Indian equity benchmarks have failed to impress investors and the market has not provided the best of starts to the year. As a result, the mood about India is also not so upbeat. Sanjiv Duggal, Investment Director-India Equities at HSBC Global AMC believes people were probably expecting much more from the Budget. However, he feels the Budget was quite up to the mark, taking into account the fact that the fiscal deficit for FY13 stood at 6 percent around 6 months ago and the target for the next fiscal now is lower than 5 percent.
Therefore, Duggal remains positive on India and sees a lot of opportunity in the market. According to him, the Indian economy has slowed down at the moment but he sees gradual pick up in growth in the coming quarters.
Duggal stressed on the need to be patient while investing in India. Besides, he considers India to be better placed when compared to other emerging markets. He explained, "We have a particular process that we follow so we are looking at profitable companies versus their valuation. Sometimes if there is in some stocks a bit of blood bath they come into our screens and they look attractive, profitable. It is an opportunity, we are very happy to buy into them or sometimes even add to our holding in the odd name."
Moreover, Dugal feels Indian equity has delivered great returns and investors can pry on opportunities when there is a lot of bad news in the market. "That is typically a good time to put money and when there is great news and the market is hitting new highs, you should be a little cautious," he added.
Here is the edited transcript of the interview on CNBC-TV18.
Q: How are you feeling about the market, it has not been the best of starts to the year and the mood seems not very great about India right now? You run such a lot of money, what is your sense now?
A: I think people were expecting more from the Budget in particular. We have had the Finance Minister (FM) come to Singapore and other places as well. Maybe, people were a little disappointed. However, from our point of view, we thought the FM did a good job in terms of the Budget.
Prior to the Budget, if you go back six months, people were looking at a 6 percent fiscal deficit for FY13. It was 6 percent six months ago and the target going for next year is below 5 percent. So, it is a tremendous change. However, I think people forget what has happened over the past six months.
Therefore, we think India is looking good. There is a lot of opportunity. We find a lot of attractively valued stocks in India. Both our emerging market (EM) team, our Asian team and us, from an India dedicated point of view, see lots of opportunity. As things improve further, as we go forward, that value will get unlocked.
Q: While there has been considerable progress on the fiscal deficit front, I think people started fretting about growth because growth is down to 4.5 percent, maybe this quarter it is quite bad as well. Are global investors beginning to feel a little shaky about India’s growth prospects?
A: I think people are expecting the economy to slowdown. Right now, people think this is roughly the bottom. Maybe the numbers just reported were the bottom, maybe the current quarter and then things should pick up as we go forward. It might not be a sharp pick up but, you will see a gradual pick up which is better news for India.
Hence, maybe when you exit next year, you could be over 6 percent exit rate. So growth will pick up. Again from a fiscal point of view, if you are looking at inflation, the fiscal deficit, current account deficit, I think India is going through the right sort of bottoming out process. You do not want these big-bang movements, which create a lot of these imbalances.
Q: Do you think earnings have bottomed out because for a couple of quarters now investors have been looking at signs for bottoming out of earnings but the quarter which went by wasn't great at all, particularly for large number of stocks outside the index. Do you have a conviction that earnings have bottomed out already?
A: Yes, we think earnings are bottoming out. When you compare it to other markets as well, Indian earnings were relatively okay for the quarter. If you look at January and February earnings, they have seen a slight upgrade, at least the numbers that we look at have been upgraded slightly and again as the economy bottoms we expect interest rates to get cut.
India has got quite a few companies which have high debt and as the economy improves plus there are lower interest rates, earnings will pick up as well, as we go forward. Operating earnings should pick up, we will get that interest benefit coming through as well.
Q: What is happening with the broader market in India because while the index has not corrected too much, there has been considerable damage outside the index and midcaps have been decimated. Are you slightly disturbed at what is going on with the way prices have come off in the last few weeks?
A: We have a particular process that we follow so we are looking at profitable companies versus their valuation. Sometimes if there is in some stocks a bit of blood bath they come into our screens and they look attractive, profitable. It is an opportunity, we are very happy to buy into them or sometimes even add to our holding in the odd name.
But, that is the market. You cannot really look at everything. Different stocks are going up and down. However, if you got a process and you stick to it, it will throw up all these opportunities. And obviously you got to be patient in investing in India.
Q: Have you been buying in January and February while the market has been coming down, tactically would you say you have been a net buyer or a net seller in India?
A: For us, a lot of it depends on flow into our fund. Unfortunately, we haven’t really seen inflows so far into our fund. It is a big contrast from the same time last year when we saw big inflow into the fund. Right now, people are still digesting all the news coming out of India and as we go forward, we are anticipating some flows coming in as India improves.
However, we have bought into the stocks which look attractive from a valuation point of view and we think they are great opportunities.
Q: Let me just speak on the point that you mentioned that you have not received a lot of inflows but India has been getting a lot of flows since the month of September, even in January, February, we have got some USD 8-9 billion. Where is the money coming in through? You are one of the largest funds operating in India, if you are not getting flows, what kind of assets are getting flows?
A: Our take is there is a lot of money coming from institutions and even retail but, into broader mandates. If we look back over the last couple of years, people have got hurt investing in equity. People are slowly, at least from a retail point of view are coming back in.
They are looking at a broader equity asset class. So money coming into emerging markets or Asian equity and eventually at some stage, people will hopefully feel a bit more comfortable and look to take country specific risk coming to India and so on.
We also see institutions investing again into broader asset classes and some coming into India and that is also the institutional flow you see. So there is also some money coming through India dedicated exchange traded funds (ETFs) as well. There is a fair amount of money out there. People are looking at India.
Again India is going to be one of these big asset classes similar to China where people will want to invest money. India is a big economy. It is going through a bad patch right now but, you are coming towards the bottom. So as India improves, you have seen the government pushed through on reform.
Again, just to repeat, six months ago people had given up on India. In the past six months there has been tremendous progress. But, people keep saying oh, the government should have done this a year ago, two years ago, five years ago etc but we have to look at what has happened, we have to look at the change. I think it has been a significant change, something like the diesel price hikes.
I know it is two in a row, over the weekend they hiked bulk diesel a little bit as well, petrol went up again, so it shows at least there is a commitment. It is an election year but the government seems to be committed. I think that is quite a powerful message.
People remain disbelievers. Speaking to my counterparts in HSBC, our EM team and Asian team see a lot of opportunity in India. Looking at our global strategist within HSBC asset management, he sees India as very attractive from a valuation point of view. It is cheaper than China, cheaper than Russia on the metrics we look at and cheaper than Brazil. It is the cheapest big EM and the currency as well is the most undervalued on a purchasing power parity basis. The currency is more medium-term factor but, if we look at price to book versus return on equity (RoE), it is cheaper than China and Russia or any big EM. The currency from a foreign investor point of view is another positive factor from a medium-term point of view.
Q: So you think it is a good entry point from a currency perspective as well because the currencies are a sore point for a large number of global investors. It has taken way from their gains in the last couple of years but, you think from where you are getting in, it might actually work in India's favour?
A: It depends on timelines that people are looking at and the currency has been quite volatile. Our longer term call is, given this big undervaluation of the rupee, the rupee should appreciate against most currencies in the world. So you will get that kick and you also get a kick from the economy picking up and the stock market doing well.
If you look at the main fund I run, we are one month short of 17 years in terms of a track record and the returns are roughly 17 percent in US dollar terms per annum over nearly 17 years. And the Indian equity asset class has delivered great returns. I know 17 years is a long period of time. However, even if you look at our local fund, when I was based in Mumbai we had our HSBC Equity fund and it has just finished 10 years in December. It has gone up 10 times.
So Indian equity has delivered great returns. People should come in where there is a lot of bad news and there is a lot of bad sentiment towards India locally, may be less so overseas but there is a lot of bad news, a lot of disbelief in India. That is typically a good time to put money and when there is great news and the market is hitting new highs, you should be a little cautious but, typically we have seen in both our products, we started very small.
However, investors have made some tremendous returns, the people who have been patient and stuck with India in rupee terms or in dollar terms have made some good money.
Q: You made the point about public sector companies and there is a lot of government paper which has come and will continue to come through the course of the year. Are you looking at those kind of offerings closely because for a large fund it is an opportunity to pick up large-sized allotments?
A: We have taken part in some of them. It is all based on our framework, what is the profitability of the company versus the valuation. As I mentioned, a lot of the public sector companies have strong balance sheets, high returns on equity, a good market share in their business or good resource base etc.
In a lot of cases we find them attractive and these issues provide an opportunity to come in if you want to take a decent chunk. So, we have participated in a few like the National Mineral Development Corporation (NMDC), Oil India, and National Thermal Power Corporation (NTPC). We have participated in the last three because within our framework they look really good and we see them delivering good returns over time.
Q: Are you looking forward to some of the new ones which are coming up like Steel Authority of India (SAIL), National Aluminium Company (NALCO) and Metals and Minerals Trading Corporation of India (MMTC)? Would you give it a shot?
A: We look at it on merit, how it stacks up on our parameters. We also look at what alternatives exist in the market. Basically, what is the best choice for our investors in our fund, we look at them as they come about, we look at all opportunities and we don’t disregard the whole set of companies. We are open and we are looking to make money for our investors, so we look at everything seriously.
Q: Since you made the point about buying stocks at low valuations and you said you bought a couple of stocks in the last month or so, would any of them have been from the really depressed sectors like anything linked to infrastructure or real estate where valuation seem tempting, but the cycle does not seem to have turned?
A: We look selectively. We picked stocks in the infrastructure space. So again having a framework takes you away from all the noise basically. It is normally a good time to invest when there is bad news about a sector or a stock. Infrastructure spend in India has slowed down tremendously and stocks obviously have fallen very sharply. It might be the odd opportunity within that space.
Again it is a good time to start picking up, again you don’t know when the bottom will be and when the government comes out with policies on the infrastructure side, you could see things move quite quickly. In the market things can move quite fast. Typically, when they come into our framework, we do a lot of work.
Our view as I mentioned before the economy is bottoming, government policy framework is a lot more supportive for the economy. Interest rates should fall as we go forward. So, we think infrastructure stocks will do well as you see more projects starting, stalled projects starting as well and new projects coming about.
Q: How do you look at banking because traditionally you have held quite a few of the Indian banks, but I was going through your last disclosed portfolio and there were quite a few private sector banks, not so many public sector names where valuations are trading at probably all-time low valuations?
A: We are actually more positioned in public sector banks. The way we look at it is we look at the active bet size, what is the weight in the benchmark and what we hold. On the public sector banking side, we have got a few names. Individually they might not be very big, but together they are quite substantial.
We are looking forward, taking into account bad debts and so and so forth we still find them attractively valued. We have got the odd non-bank financial company as well and we have got the odd private sector bank, but they have to fit into our framework in terms of being profitable and attractively valued.
We would be more biased towards public sector banks and housing finance companies and less so towards private sector banks.
Q: In the last couple of years Indian portfolios which have done well have primarily been towards consumers, pharmaceuticals and very low on cyclical stocks. Do you think the tide is turning, if you have to make serious money two years out, would you want to pare down on those stocks which have done well in the last couple of years?
A: We find that a lot of the cheaper stocks tend to be cyclical names and as we approach a cyclical upturn, that’s where the investors should be positioned. If you look at some of the consumer names, consumer staples, some of the private sector financials, some of the healthcare companies they tend to be the good companies, but they are very expensive. Hence, at a particular time of the cycle you would end up buying them. If you go back to the previous peak of the market, all these stocks were cheaper than the market.
You could buy the consumer staples at a discount to the market. That is when we would look at those stocks. Then there will be a lot of hype about cyclical stocks, which it was towards the end of 2007 and that’s when we would be shifting into healthcare, consumer staples because they would be cheaper than the market and it does happen. So in 2010 and 2011 and partly in 2012, you are right about a lot of consumer staples and healthcare having done well.
I think a lot of people sort of hide in those stocks and things change. Markets are dynamic and eventually things revert to the mean and right now, I think a lot of people don’t think that will happen. But, based on the way we see it internally, we think that it is a good time to be in cyclical. You are getting them at very attractive valuations and if it is a metal company with a good resource base, there might be some projects which are tied up. They have spent a lot of money on projects which aren’t generating any returns because of some issue or the other. As these issues get cleared, you will get the earnings picking up, the returns on equity and so on picking up as well.
Q: For a lot of long-term India watchers, people who have money in India for long time like you have, there is a counter view that the investment cycle is still not turning and they would rather wait to see this election out of the way before which the big turn happens. Do you think there is merit in that? Do you see the election as a pivot point or the positioning should happen now and not that late?
A: I am sure, as far as in the market is concerned, different investors have different views. The way we work is typically we tend to be early. A lot of people say, we are contrarian as well. But, we tend to be early, as stocks and sectors appear attractive on our screens we slowly start moving and we don’t do it in a day.
It is a gradual process and if you look at the last couple of election results or election days, you see the markets swing in dollar terms and move 20 percent up, 20 percent down nine years ago and then 20 percent up four years ago.
Q: It is a binary event you cannot game it right?
A: Yes and the moves are quite sharp and that is the market going up or down 20 percent and within that other stocks are swinging. If people think it is a good election result and people expect domestic sector would do well on the back of it and if the markets are up 20 percent, a lot of the cyclicals would be up 25-30 percent and you cannot react.
We don’t like reacting, we try to proactively position our portfolios ahead of time. We are not a momentum investor. Yes, we make mistakes, it is not a smooth ride and there are going to be bumps along the way. Election would be interesting. It is a bit too early to talk about the election but looking ahead, it is likely to be a positive outcome in our view.
Q: What is the biggest risk according to you getting into Indian stocks right now and what really gives you sleepless nights about the large amount of money that you have positioned in India, is it a long list?
A: No not a long list. The main thing for us is to ensure that India gets through a lot of these hiccups we have seen over the last two-three years and you see the government delivering on the policy front, irrespective of whichever government it is state level or central level, it should be delivering on reforms. Some of the measures are interesting. In the Railway Budget there was a proposal to link freight rates to diesel prices. At some stage they might do it with passenger fares.
However, if you try to delink the two and the government focuses on proactive policy framework, level playing field, good governance and so on and then let the foreign, domestic private sector come in and take advantage of the opportunities that exist in India.