Cyprus issue bigger concern for mkt than UPA-DMK row: IIFL

The 2G trial court on Tuesday issued summons to Sunil Mittal, Chairman & MD Bharti Cellular in the additional spectrum allocation case after which the shares of the company tanked nearly 5 percent. The news added to the already bearish mood of the market due to the Tamil Nadu based DMK party calling off their alliance with the UPA.

Nirmal Jain, Chairman, IIFL told CNBC-TV18 that the Cyprus issue is essential as it is an indication of the ultimate fall out of the European crisis. Investors should not ignore global issues as they are also responsible for the overall market sentiment, he adds.

On DMK's quitting alliance with the UPA and whether it will affect the government decisions, Jain says that if the government has the will, it can go ahead and do it. No one can please all the coalition partners and therefore the government must just move ahead with their agenda, adds Jain.

Below is the verbatim transcript of Nirmal Jain's interview on CNBC-TV18

Q: What are your thoughts on the telecom sector and the fact that Sunil Bharti Mittal is now named in terms of the additional spectrum case?

A: This comes as a bit of a surprise because it is quite late in the investigation in this case. The best thing that the government and investigative agencies could have done is to investigate and complete their findings in a very short and given time. The more it drags on, the more it hurts the investor sentiment. News like this, whether ultimately they have any impact or not but immediately there is a sell off in this stock. As it is, the sector economics is not very good from the longer term perspective because the license premium and the later auctions have gone up, the prices have come down significantly.

India has allowed lowest rate for voice as well as data services in the world. You have a huge demand in India, the penetration has gone up 60 percent. Our country is now connected by mobile phone and yet it is a bit of a paradox that the industry is not very well poised to have earnings or a growing steam of earnings in the near future. The sector has not been coveted by investors because the economics now, they don't favour long term investors. On top of that, when you have news like this, investors react in a bit of a knee-jerk manner and that is what has happened in Bharti's stock today.

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Q: We have multiple headwinds at this point in time. On one hand there is the global issue, on the other hand there is the political uncertainty. We also had the Reserve Bank (RBI) policy in which the governor has stated that there is limited headroom for further monetary policy easing. Which is the biggest threat of worry for the market right now that could drag the market lower than these levels?

A: According to me, the European worry is something that is very serious because foreign institutional investors (FII) money has been driving the market. In terms of the rate cut, 25 basis points rate cut has come through. Although there is a hawkish guidance, but that was not very unexpected because we know that RBI has been very cautious about inflation and also easing of the monetary policies. Their stance has been consistent but they have indicated that there will be open market operations (OMO) to enhance liquidity as required because the liquidity has been one of the larger issues. Maybe the cash reserve ratio (CRR) cut can come in the future reviews in the later months, maybe in a couple of months now. So that is more or less in line with expectations.

Political uncertainty is quite a surprise. The event happening today is bit of a surprise but if you go back and see DMK’s track record, they have done this before in 2011 also. But again, the uncertainty is not so big because it looks as if the Congress would be able to manage unless the ruling party itself wants an early election for whatever reasons, they should be able to sail through. This by itself should not threaten the government. Coming to political, the problems in Europe, they are more serious because what happened in Cyprus can be an indication of the ultimate fall out of this European crisis.

If you look at the Cyprus issue from a broad macro terms, then all the banks put together in aggregate, their assets have reduced or they have fallen in values significantly. On the liability side, the biggest chunk would be deposit holder’s money. The moment that is eyed, there will be crisis of confidence and that can threaten and create a larger problem.

Cyprus is just a small example of what ultimately things can come to. Let's hope things get resolved. Even if they get resolved, there will be flight of capital from Cyprus and there will always be uncertainty about money in these European countries. So that is what one needs to be cautious about. Our markets have been overly dependent on FII money. Factors like these will impact the flow of FII capital. Therefore, we should carefully watch out the developments outside India as well.

Q: With regards to political uncertainty, if UPA goes through without the DMK in terms of numbers, do you think it will get more difficult to push economic reforms simply because it will mean less of a negotiating power with the likes of Samajwadi Party (SP) which are against FDI in insurance and pension?

A: In the last six months, it has been clear that if they have built then they can push through because now elections are just one year away. Most of the hooliganism partners even if they are threatened, they don't like, but I don't think they will have the courage to pull the rug at this point in time. So for the government, we have seen what has happened in last four-five months, very difficult measures like increase in diesel price or domestic gas price or railway fare. So government has done everything. Also in the Budget, there has not been a single populist measure like farm loans waiver.

A lot of projects are stuck and we need to get them out and that is causing significant amount of non-performing assets (NPAs) with the banks. If the government has the will, it can go ahead and do it. Now it knows that whichever way, they can never please all the coalition partners. It is impossible for anybody. They have to move ahead with their agenda and that is what they have been doing.

Q: Do you think gold loan companies like Manappuram could be impacted because there is a huge slide in that stock now?

A: Last year, towards the end of March, RBI changed the policy and made it mandatory for non-banking financial companies (NBFCs) to have 60 percent loan-to-value (LTV). Some of the gold loan companies that were more aggressive and would have lent more and when rolled, cannot give the same amount of loan. Therefore, sometimes it goes into auction or has to be settled with the client, with the customers. When your interest accruing is very aggressive, the penal rate of interest is very high then you cannot recover it by auctioning the underlying and that is what might be causing this under-recovery.

Manappuram seemed to be overly impacted by this because Rs 250 crore seems to be a very large amount. I do not have the numbers in proportion to their balance sheet and income for this quarter, but still amount seems very high. I do not think the entire sector would be impacted in this magnitude and there maybe minor impact here and there.

Even from Manappuram's point of view, this should get over in one or two quarters, because this seems to be the impact of the change in RBI’s policy to 60 percent LTV which was done in March, last year. It is one year and one year is a time when your typical loan tenure for gold loan is and becomes NPA from 13th month. So this seems to be broadly the region, but maybe management will answer these questions better in their call.