See more FII deals in infra, power sector: Baer Cap

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

Deepak Shahdadpuri, MD of Baer Capital Partners, in an interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy, spoke about his reading of the market and his outlook.

Below is the verbatim transcript of the interview. Also watch the accompanying video.

Q: What is your view on Indian equities at this juncture? We have seen a fairly deep corrections year-on-year (YoY). Last three months have also seen bit of finance capital move out to find some kind of a support at the 5200 mark. What is your sense for the rest of 2011? Does it look like capital will be attracted back?

A: It is early to say what the equity markets will do for the rest of 2011. For last few weeks, there have been couple of unprecedented events with issues in the Middle East and Libya, and the earthquake and tsunami in Japan.

There are two-three broad themes at a macro level which impacts India. One is the continued channel of version away from emerging markets to develop markets or the EM-DM debate has been raging for a couple of quarters.

If we look at a couple of recent reports that came out earlier this week, the global macro analyst reduces exposure to India even more and an increasing exposure to developing markets.

If we look at the emerging markets, India is relatively underweight relative to Brazil or China. The emergence or re-emergence of Russia as an potential investment target has surprised most of us.

From a macro perspective, there are a lot of headwinds which India will face. However, the underlying growth in India is tact. We expect GDP to grow at about 8%. Compared to the FY11 numbers, FY12 will see a moderation in the growth rate. It will still be very attractive for most equity investors.

They are waiting for an interesting or safe entry point to enter the public markets. The issue concerning them is the inflation number. Inflation was meant to be trending down, but the numbers that came out yesterday, WPI were actually trending up.

The FIIs are expected to be on the sidelines in the immediate future and look at underlying results coming out of the fourth quarter before making any new allocation decisions.

Also watch: Oil prices, rate hike may up market volatility: Baer Cap

Q: The kind of emerging market versus developed markets preference is a little worrying that is currently ensuing. What do you think of this unprecedented crisis that we just saw from Japan? How much do you think will that hit the inflows into India? Do you think the near term risk of reversal in terms of inflows is what we are looking at or won't it be too significant?

A: The big issue is inflation. The large component of inflation and big variable was cost of oil. We expected the cost of oil to be at least sub USD 100 or sub USD 95for current year 2011. The place we are stand today, oil cannot be less than USD 100.

Libya has short term supply constraints. Some other refineries in Japan are shutting down. The longer term implications of the nuclear fall out, whether Japan and other countries will go slow on future nuclear energy build out will have a large impact on the cost of oil, gas and coal, as more countries balance the risk of nuclear energy versus the risk of nuclear energy.

As long as oil is above USD 100-105 per barrel, most foreign investors will have genuine concerns in India. We will see persistence and sticky inflation. Probably, the RBI may start being more aggressive and increasing the rates. Some commentators used to say that India was ahead of the curve. Now, they say that India is behind the curve given where inflation is.

Q: You mentioned about moving away of risk capital from risk assets like emerging markets. Over the past month this trend has impacted commodities as well. Crude has buffeted by several factors. In the past week, crude recalled from Brent from USD 117 and NYMEX from USD 110. We are just playing a lot of other commodities throughout today. The one month fall in wheat is 25%, soya bean is 10.5%, sugar is about 10% and nickel is 12.7% across the board. Whether it is metals and food stuffs, there has been a significant drop in commodity prices. Are you looking at this as a start of a trend and just technical rebounding?

A: Commodity prices have got ahead of themselves. The outlook on the demand side was very strong. Given the recent events, corporates investing and consumers' savings, there has been a recalibration.

Commodities on a long term basis will be on an uptrend. In spite of being a commodity expert, the recent price action is very valid except for oil which has different reasons given the events globally.

Q: What has been the interest towards the private capital? We have had some disturbing and falling numbers in terms of FDI into India in 2010. How has the interest been now? We had the year's start off with big investments on the FDI front like Reliance Industries getting British Petroleum (BP) as well as Nippon picking up a stake in the Reliance Life Insurance Company. What is the private equity interest? Will there be lots of it in 2011?

A: Private equity is interesting. The appetite is very strong. They still see India's underlying growth rates being intact and not growing. The worst case scenario is, if a lot of bad news does happen, India will grow at 6% to 6.5%. If we have tailwinds and everything goes in our favour, we will see growth rates closer to 9%. Growth rate of 6-9% GDP is very attractive to most global investors.

Private equity also less than negotiates direct interest in operating businesses. They think of a reasonable price. In the last couple of years, private equity deals were being priced often on par with public market comparables, which does not make sense given the ill-liquidity and very nature of private equity.

In the last three months, private equity deals are being priced at a discount to comparables. Firstly, you have public market valuations coming down. Secondly, the discounts of public markets are widening.

Private equity as an entry point into Indian equities has started looking more interesting. More capital will coming into India via private equity.

Q: Could you break down further, what is the preferred route in terms of sectors that this capital would be deployed as a lot of the money use to get routed into sectors like infrastructure and power? There was a bit of a risk aversion seen in that space. Because of the underlying demand, will the money start to flow back in into sectors like these?

A: They will. India, as a macro opportunity, there are two or three big themes. One is the demographic dividend. We have a very young population. They are getting more educated and are consuming.

Secondly, we have growth across sectors. There is a large pool of capital that wants to service the Indian infrastructure and the Indian real estate market. That capital has not disappeared, but it is very much of the sidelines.

In the last six months, with the number of scams and environmental clearances and forest issues, the global investors want more clarity before deploying capital. India will not be able to deliver 7-9% growth numbers with out a significant and real investment in infrastructure.

Infrastructure spending will come back. We have around 300-400 million middle class consuming. This is across sectors like healthcare, education, retail and eating out. These trends have been stopped.

If we look at underlying portfolio companies within private equity portfolios whether my or portfolio of other funds; then for last 12 to 24 months, most of our businesses, having a consumer centric focus have grown at 40%.

Everybody is very bullish. It is a concern that people do not start over paying and ending up being at a position, where they have invested in interesting businesses, but have not been able to get targeting returns.