The Budget 2013 is just a few days away and the Street has high expectations as this is the present government's last Budget before 2014 polls. Raj Venkatesan, Managing Partner of Standard Pacific Capital tells CNBC-TV18 that he hopes to see execution of plans laid down for the infra and power sector.
"As an equity investor one of our concern is the delay in infrastructure and power projects. Government's plan on National Investment Board's (NIB) to deal with coal price pooling and fuel supply agreements is an excellent move, but we would like to see a little bit more execution," he elaborates.
Venkatesan also feels that the growth in India has bottomed out. "Growth rate moving from 5 percent towards 6-7 percent seems more possible now than six or 12 months ago," he adds.
Below is the verbatim transcript of Raj Venkatesan's interview on CNBC-TV18
Q: Has India's perception changed in the eyes of global investors like yours after Chidambaram took over as the finance minister and the kind of repeated communication he is trying to establish selling the India story to people like you?
A: I think that is accurate. The perception globally has been that the government knows what is to be done. The concern has been about execution and Chidambaram brings some credibility as he begins the execution.
Q: What more would you like to see in terms of execution from the government because there have been many promises on the fiscal deficit front but on the issues of growth and reviving the investment cycle, what more would you like to see?
A: From our perspective as equity investor in particular, one of the concerns that we have is around the infrastructure and power sectors. The plans that have been discussed and the move on National Investment Board's (NIB) moves as far as coal price pooling, fuel supply uncertainty environment.
All excellent moves and ideas, we would like to see a little bit more execution there. Those things should get along and remove some bottlenecks that are perceived to be blocking some of the projects. That has far ranging implications further down the value chain both to companies that end up supplying those power projects and also for small and medium size companies that end up being problem loans at some of the banks as well.
Q: Do you think the stock market moved a bit ahead in terms of pricing in some of the promises and plans which have been made public? Has it done the right thing in assuming that execution will follow?
A: Stock markets make a business of predicting somewhat future and it is doing that. If the execution does not follow the policy then, market are gone ahead of themselves. On the other hand, it seems as if markets are beginning to see enough steps in the right direction, enough commitment from the government that they see more confident in their ability to achieve those things.
If we do not see small moves as pertains to infrastructure, we do not see more moves as pertains to Budget and subsidies and spending, the market will be disappointed. The market has moved in anticipation of those things. On the other hand, I do not think the moves are ahead of themselves. If some of those issues do get resolved then we do get little more clarity. There is reasonable amount of upside across the number of industries in India.
Q: What does it mean for currency because that would be quite pertinent for investors like your because the rupee has taken away, not of-late but over the last many years quite a bit of your equity returns from India? With what the government is trying to do, does it puts a bit of a floor on the rupee?
A: I think it does. There are several things that need to happen. If the fiscal deficit can be controlled and going into an election year, the government can avoid policies that are too blatantly populist, which the FM understands. You end up at least holding the rupee and had reasonable amount of depreciation in that regard over past couple of years.
With regards to rupee, you need a little bit of luck in some of the natural resources prices, oil prices. We would like to see it move towards more deregulation on oil and gas, better place in policy in terms of gas going forward in India and certainly overtime diesel and that would take some of the pressure off the government.
If the government continues with the policy to disinvest and to control some of the spending, it is somewhat rupee positive in a world in which we have pretty low rates in the rest of the world and not very much growth. I do not think its just interest rate differentials that end up moving the rupee.
Relative growth rates and India, if they can move into higher growth rate regime, from a 5-6 percent regime to higher growth rate than you will find that foreign investment comes back both directly and in portfolio investment.
Q: How are you mapping Indian macro right now because just a few days back there was a bit of a scare with the CSO putting out a 5 percent growth number? Are you feeling sanguine that growth has bottomed out in India?
A: Growth has bottomed out whether you get back to an 8 percent growth rate, but the possibility of a positive second derivative that is a growth rate moving off that 5 percent and moving towards a 6-7 percent growth rate seems to be more possible than it was six or 12 months ago at least from the markets perspective.
Q: Given the kind of backdrop that we are in today, can you justify more upward rerating of India's PE multiple from what has happened in 2012 already? Do you think the market will move in line with earnings, at this stage more significantly higher PE multiple will be difficult to accord?
A: It depends on a number of issues and these are the same issues that we contend with globally. Everything that we end up looking at when investors look at asset allocation between fixed income, other assets and equities ends up being a tradeoff. If India can accelerate growth rates, then some of the multiples that we have seen in the recent past in India can be achieved again If the growth rates remain in 5-6 percent range and corporate profit growth ends up at those rates, it will be difficult for India to see a real rerating in terms of the multiple.
However, part of this surrounds the investment environment and if the Reserve Bank of India (RBI) is successful in bringing rates down and doesn't become too inflationary, you have faster growth rates both in earnings. You have some lower discount rates that people will use as well as the alternative between fixed income and equity and it could allow equities to somewhat rerate. When we look at our investments, we are not anticipating big equity rerating. We were investing in earnings or cash flow growth.
Q: We got USD 24 billion the Indian equity market in 2012. The first five weeks of 2013 have already sucked in USD 7 billion. Do you see this scorching pace continuing or is there a risk off phase globally which is looming ahead?
A: It is very difficult to predict the macro and the shocks that might occur from a global perspective. The lesson for equity investors and for us over the past two-three years has been where you can buy good companies at reasonable valuations because the globe gets too concerned about risk premium whether it is fiscal cliff in the US, Chinese growth slowdown or concerns about Europe.
The opportunity to buy good companies at reasonable valuations has been good. If 2013 is not dissimilar to 2010, 2011 and 2012, we may get scared at some point this year and investors are wise to keep little bit of dry powder. We leave some room to add the companies that you have been shopping for a while or are already in your portfolio and can make larger.
I anticipate that you have some sort of correction. On the other hand, you have a number of benign factors going on in the world whether it is Federal Reserve, ECB, Bank of Japan, policy. You have policy makers both at a fiscal level and at monetary level who are growth supportive for a change. It seems uniform across the world, so it still seems as if the trade off between fixed income and equities is in favour of equities. This means that there is a fair amount of money that could continue to come out of fixed income at least in developing world.
However, in the developed world those flows could continue to go into equities and both rerate equities but it wouldn't surprise me to see emerging markets make some catch up from what we have seen over the last two-three years. India could benefit from that.
Q: You spoke about the NIB earlier and that is one area where people have lots of expectations from the Budget this time around. Have you started taking any positions in Indian infrastructure in anticipation of an upturn in the investment cycle?
A: We have, but we have been investors in Indian infrastructure for past 12-15 months where the news has gone from outright very negative to less negative and now we have gone to neutral. We are moving towards positive and the NIB would be able to move in that direction.
However, if you think about equities as pricing things on the margin, we had a situation 12-18 months ago where there was a lot of bad news, things at the margin are getting better. It is generally positive for equities and that is why we have invested in some of the infrastructure stocks and things related to power and financing the infrastructure.
You have some good companies with good track record over time where we have been able to put money to work. For some of the primary players who are investors in either power plants or road projects, there is a little bit more risk there. Whether your equity returns are as attractive as we would like them to be and the market would like them to be, it remains to be seen.
You have to differentiate as to who has the balance sheets and who has the capability with some of the policy change to be able to see higher return on capital and higher return on equity. But, if you are selective there are still very good opportunities in the infrastructure space.