Why the weakening dollar may be good for India

Excerpts from Bazaar on CNBC-TV18 Watch the full show » Nifty BSE | NSE 30/05/12 Are Mutual Funds betting on Nifty?

Q: What about the currency, how much of a fact is that playing right now in both interest towards our market and the liquidity gush that you spoke off?

A: Currency is a clear indicator for many- many companies, even within our economy. The weakening dollar actually make commodities pretty expensive the world over. However, one has to look at it a little more carefully because each of these moments impacts each company in a different way. One has to remember that India is a net importer on the trade account, which means that a stronger rupee actually benefits us in the longer run, especially from our purchase of commodities such as oil is concerned. But on the other hand, if you look at exports, which is IT to a large extent, as well as metal, ore, that is where you will not see the upside come through. So, if we see commodities going up; for more export oriented companies within India that is not that hot issue. Though sentiment does carry the fact that if global prices of steel say go up that is the reflection of steel prices in even India and as a result realisation domestically for steel sales may go up. But export oriented metal companies are not going to reap that benefit.

In an overall sense, the weakening dollar is pretty significantly positive for Indian on two counts; one is that that our overall trades balance and the fiscal deficit as result driven by these purchases of international commodities, will remain better off. However, export oriented companies will suffer when the dollar starts to weaken the way it is.

Q: What about telecom have you changed your view after this recent spate of news as a fund manager because a lot of people seem to have deserted the telecom ship in the last 10 days?

A: That is true, what is clear to all investors is that this market is becoming very competitive. The issue is whether this level of competition will erode profits significantly in future, to actually derate these companies in terms of valuations. If you look at pros of the sector, clearly telecom penetration for India as a whole continues to remain well below world average. If you look at tariffs, we always argued that we were the lower tariff telecom economy in the world and we are now more so than before. So obviously, the entry funds, your entrances have just gone up which means breakevens for these companies will get lengthened.

However, my preference would again be that in such a severe competitive environment, valuations will definitely come under pressure. But any company which manages to increase market share, any company which continues to remain a very large market share holding for the longer term in this market, will reap the benefit in the future because telecom is a business, which is very capital intensive and front ended capital intensity in nature. Which means as long as you ca survive this intensity for the initial period, the rewards towards the end are pretty much for taking because incrementally any subscriber coming into your network which is either fully paid in the first few years, is directly going to your bottom-line.

One has to realise that these valuations currently may  be depressed for the kind of environment that we are in. But I think more stronger players will emerge pretty strong even more stronger as we go along but it's a matter of patience. I think equities represent an opportunity, in the sense that if any investor thinks there is better opportunity than holding on to telecom today for whatever interim period which he feels this sector be under pressure then there might be other opportunities in the market. But if there is any long-term nature to investment activity and if you think these businesses are very strong and extremely cash generative and they will remain so in the future, I think the telecom market from that point of view continues to remain attractive especially for stronger, more established players.

Q: If the call is that the market is more likely headed higher from here what kind of beta exposure would you keep in your portfolio- how high or low would it be right now?

A: This is always a difficult one to answer simply for the fact, that we don't believe that purely beta is the reason why you should run the portfolio for what it is worth. One thing I would like to clarify is that it's the view that given all of those things that the market may go up, it is not reality.  Many things may happen from now till the end of the year to change that view.  So which means that the only hope we have is to assess the valuation of the companies that we buy, for the nature of the business that we are buying. As opposed to just saying that let us buy something because the market is going up, I think that is a dangerous conclusion to come to.

One has to realise that whatever one buys has fundamental merit, has longer term earning visibility and these are things that you are buying at a price which will always have some sort of margin of safety, no matter what happens to the market. So, in that sense, form our point of view nothing really changes. We continue to remain focused on fundamentals, buying companies, which we believe will provide longer-term value. So in that sense, at least, from my point of view we don't change our view depending on the fact that we think the market may go up, we may think otherwise as well in a few weeks time.