India’s high domestic demand immune to US slowdown: ML

Q: How bad can it get? There are some people who are speaking about recession. Do you expect that this is going to be as prolonged as to render all of 2009 perhaps not a growth year for the US?

A: Well, if you look at where the US IS right now, it is right around zero. You saw the first quarter numbers; we were reported at 0.6%. But if you took out the inventory adjustments, it actually was slightly negative. The US economy is running around zero. It is really a question of how long and how flat is the shape of the U. I don’t think there is any question that we are not going to have a V-shaped recovery. But the bottom can be prolonged. I still think the US is going to be slow at least for 6-12 months.

Q: How do you look at this entire inflation problem? It is definitely there with fuel and food. But it has not abated in steel and is not abating in metals. Do you think inflation can put paid to a lot of growth plans in the US as well in emerging markets?

A: All the metal and commodity prices are rising because there is still very significant growth in parts of the world like India and China. So, the world economy is still growing and even if the US is not, there are upward pressures on commodity prices.

But the world economy is still continuing to consume them at very rapid rates. Steel prices are up because iron ore prices, electricity prices and coal prices are up and that is pushing steel prices up. So, that it is a function of the wealth that is still occurring in the faster growing parts of the world.

Q: Given this kind of inflation in fuel and even commodities, do you think the US Fed has practically run out of its rate-cutting spree and it will not have that option and that pause is very much there?

A: Given where the Fed is now, it is unlikely they are going to cut rates any time soon.

Q: What can that mean to currencies? Do you think the worst of the dollar would be over and you would perhaps see some stability in the currency markets?

A: I am not going to predict the level of the dollar, just like the level of the stock market. But certainly the dollar has been doing at least a little bit better. The expectation that the rates are not going to go lower in the US is part of the reason it has done a little bit better. Of course, the trade deficit has also improved somewhat. So, that is taking some of the pressure off the dollar. I don’t think there is that much more downward pressure at least for a while.

Q: Last year for India was historic in terms of cross border deals because of the big Tata-Corus deal and the USD 13 billion company being bought over. Now, there is another Indian company probably eyeing half of USD 44 billion. Do you think the LBO market will be able to sustain this kind of demand or this kind of deal or do you think that might make such deals difficult in 2008?

A: Well, I am a little bit biased because we are representing MTN in this particular case. But I do think deals can get done. I think even large deals can get done. The financing has to be on reasonable terms that are acceptable to the market. But actually, big deals can get done and it is actually quite a positive that you are seeing Indian companies really starting to look around the world and becoming big global companies.

Q: You are meeting a lot of CEOs in this visit to India. I understand that you are meeting Mukesh Ambani as well. I am sure you will be meeting a lot of CEOs including Sunil Mittal. But do you smell that in 2008, we are going to have another deal out of India as big as the Corus deal or bigger?

A: I am not going to predict any particular deal.

Q: But you have a finger on the pulse of Indian CEOs. You know more than the rest. Surely, you can say whether in the next six months such a deal can happen or not.

A: I am not going to say about any particular deal. But I will say that the CEOs of Indian companies are looking to expand globally, are looking to become bigger global companies and that presents great opportunities for them and also for us.

Q: What would be the best year for stock markets from hereon? 2008 has been a depressed year. Do you think 2009-end would see a better year or do you think we will have to wait until 2010? What is your best guess, it is crystal ball gazing?

A: It is definitely crystal ball gazing. But I think that in the global economy and the US economy things would be better in 2009. So, 2009 will be a better year in the equity market and for business as a whole.

Q: If I have to ask you to compare in Asia, if you had a choice of investing your USD 2.7 billion that you have raised in your private equity fund, where would you rank India among Asian countries?

A: Right now, we are investing more in India than any other part of Asia. India is the best opportunity for us. The joint venture that we have had for years here positions us better than anyone else in India.

The only other place that has equally good opportunities is China. At the moment, we don’t have the licenses. We need to access the domestic Chinese market. So, there is no question that India is number one.

Q: If crude were to go to USD 150 per barrel, what would your bets be? What is the kind of downside you are looking at?

A: You have to ask yourself why is crude at USD 150 and what is the likelihood that it is really going to stay there. There is no question there is a lot of speculative pressure on crude, particularly as you look at how it is priced right now. It is not very likely that even if oil goes there, it is not going to stay there for that long a period of time. So, I think it will negatively impact growth somewhat. But part of the reason why all energy prices are high is because the world is in fact growing. So, there will be more investment in new oil discoveries and infrastructure to bring more oil to the market. I don’t think that is necessarily bad.

Q: Where do you think this commodity madness will end? Will the commodity bubble and rally smooth out or plateau? It just seems like a one-way street now.

A: No, over time you will see more production come on line. It is just a question that the supply of oil is relatively inelastic at least over the short-term. So, whenever you have supply and demand very closely matched, if you get a little bit of a mismatch, you can drive the prices up a lot in a short period of time. But that doesn’t mean it stays there for that long. You will see more production come online over the course of the next couple of years.

Q: You have been looking at a lot of Indian companies in your current visit and are sitting on some cash that you are looking to deploy. What would be the sectors that would look good to you in India?

A: It is all the sectors that are participating in the growth in India. So, the telecom sector, anything in the infrastructure part of the economy and the banking systems or parts of the economy that grow. There are actually a lot of very interesting investment opportunities in the real estate sector. We are investing in real estate in India.