We see the corporate earnings cycle getting better in 12 months: Shailesh Raj Bhan

Interview with Shailesh Raj Bhan, Deputy Chief Investment Officer, Reliance Mutual Fund

What will be the impact of bank recapitalisation on the economy and large-cap stocks?

This will provide lot of confidence in public sector bank because they were saddled with non-performing assets. They need capital to facilitate further lending and to take write-off for bad loans. This apart, it will improve the whole environment for growth. PSU banks will now be ready to look over the past problems and fuel growth. This will also make some of the PSU banks turn as lenders for larger infrastructure projects. With fresh fund infusion they can now lend with renewed confidence. I think, it is part of a process which was initiated by government earlier. It started with the identification of the problem, recognisation of the issue, the resolution process which is on at NCLT and now infusion of fresh capital in banks. This will provide a big kicker to restart the economy.

Lack of growth in credit offtake is one of the major concerns in banking sector. With signs of economic revival do you think this trend will reverse?

I think fresh fund infusion will provide the perfect environment for revival of credit offtake. When some large banks are under stress their ability lend is constrained. They want to lend only to triple A rated companies which are not looking to raise funds from banks. So to that extend their hands were tied. The risk aversion in the system reduces if you do not develop a sustainable model. Now they can take that extra bit of risk to lend to big projects. This facilitates credit recovery which is also a function of economic growth and volume pick up. Of course, the fund infusion itself will not lead to credit off take, but it creates the right environment for facilitating credit.

Do you think government ability to spend in infrastructure will any way be reduced due to the fund infusion in banks?

It is going to have a significant impact on infrastructure sector. People were always wondering where the funding come for the huge infrastructure plans proposed by the government. Now banks have been given the capital and they can lend to large infrastructure projects. Large private sector banks are not corporate lenders most of them are focused on retail. Infrastructure projects typically need money for long tenures. This can be provided by only project lenders which are primarily public sector banks.

Will the large capital infusion into bank have any impact on the country’s debt to equity ratio?

The impact will be very miniscule. It will be less than one per cent. India’s GDP is now a large number and is not what it used to be a few years back.

Are you worried about the recent run up in stock prices with no significant upside in earnings growth? Do you think consumer spending will slow down?

We see the earning cycle getting better in 12 months and accelerating further. This will be supported by economic cycle recovery and revival in global growth. Consumer growth has been saving grace for India. We had a pretty decent festive season. This would have positive impact on economy. Retail lending by banks has been growing at 18-20 per cent. I think consumer spending will continue to remain strong and will not be anyway constrained.

What kind of returns can large cap mutual fund investors expect?

In our case earning led returns are positive. Returns are derivate of earnings over a period of time. We think corporate earnings should compound 15-18 per cent over 3 years. Earnings should start looking far better than what it is today and this will support large cap companies. We are positive on corporate banks, engineering and infrastructure companies.

Should investors consider look to book some profit with run-up in market?

I do not think so. We are coming out of seven years of low earning cycle. Why cannot we reap the benefit of three-four years of better corporate profit. The reasons for seven years of low growth were weak economy, challenges in commodity market and global economic slowdown. Now, the global economy has revived, interest rate in India is moderating, large domestic projects are being launched and executed. With government facilitating huge investments, it is only matter of time before private sector investment revives.

Will large caps be impacted if Foreign portfolio investors start pulling out their investments?

Foreign investors generally invest with long term view over 10-15 years. We have very few foreign investors who take tactical short term view. Foreign investors are holding 25 per cent of this country. You may have some people shifting from one market to another but that will not have much impact. Our single focus point now should be to see the corporate earning reviving. This will determine returns for investors.

Lot of infrastructure companies are in bad shape. Will this have an impact on their ability to invest further?

True. But there are set of infrastructure companies that are looking better. Lot of EPC (Engineering, Procurement and Construction) companies are now in better shape than what they were two years back. When the growth comes back, the problem becomes smaller. Their ability to get finances improves. Existing capital stuck in dispute will start flowing in. Government has also announced process to speed up arbitration process with public sector banks. It is an improving trend for infrastructure companies.

Do you think that the country is carrying a huge political risk, if BJP does not come to power again?

These reforms being implemented were started by the previous government. I think directionally nobody will change the reform process. Only think that may change is the pace and the priority of sectors. Reform is an irreversible process in India. India needs to create infrastructure, possibilities and opportunities for large segment of population still. To do this you need to facilitate economic growth by opening new opportunities. Any government comes to power reforms do not change only the pace varies. GST is the biggest reforms in India and can lead to very big changes in 3-5 years. Initially there may be challenges. Suddenly we have 25 taxes clubbed into one. The whole nation has become one market. People who never registered their business have to now register. We will have the noise for six months, then it will change. Transparency improves big time. SMEs were not getting loans because there was no data to judge them. Compliance and transparency shoot up and ability to lend improves leading to lower cost of capital. There will be little give and take by the government. GST is like changing the engine when the car is running. So one should not be too worried about issues.

What do you think could upset the entire reform process?

Some large event happens internationally. Most of the international markets are at their high and if something happens there it could cause problem. If there is a huge upswing in oil then it would impact us. We have to live with it. Lot of things now in India are under control. Marco economic condition here is much matter now.

Published on November 10, 2017

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