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Jun 14, 2012 01:22 PM IST | Source: CNBC-TV18

Global events important than 25 bps repo cut: UBS India

Investors are betting that the Reserve of India will pump in liquidity to fix the tight liquidity situation to some extent. Indian market, too, is holding firm as hopes are building for a rate cut in the monetary policy review on June 18.

Investors are betting that the Reserve of India will pump in liquidity to fix the tight liquidity situation to some extent. Indian market, too, is holding firm as hopes are building for a rate cut in the monetary policy review on June 18.

However, Gautam Chhaochharia, head of mid-cap research UBS India does not think RBI's monetary easing alone can change economic situation. He believes that more than a rate cute the key is whether the RBI is in a position or looking at cutting rates through the year to a lower interest rate structure.

"So it’s still at best a signaling tool that RBI is supportive of growth rather than anything more than that,” he said in an interview to CNBC-TV18.

Chhaochharia is expecting a 50 bps CRR cut and no repo rate cut.

As an investment strategy, he advises clients to be defensive for couple of quarters. Chhaochharia is positive that the market is attractive for investors with a two-year perspective.

Also read: Premature easing by RBI may aggravate problems, says Chetan Ahya

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: What are your expectations from the RBI?

A: Our official stance is still a 50 bps CRR cut and no repo rate cut.  But there are some enablers in play for the RBI to be more proactive in terms of crude, inflation, and IIP. So, RBI could surprise, but our official expectation is still a 50 bps CRR cut.

Q: If it plays out that way i.e. there is no direct rate action from the Reserve Bank, do you expect to see a big turnaround in the market because that’s what the market seems primed for some kind of rate action?

A: Yes, it could be a bit of a disappointment for the market in the short-term because there is a broad based expectation of a 25 bps cut in repo rate. So, if there is no repo rate cut then there definitely could be a marginal short-term disappointment.

Q: How important do you think the global events spitted around that policy meet will be, both what the Fed has to say, what happens in Greece? Is it going to be a make or break for Indian markets as well?

A: Yes, they will be much more relevant in our view because the risk appetite globally will drive the capital flows. Both markets and economy right now are heavily dependent on capital inflows. So, they are much more relevant right now.

Twenty five bps rate cut here and there really doesn’t change the needle in terms of fundamentals for the economy in the near-term. What is the key from a monetary policy point of view is whether the RBI is looking at cutting rates through the year to a more lower interest rate structure in generally. That doesn’t look like the case right now. So, it’s still at best a signalling tool that RBI is supportive of growth rather than anything more than that. So, global macro events will be the bigger driver for markets.

Q: You recently had a midcap conference in which you showcased some fertiliser companies as well. Would you back them because there has not been too much action from the government on that front for the last many months?

A: Yes, we will back them. Coromandel has been impacted over last couple of quarters because of the weak monsoons in South India impacting volumes in the December and March quarter. There are some concerns about inventory in the system, but even that should be handled in the June quarter.

Going forward, these companies look very well placed in terms of growth coming back because of expected normal monsoons. Margins, anyway, have been quite stable for these companies. That has been missed by the markets. The stocks are quite attractively valued. So, definitely we are positive in backing these guys.


Q: You also had VIP in that conference, but that stock has been a huge underperformer off late, particularly since it reported results last which were lacklustre.

A: VIP had a lot of headwinds last year, apart from macro slowdown. I think the biggest headwind for them was currency. Any sharp move in currency impacts them directly because they import mostly from China. So, they got majorly impacted there. The sharp move in currency takes time to pass it on in terms of price increases to customers to recover margins. So, there is a lag effect. It’s only now that they should see some recovery in margins.

The second factor, which impacted them last year, was more aggressive competitive environment, especially from Samsonite. That from our channel checks looks like it is abating; Samsonite having taken price hikes in India. So, VIP should follow suite. Therefore, the next few quarters you should see a margin recovery for the company. So, again the stock has corrected a lot based on backward looking factors. We like the stock. We have a buy on that name.

Q: What’s your call on the market? What is your year-end target holding at? Do you expect to see any tactical shift of money in the second half towards or away from India?

A: We don’t have a formal target such, but we have a defensive positioning for the market. So, we are recommending investors to be defensive on Indian market in terms of portfolio positioning.

In the next couple of quarters, we think that the risk-reward for Indian market is not great. We see downside potential. The primary driver for that we have seen that over last month or so, which we have been highlighting earlier, is that this is a phase of reset of growth expectations. So, that’s happening already. There is possibly some more to come over next quarter or so.

Once we are at a lower trajectory of growth expectations, it should support markets at some stage. But till that happens, which I think is still a quarter away, you still see downside potential. Optically, the market looks cheap at 12-12.5 times forward PE multiple, but one has to remember that you can’t really compare with historical PE multiples, given that the quality of earnings is much inferior now in terms of growth, leverage, return ratios. So, you can’t really look at historical averages to say that Indian market is cheap.

Current multiples at 12-12.5 times look broadly fair in terms of the current growth outlook and return ratios. So, in that context, any reset phase or any downside trend in terms of growth rates expectations is not really good for market. So, we see a downside potential over next couple of quarters. Beyond that, if you take a one to two-year view then yes, the market becomes much more attractive where downside seems limited.

Q: The recent outperformers have been financials. Within that, even some of these NBFCs have been moving well. Do you guys track or have a call on any of them, the NBFC category?

A: Yes, we track a lot of them. NBFCs typically, in the near-term, do trade on monetary policy parameters. So, a lot of that performance is driven by monetary easing expectations. We do have coverage of most of the NBFC names, but it’s not a preferred pick at this stage. We still prefer the private sector banks, within the financial space, rather than NBFCs or government banks.

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