Foreign institutional investor (FII) investments in Indian equities have crossed Rs 13,000 crore (about USD 2.5 billion) in January itself and Gautam Trivedi of Religare Capital Markets expects strong flows to continue in the near-term. However, continuous selling by the domestic investors remain a cause for worry, he told CNBC-TV18.
Pointing at the rosy picture ahead, Trivedi said that Asian clients are beginning to reallocate their funds, particularly long-only funds, to India and are therefore, increasing better allocation to the country. But, the India dedicated funds are still not witnessing inflows, he reminded.
Trivedi further added that the Indian equity benchmarks need to rise another 10 percent for retail interest to return. Going forward, interest rate cuts are going to be a key trigger for the markets, he said.
As far as sectors are concerned, Trivedi sees buying interest in IT, oil and gas. He is also positive on Reliance given its improving regulatory newsflow.
Here is the edited transcript of the interview on CNBC-TV18.
Q: Flows have been very robust these last couple of months. What are your checks with your clients telling you? Are flows likely to be this strong with global risk on continuing?
A: I think flows will continue to remain strong. Let us not forget Vanguard which is rebalancing its portfolio away from the MSCI and going to FTSE. As we know, the FTSE South Korea is a developed market and hence the weightage of India goes up and as a function of that they will have to invest incremental USD 1.5 billion into India, the process of which has already begun.
So that is obviously one strong source of inflow. The second of course is the fact that foreigners continue to remain positive on India. I think we are seeing flows even on our desk on a day-to-day basis.
Q: It does not seem to translate into large traction for the market though. What do you make of that?
A: Let us not forget the fact that of the USD 2.4 billion that has come into India YTD, that is in the past three weeks, you have seen almost USD 2.1 billion of net selling from the domestic mutual funds and I think that clearly remains an ongoing concern for the last 12 months, where you effectively saw foreigners buying massively in the market. But, domestic mutual funds are compelled to sell because of the redemption pressure. That of course is limiting the gains for the market in absolute terms.
Q: What kind of money is coming into the market now? We have got used to an average of Rs 800 to Rs 1,000 crore a day. Is it coming in largely from the US, Europe or from Japan? What kind of funds are putting in the money if you can just break it down for us a bit?
A: I do not know if I have that level of granularity, but I think Exchange-Traded Fund (ETF) money has obviously been big, like for instance Vanguard and that is mostly US money. Of course, we have seen a lot of Asian accounts starting to reallocate funds to India.
I was in Asia last month where we met about 25 to 30 foreign institutional investors (FII) who are extremely positive on the market. I do not think we have met a single investor who was negative on the Indian market. A lot of them are actually surprised with the move India had last year in spite of all of the issues that the country had faced.
But, the fact is, inspite of rupee being down as much as 25 percent over the past 18 months, the level of interest from Asian investors was extremely strong. A lot of the long-onlys that we met in January were reallocating more to India and that remains a positive factor.
The other caveat I want to add in there is the other piece of feedback that we got from our investor meetings last month. It said that the big money has still not been coming to Asia and the catalyst for that is not India, it is going to be China. So when China turns and which it seems to be starting to now, we believe that there will be incrementally more money coming to Asia. It will not cannibalize India, it will actually be incrementally positive for India as well.
Q: The most recent EPFR data shows that global retail has actually begun to invest in the market. For the first time in the last six-seven years, there are some inflows coming in. Are you beginning to sense interest even in terms of global retail towards India, whether from the far east or otherwise?
A: No, we are not seeing any sense of that. Let me just also put in another caveat here. The India dedicated funds, whether they were hedge funds or long-onlys are still not incrementally seeing a lot of money coming in. All the money that we are seeing is still regional allocations and allocating more money to India and obviously away from other markets.
Q: How does your call on liquidity tie-in with your tactical call on the market? Do you believe that this liquidity still has the potential to take the market much higher?
A: I sincerely do. Like I said at the outset, the big issue here of course is the domestic retail investor in India. I have said in the past that Religare runs some of the largest retail franchises in the country. When we talk to our retail guys in the past few weeks, they are witnessing that domestic retail investor interest is waning and a lot of that interest is in the sub-Rs 100 stocks in absolute price, in absolute terms.
But, the fact that it is coming back gradually is obviously a big positive. However, I still end up having the odd conversation with domestic fund managers, wherein I said this stock looks interesting. He says, I would love to buy it, but the problem is I have a Rs 50 crore redemption this morning so I have to sell. That is obviously a concern.
Q: The market breadth over the last few days has not been great. Are you seeing signs of participation picking up or people just have a left out feeling and they are watching from the sidelines that the markets ran away without them having exposed adequately to equities?
A: I think the market needs to go up another at least 10 percent to see a huge return of the retail investor. I think a lot of retail investors, even today, seemed to be selling stocks they have bought four to five years ago and the absolute price of the stock has come back today and they are selling it.
I think the market has not really been that attractive as yet for retail investors to come back in a big way. But, like I have said in the past, I think the one determinant of that is going to be interest rates. If the Reserve Bank of India (RBI) cuts interest rates, which we hope they do this quarter by 25-50 basis points and incrementally over the next few quarters, I think you will see interest coming back in the equity markets for sure.
Q: Hindustan Unilever (HUL) declares today. I do not see it in your top list for 2013. Are you guys going underweight in that space?
A: I will not be going underweight necessarily, but I think given the outperformance of the Fast Moving Consumer Goods (FMCG) names last year and given the reform momentum that the government has currently undertaken, I would not say I would remain underweight. But, I would remain neutral on the FMCG space at this point given especially where valuations are and after looking at some of the high-beta plays.
Q: One of your top picks is United Spirits (UNSP) and that has been under some stress, especially regarding whether or not this open offer is going to go through?
A: I think the stock fundamentally remains a buy from a 12 to 24 month perspective. We sincerely believe the company will have a significant turnaround in its financials, especially its operating margin which is currently between 12 and 13 percent.
The company has in its recent history witnessed operating margins of about 20 to 21 percent, so I think Diageo will come and significantly change that. More importantly, I think we are looking at a potential stake sale in United Breweries (UBBL). UNSP still owns 3.5 percent of UBBL. The other asset they have is the inventory of alcohol in Whyte & Mackay and the third asset itself is Whyte & Mackay.
So there are series of events that could unlock value in UNSP and we continue to remain very positive on that.
Q: Do you believe Larsen & Toubro (L&T) will continue to deliver? That space generally has been under some strife, not L&T in specific, but the infrastructure side of things.
A: I think L&T is one stock that has been left standing in the infra space. We know that the others are down anywhere from 70 to 90 percent. But, I think this is a rock solid name and if investors out there are looking at playing the infra space, it is the best bet.
In fact, over the past few days we have actually seen a fair amount of short covering and long build up in L&T as well.
Q: What kind of appetite do you expect to see in the government offerings over the next few weeks, in names like Oil India and National Thermal Power Corporation (NTPC)?
A: I think we have buys on both Oil India and NTPC. There will be interest in those stocks. NTPC among the utilities space is obviously a clear winner. It does not have any of the issues that unfortunately some of the other private sector names have. I think we continue to like that name.
Assuming of course all of this is priced attractively, I think there will be significant demand for both the names. Oil India, as has the case been with the overall Public Sector Undertakings (PSU) basket, Oil Marketing Companies (OMCs), Oil and Natural Gas Corporation (ONGC), Gas Authority of India Limited (GAIL), all are going to be beneficiaries of the diesel deregulation.
Q: Do you have any preferences in that oil list?
A: In a pecking order, we like ONGC and GAIL. The OMCs have run up quite sharply and therefore, I would prefer these two.
Q: Someone was pointing out yesterday that retail interest is actually picking up via the primary market. Apart from these government offerings, anything else you see that might fire up retail sentiment?
A: I think historically retail interest has come back when they have actually made money in Initial Public Offerings (IPOs). The big significant IPO that we had recently was Bharti Infratel and that has not done too well.
I think we need a couple of successful deals to see retail interest come back in the market. That does need to happen and the fact is between now and June 30 you have got a bunch of Offer For Sale (OFS) or Institutional Placement Programme (IPP) scheduled to happen.
I also want to mention that between now and the end of this quarter, you will see a large amount of divestments. There are opportunities to make money, assuming all of these deals do get priced properly.
Q: The other point of concern seems to be that 20,000 is not necessarily the best level to be getting into the market. You have got a year-end target of 22,500. What kind of downside risk would you say is present to the market this year?
A: There are a couple of risks. Everything looks rosy at this point. Mr. Chidambaram has done a fantastic job of delivering on reforms and more importantly, improving the sentiment. He is going to be on the road later this week, meeting investors abroad. I think that will bring in a lot of positive cheer.
To mention that next month there are about six to seven India dedicated conferences in India by various firms. So I think that momentum will continue into the New Year. In terms of the downside, we have significant risks such as the fiscal deficit not being contained given that we are in a pre-election year.
Second of course is the currency and the Current Account Deficit (CAD) which continues to balloon. Hopefully, the increase in the import duty on gold will address some of that problem. But, I do not see a downside of more than 5 to 10 percent. Things could change if something goes wrong, but otherwise looking ahead, today I do not see a significant downside to the market.
Q: What do you expect to see between here and the budget in terms of any further policy impetus that one can get from New Delhi?
A: I do not think there is that much more which the street is expecting from the Ministry of Finance or for that matter from the government. I think a lot has been already announced and is being delivered. Maybe some idea or a roadmap on Goods and Services Tax (GST) would be significantly helpful, though I will be surprised if that does come through in this budget.
That is too big an issue to resolve a year before election and probably the next government will address it. But, I think continuity between now and the budget in terms of reforms and positive speak from the government will be very, very useful.
Q: Do you expect any of this global liquidity to hold their call, given global developments especially from the US, because February and March are important months for them?
A: I do not think so. That is not the impression I am getting so far. I think there is clearly an appetite for Indian stocks right now. We are getting a lot of inbound queries on what stocks to buy. Cement is one sector that we are seeing a lot of buying interest in. Media is another space in particular where a lot of the Foreign Institutional Investors (FIIs) and also some domestic investors have missed out on.
Media stocks on an average have rallied 100 percent in the last 12 months. So we are seeing a lot of interest there. I think even in general on the auto space, given how some of these stocks have done in the past 12 months, we are seeing renewed interest coming back. Real estate is the other sector which has been an underperformer.
I think if you look at how in the past three weeks some of the stocks have done, IT has taken everybody by surprise. We have seen a lot of people underweight Infosys, so we are seeing a lot of buying coming in there. We are also seeing a lot of buying interest coming into the oil and gas space and of course, real estate. These are the three of the large underperformers of last year where we are seeing significant buying interest coming in.
Q: What about Reliance Industries? Do you think 2013 could be a turnaround year or you are still sceptical?
A: My analysts are not as positive as I am. But, the fact is the government clearly in today’s press seems to be indicating that they are willing to work out a compromise and come to terms and sit down across the table and work it out with Reliance. If that were to happen, it will be a huge positive for the stock.
Inspite of the fact that the refining margins are doing well, petchem margins are doing well, I think the single biggest block in the minds of the investors unfortunately is production at KG-D6. If that issue can be resolved, I think the stock could definitely go up another 20 to 30 percent from these levels.