Market sentiment is bullish and India’s growth story looks positive. Market expert Mihir Vora says that India is a good shining spot.
The market sentiment is bullish and India’s growth story looks positive according to market expert Mihir Vora who believes India is a good shining spot.
Speaking to CNBC-TV18, the Director and Chief Investment Officer at Max Life Insurance said, “India is a good growth story driven predominantly by consumption and a little bit by government spending.”
He also said that the domestic institutional (DIIs) investors have become stronger and India is not at the mercy of foreign institutional (FIIs) investors.
Also, FIIs are incrementally getting confident about probably even investing in Indian debt without hedging, he said. So, even on the debt side, India should continue to see good flows coming in, believes Vora.
Vora is looking at an earnings upgrade for the market to outperform. “You need earnings estimates acceleration or upgrades for the markets to get further re-rated.”
He maintained a positive outlook on both IT and pharma space. He said while pharma sector has underperformed in the last couple of years, going forward the sector is likely to see positive news.
The major cause of concern for pharma companies were issues raised by the US FDA but now these companies are working aggressively to address these problems.
“The fact remains that these are companies with good quality assets on the ground,” and once they get the things right in terms of the processes, quality control they will again see Indian companies beginning to export from those plants.
IT companies, too, have realised their pain points and are taking steps to push away the negativity surrounding the sector. Few companies have opted at investor friendly buyback announcements and another option for them is significant value accretive acquisitions.
Below is the verbatim transcript of Mihir Vora’s interview to Prashant Nair & Ekta Batra on CNBC-TV18.
Prashant: I am looking at your views and you are essentially saying that it is a market where people are chasing returns rather than fundamentals. That is quite a telling comment and in your universe you are essentially bullish on IT and pharma you find some valuation comfort there. Your view on what we have seen recently in the market?
A: My quote probably is a bit misplaced, so basically let me tell you what the market view is. Market view is that we have ample liquidity in the local system and we have investor confidence both global and local returning to the markets locally and globally. Only thing is we have not seen upgrades in earnings and typically when valuations tend to be at around 17 times on a one year forward basis you need earnings estimates acceleration or upgrades for the markets to get further re-rated. So, to that extent probably it is a good time for the markets to consolidate digest the up move that we have seen. Then based on the incremental data that we see in the next few months on whether we have had any lingering impacts of demonetisation and plus couple of global events that we do expect some volatility around, take a call and then move on further. But, the fact remains that the sentiment continues to remain very bullish.
Ekta: Any which way what might your stand be on IT and pharmaceutical in terms of a sector?
A: IT and pharma we have been underweight for quite some time. But, the way the rest of the market has moved up the sectors have become undervalued compared to the rest of the market. Given the fact that most of these companies do have very efficient capital return ratios etc. the reason why they have underperformed of course is because of their own fundamentals. In the case of pharma significant issues with the FDA, many plants getting adverse comments and people have to go and rework their quality controls, their processes and their manufacturing. So, the sector has underperformed for couple of years now and sharply so and rightly so, but the fact remains that these are companies with good quality assets on the ground. Once we get the things right in terms of the processes, quality control etc. one by one plants are going to come on stream and we will again see Indian companies beginning to export from those plants.
The problem of course is mostly with the US FDA, so export to US which has higher margins will start from one plant and then the other plant so I think given the fact that the sector has underperformed for quite some time and companies have spent enough time and resources over the last couple of years to fix those issues we should see a steady stream of positive news flow plant by plant in the segment. So, it is a segment that is interesting both on incremental, fundamentals improving as well as valuations being much attractive compared to what they were couple of years back.
On IT, it is a similar story again. We have seen quite a lot of negative sentiment but companies have realised that they need to do things probably a bit differently than before so in a few cases we have seen investor friendly buyback announcements etc. and probably if couple of companies do some significant value accretive acquisitions etc. using their cash then we can see some more interesting movements in the sector as far as IT is concerned.
Prashant: You said the sentiment is quite bullish. Absolutely, no doubt about it. But, when you look around sectors, etc. do you find good fundamentally very good companies available at attractive valuations across sectors? I am being agnostic here. Or is it kind of tough to do and hence IT pharmaceuticals, valuations seem to be quite comfortable.
A: Absolutely. You mentioned it correctly. It is becoming rather difficult to find the quality growth companies that we want at attractive valuations. So to that extent, as I said, the valuations at 17 times for the market as a whole are a bit on the expensive side. And typically, for the markets to outperform from these levels, you need to see an earnings upgrade cycle which we hope that will happen given the slate of initiatives that the government takes but we want to see more data before putting in much more money into the market to work.
Ekta: What is your sense in terms of the foreign institutional investor (FII) flows now because we have seen that return especially post the state election verdict. Is it here to stay and your sense in terms of whether it is actually going to surpass domestic institutional investors (DII)?
A: I do not know whether FIIs will surpass DIIs because DIIs have become very strong in the past three years especially the systematic investment plan (SIP) book has become quite stable, robust and predictable. So, to that extent, it is a good balance that we have now. We are no longer subject to the mercies of FIIs alone to drive the market. So structurally that is a long-term positive that we are seeing and it is a huge long-term positive.
But as far as FIIs are concerned, there are a couple of things that standout as far as India is concerned. One is of course that even at 7 percent plus which we want it to be at or even more, but even at 7-7.5 percent India is still a good growth story relative to the rest of the world. In the developed markets, when we talk about good growth, they are talking about 2-2.5 percent growth in the US which is good and for even 7 is okay, not that great.
So, relatively speaking, India is a good shining spot. Of course, driven predominantly by consumption and a little bit by government spending, but net-net, it is a good story as far as growth is concerned.
Second is even as we speak, nominal interest rates in India are quite high at 7 percent plus if you look at any good quality bond and given the stability of the currency, FIIs are incrementally getting confident about probably even investing in Indian debt without hedging. So, to that extent, even on the debt side, we should continue to see good flows coming into India. So as far as the currency stability is concerned, it provides a lot of comfort and when you have a stable currency with a growth story that should continue to attract good FII flows.
Prashant: If the local liquidity continues to be as strong as it has been, although in January and February, it has come off quite a bit compared to November and December, 2016. I am talking about flows into equity mutual funds. That may be because of redemption, etc. Net flows have reduced quite a bit. But, even then, we are talking about USD 1 billion, if not more, a month. If it remains so strong, do you think people are going to continue to buy what they already own in their portfolio or people will look for other ideas? They will be okay going down the quality curve? You would already have that sense when you talk to your peers and what you yourself are doing.
A: There is obviously a mix of everything. Probably the outperformance that we see in the mid and smallcaps is obviously a manifestation of the fact that when largecaps look expensive, you go down the market cap curve and try to pick stocks in the smaller segment. That will continue as long as flows are stable.Having said that, even though flows will be stable and are expected to remain stable, you cannot of course, rule out market volatility because our Futures and Options (F&O) segment is also quite large and a lot of the volatility that we did see last year, especially in June, then of course, in October, November and December was driven by building and unwinding of F&O positions, both by FIIs and the local funds as well as investors. So, to that extent, just because funds are coming in at a regular pace does not mean that we can preclude volatility from the market. That phenomenon will continue.