Don't look for a hero but look up to institutions: Ambit Cap

The government has worked promptly in ushering in a new set of reforms soon after Rexit happened, said Ashok Wadhwa, the group CEO of Ambit Holdings. He added that Raghuram Rajan is a globally accepted giant in his own right, and the government is aware that if Modi and Jaitely have improved India's visibility, Rajan has improved India's credibility in the financial world and an appropriate replacement for him is both essential and forthcoming. Saurabh Mukherjea, CEO-Institutional Equities of Ambit Capital, said that the Monetary Policy Committee (MPC) will become the focal point in the next few months. "Rajan's exit marks a new chapter in the way the RBI is run and how we institutionalise Rajan. So, we must not look for a hero but move away from individuals and look up to institutions," Mukherjea added. Below is the verbatim transcript of Ashok Wadhwa & Saurabh Mukherjea’s interview with Latha Venkatesh & Nigel D'Souza on CNBC-TV18. Latha: A head of the conference a lot of things are happening, the Brexit referendum vote will be known to you and you are going to take perhaps the First big Indian brokerage or securities company to speak with foreign institutional investors (FII) after the governor decided not to continue. What are you going to tell them that is India in a safe pair of hands? Have you already received a lot of questions from your potential investors? Wadhwa: Between your channel and similar channels there has been so much coverage on Rexit as they call it by now that Brexit has been kind of overshadowed certainly on the Indian screen over the last few days. While, we talk about Raghuram Rajan’s exit which is obviously a subject matter of lot of debate now let us also not ignore the fact that the government has moved very promptly very swiftly in bringing in and ushering in a new sets of reforms. Making Foreign Investment Promotion Board (FIPB) less relevant, making automatic approval clearer, focusing on ease of doing business in India and permitting foreign investment in a plethora of new sector that we couldn’t imagine was possible a few days ago. So, if that is what Rexit has done then in some ways it is expedited and fast forwarded the reform process and maybe that is the price we pay. Everybody has spoken about it you can’t find a more acceptable, a more global giant in his own, right. Raghuram Rajan somebody who I think has left an impact on the India’s monetary policy over the last three years. However, I would also like to believe that event has done and over with. I am sure the government is well seized of the problem, government is fully aware that well as our Prime Minister and the Finance Minister have improved India’s visibility. Rajan had certainly improved in India’s credibility in the financial world. An appropriate replacement for him is both essential and I am sure forthcoming. Nigel: Who will be the appropriate replacement as per you? We have heard quite a few numbers, Latha has been filling us in five-six names who do you think will be best placed to take over from Dr Rajan? Wadhwa: I don’t want to be involved in that debate. It is an irrelevant debate in anyways. There are people significantly better qualified than Saurabh Mukherjea and me to look at that issue. Latha: You will have a lot of investors asking you that question. I don’t know if Amandi will come there, if Fidelity will come there; they are all big bond investors in India. In 2014-2015 USD 40 billion came from bonds, less than half of that money came from equities. Saurabh you are going to be asked what will allow us to feel that our money is safe? That question is going to be asked so what will be the best answer from the Indian government point of view that will reassure investors? Mukherjea: My sense is leaving the personalities on the table aside my reckoning is what will happen over the next year or so is we will see the monetary policy committee (MPC) been made the focal point of monetary policy decision. As you know as per the bill which is already been passed in the Budget session half of the MPC will be nominated by the finance ministry, half by the Reserve Bank of India (RBI). It will be new development in Indian monetary policy. The western style, the Bank of England style monetary policy framework which our speaker at the conference Sushik Wadhwani will be familiar with –I think that will become a focal point of monetary policy formulation. With regards to banking system already the Banks Board Bureau (BBB) is front in centre and we know the guys front in centre in running the banking system. So, in a very interesting way Rajan’s exit marks a new chapter I reckon in the way the RBI has run and in a way we are institutionalising the RBI governor and disaggregating his roles and passing them out some to the MPC and some to the BBB. Latha: That will be your answer to your investors? Mukherjea: The point we will try to make is this is part of India’s evolution where we institutionalise and move away from individuals. Because if we think about whether it is in cricket or in monetary policy or in politics we are always looking for the hero. Part of our evolution as a country has to be towards institution and away from the hero. Nigel: Now majority of the street is factoring and may be Brexit will not come about so tell us what is the upside them in that case. We have already done 150 points from yesterday’s low or thereabout so what is the upside and also I was quite interested to know you had revised your rating on the Sensex to around 29,000 odd but you said that 22,000 is still a possibility. What were the key factors that went in to that 29,000 number? Mukherjea: Over the last year, year and a half when we turned bearish in March last year India has been playing a dance between a very slow recovery at home and high amounts of volatility globally. By high amounts of volatility I mean we are referring to factors such as a meaningful Chinese devaluation, such as western bond yields being zero at a time when CPI inflation is below zero. You can’t think of a worst combination for a banking system CPI below zero and interest rates are below zero. So, these are very meaningful global risks. I don’t think we at Ambit can certainly say we have better grip on these global risks they are major risks. We are highlighting them on the table and saying there is a genuine chance that the market could fall to 22,000 on the back of it. We are taking cognisance of the fact that between the RBI, the BBB and the finance ministry lots of repair work has been done on the banking system. I doubt that repair work will suddenly stop on the back of governor Rajan’s exit, the repair work will continue. Provided that banking system holds together a slow economy recovery is underway. 10 percent earnings growth this year and thus 10 percent upside on the market level is what is our base case scenario. We have taken the 22,000 call as a base case off the table because we believe central scenario is now for a slow grinding economic recovery driven largely by consumption rather than the CAPEX. It is difficult to see CAPEX suddenly taking off in India 10 percent earnings growth, 10 percent market upside that is our central scenario and that should be reasonably resilient to adverse global events barring a full blown banking crisis in the western world. Latha: This is your pet subject we get closer to April 2017 and the anti avoidance rules will become effective. You don’t see that being a debate among foreign investor especially when they see you? Wadhwa: I don’t think, I think the issuance of all the clarifications vis-a-vis Mauritius which then has an impact on all other treaty countries I think should provide adequate comfort to everybody that the government has in a very transparent manner laid a framework of how stuff will move from way we are to 17 and then of course to 19. The greatest comfort comes from the fact that anybody and everybody holding stocks through Mauritius will not be subject to tax in India so long as you acquired to shares before March 31st 2017. That certainty itself in many ways is what people were seeking. The fact that there is an additional concession given for two more years is in some way a bonus. A lot has been spoken about whether it is detrimental to India’s interest in terms being able to gain more flows because of change in Mauritius law. At the margin yes because people will have to pay tax but so long as there is certainty and you can budget for that certainty upfront I think it is par for the course. _PAGEBREAK_Latha: A bigger question is what is the story you are going to tell in your conference?Wadhwa: I think Saurabh touched upon amongst the two engines in India; clearly the consumption engine seems to be firing at this point of time, albeit a bit slowly. About two years ago when we saw the rural consumption completely fall of the cliff, partly on the back of poor monsoon, but also partly on the back of the government reset on how benefits were going to transferred. We were very concerned that the one engine that had been firing over the 12-14 period that also kind of stopped firing, was very slow in firing, that engine seems to be coming back and if we have a strong monsoon which appears to be the case at this point of time, don’t want to be taking ahead of the full monsoon, but that certainly creates a better sentiment and we see an upsurge in the rural consumption which itself should augur well for overall consumption.Unfortunately, the investment engine is just not firing. Unfortunately, despite government’s commitment that at least the government capital expenditure is starting to happen, we see no semblance of private sector thinking or planning of any capital expenditure and honestly until that starts happening, we will continue to remain in sombre mood.Latha: Incidentally Bank of India actually this time also reported a better current account saving account (CASA) it rose from 29 percent to 35 percent, so there is some repair work being done on several fronts. Any comments.Mukherjea: This will be one of the central trade that a lot of foreign investors are working on (a) which PSU banks should we take stake sale and we got Bank of Baroda at our conference and (b) as the sort of smaller end of the PSU world, the bottom 20 PSUs basically become capital starved, which private sector lenders will benefit from that shift. So the two private lenders at our conference City Union Bank and DCB my sense is both are already picking up SME market share on the back of the weakness of the smaller end of the PSU, but these are two large trades that a lot of investors are working on. Which PSU and which private sector lender will benefit from the dislocations in the financial systems, so very active subject, there will be constant news flow through the summer about some bank or other selling stakes in private sector entities almost every day.Nigel: I want to ask you on another space, the real estate space you have all had come with the big call last year, a lot of people asking us what’s going on there, maybe a not a lot of market savvy people as well. They want to know what’s going on in the real estate market. What’s your stake at real estate, at one point of time when we were growing up, everyone said put your money in real estate maybe you’ll double it. Now I think the way prices have moved is it looking a little iffy?Mukherjea: One of the central thrust of this government reset has been against black money and it is pretty abundantly clear that both jewellery and real estate as two large laundering engines have been jammed comprehensively. As soon as we do that it put at risks the valuations at which real estate trades at whether it’s in Bombay or whether it’s in Delhi, the city doesn’t matter. The whole business model on which real estate was predicated has been put at risk by the reset that the NDA government has wrought.The question that we keep asking and by the way we are not seeing any valuation uptick or volume uptick in real estate. We continue going into the registry office in various cities quite frequently. We speak to bankers, we neither seeing a price uptick nor a volume uptick in real estate and my reckoning is the larger developers are getting increasingly financially stressed. The smaller developers quite palpably are throwing the towel, so the question that become really is for the banking system, what is the risk that this poses. At the first outset it is the housing finance companies, the specialist real estate lenders who have lent to developers who appear to us to be at greatest risk, so we have written about this quite extensively about how the NBFC and housing finance sector is exposed to developer’s loans particularly and the loan against property segment. I don’t see this risks abetting and if the black money crackdown from the NDA continues, my reckoning is we should see a price correction after all black money was the underpinning of lot of real estate valuations in the large cities in our country.Latha: They are not your favourite spaces?Mukherjea: We haven’t written a positive note on the subject for a year and a half.Latha: The big themes that the government came with was more expenditure on rail and more expenditure on road. Has that impressed investors, does this guide your stock picking?Wadhwa: Well, I leave Saurabh to talk about stock picking, but clearly in the debates between roads and rail, at least at this stage it appears like that road story is unfolding much better and there is greater traction for investors to start investing in the road sector. We saw the big transaction that Brookfield did with Gammon, when they acquire all of the road portfolio of Gammon and you will see a lot of long term money, there is lot of insurance and pension money long dated money that is chasing Indian opportunities in the road sector. I haven’t seen significant interest from investors talking about the Indian rail sector as yet, that doesn’t mean that enough work has not been done there. It just mean that the opportunity seems to be a little delayed at this point of time, but clearly road is something where there is serious interest and that clearly our favoured proposition now.Nigel: So you guide us, then tell us what about stock picking and roads are doing well then cement space should do as well?Latha: A bigger question is what is the story you are going to tell in your conference?Wadhwa: I think Saurabh touched upon amongst the two engines in India; clearly the consumption engine seems to be firing at this point of time, albeit a bit slowly. About two years ago when we saw the rural consumption completely fall of the cliff, partly on the back of poor monsoon, but also partly on the back of the government reset on how benefits were going to transferred. We were very concerned that the one engine that had been firing over the 12-14 period that also kind of stopped firing, was very slow in firing, that engine seems to be coming back and if we have a strong monsoon which appears to be the case at this point of time, don’t want to be taking ahead of the full monsoon, but that certainly creates a better sentiment and we see an upsurge in the rural consumption which itself should augur well for overall consumption.Unfortunately, the investment engine is just not firing. Unfortunately, despite government’s commitment that at least the government capital expenditure is starting to happen, we see no semblance of private sector thinking or planning of any capital expenditure and honestly until that starts happening, we will continue to remain in sombre mood.Latha: Incidentally Bank of India actually this time also reported a better current account saving account (CASA) it rose from 29 percent to 35 percent, so there is some repair work being done on several fronts. Any comments.Mukherjea: This will be one of the central trade that a lot of foreign investors are working on (a) which PSU banks should we take stake sale and we got Bank of Baroda at our conference and (b) as the sort of smaller end of the PSU world, the bottom 20 PSUs basically become capital starved, which private sector lenders will benefit from that shift. So the two private lenders at our conference City Union Bank and DCB my sense is both are already picking up SME market share on the back of the weakness of the smaller end of the PSU, but these are two large trades that a lot of investors are working on. Which PSU and which private sector lender will benefit from the dislocations in the financial systems, so very active subject, there will be constant news flow through the summer about some bank or other selling stakes in private sector entities almost every day.Nigel: I want to ask you on another space, the real estate space you have all had come with the big call last year, a lot of people asking us what’s going on there, maybe a not a lot of market savvy people as well. They want to know what’s going on in the real estate market. What’s your stake at real estate, at one point of time when we were growing up, everyone said put your money in real estate maybe you’ll double it. Now I think the way prices have moved is it looking a little iffy?Mukherjea: One of the central thrust of this government reset has been against black money and it is pretty abundantly clear that both jewellery and real estate as two large laundering engines have been jammed comprehensively. As soon as we do that it put at risks the valuations at which real estate trades at whether it’s in Bombay or whether it’s in Delhi, the city doesn’t matter. The whole business model on which real estate was predicated has been put at risk by the reset that the NDA government has wrought.The question that we keep asking and by the way we are not seeing any valuation uptick or volume uptick in real estate. We continue going into the registry office in various cities quite frequently. We speak to bankers, we neither seeing a price uptick nor a volume uptick in real estate and my reckoning is the larger developers are getting increasingly financially stressed. The smaller developers quite palpably are throwing the towel, so the question that become really is for the banking system, what is the risk that this poses. At the first outset it is the housing finance companies, the specialist real estate lenders who have lent to developers who appear to us to be at greatest risk, so we have written about this quite extensively about how the NBFC and housing finance sector is exposed to developer’s loans particularly and the loan against property segment. I don’t see this risks abetting and if the black money crackdown from the NDA continues, my reckoning is we should see a price correction after all black money was the underpinning of lot of real estate valuations in the large cities in our country.Latha: They are not your favourite spaces?Mukherjea: I think the easiest way to play the road story I would say is play the CV manufacturers and specifically in South India Ashok Leyland is not just the conference attendee, it is the stock we have been championing for best part of three years. I think the other way to look at the shift in the way the government has re-priorities as Ashok was saying they spent heavily on roads, but it is also clear that the recapitalisation of the PSUs, the government has been fairly wary of committing large sums. Now that in turn has created a big opportunities for these well capitalised private sector lenders and there is a trade to be done there and the third trade, the third sort of a substitution trade I call it as historically India has spent USD 400 billion per annum on real estate and jewellery like roughly USD 300 on real estate and roughly USD 100 billion on jewellery, that trade seem to have fallen off a cliff, which we will discuss endlessly, which in turn means a huge amount of consumer spending available which people are trying to figure out what to do. Now clearly some of that money is underneath people’s pillows hence the rise in cash in circulation, but what we also seeing is consistent rise in spend on cars, SUVs, motorbikes, home improvement and the entire aspirational consumption space as Ashok was referring to earlier in his conversation has come alive. Paradoxically, because spent on real estate and jewellery has throttle, so these three big substitution I think how India is getting reshaped under the NDA away from rail towards roads, away from PSU banks towards the private sector lenders, away from spent on real estate and jewellery towards other forms of aspirational spent.Latha: You have been so in on so many deals. You just spoke about the Brookfield's purchase of Gammons roads. Will you see more of that with the RBI turning the screws asking the banks to recognise unsustainable debts and banks now emboldened to probably look for new promoters. Are there more M&A deals waiting to happen and will that be a de-stressing factor?Wadhwa: If you take one large sector that has been a cause of stress for the banks which is the overall infrastructure sector, whether that is ports, whether that is roads, whether that is steel, whether that is other form of infrastructure I would say that as a result of sustained pressure from RBI and of course by banks chasing those opportunities up more and more promoters have reconciled to the fact that they must liquidate that portfolio and gone are those days when hope was your strategy and that the next turn would actually rerate the pricing for your company.So, you are seeing many more promoters talking quite openly about wanting to sell those portfolios. It in a sense is also fortuitous because at this point of time there is a lot of, as I said, insurance and pension money that wants to go to India because it finds India as a very safe jurisdiction for long dated assets. So, that meetings of minds in a sense is working out and you will see a lot of money invested in India over the next 12 months when Indian promoters sell those assets out and of course these large insurance companies buy them.The other part is Strategic Debt Restructuring (SDR) and some concessions that have happened since then and how is that working out in terms of promoters ceding control. Again Gammon is perhaps one of the early companies where you have seen ceding of control already happened. It has been announced in a few other cases but I am not sure it has worked out very well at this point of time. More sustained pressure from the banks is necessary because some promoters have to be told that hope is not a strategy.