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'Demonetisation Has Deferred The Consumption For Couple Of Quarters'

Arun Thukral, MD & CEO, Axis Securities speaks to BW Businessworld on his outlook on the markets, the role of technology in shaping investor behaviours, and his competitive strategy for Axis Securities

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Arun Thukral, MD & CEO, Axis Securities speaks to BW Businessworld on his outlook on the markets, the role of technology in shaping investor behaviours, and his competitive strategy for Axis Securities.

What's your take on the markets in 2017? Are we poised for secular growth, or is this a stock picker's market now?
The developed markets are going to attract more eyeballs in 2017. With inflationary trends following US Presidential elections, the US yields have moved up sharply; other developed markets' yield also perked up. Rising yields have led to fund outflows from Emerging Markets (EMs). EMs with weak macros has suffered most which was reflected in the behaviour of their currency. Given the expectations of strong inflationary pull from US, the funds are expected to gravitate towards developed markets especially, US. We see a trend of rising global GDP in 2017 driven by US economic growth. For India we see an emerging trend for investments from physical asset to financial asset, thus more domestic fund flow towards equity will help cushion dependency on FII flows.

Back home, Q3FY17 results would give a colour of the impact of demonetization exercise. We expect both Q3 & Q4 FY17 will have to bear the brunt of the demonetization with Q3 taking the larger hit. Come Q1FY18, we see demand returning on back of good Rabi harvest and improved currency circulation in the system. Given the climatic conditions, the 2017 monsoon is expected to be normal. Had the demonetization event not taken place, the Q3FY17 would have given the first quarterly growth after consistent misses/ degrowth for 6 quarters in row. The whole process has now been shifted ahead by couple of quarters. Corporate earnings have stagnated for last 2 years. We may see a more or less repeat for FY17. In FY18, the earnings are expected to jump sharply maybe in mid-to-high teens on back of a) low base b) positives of demonetization and c) demand revival.

Prior to demonetization, few sectors were priced at high multiples discounting very high growth for consistently long period. Due to deferment of growth post demonetization, for couple of quarters, these stocks/ sectors suffered sharp downwards re-rating and are now available at reasonable valuations. If one has an investment horizon of more than 15 months, one should start accumulate these stocks in staggered manner.

The markets are not expected to exhibit a secular growth in near future. Few segments of the market viz., IT, Pharma, PSBs etc are reeling under their own headwinds. Moreover, for a secular growth like it happened in 2006-2008 bull market, abundant liquidity plays a crucial role, which is seen lacking in current context. Hence, we are of the opinion that it is stock picker's market. One has to properly identify the investment idea, understand the tailwinds associated with it, so that the investment outperforms the rest of the market.

Broadly, how do you feel that demonetisation will impact the equity markets in 2017, if at all?
Demonetization has deferred the consumption for couple of quarters. We expect the impact would be felt in Q3 & Q4FY17 with Q3 taking a bigger share. The markets have already factored in the impact of demonetization. As the Rabi crop is harvested, we expect the demand to revive. The earnings growth is expected to be in mid-to-high teen in FY18. Moreover, as demonetization will cause the informal sector to join the mainstream, the recovery is expected to be fast and qualitative. We expect the GST to be implemented in late H1FY18. As corporate earnings improve, the markets would be rewarded.

How do you see the role of technology shaping client behaviours and the broking industry in 2017 and beyond?
Technology today is achieving new possibilities and is crunching time taken in everything we do. Transactions have moved online to mobile and desktops of investors. Moreover, with the advent of social media, people are abuzz with plethora of news, analysis and that has considerable influence on the markets / stock price movements. The time gap between receipt of news, its analysis and execution in terms of stock price movement has been reduced to seconds.

At Axis Direct, we are deeply aware of changing customer preferences due to fast technology adoption and we have our core focus to be in the forefront of technological innovation at all times. To keep up with the increased mobile adoption, we are constantly innovating our mobile app and we have so far seen significant contribution in terms of trade volumes happening through the app. We have also revamped our website to provide a simplified and delightful user experience. Our new portal works on all devices be it your mobile, tablet, desktop or laptop. We realise that users prefer to access content in the form videos and not text. That is why most of our research reports and learn courses are now in the form of quick 2-3 minute videos.

We also understand that people want information on a real-time basis to take decisions, it was therefore imperative that our customer facing emails are live i.e. whenever the user opens the email they see the real time information in terms of stock price, research updates, market news, portfolio etc. For this industry first innovation, we have won awards by DMA not only in India and Asia but also at an international level.

Are you bullish on any particular sector/stocks at this time?
We expect demonetization to have an impact on Q3 & Q4FY17 earnings with Q3 taking a larger impact. As we approach Q1FY18, the demand is expected to be normalized due to improved circulation of currency and good Rabi harvest. Moreover, the expected normal monsoon would also stoke consumption. The consumption segment would revive as the demand gets normalized. The 2017 monsoon is expected to be normal, given the climatic conditions. A good harvest would further stoke consumption driven demand. Budget 2017 is expected to be focused on reviving demand and generate jobs post the demonetization drive. We expect the Govt. to put more money in consumer's pocket by proposing the change in tax limits/ exemptions, which in turns will enable better and faster demand revival. Auto and Auto ancillary industries, consumer discretionary sector, FMCG etc would be benefitted by the demand revival in mid 2017.

The after effect of demonetization would be a complete marginalization of parallel economy, which corners a large share of economy. As the informal economy joins mainstream, the tax base widens, tax collection rises helping the Govt. meet its revenue & expenditure targets. With rise in tax collection, the spending power of Govt. for public infrastructure is likely to jump thus helping the infrastructure, cement sector.

We expect GST to be implemented in H1FY18 which again would lead to reduction in prices of end products bringing it within reach of larger base of population. We expect it to further drive the consumption led demand. Implementation of GST would be beneficial for logistics companies as their cost of operations would reduce helping them improve their margins. Post implementation of GST, the organized segment would grow at the expense of unorganized segment. Organized players in segments like ceramics, retail, leather goods & footwear would be larger beneficiaries.

Benign interest rates are expected to prevail in near to midterm stoking the leverage driven consumption in say electronics, automobiles, housing finance etc. We like Private sector banks with higher retail exposure along with housing finance companies.

With the index not having gone great guns in the past 1 year and 2 year timeframes, what sort of challenges are you facing today, as a broking house?
Despite subdued markets, we have been growing at a very rapid pace in the backdrop of accelerated pace of customer acquisition. Not only are we acquiring customers but we have a structured customer lifecycle management which helps the investors in creating portfolios. Also, I would like to mention that unlike being just an equity broking firm, we are a full-fledged investment solutions provider. We have been the beneficiaries of increased customer interest in Mutual Funds which has witnessed all time high inflows. We firmly believe in the India Growth Story and we have therefore advised our customers to stay invested, by SIPing into quality stocks and mutual fund over the long-term to create wealth.

Lastly, could you tell us a bit about Axis Securities and how things have progressed for you in the past five years? What's your competitive strategy?
In the last six years, we have grown from strength to strength and we are now a force to reckon with. In a short span of time, we are among the top 5 players in the industry in terms of customer base, new acquisition & active investors. I am happy to share that we have been awarded as the best growing equity broking house for the last 3 consecutive years by BSE and D&B.

Our strategy is 3 pronged - Go deep, stay agile and aim for customer delight. We believe that India is deeply under penetrated with ~3 per cent population participating in the equity markets and the potential for expansion is enormous. We want to therefore take the Blue Ocean Strategy and reach out to new customers by creating more awareness about the benefits of equity as an asset class. We want to stay agile and lead technology innovation by taking big strides in mobile technology in form of simple yet powerful user interface and introduction of voice based investing. Last but not the least; we want to create customer delight through great user experience across channels.