Nov 15, 2011, 01.54 PM IST | Source: CNBC-TV18

Mkt grim on global concerns, things to get worse: CLSA

Maintaining a 'cautious' call on the market due to macro headwinds, Anirudha Dutta, head of thematic research at CLSA Asia Pacific Markets says the global sentiment remains a cause of concern, and a 'primary overhang' on the market. Further, Dutta shares the Street's apprehension that interest rate cuts are unlikely to come in the near-term.

Anirudha Dutta, head of thematic research, CLSA Asia Pacific Markets

Maintaining a 'cautious' call on the market due to macro headwinds, Anirudha Dutta, head of thematic research at CLSA Asia Pacific Markets says the global sentiment remains a cause of concern, and a 'primary overhang' on the market. Further, Dutta shares the Street's apprehension that interest rate cuts are unlikely to come in the near-term and hence, believes that the Indian banking sector may underperform until RBI cuts rates.

Nevertheless, he says the investors are still positive on India, although are waiting for the right opportunities. "There is still faith in the Indian growth story, and the mood is not too bad compared to what is happening in the rest of the world," he says.

He also says that the rupee volatility remains a worry and sees no respite on that front, unless problems on the European front resolve. Looking into the grim picture of the aviation sector, he adds that the financial performance of listed airlines will remain dismal. "Airlines, infra and power sector loans will be under pressure," he holds. However, on the slowdown in policy making, Dutta believes that decision making will improve by mid-2012.

Below is an edited transcript of Anirudha Dutta's exclusive interview to CNBC-TV18. Also watch the accompanying video.

Q: How you are feeling about the market now because we have seen some circumspect noises since yesterday?

A: Overall, we are quite cautious on the market due to reasons like the investment slowdown, high interest rates, stubborn inflation which are also impacting the corporate profitability. We have seen consumer demand holding up relatively well, although it has perceptibly slowed down.

At the CLSA conference, there are a large number of investors as compared to the last year, and people are still looking for investment ideas. The foreign investors have not capitulated this year and despite all the bad news, both locally and globally, investors are looking at when to buy India.

There is still faith and belief in the Indian growth story, as it will pan out over the longer period of time and hence, the mood is not too bad compared to what is happening in the rest of the world.

Q: Did you get the sense that the panic or leg down may still be waiting or do you think this time people are more mature and they wont press the panic button?

A: It is not a question of maturity because if there is a bad news that comes globally, whether its euro or anything else, you will see that capitulation happening. And unfortunately, what is happening internally in the country is not doing anything to keep yup the faith that we are managing things well. Sure we are growing faster than most of the world and this place does not look like things have fallen off the cliff, but having said that, the slowdown in decision making, the fact that pipeline of projects are plummeting rapidly that is reflected in infrastructure stocks, in the banks and the fear that NPLs may go up will impact sentiment at some stage.

Our model portfolio stance hence, is more defensive. It is still overweight on the side of the consumer staple, discretionary and the pharmaceuticals but we also see at least some right noises coming out of the government, trying to take legislative action, going forward. It may not happen in this winter session but certainly by the budget session or after that we may see policy action. Whether it is the land acquisition bill or the mining bill, the Lokpal bill it will be towards mid 2012 that the policy making will be on the right track. And if that happens, the market will then start reacting positively in some of these beaten down sectors and stock.

Q: From the investors you speak to what kind of contest are they getting into next year with? Is there general consensus that we are still in a bear market but maybe the market will offer trading opportunities or are you getting the sense that fundamentally things are changing around and the market needs to be approached in that context?

A: I think most of the investors I have spoken to over the last few days are in a bit of confusion. Most people this time are overseas visitors into this country and they are very depressed about what is happening in Europe, there is a very negative perception on Europe and that is colouring the judgement about what should be done next. So, they are hopeful that things will improve out here but no one is enthusiastically looking to start buying tomorrow.

Q: Your conference had a very detailed discussion about the Moodys downgrade for the banking sector and that has been the focal of nervousness in the market. What is your view of how dire the situation is, in terms of the Indian financial banks and how would you approach financials going into the next year?

A: The Moodys downgrade presentation highlighted the rational for why Moodys downgraded and our own sense internally is that NPLs will move up. I dont think anybody is in denial mode on that. Its a question of how much and does it get as worse as in 2008. Our internal view still remains that it doesnt get worse in 2008 or going back to the 1998 period, when there is a big scare on the Indian banking sector and when large NPLs were happening in steel and various other sectors.

Having said that the headline news could continue to be quite negative, so power sector and related sectors projects are going to be bad. Some SEB loans being restructured and this news flow will continue for some more time and overall, probably for the sector it is in some ways good because the right decisions will be taken and the right environment will be created for the future investments. Protecting the investment which has already taken place whether mines or the power purchase agreement or fuel linkages is one part of it. However, if this continues, whether its about the airline sector, infrastructure, power, it could certainly keep the banking sector from outperforming in the near term.

The rate hikes are behind us but we are still not in a position where the interest rate downgrade cycle will start anytime soon. So, until the interest rate downgrade starts and therefore there is less stress on the corporate sector, and some pickup in private investments with the consumer sentiments reviving again, the sector may struggle to perform.

Hence, there is a clear acknowledgement from investors that the Indian banking sector remains in good health and there is a need to differentiate between the private and the public sector. Hopefully, the government wouldnt nudge, so unless there is something of strategic importance or national importance there is no reason for bailouts and other things that could spook the investment community.

Q: How is this whole Kingfisher Airlines episode playing out? Did you hear mentions of it in the conference and whether this means that a lot of restructured loans might get sticky during the next one year because it is happening co-incidentally with your conference?

A: Airline is such a visible sector and the result of all the airline companies has been quite poor. The only profitable airline right now seems to be Indigo, which is in the unlisted space. The prime minister had to make a mention of keeping Kingfisher afloat and that is what is raising concerns as to what will the banking sector then do. It is very clear there is no more a case of debt restructuring.

What is urgently needed is really a large dollops of cash infusion out there and will the banks enforce the promoters, the main shareholders to bring in that cash does it come in fast enough or on assurance will the banks try and infuse more cash in which case there will be concerns by on the side of investors about the health of the banking sector and whether in six months or twelve months again some of these loans need to be restructured or written off or whatever it may be.

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