FIIs cautious on India, may trim funds : Nomura

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FIIs cautious on India, may trim funds : Nomura

In an interview to CNBC-TV18, Prabhat Awasthi, MD India and Head of Equity Research, Nomura Financial Advisories said that Indian market has a risk of FII outflow.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS What is Veda Investments betting on? September crucial, market may drift to 5100 Market cues: FIIs net buy $58.2 mn in equities on August 30 BNP Paribas bets big on India's self-sustained growth story Sensex recoups losses; auto, FMCG, pvt banks up ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets

Global economic data has not been so supportive spreading an air of caution among experts and economists. Some are even worried that foreign institutional investors (FIIs) may suck out money from India.

In an interview with CNBC-TV18's Managing Editor Udayan Mukherjee, Prabhat Awasthi, MD and Head of Equity Research, India, Nomura Financial Advisories said that Indian market has a risk of FII outflow.

He is cautious on India as there is a possibility that risk aversion may return to the Indian shores.

Awasthi also warned that earnings could be impacted by global demand. However he feels that there will be no big risk if earnings manage a 15-16% growth.

Adding that the markets may slip 5-10%, Awasthi said that he would buy if markets correct. "There is a possibility of a repeat of  2008 slip," he commented.

He is bullish on banks and real estate sector as they are poised for a strong run up.

According to him, delay in gas ramp up might hurt Reliance Industries . He suggested buying RIL on dips.

Here is the verbatim transcript of his interview. Also watch the accompanying video.

Q: Have we started some kind of corrective phase out here in India, from what you have seen over the last week or so? What is your sense?

A: We had downgraded our stance to a more neutral stance last month and that we continue with that at this point in time. What has happened over the last month is that global uncertainties have moved up. The data from US has been weaker. In the last two-three weeks, the data has essentially become weaker.

On the Indian side, the lead indicators are pointing towards some midterm slow down. We are at this point of time cautious, because we think that even if the long term story is intact, the valuation are versus the overall picture is well balanced. There could be some downside to the market, not a huge one but nonetheless, I would be more cautious at this point in time.

Q: These global problems that you are speaking about, do you think that will affect primarily liquidity into Indian markets or do you think in India we should also prepare ourselves for some economic softness or sluggishness over the next six-nine months?

A: There are two ways the global picture impacts us. One is obviously through the trade channels, where we essentially have seen some amount of softening in export data for example in the recent past. That will be the impact that will flow through the direct real economy channels and then obviously liquidity. On liquidity it is not very certain because if the growth is slow then it is likely that global central banks will keep the monetary policy loose. Even then, you cannot rule out some amount of risk aversion at some point of time. The growth numbers do become poorer.

Also remember that given the fact that we run a fairly large current account deficit, we do need fair amount of capital every month to plug that gap. If you have a negative outflow then it does itself exacerbate the liquidity picture of it. So from that perspective as well, there is a risk. Now whether that risk pans out or not, it depends on how high the risk aversion becomes or indeed it does come through or not. As far as real economies come in, there will be some impact of slowing down through the export channel.

The other thing is that there would be some amount of impact coming from the fact that you are starting to hit production constraints across sectors. Auto is a very good example, where demand is probably outstripping supply. Power, oil sector, so it is essentially hitting production constraints and that is also hindering some amount of growth, which is in some sense it is not a slowdown in demand but it is a slowdown which is led by supply.

Q: Do you think we will see this kind of softness in industry numbers like industrial production (IIP) over the next few quarters and do you see it leading to any kind of earnings downgrades as well at the micro level?

A; I think three-six months is what you should prepare yourselves for in terms of slower numbers. The base effects are coming into play. Last year, at this point of time the industry growth was strengthening throughout and we have been softening in the last couple of months so that essentially you will see poorer numbers for the next three-six months.

In terms of earnings, the call is less clear because the demand side is strong. The issue essentially will come through the global channels. If the global demand does weaken quite a bit then commodity earnings could get impacted. That is a fairly large part of earnings. But I won't think a big risk exist to the current 15-16% growth numbers not a big risk. I think a couple of percentage points that's about it.

Q: What is the sales desk at Nomura telling you in terms of flows for the month of September and October? Is there a bit more of a cautious kind of an approach with flows after strong inflows in July and August?

A: Inflows definitely have slowed down from foreign institutional investors (FIIs) positive inflows, as you would have seen for the aggregate numbers as well and in domestics there are negative streak has been there, they might have slowed down a bit but still nothing to report. Flows definitely have slowed down from overseas at this point of time and I think it is largely a function of what is happening globally.

Q: What is going on with Reliance ? Huge delivery base selling yesterday. The stock seems unable to get its head above Rs 1,000 and stay there. What explains this kind of pressure?

A: What has happened in Reliance is since news of the gas ramp up will be delayed, that was the first trigger that pushed the stock down because that was the main earnings trigger for Reliance. That started hemorrhaging the stock. If you look at the next one year, essentially you have a play on the cycle end and most of the new acquisitions that they have made, they have announced several acquisitions and there is no visibility the market has in terms of how that will impact earnings, timeframe etc.

It has sort of slipped down in absence of positive earnings triggers. There has been some amount of concern with investors rightly or wrongly that they are diversifying and that is concerning some investors. For example, they got into hotels and telecom. There is this whole phase in Reliance where a lot of investments are happening but earnings triggers might be far off.

We believe that is an opportunity to buy the stock because we think that they will execute but obviously in the very short-term there are no triggers on earnings side which helped the stock but there is always a valuation. I think this probably is an opportunity.

Q: Sticking with commodities, the other stock which has got hammered quite a bit because of newsflow has been Sterlite . You guys have just upgraded that name?

A: This morning we upgraded Sterlite. The reason is that the impact on the stock because of the newsflow on both bauxite mines as well as Cairn was largely unwarranted. Sterlite is not involved in that acquisition, so the market is a bit worried about that. Secondly, about bauxite, as we value it, a very small percent of value of Sterlite comes from Vedanta Aluminum. From our perspective, there is an overreaction. We believe this is an opportunity and we think that the upside is strong enough to warrant a buy at this point of time.

Q: What is hurting sentiment in infrastructure? If you look at names like JP Associates, Hindustan Construction , Punj Lloyd , all these names have underperformed big time over the last one month.  In fact the last one week has been terrible for many of these construction or infrastructure names. What is the problem here?

A: If you look at the toplines of these companies, there has been slow topline growth for sometime and there is some evidence, which suggests that it might remain for some more time. If you have seen order books filling but the topline growth has been muted and more the uncertainty in the global front emerges, more soft decision making becomes. It could be the case that you will see a topline growth being slow for sometime.

Secondly, the margin pressures could still remain in place because of the fact that a lot of contracts at the point of time when the cycle was really in doldrums about a year back, low margins and commodity prices went up since then. There is a temporary phase in which earnings and topline growth might remain weak. That has to be the reason otherwise the long-term story is fairly solid. But in the near-term I think the uncertainty on earnings remain fairly high for this sector.