Why Bandhan AMC's Manish Gunwani Sees Telecom As A Defensive Sector
The S&P BSE Telecommunication rose nearly 77% in the last 12 months, according to Bloomberg data.
Telecom is a good and defensive investment in the current high-valuation climate, according to Manish Gunwani, head of equity at Bandhan AMC Ltd. He highlighted its resilience, asserting that consumer usage is unlikely to decrease even during economic downturns or fluctuations in interest rates.
There needs to be a substantial shift in industry profitability. This shift entails a significant uptick in tariffs, as investors are banking on the sector's ability to implement favourable pricing actions. "Telecommunication companies need new ways to increase profitability," he told NDTV Profit's Niraj Shah.
The recent runner-up in valuation analysis suggests that external capital alone may not suffice to address the challenges faced by telecom companies, Gunwani said.
"For me, it is not a high-conviction bet either way," he said.
The S&P BSE Telecommunication rose nearly 77% in the last 12 months, according to Bloomberg data.
Bullish On Small-Cap Space
In the medium to long term, Gunwani foresees alpha potential in small-cap stocks. However, he notes a diminishing pool of attractive options as the market heats up.
He remains optimistic on the small-cap space, citing the anticipated influx of liquidity into India from various sources such as foreign portfolio investments, foreign direct investments, debt inflows, and non-resident Indians investing in real estate. He emphasised that India stands to benefit from multiple channels of capital inflow beyond equities.
The current account surplus in India is bolstering performance of the Indian currency, leading to increased liquidity, he said. India is predominantly a domestic-driven economy. It is poised to stand out amid global market dynamics, Gunwani said.
Watch The Full Interview Here:
Edited Excerpts From The Interview:
Is this market surprising you as well? It seems to be climbing every single wall of worry, be it local or global. I can count seven instances in the last nine months wherein everybody's called that this is a top. The markets correct a little bit and then tend to bounce back very, very smoothly.
Manish Gunwani: I think the last one month in particular has been surprising given that we had a correction in March based on the regulator’s statement. And then, globally also, if you see the whole thesis of interest rates coming down globally and that has broadly gone for a toss.
So, the US 10-year yield is back to where they were probably 3–4 months back. See, we felt that the Indian macro, obviously both on a relative sense versus other emerging markets and in absolute terms, in terms of what has been happening to India's current account, which we felt was leading to Indian currency outperforming massively versus other currencies, would lead to a liquidity flow.
And that is why we have been relatively more constructive on small caps with a medium to long-term view. But yes, the pace of the last one month has been quite strong. Clearly in terms of pockets of value, you're running out of ideas. You can buy comfortably.
The other thing about this market is also that whatever is performing continues to perform and whatever is not performing doesn't turn around.
So whether it is power, real estate, capital markets, autos, those have continued to perform month after month, while IT and private banks are still struggling month after month. So the polarisation in valuation is obviously increasing.
Now you can obviously say that this is a cycle and a lot of these segments had done badly for many years before this bull run. So it is a bit of a challenge now how to get ideas to put fresh money in. There's no doubt about that.
But at the same time, we are seeing a lot of change across the world in terms of technology and in terms of policy and I think you have to work hard to get the niches where you think India is heading, where the world is heading. Find those niches. They're not very big sectors, which will grow very fast to my mind, which is why I think selectively small caps with the medium to long-term view are still where I think alpha will be there. But the number of stocks that look attractive is obviously going down as the market heats up.
You mentioned that the idea to build a portfolio is to try and figure out where the world is heading and where India is heading? Where is India heading?
Manish Gunwani: So India, I think, is obviously relatively very strong in terms of growth. As I said, one of the key reasons for us to be positive relatively on the small-cap space is the fact that India, after 30–40 years of running current account, virtually to our mind on a structural basis zero current account, may turn positive in 3–4 years hopefully.
That, obviously will draw in a lot of capital. It need not be from FII equity. So FII equity probably is one part. But you have debt, you have FDI, you have NRIs buying real estate, you have NRIs putting in fixed deposits or whatever.
So there are various ways foreign capital will come in which is clear if you see RBI’s forex reserves, which also have been very strong given that the dollar has appreciated and US yields have gone up. So on a mark-to-market basis, the forex reserves should have not done well but they've done well which means their flows are quite strong.
So my point is this. One is, India will get a lot of liquidity in the medium to long term from the global capital pool. Second is that, given our base, given whatever policies are there, we should continue to grow anywhere between 5.5% and 7.5%.
I don't think when global growth is going to be tepid, we can grow much beyond that. And our view is also that global growth is going to be tepid for the next 5–10 years, purely because of demographics and debt. Now, in that scenario, India because it is domestic-driven, not very dependent on commodities, relatively will stand out.
The other thing is, and again, this is specific to India in intensity, but I also think that it's probably happening globally. It is that there is a reshoring that is happening in lot of industries where countries in terms of strategic industries like semiconductors or defence or various other manufacturing segments. It could be steel, it could be a lot of other things.
Countries are trying to reduce the dependence on external supply chains. This is a kind of reversal again after 25–30 years. So that is why I say that there is so much change—whether it's technology, whether these shifts are happening in reshoring, shift away from China sourcing. So, it is unlikely that a lot of these changes will be captured in very large companies.
Telecom is formally in the thick of things. Do you think that the next three, four or five years will be different from what the preceding five years have been for telecom, because of Vodafone’s FPO success?
Manish Gunwani: I think, one is the number of players and second is the pricing level or the let's say the profitability of the industry—what is the return on equity or operating margin it stabilises ahead.
I think, the recent run-up in valuations is predicting that if the third player gets capitalised—external capital alone will not be enough but there needs to be step shift in profitability of the industry—where there'll be a lot of tariff hikes and the third player also may reach a point where it is stable.
For that, I think, you need significant pricing improvement in that industry. So I think investors are betting that their pricing action will come through. I am neither underweight nor overweight and because these are very, very difficult decisions to predict.
Good part is in the current market context, where valuations are high, it is a good, defensive sector. It is an essential item that no one is going to decrease its usage, if the economy turns down or if interest rates go up. So it is a defensive sector, free cash flow yields and if you assume these tariff hikes come through, probably good.
But again it's not a high growth sector. I mean, every citizen in the country broadly has a phone in his or her hand and therefore the penetration levels are high. To me, it's not a very high conviction bet either way. I would hesitate to be very bullish or very bearish on this sector at this point.
Are you constructive on financials, not just relative to the index weightage but in general? If you had a choice, would you be grossly underweight financials?
Manish Gunwani: Most of the banks, I am not so excited about, or rather I would say we need to see how this CASA thing plays out.
See one is, the bank credit growth. I'm of the view that the banking system is not a great play on capex because if you see most of the banks today, especially the private banks, which are the big weights in the index, 60–65% book is retail. And even in the other part, there are many agri and SME and all that.
So you're not going to play power or other kinds of capex through banks and best part of credit cost is already priced in. So you can't take the view that look, I think, the economy's going to do great. In a great economy, credit cost fall a lot because most of the companies or individuals are doing well.
But the thing is, that it is already priced in because the credit cost is at multi-decade low. So, incrementally, you can't play banks for improvement in credit costs, or as capex plays.
What you need to see is, first of all, if you believe credit growth will accelerate up from 13-14%, which I don't see any reason why it will. More importantly, I think, you need to see CASA growth because ultimately the reason you want bank versus an NBFC is purely because of the deposit franchise and right now the jury's out whether you're seeing a cyclical slowdown in CASA because interest rates are high so people are moving to term deposits, or stock markets are healthy. So people are putting money in SIPs and all that.
But it could be structural as well, because at one level, CASA is inefficient money. You're basically putting money in an account for transactions, which doesn’t earn you much. Now because of technology, because of financial literacy, if you believe that, there is more efficiency in the system because of which CASA is not going well, then I think there is no hurry to buy a lot of banks.