Mar 08, 2013 03:25 PM IST | Source: CNBC-TV18

India more vulnerable to global woes Vs other EMs: Axis Cap

Liquidity has been the key driver of Indian market and will remain so going ahead, says Nandan Chakraborty of Axis Capital. However, he cautions that India is more vulnerable to global volatility compared to other emerging markets (EMs).

Liquidity has been the key driver of Indian market and will remain so going ahead, says Nandan Chakraborty of Axis Capital. However, he cautions that India is more vulnerable to global volatility compared to other emerging markets (EMs).

On the policy front, Chakraborty expects government's reform push to continue over the next two-three. This he feels would be the key domestic trigger for the market. "Given the twin deficit concerns, the economic recovery is still very fragile and would pick pace in FY14," he adds.

Also Read: See strong resistance at 5900; buy on dips: Sukhani

From the Reserve Bank of India (RBI) he expects a repo rate cut of 50 basis points (bps) within a month. In its January policy, the central bank lowered its key policy rate for the first time in nine months. It reduced the repo rate by 25bps to 7.75 percent. For the rest of 2013, Chakraborty foresees a total of 100 bps cut in repo rate.

Talking stock specific, he says Axis Capital has raised weightage on SBI and LIC Housing in its portfolio. It remains overweight on L&T, but has reduced weightage. "The US BFSI sector is in currently in recovery mode which will boost the Indian IT sector going ahead."

Below is the verbatim transcript of Nandan Chakraborty's interview on CNBC-TV18

Q: How are you feeling about the market because the broader market moves since the start of the year would have disappointed most retail and HNI investors? Do you see it being a bumpy ride this year?

A: A lot of stuff that will happen by the government will happen from outside the Budget, post Budget. It's a typical P Chidambaram Budget where a lot of fine print is there, a lot of positives come out after the Budget. The negative which had come, he immediately took it back. He said it was wrong.

Over the next two-three months, you will see a lot of positive news coming out of the cabinet and will buoy the market from a domestic perspective. The global perspective remains fragile, on that depends how we finance our current account deficit which is the divestments and spectrum auctions and so it remains fragile. I think the government is pretty aware of it.

Q: Would you lean towards more aggressive rate cuts in terms of monetary policy now? How much of a salutary effect will that have on equities?

A: There are three-four things that will happen over the next few months. One, the RBI would be open to rate cuts now. A lot of it will be front ended. It should cut 50 bps by next month and another 50 bps later on maybe towards the busy season policy during September-October-November. We will see 50-100 bps cut coming this year and they will be very positive on the rate sensitives.

Secondly, you will hear a lot of clearances coming through from the government as the it acts in concert. Thirdly, as the divestment news includes, which includes not just the government companies but also the non-government companies, you will see a positive news flow coming out of that because of a lot of confidence in the system there. What is also interesting is the fact that the spending by ministries which has been hardly anything last year.

Even if you don't take the huge planned expenditure that the government is projecting, even what is not spent last year is a huge amount and Rs 90,000 crore is similar to that. It is a huge amount which will start drive to capex. However, all this is still work in progress (WIP). What P Chidambaram has done is clever. The few things that he mentioned and will speak about, will happen by itself after the Budget which is getting a lot of people into the tax net. For example, he has hinted on the anti-money laundering schemes. So, for all jewellery purchases, the limits for which you will have to get your PAN cards and order maybe reduced.

Whenever you will buy a property, you will have to get your TDS. Again, you are a part of the tax net. Otherwise, the seller does not input credit on that. He also spoke about the Voluntary Disclosure of Income Scheme (VDIS) on service tax. You will see a lot of people getting into the tax net now. All this is yet to evolve over the next few months.


Q: Would it be fair to say that you are bullish on the market for the next six months? Do you think flows might continue? Is it just the liquidity that is driving the markets in the face of fairly anaemic earnings so far?

A: Now, you have a situation where both on the domestic as well as the global front, you have seen almost a trough this quarter. This quarter is also going to be extremely bad in terms of earnings. From this trough onwards, both, globally as well as in India, we see almost all parameters increasing in the fisc, in the current account deficit (CAD) in India. The problem is because the world is so fragile, you might have a depreciating rupee because it all depends on how much of the CAD that you can finance.

While we will have growth, there will be some increase in GDP because 6.2 percent is a great GDP number compared to 5 percent. But it is still not as great as we are use to. Because of rupee depreciation, you will see the Sensex going up. But you are still very fragile. So, it is a question of timing, when do you want to get into an aggressive mode, right now or whether you want to wait for a couple of months before the government starts taking some actions.

In our model portfolio, we went very aggressive in mid September and from then onwards kept toning down to reduce the major aggressive positions into a little more neutral position. Recently, we have increased all our rupee depreciation bets. We have also increased our consumer discretionary. This is because with the amount of spends that the government will do in the Budget, plus what the politicians will do off the Budget, plus the direct cash transfers and the rate cuts, there will be huge impetus for the consumer discretionary.

If there is a problem in flows globally because of recession in Germany or some problem in China, that is one danger that can keep things fragile in terms of financing the CAD. Second is, if there is no follow up by the government in terms of diesel prices, they said 50 paise per month, but if they don't follow it through after a couple of months, that is a danger. Thirdly, whether minimum support price (MSP) will be increased massively or not. We know that agri loan targeting this time because it is pre-election, the banks will have to adhere to it compared to earlier years. So, let's see if MSPs are increased and are signs to be watched over the next two-three months.

Q: How much of a recovery in price to earnings (P/E) do you expect to see on the market? Do you have a target that the market may comfortably achieve over the next few months?

A: Roughly, I don’t expect any great P/E re-rating. FY13 to FY14 and FY14 to FY15, in any case, because of the low base effect and the recovery that you are seeing from 5 percent to 6.2 percent GDP, you have a 15 percent EPS growth. That is as of now, where we have not even taken the rupee depreciation into account. We are still to revise our earnings to take rupee depreciation into account. Right now, we have a slight appreciating bias to the rupee on which these calculations were done. This means it will be between 15-20 percent, the EPS growth, because IT is a large sector. That is the sort of ballpark I am seeing for the Sensex earnings for IT, metals.

Q: You described how a lot of spending from the government, unspent money, will drive consumption. Does that sit well with your expectations of monetary policy reduction? Are you talking about loose fisc and monetary conditions in the face of inflation where the RBI has not declared a complete demise yet?

A: People are getting into the basic economics, that you can control only two or three variables. One is currency, one is interest rates and one is inflation. More and more noises are seen both from the government as well as the RBI, let us not take care of the currency for now, let it depreciate if it has to. We will take care of the interest rate and the inflation side of it.

Q: Are you telling us how you think we could still have a loose fisc plus monetary policy going in 2013?

A: RBI’s priority is inflation, but between currency, interest rates and inflation, it can take care of two out of three. It has to let go of the currency to be able to take care of the other two. Inflation, since it is far more dependent on crude and food, as long as crude and food don’t shoot up, just because of the base effect, inflation will be far better. The government is also calibrated about spend.

It has committed that it will not bring the fiscal deficit above a particular level post this year which it has managed and so it will be calibrated. I spoke about the amount that is unspent last year, forget about the amount they intent to spend next year which is fairly good. That is why one of our bets is the entire consumer discretionary spend that includes auto, realty, durables as well as housing finance companies and so that will be a large bet this year.

Q: If your call is that the rupee is going to depreciate - how does that place the prospect of global flows because FIIs don't seem to be too happy with the currency and the amount it is taking away from their investments?

A: The rupee has depreciated by over 15 percent. You have seen what flows have come in. The question is whether the country is going down to the dogs because of the rupee depreciation or not? If you are getting more competitive because of the rupee as there is a competitive devaluation around the world. If you are doing better in your EPS growth despite the rupee, then you will continue to get the flows.

Q: Is there anything happening in the primary market, both from the government and on individual company level we hear of three-four OFS scheduled every week? Do you think that may put some pressure on the secondary market and the kind of flows it could have pulled?

A: It will, but it is either chicken or egg. It is a fact that all the issues whether government or private are doing well - that puts even more confidence on the markets. If it all gets absorbed then it continues to go up. As of now, these issues are a lot, but because they are getting absorbed, we are also feeling far more confident about it. We are also confident that the government will be able to meet its fiscal deficit and therefore works as a positive feed back circle.


Q: You are reducing weightage on the banks. Is that a function of your concern on asset quality or do you think headlines growth for banks itself is beginning to stutter?

A: Looking at the banks portfolio, we have increased our weightage on SBI because there is capital that is going to come in as well as the fact that the valuations are what they are. We have tried to be less defensive now than we were earlier. But cutting weights on HDFC, HDFC Bank and then increasing for example LIC finance and the ones in consumer discretionary scheme. It is more a function of how defensive versus aggressive you want to be. Also, there are high targets for agri loans and so there is a concern on the part when I have other sectors to play. Total 100, it is reduced proportionately to be able to give weightage to the other sectors that I wanted to.

Q: Why are you cutting your overweight on many PSU names like Coal India, NTPC?
A: When we went super aggressive in September, we had to keep some cash equivalent and we kept them in these PSUs. That time we didn’t know that the FPOs were coming in. But the overweight were such high positions, it was about five times the Nifty weightage and so there has simply been a cut to adjust into. I don't need such a high cash position now. I have deployed them in IT, Pharma, consumer discretionary, so it is more of an allocation in these names.

Q: You have also reduced weightage on L&T. Is that also an adjustment issue or are you feeling more cautious about infrastructure and how it has been performing in last couple of quarters?

A: Some of these aggressive names, we have been cutting it, still overweight. L&T is still overweight and over the next three years you will see massive orders coming out of the railways and oil and gas. This is not related to the politics of the nation because tariffs will be increased in railways, oil and gas also largely, Reliance and ONGC - these are committed funds. This will happen over the next three years in any case but at the moment it is a question of allocation that I wanted to give more weightage to some of the other ones. L&Ts P/E growth will show up first and the EPS growth will show up later.

Q: What will work better with the market and the global context that is going? Is it better to get into high beta now or is it still safe to play defensives till there is more clarity towards the later half of the year on how things are shaping up?

A: When one tries to do too much macro from top down, it loses sight of the valuations because whether you do something which is top down, it maybe already priced in. You have to figure out for each stock - how much or your top down is already priced in. Therefore, how to adjust your allocations? That is not just because of that. Getting defensives, what we have done in the banking sector is an example. Because of valuations, because of capital coming in, we have raised rates in SBI.

ICICI for example is another stock in the private sector where the capital repatriation starts but yet we had to reduce that slightly, while it is still overweight. Whereas for HDFC, HDFC Bank, we have reduced the overall overweight position because they were defensive. A mix and a lot of it is bottom up where you weigh in the macro top down approach with the actual valuation.

Q: How much of the performance is still to do with the global mood and global liquidity situation? In 2012, we did not have a great macro or earnings but the market did very well and that was because of liquidity, do you think that still holds the key regardless of what we are doing in India positive or negative?

A: It is a large function of global flows because it is a chicken and egg.  If the global flows continue then your current account deficit gets financed properly, your fiscal deficit gets financed. If there is something in the globe which disappoints irrespective of what you do here, ultimately India is a vulnerable country to flows and so that question is absolutely basic. If something happens in Europe, but you cannot live with a hypothesis that something will happen across the world, something negative but if it does happen, we are more vulnerable than most other nations.

Q: Are you still feeling comfortable about the earnings potential of companies that are linked closely to global growth or in large part derive their revenues from their global exposure and not so much domestic?

A: You have to cut it into four parts. One is IT, then pharmaceutical, then auto, Tata Motors that is dependent on the growth and fourth is metals, which is straightaway dependent on the metal price itself.

In case of IT, whatever worst could happen in IT happened last year. There is nothing that could have been worst and that is why we have been constantly raising our IT weightages from September last year saying that once the fiscal cliff is resolved and a new president comes on, people will be able to make their budgets. BFSI in the US is one of the main drivers and that is the one which had suffered earlier. Then there was a big fear of cloud computing and every seven years there is a fear. All these fears were there at the same time last year. So, IT is a story where there is a revival in US economic growth and therefore the budgets are only being concretised now. 

For pharmaceuticals, there was a major decrease in the inventory levels in the US, it has been happening for sometime. That whole thing is easing out now.

If you look at Tata Motors, it depends on what happens to China post elections and how much buying revised in the US and UK, which we have kept more or less flat. A lot of growth depends on Chinese growth.

Metals, is quite vulnerable but you have to divide it into ferrous and non-ferrous. Ferrous is still fragile but if you look at the aluminum side, you are almost at cash breakeven prices. The prices of aluminum cannot fall further with regards to London Metal Exchange (LME). So, you have some comfort on the aluminum side and will benefit from the rupee depreciation

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