Expect USD 20-25 bn FII flow this year: Raamdeo Agrawal

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The markets have been witnessing spectacular rally in the past few trading sessions, which signifies that foreign institutional investors are betting big on India. In his analysis of the markets, director and co-founder, Motilal Oswal Raamdeo Agrawal said the current upswing in the bourses is backed by largescale foreign buying with little participation from retail investors. The FIIs, particularly large hedge funds, believe  in the India story rather than China and Agrawal forsees USD 20-25 billion FII flow into the county this year. This flush of liquidity can push markets up by another 10-12%.

In the current scenario, Raamdeo Agrawal continues to bet on the banking sector. According to him the recent run of the banking stocks is justified based on valuations and growth prospects.  He is circumspect of telecom, given its earnings and competition concerns. He also advises caution on the cement story.

Here is a verbatim transcript of the exclusive interview with Raamdeo Agrawal on CNBC-TV18. Also watch the accompanying video.

Q: It's looking like a breakout these past few days, what have you made of the big upmove we have had?

A: I am also positively surprised by the last two days movement. But the backdrop was developing for this kind of moves, in the sense that foreigners have been relentlessly buying and monsoon has been good. Earning season though started off very badly and broadly there were lot of underperformers than the outperformers, but thanks to JLR's result, overall it looks to be alright.

Q: We saw a big rally in cement after a long time yesterday. Where do you stand on it?

A: The news from the sector is not that encouraging, dispatches are bad and in Mumbai the prices moved up. My sense is that market is looking for anything which is little underpriced and not followed up so far. I think it is too much of underperformance to the market that it gives a catch-up. But if you check the broader market, I do not think there is so much of encouraging demand and encouraging price movements.

Q: There may not be any retail euphoria in the market yet in terms of participation, but in the way some stock have moved and captured valuations from intrinsic or underlying businesses of assets, are you getting any sense of euphoria which is building up?

A: No, I don't think so. We run one of the largest retail chains and we have more than half a million customers, but still participation is very muted. For the last one month, we are seeing a bit of participation in terms of slightly higher volumes, but any kind of enthusiasm, to term it as enthusiasm is lot of exaggeration.

Q: On your point about liquidity though, year to date India has now got more than 50% of the money that's come into the region, any fears that this is becoming an overcrowded trade?

A: It's tough to say that. What is happening is that if you talk to the guys among the larger emerging markets between India and China, China story has somehow soured in the last eight-ten months for whatever reason, whether it is emerging trade dispute or the story is not sustainable, but somehow China is not hot among the larger hedge fund managers and all. But India story is looking better and better in relation to other stories. So, I think the inflow is matching up to that. The kind of risk of rate US has achieved, my sense is that inflow here will remain strong. We might end up, I don't know about other regions, but in India we could get anywhere around USD 20-25 billion for the whole year.

Q: Given that liquidity inflow and given the fact that at least headline earnings may not be pulled down too much, would you say there is a case for the market to move significantly from hereon, 10% plus?

A: If the liquidity push is there from the global side, anything can happen, 10% is quite possible. If we keep buying Rs 500-1,000 crore everyday relentlessly, that kind of liquidity push will definitely take the stocks higher, whether the earnings will support or not that is a big question mark.

Q: Given that there has not been significant earnings upgrade at the end of this quarter and everybody still stuck in that Rs 1,020-1,030 kind of earnings per share (EPS) for the full year. Do you see a situation again where the Sensex starts trading at 20 times current year's earnings estimates like we saw in the end of 2007?

A: In March of 2010, we were in any case trading at about 20-21 times. Now, the issue is that in the current year we are talking about 25% kind of earnings growth from Rs 830 to about Rs 1,067-1,068. What is happening is four-five consolidated global numbers like Tata Motors , Tata Steel , Bharti and Hindalco , these four have become USD 10 billon kind of outside investment. They are not in the grips of analysts at this juncture. So that is a swing factor like the way JLR has come back and the kind of demand they are talking about, it can surprise in the aggregate.

So, if they we do about Rs 1,050 kind of EPS '10-11 in March, there is no reason why we cannot command again 20 PE multiple what we commanded in March 2010 because by that time I hope inflation will also be much more subdued. In March 2010, inflation was very high, so interest rate was looking up. But as the inflation comes down to more like 6-7% or maybe even lower, you will see much better PE multiple than what we saw in 2010.