Rashesh Shah, Chairman & CEO, Edelweiss Fin Services is positive on Indian equities given the slew of positive cues like declining inflation, stabilising rupee, narrowing current account deficit, good corporate earnings and revival in global growth. However, he cautions market volatility to return around election during April-May-June.
Sectorally, IT and pharma would continue performing well because its valuations are still reasonable compared to FMCG said Shah. Moreover, he recommends investors to stay away from sectors that are strongly influenced by government policies and actions, for example telecom.
Commenting on the non-convertible debentures (NCD) issued by Edelweiss he said: "We are offering returns from 11.6-11.85 percent per annum on a monthly basis. So the annualised yield is much higher and can be as high as 12.5 percent onwards for investors.” The NCD issue has received AA rating by CARE, he said.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: What do you think about HCL Tech and the overall IT pack?
A: We are seeing that the IT story continues to get stronger and stronger. Even from a valuation perspective most of the companies are not very expensive yet.
Couple of years ago there was a switch away from IT into banking and most of the FIIs over allocated to banking and were underinvested in IT, which started reversing about a year ago. Therefore, I think the IT underweight story and banking overweight story has got reversed in the last year continues at least for another 12-16 months.
Stocks are not overvalued. They are clipping along at good return on equity (ROEs), good growth. With the rupee weakening and remaining in this range coupled with recovery in the US economy, it is going to be a huge benefit for IT sector. All this put together IT continues to be a good story at a reasonable price.
Q: The sector that is really getting hit hard today is telecom. All the telecom names Bharti Airtel, Idea Cellular, Reliance Communications are all lower. There is of course the fear of the participation of Reliance Jio in the upcoming spectrum auction which may perhaps hit the profitability of these companies and increased competition. How do you approach this entire sector?
A: This sector has consolidated and the large new entrant is going to create some challenges. There is also a lot more government involvement in framing the rules from a regulatory point of view etc.
So it is a theme until next elections that people will still try and stay away from sectors which can be strongly influenced by government policy and government actions, especially where there is still some amount of over competition.
Meanwhile, people will find solace in sectors which are slightly away from the government influences so much which is mainly as you spoke earlier IT and pharmaceuticals.
Earlier there was FMCG but unlike IT and pharma FMCG valuations went up. So when we talked to institutional investors they still find a lot of solace in IT and pharma and away from all the other infrastructure oriented companies.
Q: What is your overall call for the market for this year? Last year was really essentially stock specific. The market overall was quite flat, but within that you had lot of stocks going up or down 60 percent. Do you think we will have something similar this year or could this year be a bit of top down for the market?
A: In the last year markets were very volatile all through the year. This year too there will be equal amount of volatility around April-May-June, election time we should see quite a bit of market volatility but outside of that I would see the market to remain strong for various reasons.
I do think Indian equity is under-owned by most of the Indian investors and for the last few years we have seen outflows from insurance companies from the equity mutual funds, all of that which has at least started stabilizing. Along with that market being almost at a new high, with the rupee being stable, with inflation coming down - so a lot of the macroeconomic parameters which really crippled India for the last couple of years have changed although not all of them have got solved.
I think the fiscal deficit and overall inflation is still a problem, but the trend in inflation, the rupee stability, the current account gap coming down, even the corporate earnings is fairly good, the global economy getting revived with the US markets coming back, all of those are good news overall for the market and also there is an asset class allocation. We are seeing more and more investors switching out of commodities and real estate into equities now.
I think equities and fixed income because current rates are still high are the two instruments very strongly favoured by investors and the bonds will stay in favour until interest rates start coming down which will be maybe over the next 3-4-5 months and equities should stay in favour for the whole year. So I think it should be a good year for equities.
Q: Since you are talking about what investors should do let us talk about the non-convertible debentures (NCD) that Edelweiss has issued. I understand that the issue is opened from 16th to 27th of January. What kind of returns would this NCD offer?
A: The issue as you said as opened today is a Rs 250 crore issue with a greenshoe of another Rs 250 crore, so about Rs 500 crore altogether for the issue. We are offering returns from 11.6-11.85 percent per annum on a monthly basis. So the annualised yield is much higher and can be as high as 12.5 percent onwards for investors.
So it is a good coupon. The issue is rated AA by CARE. A lot of investors are looking at good returns from bonds and fixed income instruments. They are increasingly switching out of bank deposits, because the bank deposit rates have not gone up in the last 5-6 months, while interest rates have gone up a little bit. So, on that count we are seeing a lot of retail investment.
For us in Edelweiss this is our first NCD issue in the retail space and up till now we have been growing by borrowing from the mutual funds and the banks and we are now expanding the third source of funding for our credit book which is through the retail bond issue.
Q: Do you expect the interest to be high in some of these NCDs as we move forward from the retail and not as much as equities, because retail has been completely absent from equities, because fixed income for them has made more money over the last 4-5 years. Do you think that trend will continue this year as well?
A: At least for the first 3-4 months I would expect it to continue until interest rates start coming down, because currently the hypothesis is that interest rates are still fairly high, but hopefully inflation is coming under control, so at some point of time, maybe in the second half of the year interest rates have to start falling. Until then a lot of investors - if you are getting on a pre-tax basis between 12-13 percent return it is not bad, because current expectation of equity market returns are about 14-15 percent. So there is not a large equity premium in the eyes of the investor, when I am getting 12-13 percent on bonds and I am getting 14-15 percent in equities what I expect will happen over the year, maybe in the second half of the year as the interest rates come down is bond yields will fall to maybe 10-11 percent if RBI rate cuts and all that and if there is a corporate earnings growth rate then expectation equity returns will go to 16-17 percent.
It is at that point of time that the gap between expected equity returns and the expected bond returns will widen, because currently the gap is very small, it is only 150 bps or so which is not good enough, because in the past we have seen that the gap has to be at least 300-400 bps for equities to also start looking attractive as compared to bonds. So I would expect that should happen after the elections hopefully.
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