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Very strong credit growth likely over next 3-4 years: Susmit Patodia


Inflation, working capital cycle and corporate capex kicking up all put together should lead to very strong credit growth in the system over the next three, four years, says Susmit Patodia, Director, Portfolio Manager, Motilal Oswal AMC.


The nice little correction which happened in the broader markets over the last 8-10 sessions got accelerated yesterday but at the same time got arrested in the second half and now of course, they are coming back. Is the froth out now?
A market correction of 3-4% is not really worthy of being called a correction or the froth being out. Whether it is related to the BSE surveillance circular or the stream of IPOs that we have had in the great listing, a small move of 2-3% should not be called a correction, it was just an adjustment.

On the index level, it appeared small but a large part of small and midcaps got reasonably corrected. Where in this market are you witnessing the highest margin of safety versus earnings acceleration in coming quarters?
We continue to believe that vaccination is the way out of this pandemic and as the vaccination drive picks up over the next couple of months, we should see the normal economy coming back. We still have to follow Covid appropriate behaviour with respect to masks, but hopefully businesses should be normal by Diwali this year. and if that happens then sectors which are geared towards physicality of either goods or services should do much better and will have a lot of margin of safety and earnings momentum ahead then what has happened in the last 12 to 24 months.

So whether it is malls or the auto sector, anything involving physicality of an individual should have much better prospects in the next few months or quarters.

I was just looking at the commentary coming from Siemens this time regarding the demand environment, the orders etc. and the kind of discussions they are having with their clients. What are your thoughts on this space?
If one considers deep capital goods plays, Siemens is one of them. Most of these companies are seeing enquiries and order books not seen in the last decade. And again this is not surprising if you look at the typical capex cycle of our country or for that matter any country. India went through this huge capacity build up from 2002 to 2010 and then we had a correction phase which ended with the cleanup of the credit cycle. That is what has happened over the last four years in India since Dr Rajan initiated the QR and we have been in the clean up phase of the credit cycle.

In the last two-three quarters, corporate banks’ results show that the credit cycle is behind and now we will have the build up phase of capex. This is exactly what happened from 1997 to 2002. There was a big NPA issue in Indian banking system. Once that was cleaned up, there was a big capex boom. Obviously the texture and the feel will be very different from the last cycle where hydrocarbon, metals and cement nearly make up 50% to 60% of the capex cycle. This time it could be housing, infrastructure like roads, railways which could do the heavy lifting for the capex cycle.

Commentary from real estate companies indicate very robust pre-sales. But if one were to really break down the entire real estate space in southern India based companies — be it companies from the Mumbai, Pune belt or NCR, do you have any preference which side appears to be in better shape on earnings versus valuation parameter?
Frankly, real estate is a very localised industry. You may have a national brand but typically if one looks at Hong Kong, US or London — most of the developers are regional in their play. You will find very few pan-country players, especially in the residential sector. Within that, the western region in India, especially MMR looks very interesting, primarily because the prices have not gone anywhere for eight years, while incomes have gone up 7-8% CAGR.

But HDFC is saying that the affordability index of housing in India is at a nearly 20-year high and economic prosperity is concentrated in Mumbai and Pune. Also, the demand for houses is the most in these cities. So western India is most bullish. Secondly, the IT belt, which would be Hyderabad, Bangalore and the third would be NCR. That is how residential real estate stacks up. About 8-10 years ago, as a country we used to sell 5-5.5 lakh new houses. Today that number is down to 2.5 lakh houses in a country of nearly 25 to 30 crore families. So, there’s a long way to go.

What about banks? Laggards like HDFC Bank, Kotak have just started coming back. For almost one year, they did not move and the focus of the market was ICICI, Axis and SBI. How are you looking at the private sector banks?
Yester year’s retail banks have become today’s corporate banks and the yester year’s corporate banks have become retail banks. At HDFC Bank, the majority of the loan book is now corporate. At SBI, the majority of their loan book is retail. So a kind of funny transition has happened over the last few years.

Having said that, in the last one year, some banks have done well primarily because they did not show credit costs that people had anticipated. Unfortunately there hasn’t been any credit growth for most of the banks. Whenever credit growth comes back, most of the banks in India should do well. Our credit growth for the last six years has been 6% CAGR and if you believe what Siemens and other corporates say and if you believe housing is going to come back, then credit growth could go back to 12-15% very soon. If that happens, then almost all banks do very well.

The other interesting thing is inflation. Whenever one is in an inflationary cycle, the working capital requirement goes and when that happens, automatically there is credit growth as well. So I would say inflation, working capital cycle and corporate capex kicking up all put together should lead to very strong credit growth in the system over the next three, four years.



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