Sanjeev Prasad, senior executive director and co-head, Kotak Institutional Equities believes the emerging markets will be under pressure due to tapering by the US Federal Reserve. Speaking to CNBC-TV18 regarding the foreign institutional investor (FII) flows he says, so far the FIIs have been holding in the Indian market but are likely to sell if rupee falls further. Prasad also adds that market will have to deal with the present political uncertainties.
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A: What will determine the market movement in the next 3-4 months will clearly reap two things; one, global events and some developments that we are seeing in the last few weeks are definitely not good for the market. On the oil side, one has seen oil prices going above USD 110 a barrel which cannot be good for India’s macro economic situation both in terms of higher oil imports, higher subsidies, pressure on the fiscal.
Secondly, US 10-year yields have started to go up quite sharply. Last night they were at about 2.8 percent which means that at least the bond market in the US is suggesting that at some point in time the US Fed is going to start its tapering programme as far as the bond buyback programme is concerned. This indicates that one could see a lot of pressure on emerging markets (EMs) moving forward and particularly EMs which have pretty large current account deficit and unfortunately India falls in that bracket. So, that is on the macro economic front where developments are not very positive.
On the political side, as we head closer to elections a lot of uncertainty will start emerging and whether we can continue with the reform process, we will have to wait and watch. Given all this, I would be very surprised if this market manages to hold around current levels. If global events turn more hostile then the pressure on the rupee could continue which in turn could result in some amount of selling from FIIs and pressure on the market in that case.
Q: It is a marginal control and certainly nobody is touching FII money, how have people responded to it?
A: It is again one more step in the direction of supporting the currency, but the policy making looks as if it is behind the curve in terms of the events into moving mush faster. Food prices moving up, US 10-year yields moving up may not give us much luxury of time now.
It is time, the government actually starts taking more effective measures as far as both current account and capital flows are concerned. On the current account side, there have been a lot of measures to curb gold imports.
The right way to go about it is to try and curtail gold consumption and one of the easiest ways to do that is to implement domestic tax on gold sales in the country.
A lot of gold transactions take place in the form of cash or black money and the moment one does that a lot of these transactions will disappear which would mean that gold consumption would come off to some extent. Also, know your customer (KYC) norms should be tightened as far as gold purchase and cash is concerned. It is something we can do on the CAD front immediately and try controlling CAD to some extent.
I don't think other measures will work much given the fact that it is impossible to change the dynamics of imports and exports in a very short term. So gold is the only way we can at least adjust this current account problem partly.
Coming to capital flows, the whole thrust of the government policy making has been on the debt side, how to attract more flows into the country. It is time to look at how to get more equity flows into the country because that is more stable and is a much larger pool of FII money in the country.
Given the fact that some of the policy measures cannot be positive for some sectors, all the liquidity tightening measures that have been announced by the RBI are definitely a big negative for the banking sector. The banking sector is a very large holding of FIIs portfolio.
If one looks at the latest shareholding pattern, banks have 34 percent of the FII holding in India. So if one large chunk of FII portfolio is not doing well, one could see some outflows there, one-and-half months post the RBI action.
There are some other sectors that can emerge to attract foreign inflows into the country and there are two things that can be done there.
One, try and sell some minority stakes that government has in companies like Axis bank, Hindustan Zinc, ITC, Larsen and Turbo (L&T) either directly or through Specified Undertaking of UTI (SUUTI). This will address two issues.
Firstly, it will get some foreign inflows into the country in the form of equity flows. Secondly, it also helps in meeting the divestment target which is floundering at this point in time. The divestment target is Rs 558 billion, so far the amount collected is Rs 9 billion.
Unfortunately, the interest in the PSU companies is not very high, so the government has to look at other ways to meet the divestment target and our proposed measure can help.
Two, the government can try to get equity flows in some other sectors like energy, resources, telecom where if we just provide some regulatory clarity, hopefully some money will come.
There are some reforms on the energy side but nobody knows their benefits as far as those companies are concerned, so FIIs are still putting their money there.
We can do a bit more on gold in terms of restricting the CAD to a more manageable number and as far as the capital side is concerned, we should definitely try and get more equity flows compared to debt flows. There are other options available and it is upto the government to exercise them.
_PAGEBREAK_ Q: We have seen a fairly significant rally in Tata Motors. What is the earnings growth? Do you think they will do 24-25 percent in the current year and therefore, can you justify close to Rs 400 price for that stock?
A: We are bullish on Tata Motors, but not much. Rs 400 we will have to wait and see, but Rs 350 is likely and that is a fair value for the stock. In general we are seeing a lot more positive data points as far as rest of the world is concerned. US is improving.
If you look at all the data points this week in the US, some of them point to sharper recovery in the US compared to the previous expectations. Europe is also turning around. I do not know what is working there, but for whatever it is worth, it looks like the activity is picking up there.
More importantly, China, which is the third pivot as far as Tata Motors is concerned the last one month data point has been pretty positive. Looking at export numbers, import numbers, PMI numbers, everything seems to be pointing to some moderation in the GDP growth compared to the early expectations that GDP growth could go down to as low as 6 percent in the next one year. I do not think that is the case.
Q: What do you think about the banking space? Would you pick any private sector entities now? It is the public sector entity that have been taking the pasting so far. Lately you saw some selling in private sector banks after money market tightness. Is there value in that space given the book now?
A: There is a lot of value in the PSU bank space, but it is very hard to get a handle on the book there given the fact that the non-performing loan (NPL) problem continues and is turning out to be a lot bigger than what people had assumed.
We have been pretty worried about the NPL problems for more than a year now and we have not really seen any of those large companies getting into trouble which they will eventually. Unfortunately, looking at the fact that economic recovery is going to be pretty slow, the capex cycle is just not there, so I will not be surprised if a lot of companies in the infrastructure space and I would put three sectors over there, power, steel, telecom being the prominent ones where you will see a lot of stress going forward.
Looking at the last quarter numbers for the PSU banks the slippages continue to be very high. So, there is continued problem as far as NPLs in the banking space is concerned. As far as the private banks are concerned, you need to divide that into the retail oriented private banks and the more corporate focused banks.
The retail oriented banks are the ones that will do relatively better given the fact that they will not have much NPL issues. Consumer part of the portfolio is holding out reasonably well. You have been seeing some growth and absolutely no NPL issues over there barring maybe little bit in the commercial vehicles (CV) space. Apart from this, that part of the book is doing absolutely fine.
The correction in valuations are not at a level where you can jump in and start buying specially given the environment of continued high interest rates for some more time. Although something like an IndusInd Bank from a valuation perspective looks okay, it is about 2.4 times 2014 book, 2.1 times 2015 book.
There will be some slowdown in our loan growth over there. We have always liked HDFC Bank for its execution and strategy vision. It has corrected, but from a valuation standpoint it is still at about 2.93 times on 2015 books. So at a level where it is starting to get interesting, but from a top down view banking is not a sector where you should be currently until you start seeing some of the macro issues getting resolved and unfortunately that does not seem to be the case.
We have been pretty underweight in the model portfolio that we run on banks and starting from April we had something like 600 bps underweight. It was more on the concern on NPL side. We never thought that this would become such a big problem from the interest rate cycle side which is affecting the bank significantly.
One real issue is to worry about the kind of treasury losses that the banks would book in the second quarter and maybe subsequent quarters, if the 10-year yields and yields in general continue to stay at current levels all the gains which you saw in the first quarter, not only will they be wiped out but will be a lot of incremental losses on treasury books of the bank.
We will have to wait and see how they deal with that. Hopefully, they get some special dispensation from the RBI otherwise the second quarter numbers will be completely horrible for the banks. Q: What is your view on Yes Bank? It has taken a pounding. It is a wholesale borrower, but there are limits to the extent to which you should pound or punish it. At this point in time, one does not expect the wholesale tightness to remain for the entire fiscal, is that at least value zone?
A: One of the concerns that market has on Yes Bank is just the book itself. It is one of the few banks that has not seen any NPL problem in the last 1-2 years and in a cycle it is completely unscathed as far as NPL problem is concerned.
Given the fact that Yes Bank has most of its loan book to the corporate and Small and Medium Enterprise (SME) segment, something like 86 percent of the loan book is to the corporate and SME segment. In that context, if a bank has pretty low NPLs then unless you get some conviction on that, the bank may continue to languish at current valuations.
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