Krishna Sanghavi, CIO-Equities, Mahindra Manulife MF, says “there is the prevalence of too many people focusing on the shorter end of the curve in terms of leverage positions on trading, maybe investment with a very quick short-term view. Those two combinations make some of this volatility part and parcel of what we see daily. It does not really change the fundamental picture of India doing well and creating wealth for investors. It creates its own high churn or high quick returns or a quick loss kind of scenario for traders. If you are a trader versus if you are an investor, the current market does not really offer a similar payoff for both sides. ”
There was a furious rally and markey was almost at 19,800. Was the market getting the rallies justified because there was a genuine change in narrative on rates front globally and people are deriving that probably by mid year, rates in India would start heading lower while earnings are not too bad already?
Yes, I agree, very broadly. Markets are moving too fast. At the same time, if we just step back and look at the last two months, we were actually back at where we were two months back and that is not only true for India, it is true globally also. There are two variables. One variable is that quite a bit of high-frequency economic data keeps on changing, keeps on coming every day which is the normal path.
The second part is slightly more worrisome, not only in India but worldwide. Maybe it is the prevalence of too many people focusing on the shorter end of the curve in terms of leverage positions on trading, maybe investment with a very quick short-term view. Those two combinations make some of this volatility part and parcel of what we see daily. It does not really change the fundamental picture of India doing well and creating wealth for investors. However, it creates its own high churn or high quick returns or a quick loss kind of scenario for traders and that is what people may just need to be aware of, that if you are a trader versus if you are an investor, the current market does not really offer a similar payoff for both sides.
I must congratulate you on the great performance of your smallcap fund. Do you think the correction in the smallcaps and midcaps is over now and at least the ones which are backed by earnings will have a good run from here on?
I agree. We had a nice launch, exactly 11 months back. Our smallcap fund sometime in December 2022 started investing. The fund has done pretty well right now. I guess it is always going to be a stock specific market because for every segment of the economy, some set of corporate, some set of companies or sectors are beneficiaries. The other sets of people are sufferers because when you say value creation, that keeps on shifting between consumers and users. For example, if banks are resource owners, the corporate are the resource borrowers and to an extent, high interest rates favour the banks while it disfavours the corporates who borrowed.
So that economic part does play out and that is where we believe there is value across the spectrum on sectors, on stocks whether it is largecap, midcap, smallcap. That is one way to look at it but at the same time, even sector wise there are pockets of opportunities which one can invest in, in the markets right now also.
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There is a power renewable, green renewable NBFC IPO which is getting launched. You were also positive on power space for some time now. How are you analysing the valuations of power lenders to start with and then the generation companies be it renewable or even legacy?
The macro opportunity for power is so strong that India is right now more or less balanced on what power we need currently versus what power we can produce as a country, maybe a 5% to 10% deviation in demand can actually alter the problem for India. So, we need to create capacity and that is where in the macro picture lies that if India is going to grow, we need more power consumption and that power capacity needs to be created now.
The process needs to start now so that three and four years down the line, we will actually have enough capacity. You split further, a thermal takes maybe four -five years to set up while renewables like solar, wind possibly takes a shorter time of 12 to 18 months period and that is what lies opportunity in the absolute next three, four, five-year period, you need to create capacity across the spectrum, renewables as well as thermal.
Coming to power finance, that as a segment has a tremendous opportunity because the sheer amount of capital required in the generation as well as in the transmission and distribution is going to create an opportunity for our companies to lend. The way we look at valuation right now is also partly a function of the capital adequacy. So, if there are companies operating on a 22-23% adequacy on capital and generating 20% plus ROEs, they are in a pretty good shape to take part in this entire power sector lending opportunities and participate there on.
Today, we are discussing a situation where there are not too many issues about troubled assets or asset quality pains also. In a way, it is a low credit cost, high credit growth environment which works very much in favour if you have the right amount of capital which is what some of these power finance companies have.
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In the last few years, the runup for lenders, especially banks has been very good. Do you see that mid next year onward if indeed rate cuts start in India? Can NBFCs have a good time going forward because they tend to benefit in a receding rate trajectory?
To an extent, yes, because they are slightly more wholesale borrowers of money rather than retail in the sense that banks have far more reliance on CASA. So, it can be true but at the same time have a situation where in a falling rate atmosphere maybe your NIMs are bound to compress because if you look at some of these NBFCs, they really had a good time when rates were going up. It is going to be tricky unless the asset liability mismatch of NBFC specific can be analysed differently. We will always have a stock specific answer.
But on a macro basis, yes, some benefit can happen to a wholesale borrower of money when the rate environment goes down. But at the same time, we need to worry about liquidity, just because there are going to be rate cuts, we may not really have a liquidity environment as favourable as what possibly it was two years back. That is an area which is a little bit uncertain right now.
