There's no need to be concerned about dividend payouts of Indian corporates as their profitability has been on an upswing, apart from healthy balance sheets, said Ashish Gupta, chief investment officer of Axis Asset Management Co.
"From cash flow and profitability side, corporate India is probably having the best scenario compared to the last 12-15 years," Gupta told NDTV Profit. "I don't think dividend will be a challenge. Once you get into FY25, you'll see dividends will be more than FY24 for sure."
India Inc.'s profitability was about 2% of GDP a few years ago, but stood at 4.5% of GDP last quarter, he said.
There are also enough opportunities for corporates to boost their balance sheet, given the buoyant capital market from equity raises, he said. "So, if you see the number of primary and secondary offerings that are hitting the market, we are virtually seeing three to four issuances every day."
Valuation in Indian markets remained high and one way to go past this challenge is to focus on companies confident on delivering earnings, according to Gupta. Secondly, companies which have long-term growth visibility are also safe options.
It's better to avoid companies which have larger risk to earnings, he said.
Axis AMC is still quite positive on capex in industrial manufacturing companies, because the domestic cycle is in their favour, according to him.
India Well-Positioned To Spend On Consumption
The upcoming budget is certainly expected to focus more on consumption, given the importance of it, Gupta said.
Buoyant tax revenue for the government will aid spending on consumption. However, one of the key monitorables is how the central government adheres to the 4.5% fiscal consolidation path.
Over the past couple of years, government tax revenue to GDP has gone up by 150 basis points. "We have a step-up with the RBI dividend," he said.
So, there is room for the government to raise spending without diluting fiscal consolidation, according to him.
As long as India stays on the fiscal consolidation path, buoyant government revenue and macro stability will "keep the country's multiples insulated", said Gupta.
Consumption Cycle Up For Rebound
Irrespective of any change in policy, India's consumption cycle is set for a rebound, Gupta said. Whether it takes six or nine months, it will be back on track.
The country had five years of downtrend in consumption for multiple reasons—pandemic, gradual recovery from pandemic, and high inflation, he said.
Though consumption stocks have underperformed, they are not really cheap. Most of those stocks are trading at a high level. The underperformance didn't lead to cheap valuations, he said.
It remains to be seen how aggressive India will be in boosting consumption when multiples are still about one standard deviation higher than the historic average, he said.
Watch The Full Conversation Here:
Edited Excerpts From The Interview:
Do you expect consumption-aiding policies to come into play, and is there something that becomes an integral part of your thought process? And if there is a tilt towards populism, could overall multiples that India enjoys come into question?
Ashish Gupta: If I take the first part of your question: Should there be more focus on conversion? Certainly so. If you look at the India growth story, one of the biggest underpinnings for that always has been really the demographics we enjoy and really consumption is one of the sectors that benefits the most out of it.
So at all points of time, I think consumption is front and centre of the economy, of the investment universe. We have now had really five years of downtrend—a cyclical downturn in consumption for multiple reasons. There was the pandemic-related slowdown and the recovery from that has been slow. There was high inflation and that impacted affordability. All of these are really the cyclical factors that were the headwinds and are now dissipating.
I think, irrespective of what really changes in the policy direction, the consumption cycle is due for a rebound. We don't know whether it will happen this quarter or six months from now or nine months from now. But it is bound to come back. I think we have to be positioned for that.
Having said that, one thing that also is very pertinent to note is that while consumption stocks have underperformed, they're not really cheap. If you see the multiples of the stocks, most of those stocks are still at elevated P/Es and the underperformance has not led to cheaper valuations primarily because you have had earnings disappointment.
So I think that is really the big challenge here—that how aggressively you move towards the consumption side when multiples are still about one standard deviation higher than the historic average.
Would you be concerned about the overall multiples coming into question if India moves from a largely fiscal deficit capex-oriented policy to one which also has hints of populism?
Ashish Gupta: I think the good thing that we have today is that there is a very strong revenue buoyancy. And whether you call it populism or whether you say higher spends towards consumption, the good news is that government revenues are strong enough to be able to absorb them.
I don't think India's multiples will get questioned as long as we don't let go of our macro stability, as long as the path towards the fiscal consolidation stays the course. And next month, all of us are eagerly looking at the Budget. To us, one key monitorable will be the path to 4.5% fiscal deficit is adhered to.
We believe there is enough flexibility with the government. You have seen how buoyant the advanced tax collections have been. Over the past couple of years government tax revenue-to-GDP has increased by 150 basis points. We have had an additional step up in the RBI dividend by about 130 basis points vis-a-vis expectations.
I think there is enough room for the government to step up spending, without diluting fiscal consolidation. If that happens, I don't think multiples for the market will get negatively impacted.
Do you believe that in the near term, due to the RBI dividend and the tax revenues this troika—consumer spending, fiscal deficit and the capex, as guided in the Budget—can co-exist?
Ashish Gupta: Certainly, because if you see, in January, the RBI dividend that was forecast was not over 2% of GDP. So I think, that alone provides better revenue manoeuvrability. We have also seen both in FY24 and in the first quarter the kind of tax collection, which has come in, has been ahead of estimates.
So I think, if the fiscal deficit stays in control, if inflation stays modest, we have seen improvement on the external account already. So the current account is also now almost in a surplus. So I think, the macro fundamentals of India continue to be very, very healthy and it is that which is driving the high multiples. If there is an additional spend towards consumption, that will actually be positive for market multiples rather than negative.
India Inc. has been slightly slow on payments of dividends as an aggregate in FY24, relative to the past. Is it an indication of available quantum to be paid out as dividends, or is it a precursor to capex plans by the private sector, which hitherto has been in fits and starts and only in select pockets and not quite industry wide?
Ashish Gupta: I don't think there's any cause to be really concerned about dividends from India Inc. I think, really, dividends are the bigger determinants. Of course, capex is one of them, but a larger determinant is corporate profitability.
If you see, corporate profitability has been on an uptrend. A few years ago, corporate profitability bottomed out at just about 2% of GDP, if I recall correctly. Last quarter, we had hit about 4.2% of GDP in terms of profitability and payout is quite linked to that. India Inc.’s balance sheet is also very healthy. So the leverage level, as you know at corporate India, is now at a 25-year low.
Even as there has been a step up in capex spend and more importantly there are more aggressive capex spend, I don’t think dividends are going to be really short-changed. We also are seeing enough opportunity for corporates to beef up their balance sheet, given the buoyant capital market from equity raises. So if you see the number of primary and secondary offerings that are hitting the market, we are virtually seeing three to four issuances every day.
So I think from the cash flow side, and profitability side, corporate India probably has really the best scenario that it has encountered in the last 12-15 years. I don't think dividends will be a challenge and I think once we get into FY25, we will see the dividends will be more than FY24, for sure.
Ashish, do capex beneficiaries across the value chain still provide opportunities? They were fantastic purchases, maybe 24 months ago. They have rallied quite significantly. How do you look at some of them now?
Ashish Gupta: Well, I think definitely that's a challenge in the market. As we spoke about earlier, valuations in the market are not cheap. You can look at it across sectors, across market cap cohorts. Valuations are quite demanding. I think that's a big challenge and in fact, while people talk about mid-cap, small-cap premium to Nifty.
We did an analysis and really rather than splitting companies into market cap cohorts, we split them into cohorts of growth and expected growth. And while average market multiples are only 21-22 times, if you look at companies, whether large cap, mid cap, small cap, if the forecast growth is around 20% plus, the average P/E is well north of 30 times. So that's the big challenge.
I think the way we are navigating this is really focusing on companies where we are more confident about earnings delivery. So companies where there is potentially larger risk-to-earnings, that is what we are looking to avoid. Secondly where there is more longer term visibility of growth. So the growth is multiple years, so that the valuation can grow...
We are still quite positive on capex, industrial manufacturing companies, because we believe that the domestic cycle is in favour of them. I talked about corporate profit-to-GDP improving from 2% to 4% of GDP.
We are hopeful that over the next three years, this number is north of 6% of GDP. That is what underpins our confidence in these companies. But yes, earnings risk is really something that we want to avoid at all costs, given how demanding the multiples are.
How high were you on the PSU investment ladder? If you were there, are you redialing the strategy back in favour of privates or not necessarily so?
Ashish Gupta: I think, this point is similar to the previous question. I think, within PSUs as well, we believe the play from here on is not as much of re-rating but really companies that can deliver earnings and earnings growth.
So, we are positive on PSU companies in sectors where there is higher earnings growth potential, whether it is power, defence, even financial services. But we are not so positive on PSU companies in sectors which are more commodity-linked, for example, where we are not confident of good earnings growth.
So, we believe across most parts of the market, the potential for re-rating is now done and performance will be much more driven just by how they grow their earnings.
Over the last two years or so, some capital market brokers have come under the SEBI scrutiny or SEBI actions. It's a very high growth space, because India has only started to invest over the last five years.
How long is this runway for growth? Do you think that multiples do not get derated necessarily over a period of 10 years, if the growth numbers look so strong, because one or two instances don’t necessarily depict the whole sector?
Ashish Gupta: I think, that is definitely true. But I think, it is equally important for all of us in the market to ensure that the trust of investors is maintained. So in the mutual fund industry, now there are 45 million investors. As you mentioned, the number of investors is increasing on a daily basis and we want to ensure that the trust of investors is enhanced. We at Axis AMC also today have over 10 million individual investors. So we want to ensure that the confidence and trust they have deposed, by giving us a part of their savings, is responsibly addressed.
I think we continue to enhance our processes and controls. We continue to move towards more and more transparency. Other industries are also very tightly regulated. So I think, that should ensure that investors can be confident about the industry as well as individual players in it.
I presume you are constructive on banks, based on what I've read about your previous interviews with other platforms. Is this a big wealth-creation opportunity, or will this be a market performer or maybe a slight outperformer over the course of the next 2-3-5 years?
Ashish Gupta: I think, like in most of the sectors, the valuations are not really depressed. Although the financial sector is one of the few sectors, we are at least for the few companies, multiples are lower than their historic traded multiples, particularly on the private banks.
But we are also seeing a few developments that were not really visible over the past nearly a decade. One is that the public sector banks are now more competitive than they used to be. Their balance sheets have been repaired. The profitability that they are reporting is as good as their private sector peers. So the number of investment opportunities that are available in the financial space across public banks, private banks, non-bank financial companies is larger. Therefore, the growth is going to be much more distributed rather than concentrated in a few players. Therefore, some of these companies might not go back to their historic multiples.
The second aspect is that like capital markets, the banking sector is also now much more tightly regulated. The regulator is keen to avoid any overexuberance and wants to ensure orderly growth of not just asset quality, but even liability side risk being adhered to. For example, they want credit growth to be in line with the deposit growth.
So it does mean that growth for the sector will be more moderate compared to the past and we might not see all the companies reversing back to their historic multiples. If I look at the fundamentals of the banks today, their balance sheets are absolutely clean and probably cleaner than they have been in the last 20 years. Most companies have profitability with ROEs between 15–20%, which make them attractive opportunities. But the trajectory of earnings growth is not accelerated, because credit demand is steady and already the uplift in profitability has happened. So I would expect the sector to outperform the market…
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