Rupee paying for govt mess; don't like gold NBFCs: HDFC Sec

With falling rupee narrowing the spreads between US yields and Indian yields (adjusted for cost of hedging), it is clear that foreighn funds won't find logic in investing in Indian debts, says Dipen Sheth of HDFC Securities in an interview to CNBC-TV18. In addition, the current account deficit makes the situation worse for rupee.

He calls the policy measures to rein in imports as "temporary fixes," and believes current account deficit was an issue which was ignored for the longest time. Sheth reminds, what everybody knows, that despite possessing fifth-largest reserves of coal and having humongous amount of untapped oil & gas, India ended up being importers of both these energy commodities. Unless these lapses are addressed, Sheth believes,  the rupee will contiue to struggle. For market players, his advise is to stick to rupee sensitive sectors. After recent regulatory changes, the telecom sector may see a good run but Sheth questions the government's need to intervene in tariff matters. He prefers Bharti and Idea in that space and is little wary of popular themes like FMCG, Pharma and private banks. Sheth is vociferously against gold NBFCs getting into banking space. "Many of these gold loan companies hardly gives you the kind of inspiration to believe that they would be better off applying for a bank license." he said addding they should mend their ways first. Edited excerpts of the interview with Dipen Sheth Q: What do you do with the rupee now, the same problem that affects the stock market also affects the rupee. Are we going to see much deeper cuts in times to come you fear?  A: It is difficult to say whether the rupee will go to 60 or worse, but we have a structural problem with our current account deficit (CAD) and we have been persisting with this problem for a while. It wasn’t so visible or didn’t matter so much to the market so long as capital flows were holding up. And every time there is a little bit of worry on the capital flows, the rupee cracks. Every time there is worry on how you are going to finance this CAD with capital flows, there is a worry on the rupee. Then there is worry on the stock markets and then there is little bit of reflexivity which plays out because money gets pulled out of the stock market.  At the margin what is also happening is that the spreads between the US yields and Indian yields adjusted for cost of hedging have also narrowed to point where debt inflows will not look meaningful. And of course the state of policy evolution ,the lesser said the better. So despite all the noises that we keep on making and the temporary fixes the policy makers keep offering, raising FDI caps and then asking questions, this is not a problem which is going to go away in a hurry. There are so many things we could have done in the last seven-eight years to fix this structural deficit. We have the fourth or fifth largest reserves of coal in the world, we have a humongous amount of untapped oil and gas potential in this country and none of that has been exploited. And as you know now we are net importers of coal, we are very large importers of oil and now even gas. So these structural solutions are what will drive the rupee back to some sane levels. Till then the rupee sensitives, the export oriented sectors will keep looking attractive. Q: Today Non-bank financial company (NBFC) stocks are doing quite well in the hope that some of them will apply for and manage to get a banking license. Do you have anything in your preferred portfolio which captures this theme? A: I think some of the NBFCs have chosen to specialize in business models which have given them returns which are reasonably insulated from the steadily worsening macros that we have seen play out over the last few years. So two prime examples of this approach that come to mind are Mahindra & Mahindra Financial Services and LIC Housing Finance.  Both of these companies are instances where we would be delighted if they were to make progress in terms of applying and getting a bank license. Both of them would be structural beneficiaries of such a move if indeed it was to fructify. Q: Are you optimistic about any of the gold Non-Banking Financial Banking Companies (NBFCs) or do you think that space is headed for further weakness? A: Not at all. We remain skeptical and indeed suspicious of the goings on in some of the gold lending companies. This is not to say that I want to tie them all together but what has happened in the gold loan specialists which puts them apart from the other specialists among the NBFCs is that they were at a stage where they had clearly gone overboard in terms of loan to values. And then the RBI came down and then of course the price of gold fell. But they were running lending models wherein interest was being accumulated and not being paid back at regular intervals as opposed to what many of the banks are doing in terms of their gold loan portfolios made them even more vulnerable. Now if you analyse what is going wrong in many of these gold loan companies then it hardly gives you the kind of inspiration to believe that they would be better off applying for a bank license. They should stick to the knitting and mend their ways first before they aspire to become banks.