Though the government is implementing measures to support the weak rupee and sliding market, petrol price hike is little that can boost sentiments.
Pratik Gupta, Head of Equities, Deutsche Equities feels that that the petrol price hike by itself is not enough to turn sentiments. In an interview to CNBC-TV18, he said that investors are cautious due to both global and domestic factors while sharp fall in rupee has hurt sentiment significantly.
According to him, diesel and LPG price hike is on the cards soon. IOC , BPCL and HPCL have hiked petrol price by Rs 6.28 per litre, including sales tax, the hike adds up to Rs 7.50/litre.
Both the Indian currency and market are continuing their losing streak. The rupee, which opened lower on Thursday, quickly hit a new low of 56.28 per dollars.
Gupta, however, is expecting the Sensex to touch 18000 by the year-end. As an investment strategy, he advises to maintain defensive stance on the market and avoid high beta play. He prefers upstream companies over the OMCs as valuations are attractive.
Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Sonia Shenoy. Also watch the accompanying videos.
Q: Big news is the petrol price hike. Are you optimistic that diesel will follow?
A: Indeed, we do believe that a couple of tough actions on the part of the government are needed, given what’s happening with the economy and the rupee. We saw the petrol price hike yesterday. It was expected, given that the Parliament got over the day before. What surprises us is obviously the magnitude of the petrol price hike.
Our oil analyst believes that there is still another Rs 1-1.50 left, even in petrol, for the oil marketing companies to breakeven. We understand there is an EGoM meeting this Friday. There are expectations that a diesel price hike and an LPG price hike will follow. These are some of the tough measures that are needed right now, if the government wants the economy and the rupee to start stabilising, start recovering and more importantly to get back the faith of foreign investors.
Right now, at Deutsche, we have been speaking to foreign investors across the world and frankly we have not seen such bearishness on long-term prospects of India. We saw a little bit of this back in December, but that was short-lived. Right now, the sentiment is very bearish. We do need some tough actions such as a diesel price hike.
Q: If we do get ad-hoc hike of Rs 3-4 on diesel, which would still leave almost a Rs 10 gap on under-recoveries, do you think that will be enough to turn sentiment around for global investors or they will not see that as essential reform?
A: In that case, I am afraid it will be seen as a stop gap one off move or a half hearted move. So, I think they need to be bold. So, to that extent, I think they need to be far more aggressive in pushing through hard on cutting the fuel subsidies.
The only thing, which may help the government, is the further decline in international crude oil prices. Brent is already down to about USD 107 per barrel. There is slowing global growth, you are seeing that the inventory pile up prices of natural gas are coming off in the West and tensions in the Middle East political tension seem to be easing to some extent. So that may help Brent prices coming off even further. That may, therefore, alleviate the pressure on the fuel subsidy bill for India.
From the government’s perspective, as of right now, I think they need to go fairly aggressive in terms of the diesel price hike and cut the fuel subsidy bill.
Q: Do you think by itself petrol will change the mood in the market or you need to see a decisive action on diesel for investors to be convinced?
A: I think petrol price hike alone will not change the sentiment. You need to see a lot more. Diesel price hike is one of them. Also, it’s not just the India specific issues, there are also issues surrounding what’s going on in Europe. As we have seen, India is not just the only market which has gone down this year. Infact markets like Brazil have done far worse. India, within Asia, has been the worst performing market this year, especially in dollar terms.
I think you have got to separate out the India specific factors from the international factors. So, on one hand, you have got a risk off environment. We saw the German two-year bonds earlier this week being subscribed for barely 7 basis points of yields. So that’s a sort of bearishness or defensive mindset that global investors have right now.
On the other hand, you have the India specific factors. We need to see a lot more action on the policy making front, efforts to cut the current account deficit, the fiscal deficit. So, therefore, just a petrol price hike alone will not help. We need to see a lot more.
Q: Just describing the rupee’s fall over the last few days, 56 plus. You were talking about the dollar returns. At dollar terms, we are back to December lows for most global investors. How much of a sentiment dampener has that been?
A: I think it has been a huge dampener. Infact I was in the US, just one week back, basically the single biggest concern for most investors was the currency, not so much the stock market or valuations, etc. It is really the currency which is holding back a lot of investors. Until the currency stabilizes, atleast on the FII front, I think there is going to be a lot of nervousness.
Obviously we are running a 4% current account deficit. We need significant capital inflows every month to keep the currency where it is. The way the currency has moved down, that’s actually really spooking a lot of people. So, until we see the currency stabilising, I think FII inflows will probably stay on the sidelines. So, to me, that’s actually a pretty significant measure which the foreign investors are looking at.
Q: You have been meeting investors and you will meet many more at the Asia conference next week for Deutsche Bank. What do you expect to hear from them? What do you think will be the most articulated fear? Is it the currency, is it policy, is it the fact that global markets are in turmoil and people are on risk off mode? What is the principle thing which is souring sentiment on India to a low that you have not seen in 20 years?
A: Firstly, our Deutsche conference, it is probably the biggest Asia conference. We have something like 1,500 odd investors, 250 corporates, lots of big keynote speakers and so on. The main discussion point right now is going to be around the global economy, especially the Euro zone. We have the Greece elections coming up on June 17. That’s going to be a significant milestone for more people. Over there also a lot of it is about politics rather than pure economic rationale. So, between Greece and the Germans, who will blink first? So that’s really one issue.
Related to that issue is the appetite for emerging markets. As far as India is concerned, the rupee is actually the way I see it is more of a symptom. The bigger issue, which people are watching, is when will we see some policy action, when will we see any decisive government steps towards cutting the various subsidies we have, whether its fertiliser, fuel and so on and measures to improve clearances for various projects. To me, that’s probably one real hope which people have that perhaps you start seeing clearances of projects. That’s one thing which doesn’t require legislative action and is less controversial, so perhaps that’s one thing. But for the time being, the attention is focused on Europe, the rupee and policy action by the government.
Q: Autos are reacting quite badly today. Do you think it is warranted the concern on the disparity in petrol and diesel prices? How it could affect prospects of manufacturers like Maruti or many of the four-wheelers and two-wheelers?
A: You are right. There is definitely some concern out there that the government will perhaps not be able to push through a fairly meaningful diesel price hike. So that is one reason, the disparity between petrol and diesel.
For the auto companies, there is also a fundamental issue in terms of the demand environment. We are expecting a fairly sharp slowdown in terms of volume growth for the auto sales in India. Also, the rupee weakness plays an important factor for a lot of these companies. It impacts different companies in different way. Some of them are heavily export oriented. So, they might benefit. On the other hand, you have companies which have exposure to the yen. The rupee-yen has moved adversely for them. So, that also is another factor.
But in general we would not be very optimistic on the outlook for the auto sector. But selectively, there are a couple of companies, which might look alright. But overall there is an issue with demand, there is an issue with the currency and now you have this fear about the petrol and diesel disparity, assuming the diesel price hike is not substantial enough.
Q: Stocks in the telecom sector like Bharti etc started coming off quite a bit. Do you see significant impact because of the way the rupee has moved on the balance sheets of many of these companies with a lot of overseas debt?
A: Yes, absolutely. Not just in the telecom sector, it holds true for companies in the auto sector and all across corporate India. Companies, with dollar liabilities and not matching dollar revenues, are obviously being exposed. Not all of the impact is visible in the P&L right away, some of these have impacted the balance sheets. So, therefore it is not easily visible.
In the case of telecom, there is also the regulatory angle, which is also playing a big factor over there. You had the recent recommendations by the Telecom Regulatory Authority of India (TRAI) both on spectrum refarming and the reserve price for the licenses and spectrum etc. That is having a probably an even bigger impact than just the rupee itself. The rupee is obviously one big factor which is affecting certain companies. But in addition to that, for the sector as a whole, the main headwind is from a regulatory perspective.
Q: In your model portfolio, you have turned much more defensive now and you have trimmed down holdings in real estate and in banking. Can you tell us why?
A: Basically, the main reason is the outlook in the Euro zone where we maintain a very cautious stance. It is fairly difficult to predict, there is a tail risk of a Greek exit. If that happens, especially if it is a disorderly exit, which is not our base case scenario, but there is a risk of that happening, in that case, you could see significant volatility, significant decrease in risk appetite for emerging markets. India will not be spared in that scenario. So that is one reason.
Also, domestically we haven’t seen any positive action in terms of policy making. So that also is one of the reasons which is holding us back. Until we get clarity, some visibility on either of these two factors changing, in the short-term, we would maintain our defensive stance on the markets. Real estate and the banks clearly are one of the most sensitive sectors.
Within banks, however, I would just highlight that we are relatively more positive on private banks, which have a strong liabilities franchise. They should do relatively better. We have been more overweight on those kind of stocks. But in general, we are recommending a relatively more defensive portfolio from a very short-term perspective.
If you are a long-term investor and can look through the short-term volatility then there is potentially a good buying opportunity, if you can withstand the short-term volatility and you have a two-three year view.
Q: Given the recent changes and expected changes in fuel prices, are you bullish on either upstream or downstream oil?
A: Upstream, we are relatively more positive. Downstream, we have fundamental issues not just with petrol, but the subsidy sharing is always dependent on the government. Upstream companies, the valuations are also relatively more attractive. I guess we will find out on Friday whether that optimism is justified or not.
Also, some of their upstream companies have outperformed the downstream companies and the market as well. They are relatively less vulnerable in our view. But I think in general overall, for the market as a whole, I think the diesel price hike or the lack of a diesel price hike or the meaningful diesel price hike will be quite significant event on Friday. So, let us see how that pans out.
Q: Have you toned down expectations from FY13, from a market return perspective, from how you are feeling at the start of the year?
A: Yes, definitely. While our index target has stayed the same, our year-end target is still about 18,000, which is roughly 12% return from here. But if you think of it from the perspective of a dollar investor, FII, they have already lost about 15% in the rupee in the last few months alone. So, to that extent, from their perspective, they have already lost quite a bit of money. So, we are kind of going back to where we were in dollar terms.
It has been quite disappointing the way the Indian economy has progressed. The marco-economic situation is definitely deteriorated. To add to all of the India specific issues, we have had a resurgence of the worries in the Euro zone. That I think is frankly the most important issue right now. India has obviously had its own issues, but don’t forget as I keep saying we are seeing similar outflows and poor sentiment towards emerging markets. Korea has seen about 16 straight sessions of FII outflows. So, it is not just India alone which is getting impacted, but perhaps a bit more so given our own domestic issues.