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Corporate earnings can compound 15-18 pc in next two years: Hiren Ved, Alchemy Capital

India has a huge opportunity in manufacturing, he says

Hiren Ved Hiren Ved, the co-founder and chief investment officer of Alchemy Capital

Even as the world is grappling with multiple challenges from the Russian invasion of Ukraine to high inflation and rising interest rates, equity markets in India have relatively held up; the BSE Sensex has re-scaled 61,000 levels and the NSE Nifty 50 is trading above 18,300. Hiren Ved, the co-founder and chief investment officer of Alchemy Capital tells THE WEEK, the Nifty could even scale 20,000 levels by the first quarter of next year as the broader markets play catch up with the earnings recovery. The equity market veteran expects banks to do well and is extremely bullish on the revival of domestic manufacturing.  

Q: On the one hand, we have the Russia-Ukraine war, on the other hand, we have rising interest rates and recessionary fears in the developed world. How does all this factor in now when you look at the markets in 2023?

Some of these risks are fairly well known. We are seeing the impact of some of these disruptions because of the war in terms of higher energy prices, and higher raw material prices. Already we are seeing this in company margins and profitability. 

Last two quarters, we have seen many businesses get hit by higher raw material prices, higher logistics costs, and supply chain issues. Obviously, companies take a little bit of time to manage some of these things. It takes two-three quarters for them to take their price hikes, etc. 

From a broad perspective, the Nifty EPS (earnings per share) in March 2020 was Rs 441. In March 2022, Nifty EPS was Rs 741, and if you take any estimate that most brokers have on the street, March 2023, will be somewhere in the region of Rs 860. So, you are talking about a 95 per cent increase, almost double in three years. 

But if you look at the markets, in February, before COVID hit us, the Nifty levels were 12,200. Today we are at more than 18,000, which is 50 per cent higher, while overall earnings are almost double. So, the markets have to catch up to this growth in earnings. My sense is that some of the margins lost in the first half, companies will be able to recoup at least some of that in the second half, because by that time the price increases would have taken effect, also commodity prices have softened since then. 

If you look at the next 2-3 years from today, it would be fair to say that earnings can compound at least 15-18 per cent. And therefore, markets can also compound somewhere in that region. 

Q: In the current geopolitical and economic context, India seems to be in a favourable position?

Today, at least relatively speaking, China has become uninvestable because of huge political regulation on some of the fastest growing sectors, zero COVID policy and the geopolitical tensions between the US and China. China's weight in the Emerging Market Index was more than twice that of India. 

Typically and historically, when global interest rates have gone up, money has gone out of emerging markets. We saw that last year, between September-October 2021, and June, July through August, FIIs have at least taken out $34 billion. But now, the question is that even if interest rates rise in the US, there will be a shift of money from China to India. 

India is also one of those few countries, which has natural growth, you don't need to stimulate the economy to get growth. Even though it's not 8-9 per cent, can India grow at 5-6 per cent? I think. In a global context where most economies are slowing down and India is still growing, there will always be a premium for growth. 

For growth in any economy, you need credit growth. Whether it's private sector banks or public sector banks we are starting this cycle with clean balance sheets, which means there will be credit growth. 

It has taken us 7-8 years to deleverage the corporate sector. Now the corporate sector is deleveraged, the banks are clean and the government is now encouraging manufacturing. Land and labour is available in India, unlike in the US where labour markets have become very tight. Capital is also available as banks are willing to lend again, and we have a great policy with PLI (production-linked incentives). And then whether you call it China plus one, Europe plus one; Indian companies will get into the global supply chain. So if you put all of this together I think we are in a very good place. 

Despite the challenges (geo-political tensions, inflation, interest rates rising) our markets have held up. There is greater confidence in our economy. And finally, the capital investment cycle is kicking off. Order books of capital goods companies are at an all-time peak. I am absolutely confident that by the end of this financial year, or maybe by first quarter of next financial year, I wouldn't be surprised if our Nifty is in the 20,000-21,000 range.

Q: If you look at this quarter's earnings, we see the kind of K-shaped economic recovery that some economists talk about...

The recovery is uneven. What happened was that the bottom of the pyramid really got hurt, because of the two years of COVID, because there were job losses. The SMEs were struggling. On top of that, in the last few months, we've also seen higher inflation. So there was a double whammy. The rural economy is struggling because people lost incomes, their expenses went up and inflation has hurt their purchasing power. In my mind, it is going to take another 12-18 months for the bottom of the pyramid to rebuild their incomes. 

The more well-to-do population, their income got less affected, plus the assets that they were holding went up in value like gold, stocks and real estate. So for the guy who's buying an SUV, now whether he's paying Rs 18 lakhs for it, or Rs 15 lakhs is not gonna matter. But, two-wheeler sales struggled, especially entry-level, because the entry-level guy could not afford. His income also went down and two-wheeler prices went up 20-30 per cent. 

This (2022-23) is the first full year where you will not have any shutdown. All these guys, some of whom are daily, weekly wage earners, they will get for the first time full 365 days to earn. They have to rebuild their earning capacity. And at the same time, inflation also has to moderate. Then the purchasing power will come back. So you're absolutely right about the K-shaped recovery. This Diwali season has been very good. This is the time to again rebuild their earnings. That impact we are already seeing in those companies. 

Q: In this kind of scenario, how do you pick up your investment themes? 

Companies that were more selling into the rural basket, we have basically avoided investing. As I said, our view is that it is going to take another 12-18 months for that to pick up. 

In consumption, we've stuck to things where premiumization is happening. Wherever companies are selling more premium products, high-priced products, more urban-oriented, consumer companies, like hotels, or, for example, liquor companies where people are buying more expensive liquor or restaurants now because things have opened up. Those guys are doing well. We have shifted our investments to more urban-centric, more premium consumption. 

But the time will come, maybe in the next six months, when the bad news about rural demand will get priced into these stocks. And it's not that forever rural demand is not going to go up. So maybe a time will come over the next few months when we will want to get back into some of those names.

Q: You talked about banks and the good shape they are in. We have seen PSU banks also doing very well and they have rallied over the last few months. Does this rally have more legs?

BFSI (banking, financial services and insurance) will do very well. But, there is going to be a fight for deposits. If you look at most banks, credit growth is faster than deposit growth. The public sector banks have a little bit of an edge because they have branches all over and can garner low-cost deposits. For public sector banks, it's a great time, where you have access to deposits. But, at the same time, lending is growing. But, if you have to fight for deposits, which means you have to pay higher interest on deposits, then your net interest margins are going to be hurt. So even within BFSI, I don't think that everything is going to go up. Whoever is able to garner low-cost deposits is going to be a winner.

Q: If you look at the next five or 10 years, where are you seeing opportunities?

With five and 10 years (horizon), everything in India is investable, We've invested in tech, banks, consumers, we've invested in pharma we've invested across the board in 6-7 sectors. But if you were to ask me and single out a sector where I think in general, I see a big opportunity, that is in manufacturing, which is reviving in a big way in this country. 

Also, two global industries are going through a massive transition at a global level. One is energy. We are all moving from traditional sources of energy to renewable energy. And that transition is a multi-year transition, is likely to start a major global capex cycle. Even more so, because of the Russia-Ukraine war, people have realized that you need to be energy-independent. The second industry which is going through a massive transition is transportation, where we are moving from traditional fuels to electric vehicles, and hydrogen, which means the entire automotive industry will have to be remade. That itself will create a new capex. 

In India, you will have two more other industries which will drive capex. One is defence, where there is a greater thrust towards indigenisation and manufacturing locally. We have seen that typically when that happens, it's not just 2-3 companies, but the whole ecosystem gets developed. The second is electronic manufacturing. There is again an urgent need, we cannot constantly import air conditioners, washing machines, televisions, and mobile phones from China. So we will see a whole ecosystem of domestic manufacturing in electronics that will come up.

These four industries together will drive the big manufacturing renaissance over the next 5-10 years. You also have the opportunity in exports, because of China plus one, whether it is speciality chemicals, whether it is pharma intermediates, API's, or auto companies. So, that will also drive capex and manufacturing. We are, apart from everything else, looking at investing in a lot of these capital goods and components, and opportunities which feed into this thesis.


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