Jun 18, 2013 10:04 PM IST | Source: CNBC-TV18

Underweight on India; neutral on Infosys: HSBC India

Our market is sure to focus on the outlook painted by Federal Reserve after today's meeting, on when the process of tapering will start and that we are likely to see some tapering in bond purchasing going forward, said Jitendra Sriram of HSBC India.

Jitendra Sriram, MD & Head of Research, HSBC India said that vulnerable rupee was impacting returns in dollar terms for Indian market. "When we homogenise the currency and look at it across all markets, India does not shape up too well given the persistent problems on the twin deficits, the fiscal and the current account. So from that perspective, India in relative context within Asia is underweight for us," he explained in an interview to CNBC-TV18. HSBC India has downgraded India to underweight from neutral.

Indian market is sure to focus on the outlook painted by Federal Reserve regarding the beginning of QE tapering process. We are likely to see some tapering in bond purchasing going forward, said Sriram .

Although valuation for some of the small and midcap names look attractive, they are not going to rally in a hurry because they may find it difficult to attract capital going forward, feels Sriram.

Also read: Valuations of EMs attractive; underweight on India: Citi

At HSBC they are neutral on Infosys because any kind of restructuring of policy or strategy for any company would take time says Sriram.

Below is the verbatim transcript of his interview on CNBC-TV18

Q: FII flows have not been great over the last few sessions. Do you see it picking up post the Fed meeting this time?

A: It will depend on what kind of outlook the Fed chairman gives out. So, it is not a question of ‘if’ but a question of ‘when’ the tapering process starts. The market will be critically looking at the kind of outlook that is painted out, and when we will see easing on bond purchase.

The other part which impacted FII flows in the last couple of weeks probably is that there is a lot of arbitrage money slashing around in capital markets. As volatility in rupee picked up, some of those trades became unviable from a costing perspective. To a large degree, those trades are not getting put through now till the volatility on the rupee subsides. That is also impacting flows to some degree.

Q: What are you hearing at HSBC though about whether or not incremental flows will likely pick up sharply post this event assuming it is in the equity markets’ favour and there is an extension of the liquidity program?

A: I would think that market will start pricing in what is the eventual game. The point is that you may still see the current pace of bond purchases continue for a couple of months. I don’t think the market is going to be too excited by that.

The point is that at some point of time later into the year or probably early next year you are going to see some tapering of these bond purchases. Eventually, culminating in some kind of rate action by the Fed as well once the US recovery gets underway and employment data etc come more to a comfort zone for the Fed chairman.

To that extent, directionally, this kind of surplus liquidity that central banks have been infusing into capital markets might be a little tighter going forward. As a result, you may not see the same quantum of flows that you have seen especially on the FII side.

Q: Within Asia though, India has been downgraded to an underweight for you guys from a neutral but the target remains 21,700. How is it that you expect the next few months to shape up?

A: Our year-end target is actually 20,700. From an earnings perspective, markets are nowhere near where they were say four-five years back. At the same point, earnings have kept compounding. So there is definitely some degree of value in some of the stocks that we like. As a result, our target is constructive from here.

Having said that, if you even look at what has happened in the last six months or the year-to-date performance, in dollar terms when we contrast it and compare it with other Asian markets, clearly the vulnerability on the currency is actually impacting dollar returns for investors. When we homogenise the currency and look at it across all markets, India does not shape up too well given the persistent problems on the twin deficits, the fiscal and the current account. So from that perspective, India in relative context within Asia is underweight for us.

Q: Your economist has scaled back this year’s growth forecast to 5.5 percent. What kind of earnings growth would that translate to because a lot of brokerages are still working with 14-15 percent earnings growth for this year?

A: After the full year numbers for FY13, we are currently at about between 10 and 11 percent growth. I would suspect that there could be a little bit of toning down. There is obviously a lag effect before growth expectations are cut and it starts percolating into corporate earnings. To that extent, the kind of numbers that you are seeing on the rupee, some sectors like healthcare, IT will gain but you will have some importing sectors also lose out.

Once the adjustments are made, my suspicion is you will probably land up at 8-10 percent kind of an earnings range. I do think there is some downside to what the consensus is forecasting going forward.

Q: What about the broader market? Do you think earnings growth might be even more tepid there if you just look beyond the Nifty and look into the basket if say top 200 stocks?

A: I would think that normally these sectors, the smaller or the midcap universe tends to work much better when there is easy capital availability and ample domestic liquidity. I don’t see any of those conditions being fulfilled at this point of time.

Although there is some degree of valuation cushion which is emerging in some of these names but the fact is that there is still not enough liquidity going around. Also, if we look at the international piece, there is a growing proliferation of passive funds which means that it is going to stay focus on the top 30, 50 or maybe if we extend the logic a bit then maybe to MSCI India 70-80 odd names. It is not going to percolate beyond that.

The midcap universe or the residual names will still find it very difficult to attract capital going forward. I don’t think you are going to see a rally in a hurry in those names although valuations may still be turning attractive.


Q: How hopeful are you of some kind of policy impetus for the market because there has been talk about really looking the FDI caps doing something else with the gas policy. Are you getting more optimistic on that front?

A: I don’t think that policy is imperative. Looking at the current account deficit (CAD); energy is one big area that India needs to sort out in the sense whether it is oil or coal. Whatever incentives from a fiscal side or from any other stimulus kind of mechanism that we can do, to longer term taper down imports of fuel groups, that is something very critical.

We have seen some action coming on to the gold front. The third is various capital goods imports that we do. So these are areas which are easy kills on the current account deficit that we need to address.

Policy is obviously a positive from a longer term perspective but if you are arguing that if today the policy changes, will investments start flowing in tomorrow? I have my doubts on that. Given that we have a general election coming ahead, you have lots of states going in for elections; I don’t think corporate India is going to take the plunge into investments right now. They will wait and watch to see whether the continuity in policy is there with whoever comes in next and then take the plunge. Although you might see some amount of de-bottlenecking and smaller ticket size capex going through but large ticket investment decisions, I don’t see a near term turnaround which is why we have also delayed the kind of our expectation on what kind of investment turnaround comes through.

Q: At this point, what do you think the domestic crowd is up to? Are they still extremely cautious and extremely negative about equities as a space?

A: When I meet the domestic mutual fund industry, I don’t think that they are negative. Negativism is measured by cash levels. I don’t think cash levels for the domestic industry anywhere exceeds 5 percent, most people are between 0 and 5 percent. It is probably end customer who is actually withdrawing money from local investment vehicles, which is forcing people to be sellers. I don’t think as a class or community they want to sell stocks. So, from a longer term perspective, I don’t think that is the issue.

In fact, they are probably in a bottoming out phase and you might see economic growth recover over the next two-three quarters. I am not seeing high levels of cash as such. If you are faced with redemption then there is no option but to sell.

Q: Have you changed you view on Infosys post all developments of the last 10 days?

A: No, we have not. We are still neutral on it. To a large degree, I think any kind of restructuring or reshaping of policies or strategy for any company will take time. It is not a magic wand that changes overnight. It is going to be a little bit of a painful process, so it will take its own sweet time to come about and show benefits.

Q: There are some new roaming guidelines that Telecom Regulatory Authority of India (TRAI) has set out. How would you approach Reliance Communications and how are you feeling about that space?

A: We are not positive on the name. Overall, if I look at forex debt, in that set of names - clearly there are stocks like Reliance Communications or telecom names or steel names which have done overseas acquisitions have actually quite high levels of forex debt, which actually makes it little bit of a concern given the kind of news we are seeing on the rupee and the levels that we are seeing on the rupee.

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