Chandra is his own man; don't see stumbling blocks: Edelweiss

After demonetisation, the economy has crawled back to normalcy, he said.

Earnings growth will be tepid for the next few years, he maintained. Investors aren’t looking at market earnings. They are looking at sectors. 

"India is never going to fire in a full way. 14-15 percent earnings growth might happen in one quarter but overall pockets of earnings, industry and sectors are key."Below is the verbatim transcript of Rashesh Shah's interview to Latha Venkatesh & Nigel D'Souza.

Latha: What is your general take on IT since that is top of the mind at this point?

A: IT is going through entire reallocation that investors are going to evaluate this on a quarter-to-quarter basis because there are a lot of positives and the main ones being its reasonably priced because IT has always been fairly aggressively valued but in the last couple of years if you look at the valuations, they are fairly reasonable but there is uncertainty around US and around visa issues etc, so people are still very confused and my feeling is that it will take another couple of quarters to see how the US economy pans out, how all these issues settle down and the important part about rupee because there was hypothesis build that rupee will weaken, which has not, so even that is confusing investors. So couple of quarters of confusion, revaluation will go on and only by the second half of this year, we think investors will have some clarity on the long-term trajectory for IT companies in India, but as I said, they are attractively valued.Nigel: How do you view TCS? The numbers didn't look bad. The new captain has come and the old guard has stepped aside. When exactly does it become attractive? 

A: TCS continues to grow well and a lot of the bad news for the last year has been priced in, the stock has been fairly flattish. I think the change in leadership will not harm the company because historically we have seen that the leadership transition has happened smoothly in TCS. I think it's a much institutionalised company with a lot of processes underway which will ensure that the injection of a new leadership will not create any stumbling blocks in the short-term and from expectation point of view a lot of the bad expectations are already priced in. So our view is that it should be a reasonable stock from an investment point of view for investors going forward.

Latha: Does overvaluation of rupee is something that has swum into your radar?

A: It is an issue because for the last three years the rupee has been almost flattish and we do have inflation between 4 and 5 percent annually. So in a way in spite of inflation the rupee has been flattish which is what has resulted in overvaluation and this is harming on the export side; we have seen the export growth has stagnated for the last few years and along with that even on the import side a lot of the Indian manufacturers lose competitiveness and we do believe that the fair exchange rate should be 72-73 to at least maintain some level of competitiveness and for the last three years it has been flat, a lot of people who have exposure in foreign currency, have not been hedging because the hedging cost is a lot higher and the rupee has not gone anywhere. So a lot of people have stopped hedging which is usually the worst point at which when it breaks out, there is a scramble to hedge. A lot of Indian corporate are unhedged and overexposed to an adverse move on the rupee front and that could, in the coming year, create some amount of uncertainty, volatility. Therefore, from a fair valuation point of view at least 4-5 percent fall in the rupee is overdue.Latha: I wanted to come back to the Chandra appointment itself. How do you think a fund manager who has a lot of Tata Motors and Tata Steel in his portfolio is likely to react to this event? Will there be a bit of trepidation that you are getting a greenhorn and probably someone handpicked by Ratan Tata and maybe someone who will not take hard decisions or will it be that this is a good evolutionary step and a lot of good may come?

A: Actually, on the contrary, I think it is a good thing for the shareholders of Tata Motors, Tata Steel, because there was some uncertainty over the last four-five months which has now got corrected because the in-fighting that was going on at the board level, all that has died down. Plus, also remember, Chandrasekaran is his own man; when he took over TCS, he had big shoes to fill from Kohli to Ramadorai and he has done fabulously well in the last eight-nine years when he has been at the helm. So, he is his own man. He has very clear strategic ideas and in a very quiet way, in his own way, he will implement what is right for Tata Motors, Tata Steel and for the shareholders of that.

I do not think it was ever an issue about what are the right things to do for the company. It was more about maybe interpersonal relationship and trust which will not be an issue now because Chandra has been part of the Tata Group, has a huge amount of respect from all the group companies out there and obviously, has a huge amount of comfort with Mr Tata also. I think that trust is very important and that will be definitely there. If there is a high level of trust between Tata Trust and Tata Sons' Chairman, that can only be good for the group.

Latha: Do we have a fairly firm bottom in place in the markets?

A: On the whole, we look at liquidity flows and all of that, the market looks fairly stable and in the last couple of months, there was a fear of the effect of demonetisation which have not panned out as badly though the gross domestic product (GDP) numbers and all are yet to come, but the feeling is that we have crawled back to normal and by end of February or latest, by end of March, the economy will be back to normal, in fact, there are some people, some investors starting to believe that having gone through such a big shock, there should be a relief rally and the economy will also come out stronger - that whole thing about if it will not break you, it will make you stronger. So, if the economy has not been broken because of this stress, it will actually become stronger and by February-March we will start seeing an uptick and currently we are looking at liquidity flows are very strong, investor concerns also low. So, we should be around here, but we have always said, market in the range of 4-5 percent is always going to happen.

Nigel: The next big event is going to be the Budget. In the last year, things were awful going into the Budget. We were just moving lower. This time, we have had a bit of a pre-Budget rally; we have gained close to around 500 points from the lows that we saw in December. What expectations do you have from the Budget and also earnings, when will earnings growth come for us? Every year we say next year and now with demonetisation, it is pushed further back.

A: A couple of things. One is obviously this year’s Union Budget is very important because after this, there is only one year remaining before the next elections. So, a lot of the new programmes, the new real push the government want to give, this would be a good year to give and obviously, because of the recent demonetisation, the government's focus priorities will become very important. So, all eyes are on that. It will have a big impact on investors and how they react to this.

On earnings growth, we should be resigned to a very tepid overall earnings growth for the next few years or so. But again, investors are no longer looking at overall market earnings. People are looking at sectors and in the last few months, we have seen steel and all have come back. We are seeing a lot of cyclical starting to come back. A lot of infrastructure companies have been coming back. Banks will, maybe another couple of quarters down the line, we will start seeing banks, the provisioning drag going down and banks will start showing earnings.

But overall, there will always be parts of the economy which will not do well because the global economy is not going anywhere; the private sector investment is not starting. So, India is never going to fire in a full way because of low exports, this absence of private sector investment. So, expecting 14-18 percent earnings growth in corporate earnings might happen on one quarter here and there because of base effect, but overall we should look at industries and pockets of earnings which, even in the last five years, there are a lot of industries and sectors which have done fairly well and I think the same trend will continue.