Indian indices today tanked along with emerging markets on fear that quantitative easing rollback could come faster than anticipated following strong US job growth data. Dipan Mehta Member BSE and NSE said indices would continue to remain under pressure as not only rupee has worsened against dollar but rising crude price is also now worrying investors.
"Until a few months ago we had almost no bulls in the crude oil market and it was expected to start trading in double digits later this year or so. But instead of that we are seeing a strengthening of the crude oil prices and that also is playing on the minds of investors," Mehta said.
All hopes of lower current account deficit are now fading. Mehta advised investors to remain away from oil stocks. “Unless we see a narrowing of the deficit as far as diesel prices are concerned, I think all oil marketing companies as well as upstream oil companies are going to remain under stress,” Mehta said.
Below is the verbatim transcript of his interview
Q: The week has not started off on a strong note and we have seen another resurgence of fear hitting the markets especially emerging markets because of what happened with the jobs data. However from hereon how would you peg the range for this market? Do you see further downside?
A: That is very difficult to call at this point of time because lot of factors which were not present a few months ago are quite active at this point of time. The variables certainly have increased and the volatility has gone up, uncertainty has again come back into our markets. So, till you don’t have a handle on whether rupee is going to stabilise and what our current account deficit is going to look like in the current year and some more colour as to how the Federal Reserve is going to go about its actual reduction in the quantitative easing (QE) which it has been undertaking, unless we have answers to these questions which in anyway are difficult to answer it is going to be very difficult to call which way our markets will move, but as we speak I think the threat on the rupee is the biggest thing which is facing market participants and unless we don’t see the rupee stabilising and there being general consensus that the worst is over, I wouldn’t like to call for a bottom in the market until that point.
Q: There have been a lot of discussions in terms of the most prudent way to stem the rupee fall. What you think would possibly be the most effective and prudent method that the government could adopt in order to do that?
A: It is a freely tradable instrument. There is very little the government can do, they have done already quite a bit. May be some of it is actually having some kind of an impact as well. We had the gold import numbers come in earlier in the day and those were quite heartening. If gold import gets curtailed to around the 35 tonnes per month level or come off may be 40-50 percent reduction from what we imported last year then that in itself will remove a lot of pressure on the rupee. So, it has to be these steps which the government has been taking along with overall realisation on the part of the average Indian that just by buying gold it is not going to benefit him and as a investment kind of a product it completely makes absolutely no sense given the way gold is declining overseas. So, unless that kind of a realisation comes to the Indian households as well and we see a sharp decline in gold imports, till that point of time the rupee will remain under pressure. That is one kind of trend to look forward to. Apart from all these aspects one needs to keep an eye on the crude oil. Until a few months ago we had almost no bulls in the crude oil market and it was expected to start trading in double digits later this year or so. But instead of that we are seeing a strengthening of the crude oil prices and that also is playing on the minds of investors who were here because earlier in the year we just thought that may be Budget would now come under control and the pressure from the government to borrow would be reduced and that would be positive for interest rates. As against that scenario now we are again going to be grappling not only with current account deficit but Budget deficit also is going to be a bit of a challenge. So, we are getting kind of boxed into both these deficits and the macros instead of improving are actually deteriorating. So, it is bit of a murky situation at this point of time. All that we can do is just wait out this time and hope for may be some kind of divine intervention for a turnaround to take place because we are getting into a vicious circle and unless we something dramatic take place, I think the markets and the rupee and the economy are going to remain under pressure.
Q: Just wanted your quick thoughts on Reliance Communications – what you made of that deal and although there is something in it for the shareholders do you feel that there will be any concrete debt reduction via what took place?
A: One positive aspect is that Reliance Communications is now looking at reducing debt and getting more out of its assets as against the earlier strategy of expanding domestically and globally and undertaking every single thing under the sun it could do so. So, that particular focus of looking inward is far better for minority shareholder point of view. The company was expanding at a hectic pace. So, whatever steps they will take will be positive and may be two, three years down the line or earlier they will be able to right size their balance sheet and at that point of time you could see the stock come back under buying list of lot of fund managers. So, all these steps which are being taken are positive and many more such steps need to be taken with even larger numbers for the company to go back on to its growth path and improve on its return ratios.
Q: Do you expect rate cuts to come through and do you think that this will be effective in terms of spurring growth or may be credit growth at this point now?
A: I don’t think so. What we are seeing is just minor adjustments taking place in interest rates. At the same time the sentiment is totally down as far as the industry is concerned and the capex cycle is getting postponed. At the same time growth is just not picking up. Lot of management attention is now on the currency markets given the way the rupee has been moving. Lot of business models, strategies in terms of exports, imports are all being reworked at this point of time. So, I would say that minor cut in interest rates, as what we have been seeing by the banking sector will not have a material impact on growth rates. Unless we see RBI going back to cutting interest rates and signaling that it will maintain its easy money policy, till that point of time the markets will remain under stress.
Historically if you go back the point of time when the G-Sec yield starts going below 7 percent, that is the time when we see improvement in growth rates at stock markets rallying and GDP looking up, corporate profits also kind of inching up. So, we are bit far away from those levels. I think that these minor adjustments are not going to make much of a difference.
Q: It is so disappointing to see the way Oil and Natural Gas Corporation (ONGC) has moved post what was deemed as the big trigger for the oil and gas space. Last week ONGC was one of the biggest losers in trader – down about 4 percent odd. This week again it started off aon a week footing. Do you think it is just the subsidy issues that continue to bog that stock and how would you approach it now?
A: I think it is a subsidy issue and we are going back to huge under recoveries as far as diesel is concerned. The share of upstream oil companies is going to go back to peak levels. May be a few months ago we were looking at lower and lower subsidy from point of view of government as well as upstream oil and now the scenario has gone back and completely reversed. At some point of time the under recovery for diesel had come to as low as Rs 3 and now we are back at Rs 8. The government is no way going to be able to address that particular differential. The oil companies are asking for an increase of Rs 0.50 – monthly increase what they have been granted to at least Rs 1 or Rs 2 or so. However given the political compulsion that looks extremely difficult. So, unless we see a narrowing of the deficit as far as diesel prices are concerned, I think all oil marketing companies as well as upstream oil companies are going to remain under stress. So, this is the kind of situation which arises when the rupee also goes for a toss and we have crude oil prices also moving up. So, in a way it is a double whammy for the entire oil sector.
Q: The big cue is Infy this week and the earnings there. What is your expectation from the numbers this time around and are you expecting any kind of shockers, the likes that we saw last quarter when the stock fell from Rs 2,900 all the way to Rs 2,300?
A: I think it is best to go into Infosys without any expectations or at least be prepared for some kind of a fresh worm shell if at all. Clearly nothing has changed from last quarter to this quarter except of course the rupee has depreciated, but then the company would have taken hedges so its benefit will not be reflected in this quarter. So I would say that rather than focusing on Infosys, the bellwether for the IT industry now has shifted to Tata Consultancy Services (TCS) and HCL Tech and those numbers will be more interesting. Of course we would like to see what the change of management is doing for Infosys and body language of top management, top managers what you are looking out for. But on the I think it could be a bit of a disappointment and as IT results will roll out more and more of the analysts will ask the question as to what the effect of such a sharp depreciation of the rupee is going to be, because from the last time they spoke to us and now there is a 10 percent reduction and that is quite a huge depreciation of the Indian rupee as far as the IT industry is concerned. They may have to pass back a lot of it to their clients, but then are they getting more volume growth and what the actual effect on pricing has been, so these are the new data points that analysts will start plugging into their forecasting models. So it would be a interesting earnings season as far as IT is concerned. I am just not sure whether Infosys will be able to give out the answers or they will be able to delight the markets per se with their numbers.
Q: Wockhardt has been in the news considering the fact that its at a 52-week low today. What is your opinion on Wockhardt and do you think that the dream run is now over for the company or would you accumulate at these levels?
A: There are lot of unanswered questions as far as Wockhardt is concerned. Although the management has put up brave face as far as all the concerns that the USFDA has about its various plants, the question does remain as to whether they will be able to sustain the growth rates which they have been maintaining over the past 2-3 years or so. It doesn’t end over there. Every now and then we are hearing some kind of news flow which is negative - about some plant or some other kind of a regulating agency taking some action. So, in a situation like this, I think investors are best advised to stay away. No doubt it is a great company and this rupee depreciation will tend to benefit them significantly considering the quantum of exports, but then these are serious concerns and unless the management gets all these various issues out of the way, I think the stock will remain under stress and with the kind of correction which it has seen, at every rise there will be a lot supply because it is one stock which was the favourite of lot of institutional investors as well and it was to an extent over owned as well. So, the technical's also don’t work in favour of the stock price at this point of time. So, I would say that fresh purchases may certainly be curtailed or avoided and may be at every rally one could look at lightening up positions a bit. At this point of time what the management has to say for this quarter results also will be very important. So, one could wait to hear what they have to say and then perhaps take a more informed call.
Q: What about something like a JSW Steel? From today itself JSW Ispat ceases to trade on the exchange. How are you reading that particular counter because now maybe the losses would increase given that Ispat has a lot of debt in its books? We have seen that JSW Steel has seen a correction of 10 percent in this month itself. So has the correction been overdone or would you chip into it at these particular levels?
A: We are totally avoiding steel and have been doing so for past several years. Per se steel industry has a horrible record as far as creating value is concerned and minority shareholders generally have not made any gains in the steel sector over a long period of time, be it Tata Steel, JSW or Jindal Steel & Power (JSPL) for that matter. Nothing has changed for us to take a different view. Globally also the industry remains under a lot of pressure and they have not delivered great returns for the past several decades or so. So why be in an industry which has a consistent track record of not delivering returns for shareholders, one would rather be in industries which have a fine track record of delivering returns to shareholders. So I would say that per se we have just completely avoided JSW and all steel companies and that would be the way going forward as well.