Mar 08, 2013 09:14 AM IST | Source: CNBC-TV18

Budget Analysis: Policy steps, rate-cuts key to fund flows: Axis AMC

Chandresh Nigam, Axis AMC, is bullish that medium-term, money will definitely flow into the market, as long as fiscal stability can be maintained. He says the Budget will reinforce investor interest in India.

With the government’s policy paralysis showing signs of abating just about 6-7 months back, one would think it would be a tough call for investors to pump in funds in economy-sensitive sectors. But Chandresh Nigam, Axis AMC, feels that the just-concluded Union Budget will reinforce investor interest in India. Talking to CNBC-TV18, he says that as of now, the market is certainly looking at safe sectors like export, pharmaceuticals and IT, but investors may take some amount of exposure in sensitive sectors once policy measures (mentioned in the Union Budget) take off, inflation gets healthier and the central bank lowers interest rates.

Here is an edited transcript of the interview

Q: What is your reading of the markets at this point in time? We heard from some fund managers that while flows into emerging markets were quite spectacular in the year to date, the last week or two have seen a bit of dithering and an outflow in the last week.  Would you worry about this trend at all?

A: Yes, the markets have held out very well. We have had very strong flows. As the market is volatile, we cannot expect secular flows. I do not think I am worried medium-term on that. I believe that despite the problems we have had, like the slowdown in earnings and the GDP, I think medium-term money will come into India. Next 3-5 years, India will be a separate asset class. Whatever is happening in China, the worries on corporate profits there, even the GDP, the rest of the world slowing down – there are virtually trillions of dollars floating around trying to find a home and as long as we can maintain some fiscal stability, which I am quite positive about after the Budget, there will be enough interest in India medium to long-term.

So, while we will have quarters when the flow will be strong and there will be quarters where there will be minor negative flow, I do not think there is anything to worry about from a medium-term perspective for an investor. I believe that it would be one of the big drivers of this market going forward in the next two-three years.

Q: In the next six months, if the call is that the market should be doing quite well, would you bet on IT, or on slightly more high beta sectors like real estate or infrastructure to play the rally over six months or even a year?

A: Six months is a little tricky right now. While we do believe that the macro number should start to look better during this period driven by inflation and then interest rates etc, there is certainly a case for looking at slightly higher beta at this point in time. How we move during these six months is going to be important. I think a lot has been talked about in terms of the biggest risk, which is the current account deficit, and what happens to currency. We do believe that there is going to be volatility in the currency markets. Right now, the market is certainly looking at the export sector, whether it is pharmaceuticals and IT. These sectors should continue to do well.

The big call which investors might have to take is once you start to see inflation numbers and the interest rates move, and some effect of policy on the ground. That is when people will have to look at adding some amount of exposure to the economy-sensitive sectors from the next twelve months on. Today, people and we we are quite comfortable with holding on to high-quality names, whether it is in consumers or financials, and certainly in IT and pharmaceuticals as well.

However, increasingly at the margin, there is going to be some addition to the economy-sensitive sectors. I think valuations for some of these economy-sensitive sectors have come off and even if these companies do not perform over the next year which seems very likely, I do not think there is too much of a downside in them.

Q: After Q3, we heard a goodish bit of downgrades. What are you expecting in terms of earnings growth for the current quarter, and more importantly, for FY14?

A: Current quarter earnings will be certainly down, leading to a yearly growth of something around 7-8 percent. Next year too does not look good on the earnings front. We will be very happy if we get double digit next year as well.  Our own assessment of growth is slightly weaker than what is being made out in the survey as well as in the Budget, so we predict about 5.5 percent kind of growth.

That should be able to give us around 10-11 percent growth, and then you have to adjust for the surcharge on corporate tax. Ten percent is a reasonably good number.  I would like to take a minute and talk about why that has become a bit irrelevant at this point in time. There is one set of companies which are high price to earnings (P/E) companies in the consumer, pharmaceutical sectors where investors are looking at more than 15 percent kind of long-term growth and that should continue. While there maybe slight derating here, it is unlikely that the P/Es will collapse and the stock should slowly go up.

The rest of the economy is where the pain is more. This is where earnings are falling and negative. There is not much room to go down further because the market has probably already discounted that. They have not grown over the past year and are unlikely to grow next year as well. The big question would be, will they grow 14-15 percent and beyond, and that comes back to the macro situation. The macro situation seems to be stabilising and we start to look at a slight bump up in the GDP numbers. I think there is a good chance of a rerating there.

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