Amit Premchandani is Senior Vice President & Fund Manager – Equity. He holds PGDM from IIM Indore and CFA charter from CFA Institute, USA. He has completed CA from ICAI. Amit joined UTI AMC in 2009 as Senior Research Analyst and has covered Banks, NBFCs, telecom and cement in his research role. In addition, he took up portfolio responsibilities in June 2014. He has over 13 years of experience.
In an interview with Shweta Papriwal, Editor, indiainfoline.com
, Amit Premchandani
said, “Fast track resolution process for financial sector bankruptcy and AQR of NBFC are desirable solution to break the impasse and unfreeze the credit environment.”
What are you views on global macroeconomic scenario as trade tensions are getting escalated rather alleviating?
Global growth has been tapering off as trade war had a negative impact and the current global expansion is one of the longest in the post war period. Two largest global economies negotiating the terms of business/ trade will create ripples in other countries as well as supply chains are linked. Impact of fiscal policy on US growth has also started to taper off while monetary policy has again turned accommodative.
How do you see the potential impact on our exports as weak manufacturing data in large economies are strengthening case of global recession?
Large part of India exports is services led which has relatively lesser impact in the current environment, with global supply chains getting disrupted India can actually gain some share of global trade as manufacturing units shift from China to other low cost location. In this context decision to reduce corporate tax for new manufacturing unit to 15% will incentivize that moves. Near term exports may remain subdued, however if we can take advantage of disruption due to ongoing trade wars, India may improve export in medium to long term.
We saw that the government has been announcing several measures including a significant reduction in Corporate Tax to address domestic slowdown and liquidity. Do you think these measures will help the country turn the corner decisively or you expect more from the government?
Reduction of corporate tax rates is a huge positive and will lead to sentiment improving and investment picking up over medium to long term.
On account of the trade war and rising cost of labor in China, manufacturing bases have started moving out of China. India should attract these units through single window clearances with focus on electronics and apparel. Part of the electronics ecosystem have started moving to India but we are lagging behind apparels manufacturing as bases are shifting to Bangladesh and Vietnam. Labor laws flexibility and duty reduction in raw material for synthetic apparel can attract these units into India.
Private capex has been muted for several years. Do you expect a kick start in private capex with substantial reduction in tax burden?
Private Capex over the last 5 years has been moderate though we have seen growth in overall capex, it was primarily driven by government capex. Corporate sector was facing the problem of over leverage which has been largely corrected post recognition of NPLs through AQR, however the incentive to invest is still missing given capacity utilization is ~75% levels and growth outlook remains muted. In this environment incentive in the form of lower tax rates for new investments should revive capital investment in the medium to long term.
Banks are coming up with external benchmark (repo rate) linked credit products which will compress their NIMs and put further pressure on struggling NBFC space. Do you think the profitability of the banking and financial services sectors will be able to manage the same level profitability?
In the current environment when large part of credit system is frozen in the NBFC space and 10 public sector banks are busy with merger related issues, the ability of the remaining players in the financial system to price risk properly and manage margins is high. Hence we think interest rates linked to external benchmarks is unlikely to have material impact on well-run banks as they will have the ability to manage margins to lack of competition.
What do you think is required to address the current crisis in the Indian financial system especially NBFCs?
NBFCs accounted for almost 20% of the credit market before the ILFS crisis, large segment of NBFCs are still facing funding constraints either through very high interest rates or lack of fresh lines of credit. Lack of liquidity for rollovers or growth can transform a liquidity issue to a solvency issue. Fast track resolution process for financial sector bankruptcy and AQR of NBFC are desirable solution to break the impasse and unfreeze the credit environment. Providing RBI liquidity window for select NBFCs can be a silver bullet to break the current logjam.
Growth cannot revive when 20% of credit providers are starved of liquidity and another 25% PSBs are busy with the merger process.
What all sectors are you bullish on from the asset allocation perspective?
I am positive on pharma, private banks, Auto given valuation are reasonable in these sectors and growth runway is huge.
Mid and small cap stocks have witnessed steep corrections over the last one year. Do you see value in them and think the time has come to look into these?
Mid-caps have also corrected, from the premium they commanded over large cap in early part of 2018, they are now at close to 20% discount to large cap hence pockets of mid cap have started to look attractive. In our fund we have increased allocation to Mid and small cap to 27-28% from 18% last year.