Healthy balance sheet of corporate India to outweigh election results: Kenneth Andrade

The markets are trying to understand which way the election results would swing, says Kenneth Andrade, founder, Old Bridge Capital. There is a fair amount of traction in infrastructure and the last nine months have been robust for every company in that space, he tells Prashant Mahesh in an interview.

Edited excerpts:

While the Nifty has gained 2% in the last one year, the mid-cap and small-cap indices are down 18% and 32%, respectively. What is the worry for the markets?

Our big challenge comes up in the next few months, trying to understand which way the election results would swing. Whichever way it goes, we will have to give a quarter or two to the new government. If there is a new entrant, then we need to give time before we stabilise, and the growth continuity starts.


Historically, it has been seen that it does not have a long-standing impact on the markets. Most governments have been progressive and worked for development of the economy and as we go into the event, we think the construct of the Corporate India balance sheet will far outweigh the outcome of the elections.

The other big challenge is the banking system, which is creating space for historical provisions and, in turn, a drag on earnings.

Macro challenge remains another big worry. While a couple of years back, we would discuss solvency problems, most corporates are beyond that now. At a larger level, debt is grinding down and capacity utilisation is going up. So, from a business perspective, corporate balance sheets are fine and we need slight amount of macro tailwinds to be out of the woods.

Where are we in the capex cycle?

Brownfield capex is happening, though greenfield is sometime away. Broadly capacity utilisation is at 75%. Private sector capex comes when you are at 90% utilisation. The big driver to capex has to be energy, power, and oil and gas.

Will there be a slowdown in NBFCs, given the recent developments in the bond markets?

We had a minor hiccup with the NBFCs. There are two changes that have happened. NBFCs on ground have stopped getting incremental capital flow from the bond market

and more importantly their equity valuations have dropped low enough to fund growth. So, in the near term, a slowdown in consumer economy is expected. We will have to wait and watch this out for six months.

What are the themes or sectors that you find interesting?

In this year, there are two parts of the economy where portfolio is positioned —infrastructure and rural economy. The way the capex cycle will begin is that you will get a kickstart to infra and that will lead to some exhaustion of capacity in engineering and capital goods and will eventually move to manufacturing. We see a fair amount of traction in infrastructure. The last nine months have been robust for every company in that space and it has come with a fair amount of capital efficiency. We have seen infra businesses execute higher order books with lesser amount of capital employed. If this is a trend going into the next year, we are fairly confident that this segment will continue to do well.

The second part of portfolio is rural footprint. The past year had been lukewarm in terms of demand and profitability. Many companies have been impacted by two variables: higher raw material prices and exchange volatility. This has kept profitability under check. While balance sheets have not deteriorated, there has been no growth in 2018. The price remuneration has not met farmer expectation. This will change in the coming year. We are seeing volumes at an all-time high. We expect fertiliser, seeds to have a robust year.

Your portfolio did not have any financials earlier in the last two years. After the corrections will you add financials?

In financial services, we see some amount of traction in corporate banks in 2019. Despite that we prefer to play infra and consumer companies funded by financial institutions. Hence no exposure to financials as of now.