Banks still represent good value in India: Lotus AMC

Ajay Bagga, CEO of Lotus Asset Management feels that by another month or so, the national politics will become irrelevant; the big issues will be the macro and US situation. He said that right now, either ways the market will not get too impacted and what is coming from the news flow is looking like the government will go through. Overall, the markets have discounted that to a large extent but we are not seeing foreign investors enthused either ways, he added. 

He believes that banks still represent good value in India because there will be a good proxy for growth asset returns. But the overall situation is bad because of the rising interest rates and the expected inflation rise, he said.

Excerpts from CNBC-TV18’s exclusive interview with Ajay Bagga:

Q: If the UPA makes this evening what do you expect to see for the market?

A: The market being a leading indicator has factored it in, already we are seeing it in the strength of the market yesterday and today to that extent. By another month or so, the politics will become irrelevant; the big issues will remain the macro and US situation.

Overall if you see the politics in India has become much more important. If you see the foreign press coverage over the weekend and yesterday we did get an inordinate amount of coverage, that shows that there is a lot of attention to this and partly because the nuclear deal has pitch forked this confidence vote on to the attention of key nations around the world. But investors will take their time; they are still looking at India as an overvalued market. The foreign investors will take time to come in and that is what will be the key determinant of the most of the markets.

If you try to extrapolate it a year down the line, the big risk is return to a 1997 kind of a situation, where over four years we had as many Prime Ministers, a fractured polity and no reforms. We are getting into a scenario where either of the three formations come in with coalitions, which will not allow any pressure groups or any significant reform to go through that could be a bigger problem for the markets going ahead. But right now, either ways the market will not get too impacted and what is coming from the news flow is looking like the government will go through. Overall, the markets have discounted that to a large extent but we are not seeing foreign investors enthused either ways. 

Q: What specifically is concerning about the macro developments in the near term because day after tomorrow we have inflation and then lower down in the month we have a policy meeting from the RBI?

A: There is a move overall by the monetary authorities to restrict the aggregate demand, you are seeing an increasing rate environment, also inflation which is not only Indian but is also a global phenomenon. What you really need to see is some demand destruction happening on the oil side which would lead oil lower, we are not seeing that really. The last four days of drop in oil was very welcome and we saw global markets rallying from that.

The US financials, the jury is out and have the made the bottom, more like the January results where the market was extremely oversold and people had picked in very grim prospects and when the numbers came ahead of those guidance’s we saw a natural bounce in the markets. You have seen about USD 440 billion to USD 450 billion of write-offs that is going to go up to a trillion if you read into the balance sheets, people are talking about credit card bankruptcies, auto loans going up apart from the housing loans. So you are looking at a pretty poor macro in the US and that will translate into the rest of the global economy and will have its own repercussions for India. Coming into India, if you look at banks who have really given the results apart from the MTM losses, what is worrying is the provisioning and the growing NPS that will be needed to watch. 

Banks still represent good value in India because there will be a good proxy for growth asset returns. But the overall situation is bad because of the rising interest rates and the expected inflation rises that we are looking to.

Q: What about monsoons, the reports coming in from the various parts of the country are not very good; do you think that might also inject some uncertainty in the market?

A: Yes you would see de-growth coming in. The situation is pretty grim in rural Maharashtra, farmers have just sown a lot of crops and there is just not any rain in the huge part. So you just get about 400 km out of Bombay and you see a real drought like situation. We are seeing monsoon really becoming a worrisome factor across penisular India and could have an impact both in terms of the rural economy suffering and the sectors linked to the rural economy in turn suffering. It could also adjourn some amount of food linked inflation coming back because the buffer stocks and the global stocks are low. So we have been able to enjoy, thanks to some fast moves by the government and the expectation of a good monsoon. We were able to bring down the food inflation in India but that could gear up its side again incase the monsoon severely fails as its looking like right now.

Q: What is the sense you are getting from earnings so far?

A: Earnings have been more or less on power, banks have been little ahead but overall the broad expectation was raw material, commodity linked cost going up and that having an impact on the margins. That has flown through in the real sector. On the other hand, in the manufacturing sector that has come through very clearly.

The guidances will be worrisome. There is still quite a bit of support thanks to financial income and to other incomes in the corporate balance sheets but the guidances are not looking that good, especially if you look at technology. It still stays hawkish with Q3, Q4 taking off, with the first two quarters being relatively flattish and even the Fed Chairman is talking about 2008 being pretty grim and 2009 not looking too good. Recession in the US by the last quarter of this calendar year could be pretty grim news for sectors like technology, which have derived a lot of their revenues from the US. There is some amount of skepticism on how those numbers will come through. Still some more rerating is to happen in this market and you will see the P/E going down a little more.

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