Jun 22, 2013 12:55 PM IST | Source: CNBC-TV18

India still looks good on dollar-adjusted basis: Edelweiss

Based on their interaction with foreign institutional investors (FIIs) at the Edelweiss Agri-Conference, he does not think FIIs will continue to sell majorly in the near future unless global emerging market (GEM) flows as a structure, category or asset class reverse.

Asset classes across board turned volatile post FOMC meet on Wednesday, which led to a selloff in emerging markets including India. However, Vikas Khemani, Edelweiss Securities Khemani feels India is much better placed than other emerging markets (EMs) and will continue to get flows.

"On a dollar adjusted basis Indian market still quite reasonably attractive," he adds.

Based on their interaction with foreign institutional investors (FIIs) at the Edelweiss Agri-Conference, he does not think FIIs will continue to sell majorly in the near future unless global emerging market (GEM) flows as a structure, category or asset class reverse.

Most of the agri companies from our conference are giving fairly positive outlook, says Khemani.

Meanwhile, long-term investors could use these sell-offs as an opportunity to build positions, he states.

Also read: Attracting FII funds a test now; see rate cut scope: Gokarn

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

Q: After the big fall that we saw yesterday today things are a bit stable. So what is the call that you are giving to investors? Should people sell into the rally?

A: Post Fed commentary we have seen markets across the world and across asset classes kind of being volatile and getting spooked, the reason being the incremental call on the liquidity is yet to be ascertained. While Fed's commentary actually relates to managing the expectation that Quantitative Easing (QE) is going to be withdrawn in an orderly manner over a period of time and Fed over last two statements have been trying to set that expectation in the market.

I do not think they are going to go ahead and immediately start withdrawing and create a situation in the market where there will be liquidity squeeze. So, post the immediate reaction, from a short-term and technical perspective markets will settle down, stabilize. And should markets continue to remain spooky, regulators would come and give comforting statements to the market. Because I don’t think it was their intention to spook the market as such but build up expectation that liquidity will be withdrawn over a period of time.

So, from a structural perspective, you might make an argument that probably the sustainable flows towards emerging markets (EM) might slowdown. However, I do not think in the next 6-12 months you will start seeing a withdrawal from EMs, but the flows might slow down. Therefore, one has to really look at that if US is growing back then what does that mean in terms of growth to the EMs.

For markets like India I feel that there is a lot more to do with the Indian story, lot more to do with the domestic problems. We are much better placed than lot of other EMs. I feel that India will continue to get flows. On a dollar adjusted basis Indian markets are still quite reasonably attractive. Also over a period of time as these uncertainties on election etc settle down, and as macros start stabilising then India from a slightly longer term perspective offers a good investment opportunity. So our advice to long-term investors is that use these opportunities as and when markets are spooky, to build your exposures out here.

Q: Have you done any work on how Earnings Per Share (EPS) estimates will change? Of course for some it is going to be beneficial as import competition reduces, but any estimates at all on how EPS for your world of companies changes? Does EPS growth fall dramatically?

A: I do not think we have done any number in terms of sensitivity, because it is very difficult to predict a number for the whole year, on the EPS given the significant amount of volatility going in the currency.

To do an assumption on the EPS you need to take a number and you do not even know what number it is going to be; so it becomes very difficult to do that. One can only look at various scenarios and what kind of impact they will have on the balance sheets and P&Ls, which is what our report has attempted to do.

Q: Would you say from experience that given a 10 percent depreciation of the currency or perhaps from Year-To-Date (YTD) an 8 percent depreciation of the currency, chances are of your EPS estimates getting lowered?

A: I do not think there will be a significant downgrade in terms of sustainable EPS. Given the 10 percent depreciation in currency, there are lot more stories like IT, export oriented pharma stories, which would benefit on the earnings. Broadly, speaking I don’t think there would be a big impact on the EPS.


Q: What is the sense you are getting from India Inc - Is there is a shaking of confidence in the immediate environment and therefore the capex cycle could get further postponed? From investors are you getting a sense that investors expect things to get a little worse before they get better, so people are not going to rush in and put the money now?

A: This conference is largely on agri-focused companies. In general, corporates have been saying that the environment has been very tough for them in terms of taking any call; the local environment, regulatory environment, policy environment, on the top of it the global environment have all been very uncertain. So, most corporates are very wary of making any significant commitment at this point in time. Probably people would want to get lot more clarity, sustainability of the policy environment around currency. If there are so many moving variables, no entrepreneur or promoter would be comfortable taking extra risks.

Therefore, I do not think people are thinking of growth at this point in time, but are thinking of how to handle current environment and troubles. So probably from capex is still sometime away.

As far as investors are concerned, unfortunate part is that we have had a pretty bad environment in terms of policy and capex and currency too has been very poor. So, right now investors right now also spooky. Some of the investors, especially the global emerging market (GEM) funds have been taking long-term call, because they  have been getting lot of flows, and India is one of the better placed markets. Therefore, whatever flow we have got in India is from those funds. They look at India as relatively better placed compared to China or other countries. So, the long-term faith in the country is intact but the key challenge is to navigate them through the current short-term crisis from now to election because most investors, most corporates are struggling to get through this environment.

Q: Just in case the monsoon this time is a little excessive – what could be negative impact of that on agri companies?

A: Most of the companies from our conference are giving fairly positive outlook. According to them sales are expected to be better be it tractors, seeds, agrochemicals etc. We feel that the agri sector is a structural story given the fact that in India, arable land is coming down and population is rising, so there is urgent need to increase the yield on the crop. Therefore, that all these segments like agrochemicals, seeds, micro irrigation fall into the opportunity bucket. That is the reason we have tried to put together this conference so that investors get to interact with the corporates about what is happening on the ground. So far, we are getting fairly positive vibes from the corporates about the sector.

Q: As the head of institutional equities you will have the best pulse of what institutions are looking to do in the market. FIIs have been sellers for last nine consecutive sessions. Are you getting a sense that there is still a lot more pent-up selling left and at least in the near-term we are likely to see this FII sell figure in the equities, cash markets to continue?

A: Based on our feel and interaction at the conference and given where the rupee and market is, from hereon you will see a significant outflow coming through unless the global GEM flows change. If the global GEM flows’ changes then you cannot single out India. For example if Indian mutual fund industry or insurance industry stopped getting flows then no mutual fund can put money in India.

Since, India was big beneficiary of GEM flows and so unless the GEM flows as a structure, category or asset class reverses, I do not think India will see major reversal of flows. Tactical selling will keep on happening. We have seen in the recent past huge amount of Futures got short, huge amount of Put Options were getting built by the FIIs. Maybe it was ahead of the event kind of selling. I do not think major selling will continue in the near future based on our interaction.

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