Budget game changer for mkt, reforms key: Akash Prakash

Akash Prakash, CEO, Amansa Capital, says that he expects next year to be an overall positive year. He also says that for the market to move up it clearly need supportive action from the government on the policy front to improve the investment climate.  

He is of the view that the market may test new highs next year but he also indicated that the earnings in the Q3 and Q4 of FY13 may not be good. The upcoming Budget will drive market action for next 6-9 months.
"On the global, Europe will remain a source of tail risk and there will be some volatility around Europe sometime next year," says Akash Prakash.
Also read: Gold slips on US budget woes Below is the edited transcript of his interview to CNBC-TV18. Q: Are you expecting an encore in 2013 or is it dangerous to extrapolate the trend of this year?
A: I think it is dangerous to extrapolate the trend. The year 2012 turned out to be better than what many people expected. The third quarter was positive and market had moved up because of some movement from Delhi on the reforms front.
The ball is clearly in the court of the FM and the government and if they can keep delivering reforms, improving the investment climate and overall capital spending in the climate then the markets will continue to do well. I think the market will do well and it will be a positive next year provided the government continues to work on the reform part.    Q: Last year you mentioned that there is a prospect of a cyclical rally. On hindsight does this look like a cyclical rally or could the trend have changed?
A: No, I think there are two-three factors. First, sentiments towards India were negative in the middle of the year. At the start of the year in 2012 there was a big rally but after some time the global sentiments towards India worsen and there was a feeling that India could not do anything correct but there was sudden change in the environment with the new finance minister.
Certain reforms were announced and there was hope that India is regaining its momentum, economic growth is stabilizing, interest rates will go down and earnings growth will accelerate. So there is a possibility of this is a more sustained and longer term rally but for that to happen there was a need for momentum in Delhi on economic policy, moving ahead on legislation, on convincing investors that India seriously mean business, that has to continue.
If the government continues the momentum then the markets will continue to do well. There is a possibility that this may be a multi year move but it all depends on the policy moves of the government going ahead.  Q: Sometimes when year ends well markets in the past have tended to rally into the Union Budget in February and then on hindsight it appears that the top was formed in January-February and the whole year goes in consolidation and digesting those gains. Do we see the same risk in 2013?
A: There will be a lot of expectation around Budget which will be announced by Chidambaram. People rightly perceive it to be a final Budget before the elections. I think there will be lot of economic policy talk in that Budget document. This is an important document to get the animal spirits for corporate India moving again. 
So expectations will be significant leading into the Budget, and there are hopes that the FM will deliver on those expectations but if he doesn’t then that could mark at least a short-term top in the market.
I do believe the market will rise into the Budget because people will expect Chidambaram to deliver something reformist. So, the market going into the Budget in a rally mode, I think very likely whether the market rally sustains post Budget, depends on what comes in the Budget and what the FM delivers. If he can deliver something which excites the market then the rally could continue but a rally into the Budget is a very high likelihood in my view.
_PAGEBREAK_ Q: If that happens we are not very far away from the old top. Could we get there, take it out and then depending on the Budget we take restock our situation or do you think valuations if we do get to a new high early in the year would have captured much of the upside anyway?
A: I think there is a reasonable chance to reach there because as mentioned that we are 5-8 percent away from a new high. Is within the realm of possibility and there is a reasonable chance one can reach there in the first two months of the year because the global economic environment in terms of flows to emerging markets, people expectation of what will happen globally, the risk-on mood is developing and  is continued right now. So I think there is a good environment for flows to keep accelerating into emerging markets broadly in India. So the first couple of months will be good. I think right now the markets are keen of more around confidence in government and what actions do the government takes.
I don't expect earnings to be good for the third quarter or the fourth quarter of financial year March ’13 but the market will overlook that because if the market believes that the government is delivering and moving ahead on economic reform and policy. The market outcome is truly dependent on government policy making and actions. The Budget is an important document and investors will be closely looking at it, there would be fears that it's very populist, there will be hope that it’s very reformist. Budget document will to a large extent drive market action for the next six-nine months in India. Q: At what point in 2013 do you see the market fretting about the elections and the prospect of a fear of a fractured mandate once again because that is a hill which the market will have to climb over the next one year?
A: In the first half of the year things like the Budget document, GST, policy actions and global risk on need to be closely looked. From September-October, the entire focus will shift towards upcoming election and the market will start discounting whatever outcome that looks more likely. So, the year will be divided into two halves Q: On liquidity, we have sucked in about USD 21-22 billion and nobody thought at the start of 2012 will get this much money in this year, how does it look getting into 2013 on this aspect?
A: Most India specific funds have not received any significant liquidity. Most of the investor base has either come into regional funds or global emerging market funds or exchange-traded funds (ETFs) etc. I think the environment for that is still good. After talking to some global asset allocators and some other people, it looks like there is once again a general desire to increase weights into emerging markets. I think there is a general belief that interest rates will remain incredibly low for a very long period of time. Bernanke's move towards linking it to unemployment rates etc.
The environment for liquidity flow into emerging markets will be good, India will get its fair share and if the Budget is positive, India will get more than its fair share because there is a renewed confidence in the country. But the counterweight to that, I expect huge amount of supply coming out of India.
We have already started seeing it; there is a deal every couple of days either offer-for-sale (OFS) or government disinvestment or by any other mode. The supply will also be incredibly large out of India. So no matter how strong the flow of money into equity markets is, supply will be more than enough to absorb most of that. Q: In the interim do you see the prospect of any kind of risk-off happening in global markets which can make these ETF, regional fund kind of flows choke up a bit in the next couple of months? Is that a high probability outcome or not in your eyes?
A: I think Europe will bump and bounce along at the bottom and will get through this type of environment and give them time to heal and improve. Europe remains the source of tail risk to the extent there is one which is obvious at the moment. Tail risk events come by definition from sources you don't expect.
Many experts in Europe feel that the crisis is not over and they still believe that Spain, Italy and specifically Greece have bought time for themselves and once again complacency to a certain extent is setting in among European policy makers.
Again people are dragging their heels and markets may once again need to riot to get European policy makers over the line in terms of some of the things that they need to do, in terms of a more realistic banking union, fiscal union, and convince the markets that this crisis is finally behind us. But I think that there could be some volatility in the middle of the year around Europe once again.
_PAGEBREAK_ Q: How are you playing this rally or momentum in India right now? Tactically, how have you positioned yourself or what changes have you made in your India portfolio?
A: We have been saying for some time that that the whole consumer defensive trade was very overdone. I have written about this as well a couple of times and on an absolute relative basis the valuations for consumer names were very high. I thought they were very over-owned and people were hiding in those stocks. So we do not own any of those names anymore, we have sold all of them in hindsight way too early, but we did.
I think we have a portfolio which has largely and more economically sensitive names and that's not because we are playing an economic sensitivity theme. I think that's the part of the market where there was genuine value on an absolute basis. We have a portfolio which has turned out to be very economically sensitive because of the valuations in the market and the type of skewed sector performance you have seen in the last 12 to 18 months in India, with defensive names that are up 70 to 80 percent over the last two to three years and a lot of economically sensitive names down 30 to 40 percent.
We think this is the beginning of the consumer defensives, especially those that are underperforming. I think that has already begun last month or so. That is in its early stages and that kind of trade will continue for some time. We do not play macro thematic but, if I were to play that the trade of would have been more economically sensitive names being underweight and the consumer consumption type of story names which were trading at 35 to 45 time multiples.
I think that trade will continue to play out where the economic sensitive names do better and consumer names start underperforming. Q: The counter to that, I buy what you are saying and a lot of people share your opinion on the consumers that if this is a multi-year trend, sometimes these leaders tend to consolidate for a while when valuations run away but leadership does not change in long trends in the market. Could it turnout that if this is a five to six year kind of trend which has begun in 2012, leadership might continue to remain with the consumption sector?
A: It could but, you are right and that is a valid point of view. That is a well established pattern but, I think that the consumer names, especially in the valuations are just way too high. They are great companies and there is no debate on that but, I do not think trading at 40 to 50 times kind of multiples will sustain. So you can play consumption in various other ways.
If you are talking about the consumption in the economy, there are multiple ways to skin that cat, it doesn’t have to be only by buying fast moving consumer goods (FMCG), multinational type of companies or FMCG companies, you can play through media for example. If consumption grows, if economic growth improves, media will directly or indirectly do very well. There are many other sectors like that which are trading at far more subdued multiples if you believe that the Indian economy and consumption remains strong and will also do well.
So I am not necessarily saying that consumption broad theme may not work out. I think that theme is a very powerful theme which will sustain and it has been a pillar of the economic growth in India and will remain so. But, I do not think the only way to play consumption is buying a multinational FMCG company trading at 40 times. There are various other ways to play that theme if you wish to do so. Q: Of the sectors which have not done very well, where people are looking to position themselves for much bigger gains, outsized gains going forward, in sectors like metals or even real estate though it started performing of late along with infrastructure and construction. Of these baskets, which ones do you have highest conviction in?
A: These are the sectors we do not normally tend to dabble much in. I am the wrong person to ask this question and we tend to be more stock specific. But, as far as the tough ones for us, we do not look at these sectors, we do not look at sectors from that point of view so we do not have much exposure in any of these sectors. I would be the wrong person to ask this question because we do not have any great deal of expertise in any of these three sectors. Q: But you do track IT and IT has not done very well over the last few months. How are you positioned there going into 2013?
A: We have a couple of names in IT which are more in the midcap IT space. We have one in the largecap as well. I think all our stocks are trading at eight to nine times. We think there are good businesses, eight to nine times on an absolute basis is a very good value and we do not believe the rupee is going back to 50.
I do not think rupee is going to 65 either, but I think rupee will be in this band of around 54 to 55 to the dollar and at that level the cash flow generation capabilities of these companies, the valuations are very cheap. So yes, I do agree that on a short-term basis, in the next couple of quarters, there is limited visibility and people are very nervous around IT growth rate etc.
But, I do believe on a longer term basis 12 to 15 percent type of revenue growth is still quite realistic for the industry. Hence, the stocks we are playing in are more of midcap IT and have specific niches. I think they will grow faster than that. I think their margins are sustainable where they are at 19 to 20 percent on EBITDA basis. So stocks trading at 8 to 8.5 times, 15 to 20 percent earnings growth, massive cash flow generation, 30 percent RoE and no dilution.
I think in the long-term you should do well in those types of companies. So yes, in the short-term there is an issue. I think the market is not giving these stocks value partly because of the low visibility over the next couple of quarters as well as the market belief that the rupee may go back to 50 or under, in which case margins will come under pressure for the IT space as a whole.
We do not subscribe to the rupee going back to 50 theses and therefore, we think the margins where they are, are quite sustainable. Q: Stock picking has done very well over the last 12 months. Do you think 2013 could be that kind of a year or could we just start maturing into a trend where top down calls work equally well and you can make money out of index funds as well?
A: It is not easy to outperform index funds globally as well and India index funds have done well. But, 2013 will also be a stock picking market because of the huge supply of paper which we expect to see happening in 2013. So the broad market over a period of time will find it difficult to have a huge run or to break out. It will start becoming heavy at a particular level because there is so much issuance of paper constantly hitting the market.
 
If you can find a basket of stocks which delivers strong earnings, no dilution then they should be able to outperform the broad indices. So 2013 will be a stock picking market again if you are in the right type of companies and if you have done enough preparation your stocks will do well and because the broad market will be weighed down by this huge issuance, I think you will get stock picking again in work in 2013 like it did in 2012. Q: Let me start by just talking about the hypothesis that we were discussing earlier in the discussion that we do get to somewhere close to 21,000 in January-February in the run up to the budget. At that point the market would be trading at 15 to 15.5 times 2014; from there do you see conditions being conducive for any further PE expansion during the course of 2013?
A: That depends on people's perception on the government and whether India is getting back to higher levels of growth. If you believe that this year will end with 5.5 to 6 percent growth, I think the expectation is that March ’14 will be somewhere near 7 percent. If the government puts in place – let’s say a strong reformist budget and the finance minister delivers it; people regain will confidence in India and the long-term story. People will start believing that India can reaccelerate back to 7.5 to 8 percent growth.
If people start to believe that then you can have further PE expansion because people will look at the fact that the last two-three years earnings have not grown significantly in India. There is a significant amount of operating leverage in a lot of companies. Many companies and sectors have almost no earnings growth over the last two to three years and they have cut cost.
So if gross domestic product (GDP) growth accelerates from 5.5 percent in financial year ’13 to 7 percent and then 7 percent going to 8 percent, then people will build in very reasonably strong and aggressive earnings growth numbers which are likely to be delivered. In that situation, PE can expand further.
If people believe that India is going back to 8 percent growth in the next 12 to 18 months, then maybe you could have scope for further expansion otherwise 15-16 or whatever number you have talked about is pretty much realistically a cap and you are unlikely to get more PE expansion and beyond that. But, if people believe that we are back to 8 percent growth then PE will expand more because then you can build in 25 percent earnings growth.
If India goes from 5.5 percent growth to 8 percent over the next 12 to 18 months you could have a strong earnings growth because there are many companies which are sitting on pretty strong operating leverage, have cut cost and will deliver some strong growth if the topline comes back.