BP Singh, Executive Director & CIO - Equity, Pramerica Mutual Fund believes that the Indian market is well placed after the recent cyclical recovery. All eyes are now on the RBI for the next trigger in terms of a rate cut.
However, Singh feels that rate cuts will not have such a significant impact on the growth. Reason being that Indian economy is different from the rest of the world, as here consumers are not leveraged manufacturers are leveraged and any rate cut allows the manufacturers to carry their inventory for longer period.
He is overweight on pharmaceuticals and is in the process of reducing underweight position in IT sector. With that he prefers to remain neutral on banking space.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: What is your call on the market from here because off late India has done well presumably on the back of the fallen commodities?
A: I agree with you. The market has done reasonably well mainly because of the cyclical recovery which we are witnessing right now in the Indian context and also when we put it in the global context. It is good news. We are very constructive on the market with that perspective.
This provides us an opportunity and deepens the long-term prospects of the market and how we utilize this opportunity to carry out further structural reforms. This makes Indian manufacturing globally competitive. That probably will drive the market in the long-term. However, in the short-term it is the cyclical recovery which has definitely helped us.
Q: How much of a leg up are you expecting from the Central Bank tomorrow?
A: There will be some rate cuts tomorrow and coupled with that the cash reserve ratio (CRR) cuts. However, I am not so excited or looking forward to it as much. I do not believe that the rate cuts have such a significant impact on the growth.
Let us accept that Indian economy is a different economy compared to the rest of the world. Our consumers are not leveraged, our manufacturers are leveraged. Any rate cut allows the manufacturers to carry their inventory for longer period.
I definitely believe a CRR cut will help because that will allow banks to transmit little bit of this reduction in the rates. As we have been witnessing in the past also, the repo rate cuts had not been transmitted as much. What I am looking forward to is not as much what happens in the credit policy in terms of the rates instead what kind of steps we take to encourage exports. Right now when we look into the globe, every economy in the world is trying to grow by exporting.
At a time when the entire world is looking to grow through exports, we need to put ourselves in shape to ensure that current account does not deteriorate from here.
Q: What are your big overweights right now in this market?
A: We still carry overweights on consumers, pharmaceuticals. We are now in the process of reducing our underweight position in IT sector. We were carrying a big underweight position in that particular sector in the past. We also carry a neutral position in banking.
Q4: The recalibration of IT weightage is on account of how much valuation have corrected in recent days?
A: Exactly because we believe that as far as the IT sector is concerned, the margin declines are going to be the idea in future. We get our revenue from economies which are slowing down and struggling to grow. Our cost base comes from our country where inflation is reasonably high.
So, in that kind of scenario and particularly with the kind of fund flow we have in our country, we do not get the support of the depreciating currency. If one combines the three, the margin decline in my opinion is going to be the story going forward. In that context the valuation becomes very critical. The recent fall, which we have witnessed in the last few weeks definitely presents an opportunity.
Q: You mentioned consumption, would that include autos as well or you are negative on that side?
A: I am not very positive on that side rather at this point in time, we are carrying underweight position. When we say consumption, it is more of the daily household things which the Indian consumers are demanding at this point in time.
Q: What about telecom?
A: Telecom and aviation are the two sectors which are leading the economy in terms of the restructuring. We believe there are two India existing, one is cash rich India and another is highly leveraged India.
Our opinion is that as we move forward, the structural reform, which we are referring to will result in a scenario where some of these leveraged companies will have to vacate space for the companies who are cash rich. That we have already witnessed in the sectors like aviation and telecom, which brings the pricing power to the corporate and results in the P/E expansion.
So, these are the two sectors, which are right now going through that phase of change. Going forward, we would be looking very keenly to them. Right now, as far as telecom is concerned, we are still equal-weight but we are keenly watching this particular sector for the developments going forward.