Consumption and capex-led recovery in India will outweigh immediate risks in equity markets, according to Ganeshram Jayaraman of Spark Capital Advisors (India) Pvt.
The money lying on the sidelines waiting to get converted into demand is unprecedented, Jayaraman, managing director-institutional equities at Spark Capital, said citing a rise in saving bank balances.
Banks saw Rs 6 lakh crore of savings bank balances, the highest ever during the pandemic, according to Jayaraman.
For the first time since 2003, Indian banks’ balance sheets have excess statutory liquidity ratio held in government bonds, he said. “The banks are ready for the demand recovery to start and for this excess to get converted into either a corporate or a retail loan.”
And India has been a recipient of Rs 9 lakh crore as exports were less impacted than imports during the pandemic, and the nation received foreign direct investment inflows and NRI remittances, according to Jayaraman.
All these factors will ultimately fuel a consumption boom and find its way into capex of some form, he said.
The government is borrowing Rs 9-10 lakh crore, twice of what was budgeted at the beginning of the year. This excess liquidity when spent on infrastructure, rural demand and food procurement will also provide money in the hands of consumers, Jayaraman said. And low interest rates have already helped boost demand in household capex — property, automobiles or consumer durables, he said.
Even as there are fears of excess liquidity stoking price rise for consumers, the first 12 months of inflation are good for equities as it gives companies the much-needed pricing power, Jayaraman said. Pricing power along with demand and consolidation, and better operating leverage due to cost cuts will boost earnings in the next couple of years, he said.
And that’s his advice to investors while building portfolios.
Pricing power is going to be their buzzword over the next 12-18 months, he said. Spark Capital will be focusing on companies that exhibit an earnings growth trajectory to offset multiple contractions. Accordingly, the focus is more on near-term cash flows.
Their portfolios are overweight on banks, discretionary consumption and auto, and underweight on life insurance, staples, IT, and oil and gas.
Banks with high credit costs created excess provisions. With provisioning coverage in excess of 70%, they are sitting on double-digit tier-1 capital adequacy, Jayaraman said. Spark Capital expects such banks to double return on equity in the next 18 to 24 months.
Jayaraman cited a dichotomy, saying, “As investors, we focus on margins and managements always focus on market share.”
Automobile as a sector is undergoing consolidation and eventually weaker players will be evicted, he said. The stronger ones focusing on protecting the market share in the short term will see margins improve, with a calibrated price rise mechanism over quarters, he said.
Manufacturing is possibly the biggest emerging theme, according to Spark Capital. Outsourced manufacturing along with export-led manufacturing turned Sparks Capital ‘overweight’ on manufacturing and industrials for the next few years.