Valuations a big hindrance for P/E investors: Deepak Parekh

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See latest News about HDFC See previous management interviews See what other Experts & Brokerages are saying about HDFC Nifty BSE | NSE 30/05/12 Are Mutual Funds betting on Nifty?

Deepak Parekh, Chairman, HDFC , says India currently looks expensive at 18 times earnings as against other emerging markets.

Speaking on the lack of private equity deals in India, Parekh said mounting valuations were a big hindrance for private equity investors. "But I do expect huge investments in private equity from insurance companies."

On the likelihood of rate hikes, Parekh feels the Reserve Bank is likely to raise interest rates by 50 bps in the fourth quarter. 

He stated that the banking system was capable investing far more but is constrained by RBI limits. "There are still some concerns that credit growth has been less. It has been low at 13% as against a deposit growth of 20% in the first half."

Parekh said Indian IT had moved forward from the Satyam scam. He feels Indian family run businesses are likely to sell majority stake in future.

On real estate, Parekh said commercial retail centres and malls were still not out of the woods. "Large commercial properties are ready with no takers." He added that affordable housing has immense potential.

Here is a verbatim transcript of the exclusive interview with Deepak Parekh on CNBC-TV18. Also see the accompanying video.

Q: We are awarding companies in India Business Leader Awards (IBLA) for the last one-year. It's been a challenging year. The last 3-6 months have been better. Do you think the worst is generally over for Indian companies?

A: I think definitely. For India atleast the worst is over. I see much positive growth. The gross domestic product (GDP) growth also will improve. We have had a little issue on the rains - on the monsoons - a little bit of drought, so food grain prices going up is a bigger concern and you see the consumer price index (CPI) is already way above in double-digits. So getting a 6.5% GDP growth this year, despite having difficult quarters in earlier parts of financial year, is not an issue. We must look at the following year 2010-2011 much more confidently than what we have gone through in the past.

Q: When we sat down to analyze the companies which have done well - the companies which stood out were the domestic focused companies where demand has been relatively strong. How much of it is because of these stimulus packages etc, which have artificially created some demand for the moment?

A: I personally feel the stimulus has probably given liquidity. The stimulus programs have put some money in the hands of rural Indians but the stimulus packages have not worked that aggressively or that well in India because the stimulus that we gave was not large in size, in quantity. You show me an industry which is not doing well. If auto sales are 31% up, fast moving consumer good (FMCG) and pharmaceutical companies are saying it is the best quarters they have had - where is the problem? The issues are over - are far behind us.

Even when in October and November last year, the biggest issue was availability of resources. The biggest issue was liquidity and interest rates went sky-high. Now interest rates have been soft, there is enough adequate liquidity, whatever way or whichever way you look at it. The credit growth has been less. The worrying concern is that the credit growth in the first six months has only been 13% this year while deposit growth has been 20% in the banking sector.

While the last year, comparative period, the credit growth was much faster. It was twice the level of current year. So somehow we need to see that the credit growth by banks happens in a faster manner and if that happens and we all expect that the last mile of infrastructure projects that have not yet got approvals or are at various levels of getting final approvals - if they are pushed through - then disbursement to the infrastructure sector i.e. roads, power, ports and all would be significant.

Q: On that point, the kind of capital raising which has happened off late through QIP/IPOs etc - do you think the capex cycle might get kick started again or that was just a balance sheet repair - it may not reignite the capex cycle?

A: Part of it is balance sheet repair and if you see what are the issues or what is the purpose of the issue - in many cases it is to repay debt, to bring debt/equity in better form, to reduce debt levels of the company - whether you take a QIP of DLF or Unitech. A number of builders - particularly developers - the main purpose of raising IPO or QIP is to reduce debt levels. So it is repairing balance sheet.

Q: We didn't find too many real estate companies in our top list of winners this time around or the contenders. Do you think the worst is over for the sector or you are still uncertain?

A: I am still a little uncertain, I will tell you on the real estate sector - I am convinced, I have gone around the country into big cities - my view is that commercial real estate is very surplus today. I was in Hyderabad last week and I saw four million square feet of commercial real estate - state-of-the-art buildings - completed and ready to move in but no takers.

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