OPMs, interest main concerns for India Inc: StanChart MF

Q: Do you spot a trend out there and do you sense that the kind of numbers or the trends you spoke about-net profits, margins under pressure-do you see this trend accelerating over the next couple of quarters?

A: The way I see the interest rates panning out, I clearly see a crowding out of private sector investments as one goes forward in Q3 and Q4. I essentially see this because I believe a far larger increase than what the market today is expecting. When one adds the state fiscal deficit of 2.5%, that is not the entire picture. One has to look at below the line numbers and they are pretty alarming. Because I just look at few numbers oil under recoveries; I think in FY07-08 they were around 78,000 crore, which is roughly a percent and half of GDP. Oil prices are at around USD 120/bbl range. For calendar year, ’07 the Indian oil basket ranges between USD 60 and USD 90. So if the oil prices continue to remain at the elevated levels, then oil under recoveries could be around 1.5 lakh crore, which is 3% of GDP and I am not in the camp that believes that one should only look at the issuance of oil bonds, one should look at this in totality. The burden borne by ONGC; the burden borne by marketing companies and oil bonds - all three should be different in totality because finally if you are not able to pass on the oil increases; to that extent the profits of upstream and marketing companies are lower, dividend accretion to government should have happened - that does not happen. So fiscal deficit gets impacted. Fertilizer prices are extremely alarming. Urea prices of 2007 were roughly at around USD 175, today urea price is around USD 400 and in fact some of the countries like Ukraine is asking for USD 500 of urea prices.

Similar is the trend in case of DAP prices. Fertilizer subsidies may also balloon out of control. Just again to put it into perspective, they were 48,000 crore as per fertilizer ministry in ’07-’08. But the government provided only for 22,500 crore in the Budget and fertilizer ministry estimates that if the prices remain at the elevated levels, it will go up to 90,000 crore and if the prices continue at the current levels then some analysts estimated could be as high as 1.5 lakh crore which is 3% of GDP.

All of us know the havoc that the shortage of different serials are playing in the global markets and its impact on the poor people - rice prices, wheat prices, edible oil prices all are at least 50%-100% higher than what they were a year back. Add it all up, situation does not look very positive as one moves forward in Q3 and Q4.

So I feel that interest rate sensitives - better watch out as you move forward and some of the rallies that one has seen sharp rallies in last month or so in some of these high beta interest rate sensitives must take into consideration the fact that as you move forward, interest rates might not ease as sharply as some would like to believe.

Q: You would be a seller in banking and what part of it are you more cautious on the PSU lot or the private sector banking space?

A: I would say more than banking, the real estate sector is one that I would be more cautious on. One has seen a very sharp upmove in some of the real estate prices between 15% and in certain cases, 40% move from the bottom. So I think there one needs to be very cautious, one needs to look at the quality of earnings - some of the companies had sold some of their assets to some trusts, which in turn are expecting to raise money overseas.  But because of the tight credit conditions overseas, they have not been able to do that and there has been a reversal, so one must look at the quality of earnings going forward in that sector.

I think the sector that still offer good medium-term to long-term bet is telecom sector is one that has thrown very good numbers, selectively pharma companies, some of the IT companies and some capital goods companies. Although one has to again take a bottom up approach because margin pressure is evident with a deceleration of orderflows and as I said raw material and power and fuel cost increases in those companies.

Disclosures:

It is safe to assume that my clients & I may have an interest in the stocks/sectors discussed.

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