'China downturn, commodity fall opportunity for India'

With the Chinese economy slowing down and commodity prices collapsing, there is a big opportunity for India, says Mihir Vora, Director and Chief Investment Officer of Max Life Insurance.Speaking to CNBC-TV18, Vora says he is underweight on sectors like oil, gas, petrochemicals and metals not just because commodity prices are falling, but also because many of these companies are leveraged.On Volkswagen emission scandal, he says it won’t affect global markets as auto sector forms only a small portion of the world economy.He recommends investors to avoid public sector banks with non-performing assets (NPA). He likes private banks, non-banking financial companies (NBFCs), road builders and companies with increasing visibility on mining and railway projects.Below is the verbatim transcript of Mihir Vora’s interview..Sonia: What is the sense you are getting about the market itself? It seems that every rally is being used as a selling opportunity. Do you think the market will be capped at these higher levels of around 8,000 or so?A: Yes, we are in for volatile times for sure. There are local factors and global factors that play here. But of course, the most important thing that one is looking at is when will the negative flows to emerging markets slow down. We have for the last many weeks seen almost continuous selling by foreigners, not only in India but also across emerging markets. So, that is one key variable to watch out. The risk aversion in the global markets is one of the key drivers for this volatility. And that is something that we need to watch out for.Anuj: The big question is that are we still part of a bull market, are we still in a bull market and is this still a correction? Would you be deploying further money if there is another five to ten percent correction or is there a risk of this market now completing even a 25-30 percent correction?A: Absolutely. The India story I would say is pretty much intact except for a few minor negatives that I will touch upon later. But if you look at the whole genesis of the recent collapse in some of the key emerging markets like Brazil or China, it has been basically the Chinese slowdown which has led to a big collapse in the commodities prices. So, whether we talk about metals or coal or steel or copper, aluminium, across the board, we have seen 20-40 percent correction in commodity prices. And if you look at the India point of view, India is actually in the Brazil, Russia, India, China and South Africa (BRICS) category one of the key importers of raw material, especially oil and gold. If oil continues to stay at these levels, it is at USD 30 on an average less than the price than we saw last year. That means Rs 1,50,000-2,00,000 crore benefit for India’s trade deficit and of course, the trickle down impact on the fiscal deficit, the fuel subsidy, etc is massive.So, the slowdown that we are seeing in the global economy especially China and the commodity collapse is a big opportunity for us to fix our own balance sheet and we should treat this as a godgiven opportunity and fix it. As far as the government is concerned, they are doing a lot. Many decisions have been taken on key parameters, especially spending on infrastructure, policy issues on defence, railways, mining, etc. and the capital expenditure (Capex) has already begun to various degrees in different segments. So, the India story is pretty much intact. There is a case for lower interest rates going forward and the way we are positioned is basically for a domestic slow cyclical upturn and playing the sectors which will benefit from that.Anuj: The larger question is that this issue has come out of nowhere. So far we were dealing with problems which were sort of the known problems. This issue has come out of nowhere. Does this have the potential to de-rate a couple of economies? These are large sectors that we are talking about, large companies that we are talking about. So, globally is this a new bit of risk that has hit the market and do you think there will be quite a bit of impact because of this? About the Volkswagen issue.A: I would not say this has a big impact on the global markets, because if you look at the listed market cap, the automobile sector is not a big chunk of the overall market cap globally. So, I won't say this is a factor which we should be worried about from the overall market point of view.Sonia: Coming on the way Tata Motors has moved, here is a story that has unravelled in front of our eyes. First the Chinese market has slowed down, now there are some talks of the North American market giving high amount discounts as far as Jaguar, Land Rover (JLR) products are concerned and as of this moment, we are looking at European markets slowing down as well. What would you do as a long-term investor in Tata Motors? Would you look to buy into this dip or would you stay away for the time being?A: I am sorry I am not allowed to comment on individual stocks. However, I would like to point out that India as a market has a significant exposure to sectors which are globally linked. So, there is rub-off especially in sectors like metals and energy which is a large chunk of the index including refining petroleum, oil and gas, metals, coal for example. So, there are sectors which have global linkages and since we are seeing a downturn in a lot of these sectors, this is impacting the Indian markets as I mentioned earlier.Anuj: A couple of sectors where we have seen some bit of downgrades are metals and oil and gas, some of these sectors have been the worst performing sectors. What is your call on some of these names? From the sectoral bets that you have taken, I believe that you are still underweight on these names.A: Yes, we are underweight on oil and gas, petro-chemicals, metals and a lot of global commodities basically not only because of the fall in commodity prices which has been very sharp in the last few months, but also because of the fact that many of these companies in the sectors are also quite leveraged. And the leverage burden is only going up year by year, because there are now issues on the earnings before interest, taxes, depreciation and amortization (EBITDA) margins also. So, we continue to stay underweight and I think we will stay that way for a while.Sonia: So, what are you recommending investors to do now in terms of buying ideas or rather sectoral buys? What are your top one, two, three sectors that you are recommending?A: We are clearly avoiding global cyclicals, we are also avoiding the banks basically, where there are likely non-performing asset (NPA) issues because we do not believe that the NPA issue has been completely dealt with. So, we are basically or avoiding or underweight on public sector banks. However, we believe that any economic growth - there has to be a participation by the banking sector. So, we do like private sector banks. We believe that they will capture a disproportionate market share as well as non-banking finance companies (NBFC). They will also capture a disproportionate market share in the credit growth when the economy picks up. So, NBFC and private sector banks is one segment that we are looking at.The other segment that we like is basically, contractors, road builders and themes or companies linked to mining, railway and defence because we believe there is a lot of initiative going on in these sectors and there is increasing visibility along those lines. But here also we are avoiding the leverage players. We are going with players who have capacity to deliver and take on more orders.Sonia: At what point do some of these stories start becoming good buying opportunities? Is this a space the global or the export led companies, is this a space that has to be avoided for now or do you think that after 30-40 percent correction perhaps these are good buying opportunities, not just Tata Motors, but even the ancillary companies?A: Structurally, the ancillary companies are on a pretty sound footing. As exporters as well as as far as the domestic market is concerned. So, these are very sound businesses with proven manufacturing technologies, manufacturing capacities not only in India, but all these companies also have global operations. So, these are fundamentally sound companies. At some point in time, one needs to look at it. We have been bullish on the auto ancillaries sector for a while because of the reasons as I mentioned. A, the global market is opening up and they have proven themselves so they are getting more and more clients. B, the local market is now grown to a critical mass and now, a lot of the auto ancillaries also have capacities in other engineering. So, some of the auto ancillary companies are also potential suppliers to the defence industry, etc. So, I would say that these are companies with special skills and at some valuation they do become buys.Anuj: What is your call on both these exporter names – IT and pharmaceuticals? Do you think they will remain the safe havens or they will also go through volatility?A: We have seen that time and again, whenever there is risk aversion, people tend to swing towards these names as well as fast-moving consumer goods (FMCG) names. However I am not so bullish on FMCG, but IT and pharmaceutical, I believe they are structural export stories benefitting from their inherent strengths like I mentioned auto ancillaries which is another export story benefitting from inherent strength. So, these are core holdings long-term holdings and we tend to be overweight on them. We like the sector.