Sandip Sabharwal: I think in the auto sector what is happening is that firstly in the equity market a lot of money is coming in because of flows into mutual funds and other asset managers.
So, wherever there is some positivity, so the majority of the money is going there. So, over the last couple of months we have seen that the growth rate on the four-wheeler side has slowed down and as such the entire attention has gone into the two-wheeler companies.
On top of that for companies like Bajaj Auto, the export picture also seems to be improving somewhat, so that is what has been driving the stock prices of Bajaj Auto, Hero MotoCorp, etc, higher.
The way they have actually grown the overall market for themselves and what they have done in the export markets. So, this could continue for some time but the valuation now are becoming slightly excessive and in case like the four-wheelers there is some growth slowdown in two-wheelers then I think these stocks could take a short-term hit. Longer term most of the auto companies will still benefit from the pickup in discretionary spending and easing of monetary policy over the next couple of years.
That is exactly what I wanted to talk about because overnight you are seeing that there are heightened expectations. I mean looking at the CME Group FedWatch Tool that traders and almost a 63% of them are actually now pricing in a 50 bps cut and your own thoughts on where the RBI is headed in terms of both the inflation as well as growth dynamics?
Sandip Sabharwal: So, if you look at the economic data coming out of the US, it does not make a case for a 50 basis point cut actually because the economy has been quite resilient even though job additions have slowed down, the layoffs continue to be moderate.
So, fundamentally there is no case to become aggressive because an aggressive cut would indicate that the Fed is actually very concerned about economic growth. So, in case there is just a 25 basis cut we could see a knee-jerk sell-off.
Now RBI governor has been constantly talking of food inflation although the headline inflation has been below 4% for the last few months and the way the monsoon has panned out, the probability that food inflation will fall off the cliff actually as we enter into the winter months is very, very high.
So, they need to be proactive and take actions to support growth. Now, the comments do not indicate that they are likely to do that, but actually they should be on the easing cycle now. The good thing is that they have at least let the liquidity build up, which has built up as the government started to spend after the elections, which reduces some risk for the economy.
What is your own sense on metals? I mean, there have been all those global growth concerns, recession concerns as well in the US, China slowdown, etc. China realty under pressure. All those factors on one end, but do you think metals could be poised in for a meaningful recovery from here? But would it fundamentally make sense to invest?
Sandip Sabharwal: See, fundamentally, if you look at it, there is no justification for a significant rally in metals because still overcapacity persists and China continues to be in a downturn with no likelihood of any recovery in economic growth. In that scenario, the commodity demand will remain subdued and this is reflected in the most liquid commodity, which is crude oil, where the prices are more near yearly lows rather than at higher levels.
Most of the other metals have also corrected, if you look at steel prices, iron ore prices. But many of these stocks continue driven by liquidity at more near 52-week highs, so that is a dichotomy. So, in that scenario, even if let us say there is hypothetically an improvement in metal prices, then still, that is already factored into these commodity stock prices. So, I do not know, unless and until there is a huge recovery in metal prices, which seems unlikely, I would not think that there is too much potential across the board.
Pretty much an extension of the point that you were making last afternoon as well that why a fancied, frenzied Bajaj Housing when there are so many other listed players in the same space, doing the same business.
Sandip Sabharwal: So, if you remember why did HDFC get merged into HDFC Bank, because the competitive intensity in housing finance had become so intense that as a standalone entity for them to be bulk borrowers in the market and to sustain profitability at the level which they were doing historically was very tough. So, in this scenario, how can we assume that Bajaj Housing will be something different? Like, obviously, if you start off a smaller base, initially as you grow much more faster, but then housing finance is a business which has issues related to continuously falling margins because everyone and every financial institution is into housing finance now and the ROAs also will be lower than many other lending businesses. So, I find it tough to understand the valuation that this stock is trading. The only explanation is low liquidity and the buying which is happening that has driven the price up.
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