Indian debt market should brace for further outflows to the tune of USD 2-3 billion over the next one month says,Sandeep Bhatia, Kotak Institutional Equities, in an interview to CNBC-TV18. India has already seen an outflow of USD 4.8 billion in the past few months.
The morbid newsflow can worsen as Bhatia foresees the declining rupee going all the way to 62/USD in the face of limited options left for Reserve Bank of India (RBI) to stem the fall. The market will naturally be hit and 5200 on the Nifty can easily be seen, he says.
Stock specific, he says JSPL after the recent collapse looks like and interesting opportunity but cautioned not to expect quick returns. One will have to hold it for the long-term.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: What are you hearing from the sales desk in terms of how much money could potentially go out? So far in the last 10 days we have lost just about a billion dollars?
A: We are now getting into a zone where from hereon maybe at least till the end of this year, we would see couple of days of huge outflows. Yesterday, we saw Foreign Institutional Investors (FII) selling USD 351 million.
In the near-term we could see further outflows from the debt side. We have already seen USD 4.8 billion going out. Another couple of billion dollars can easily go from Government of India (GOI) debt. We definitely should expect outflows of between USD 2-3 billion in the next month or so.
Q: You do track these Exchange-Traded Funds (ETF) quite carefully. Is that what you are seeing anecdotally for equities as well that the selling has accentuated ever since yesterday?
A: Although what happened yesterday was just a reaction to the comments, the selling has started, so we will have to brace for couple of days of more outflows.
It would be almost foolish to expect that this was the first and the last day of that kind of outflow that we have witnessed. When we were getting the inflows, no one was questioning the inflows and everyone was happy, but everything in life comes to a full circle. So now we are at other end of the circle.
Q: What could the impact cost be for both currency market and equities if that were to be the case? If this is the kind of outflows you are talking about from the debt market where do you think the rupee is headed and by extension how much damage do you think equity market could take?
A: I think we have to brace for some more volatility on the rupee. The real issue is that we are in a position where if RBI intervenes it could easily lose a couple of billion dollars by selling dollars and in the bargain actually suck rupee liquidity out. So, the options which the RBI has are very little. Therefore, it has done the right thing by staying away.
One of the foundations of a good recovery is that there should be a lot of cleaning out. We are in the process of seeing that cleaning out take place. We have already upped our forecast range for rupee. We think the rupee can go up to 62. Whether that happens now or it happens in the later part of the financial year, it remains to be seen. But yes, there could be further weakness in the rupee.
As far as the markets are concerned, 5200 on the Nifty can easily be seen.
Q: Yesterday we saw a lot of delivery based selling in names like ICICI Bank, Housing Development Finance Corporation (HDFC), Reliance Industries, HDFC Bank. Do you think, these kind of high quality names which are well owned by institutions could come under more pressure relatively speaking in the days to come?
A: If the indices are to slide then the large names have to fall and some of the names that you have mentioned have very high weightage in the indices. In this kind of a financial landslide that we are witnessing, a lot of damage is done which is also essentially an opportunity. We can easily see up to 10 percent downside on these names and if that happens, it is a good time to accumulate.
The tragedy of all this is the fact that we are going to remain in a market which has been essentially favouring high quality names even if valuations are high. I do not see any reason for people to move away from that story.
If GDP growth reaches 6 percent this year it will be only because of good monsoon and some good luck. Other than that growth will still remain in the 5.5-5.7 percent region and that would be the base case assumption.
One will just have to stick to quality and look for opportunities where valuations look relatively better than they have been rather than cheaper.
Q: Jindal Steel & Power (JSPL) has completely collapsed to nearly Rs 200. This one was also owned quite a bit by institutions. Everybody has got it under coverage. What do you make of the recent bloodshed in this name?
A: At these levels it is an interesting opportunity to get in the stock. I do not expect any quick turnaround on the name. It suffers from the same set of issues which every other stock, in this space is plagued by. Any investment horizon in this stock should be at least over 2-3 years. Only thing one can say is that they are in a better position to come out of the mess that the sector is in. To that extent, it is a better name to own which is one reason why we saw huge FII interest here. It would be too much to expect to make quick money in the stock right.
The whole infrastructure space is plagued by huge issues on uncertainty of allocations, questionability of whether those allocations were made in a fit and proper manner and every other stock you can raise questions with. So anyone who is looking at this space should have a longer investment horizon, but JSPL is definitely better placed in the entire space.
Q: What would you recommend doing on Hindustan Unilever (HUL) open offer?
A: For every investor it is a question of time horizon. If you have a near-term 2013 kind of time horizon, it is a good time to tender. If you think that you would have at least 3-5 year horizon, then that is the same horizon that HUL is taking on making this investment. They are a buyer there. They believe that there is something good happening here.
Q: Given these parallel problems that have build both in terms of global developments and what has happened with our domestic macros and the currency now -what would you say is the central risk for the market's performance over the next couple of quarters? Has it gone back to looking inwards and the problems within that that is probably going to stymie any performance for us?
A: I will break this answer into two parts. One is the problem that we have had for the last three years which have been well evident and nothing has been done about it. Since August-September last year we have seen movement on some of those problems, but now it is question of too little too late and also on what is happening globally.
What we are witnessing right now is essentially a global phenomena, and there is clearly a real fear that the dollar will go back home again. We saw that in 2008, when the dollar started going back home again, liquidity just dried up. I do not think we will see that kind of a dry up happening right now, but there is reversal that will happen. To some extent it will be moderated by what is happening in Japan or elsewhere. Therefore, we will definitely see impact coming through on the rupee. The only thing that one can hope for is that as far as the Indian government is concerned, we see at least proactive increase or rather increase in fuel prices and cut in subsidies which gives some strength to the macro.
Q: On the subject of that what are your expectations on this whole gas price formula? How do you think the cookie will crumble there and how would that be taken by the market?
A: Rather than pinning a number or saying that this is what I expect the gas price to be, we need a policy which is structurally sound and which allows for flexibility depending upon where gas prices are. Whether they are up from here or down from here that is not as much the question. It is that it should be fair, it should be transparent - the price sharing mechanism. As long as that is achieved that will be a big positive for the sector.
We have seen the fact that if correct prices are not given the investment in any sector will not come through. So that is what the policy should aim at.
Q: From the large cap basket have you identified a group of stocks which have very large dollar debt and therefore are most vulnerable to the kind of swings that we are seeing in the currency now?
A: Market movements will tell you where the problems are. I do not think we need to spell it out, but it is clearly the entire infrastructure space where all the problems lie. People have tried to take advantage of lower dollar denominated debt and then load up the balance sheet. Clearly the projects have not come on-stream. So the entire infrastructure space is where all the problems reside.
Cash generative pharma and consumer space is where things look much better. We will be in this phase for the next 12-18 months at least until the next government takes charge until then most of the infrastructure sectors will remain under a cloud.
Q: Have you seen enough to categorise the current developments and where we could be headed as a big bear market batch approaching for the market again or is it still a trading market and now we are now down to the lower end where sentiment usually takes a hit?
A: We are in market where we are completely at the mercy of global flows. If one thinks there is going to be a significant monetisation from Japan then I would say that, the market will move up but if one thinks there is going to be the overwhelming factor of dollar outflow, then we are in a bear market.
We have been in a bear market already for the last three years. The only reason why we saw upticks was when there was optimism on Quantitative Easing (QE) but that is now getting reversed and rightly so. Therefore, we will definitely be in a market for the next couple of months where we see outflows come through and pressure on indices.
Q: Amongst the spaces that have traditionally enjoyed higher valuations through the course of these last few years between pharmaceuticals, banks, Fast Moving Consumer Goods (FMCG), which one would you be most concerned about now over the next few quarter where you think a lot of this valuation premium will begin to come off?
A: Valuation premium will come off in sectors where earnings will come under pressure. Focus should be on earnings stability and looking at names which can manage this volatile phase that the Indian economy is in.
The best confidence one has in the market is with the private banking sector or with the consumer names but where the real volatility is going to hit you is in metals or capital goods, or where the order inflows make a big difference. The whole market is sure to come under pressure, so even some of these names can fall.
I do not think that we will see a convergence of valuations; differential will still remain. Maybe the levels at which valuations are, will come off.