Do you think 15 days from here on, we will be looking at a big recovery in some of the banking majors as well, especially the large-cap private banks?
Nilesh Shah: In the banking sector, valuations are reasonable, but there is uncertainty hanging over the sector itself. One will be the liquidity coverage ratio guideline. If RBI brings liquidity coverage ratio guidelines in line with the consultation paper issued, then there will be an impact on the banks’ profitability and that is fully not reflected in market prices at this point.
The second thing is the liquidity, or deposit competition going on among the banks. We believe interest rates will start coming down over some time. But will banks be able to cut deposit rates as fast as the interest rates come down? That is another challenge. Between these two, it is time to watch the banking sector and then invest based on when clarity emerges on these two aspects.
The government’s positioning is changing. You mentioned elections. But the capex this year is rather low. And if the capex is low, markets will start assuming that the government going easy on capital expenditure. In that case, could some of the capital goods and private-sector-dominated names hit a roadblock? Could there be a divergence in terms of what the government action was versus what the intention now could be?
Nilesh Shah: There are multiple aspects. Last year, we announced Rs 10 lakh crore infrastructure spending. We achieved about Rs 9,50,000 crore as the election cycle came into play. This year, in the Budget we announced Rs 11,11,111 crore infra spending. But please remember that April, May and June were under the election cycle, where the government had limited ability to spend. Now in about nine months, they have to spend what they had budgeted over 12 months. We will be a little short, like last year, in terms of spending, despite the government’s push to do in nine months what they intended to do over a 12-month period.
We had seen a drop in orders from the government in the first quarter, that is June ‘24, but it should start picking up in September and December and later on. The second thing is many state governments have announced various schemes and those schemes are funded essentially out of infrastructure investment. The collective spending by state governments on various schemes is about 1.8% of GDP. Now, that is going to have an impact on the infrastructure spending.
I believe state governments’ investments will slow down significantly as money gets diverted towards various other schemes. The third thing will be the private sector. We believe private sector capex is in the revival mode. We have been saying that for the last almost 18-24 months, more of a hope trade than reality. But this time, there are signs of capex happening across various sectors.So, between central government and private capex infrastructure and other investments should go up. On the state government side, it should come down. Hence, we will have positive infrastructure investments over last year, but that will likely fall on higher expectations of the market. Today, many of the infrastructure capital goods companies are trading at very high valuations. Those expectations might get belied.What is the view on the power sector, given that you talked about state investments and state capex is likely to come off? Do you think the investments the states were making in transmission, etc, will also taper and perhaps some of these power stocks are overvalued now?
Nilesh Shah: We believe power demand is growing at a faster pace than power supply. There could be power shortages unless and until we take some corrective action. Remember that power capacity cannot come up within a short period. It requires a lot of planning and hence, it has a probably five-year plus cycle. Now, within that, if we see there are power producers, there are power transmitters, and then there are power equipment makers and fuel suppliers.
We believe, at least in gas-based power, the utilisation is low. Gas prices have come down and they will have the ability to ramp up utilisation to sell power at higher rates. Hence they should do well. The second is on the power equipment makers. We have a very positive view. As we see a shortfall in power demand versus supply, more projects will come up and power equipment makers should benefit.
The third will be power transmission. Undoubtedly, there will be a need to set up transmission lines to improve efficiency and reduce transmission and distribution losses. The investments could go up and down a little bit. But undoubtedly, there will be investment towards better transmission and metering and so on.
Finally, the big gorillas in the picture are the power producers. Over here, those power producers who have more merchant power capacity should do better as power rates are likely to remain elevated. So, overall, within the power sector, valuations are high. Most of the positives I talked about are already discounted in prices and hence one will have to be careful on a bottom-up basis.
