Tarun Kataria, CEO Religare Capital Markets expects GDP growth to fall to 4 percent sometime this year as India is in a multi-year economic down cycle and it is very hard to reverse the slowdown over a 2-4 month period.
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Speaking to CNBC-TV18, Kataria says, despite all negative macros, foreign investors have not been major sellers as it would kill both the market and the rupee and FIIs do not want to risk these factors as they have kept market buoyant.
“I don’t necessarily see a massive sell-off from here unless the FIIs decide they want to exit the door in which case who knows where the bottom is,” he adds.
Below is the verbatim transcript of Tarun Kataria's interview on CNBC-TV18
Q: Your brokerage is among the most bearish in terms of its gross domestic product (GDP) expectation for this year, given that do you think there is more damage possible to this market?
A: I think there is more damage possible. We are on a cycle that is very hard to reverse over a 2-4 month period and then one can see a material down graph in GDP growth over the last couple of years. There is nothing that can come in the way to say okay this thing will now turn whether it is interest rates, industrial policy, FDI reforms, power and all the usual stuff that we talk about but nothing has changed.
We are the only firm now that has a formal sub 5 percent GDP growth number for fiscal’14. We are saying sub 5 percent but it is likely to be closer to 4.5 percent. My personal view is that either this quarter or the next, one might actually see a number close to 4 percent.
Q: What are you hearing from your clients because despite all the negative macro news, foreign institutional investors (FIIs) have not been major sellers, what would you attribute that to?
A: FIIs know it is a very narrow funnel and to exit at this point of the cycle will kill both the markets and the rupee and they do not want to take that risk and that has kept the equity markets buoyant.
But as Yashwant Sinha was eluding today, the macro environment continues to deteriorate. We thought about what the implications of bounce of payment crisis is in the next 24 months and that is something that the new Reserve Bank of India (RBI) governor needs to get his head around quickly because we are staring a crisis in the face.
Q: If you are talking about 4 percent kind of GDP growth and 4.5 percent for this year where does it leave earnings growth? Are we looking at maybe 6-7 percent earnings growth?
A: I think that is single digits – zero to single digit is a number to be looking at. Topline growth that drove a lot of earnings over the last 4-5 years has been muted. In the past, one spent time managing growth because topline grew at 20-35 percent in case of some of the fast moving consumer goods (FMCG) companies.
Now is the time to manage risk in ones business because growth will not be as robust as it has been, input pressures will continue to be high so the risk to your business from a changing assumption of environment needs to be factored in. It has been our advice to many of our corporates, what is the risk that you are facing from slower GDP growth, from high input prices, from a weak rupee what that does mean to earnings and how do you protect that.
Q: Have you scaled down your expectations from market returns as well this year? What kind of levels could we be correcting down to?
A: It is a function of what the FIIs do. We have seen what they did on the bond side and we saw the impact of that so hopefully that if it does not happen, we may over a period of time grind higher because people start as they have been doing for the last couple of months thinking there is a bottom. So, I don’t necessarily see a massive sell-off from here unless the FIIs decide they want to exit the door in which case who knows where the bottom is.
Q: Could they be taking a dimmer view of general fundamentals in India like the currency, emerging markets do you think their patience might run out at some point?
A: It is possible. I hope it doesn’t because ultimately emerging markets need to be a part of people’s portfolios. You will have cyclical ups and downs but they will be part of the portfolio. I am hoping they continue to view India as still a long-term growth story.
Q: What are you telling your clients in terms of portfolio positioning right now? Which are the hiding places?
A: It is looked as an assumption that currency continues to depreciate. One should see 68-70 against the dollar in a matter of time in which case pharma and IT are the places to hide because they will get a pick up on the back of weaker currency.
We continue to remain cautious on banks as rates continue. I suspect rates will continue to be high through the end of the year that not only puts pressure on ones asset liability management part of the business but also on their credit provisioning and therefore, I suggest caution on banks.
It is a general consensus that we may be concerned about infra, real estate, anything that is forex related. On the export side something to be generally constructive on.
Q: You have penciled in 4.5 percent with downside bias for GDP, is it a lot of destruction or decline on the services front as well?
A: It is a bit of both. Given the monsoon, the agri bit which is 15-16 percent of GDP growth, will trade up, may have a 3-5 percent growth number. Two days ago we had services PMI number that tanked from 51 to 47, so one can see services that kept up the economy over the last 4-5 quarters have taken a hit. Industrial production is not going on much in that space.
Many reforms that we have been looking for in terms of electricity, power have not come to power and so the industry side of it should be a sub 50 in terms of PMI data and that is the largest part of your GDP and therefore, on balance one will see something close to 4 percent.