only thing that might spoil the mood if the Fed is too hawkish about the future.
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