India is in a bright spot in the global environment. Demonetisation was only a temporary setback for the market. These were key takeaways from the Eight Motilal Oswal Eureaka Conference, says Rajat Rajgarhia, MD & CEO, Motilal Oswal, adding that data points now indicate things are beginning to look up.
Globally, too, investors are generally positive on equities, and commodities and so global trade looks good, says Rajgarhia.
Although some or the other headwind keeps impacting the aggregate earnings there are many companies giving good guidance and investors continue to focus on them. “Aggregate growth will be better in the next 12 months but there are pockets of opportunities where growth will be even better,” says Rajgarhia in an interview to CNBC-TV18.
While most of the foreign institutional investors (FIIs) at the conference did believe that goods and services tax (GST) was a landmark reform for the economy, they are still uncertain about how it will impact economy, companies and the market as a whole. So, post the GST rollout they would be watching for how the key variables move.
FIIs also continue to find growth opportunities in the niche space in financials. So far their investments into financials have given them good returns and they are still excited about the space.
So be prepared for a time when both the FIIs and domestic investors will be net buyers, says Rajgarhia.
The other theme besides financials that FII investors are excited about is insurance and with two large private insurance companies getting listed there is an option to play them.
Consumer discretionary space also looks attractive for investors because India is basically a consumption story, says Rajgarhia.
With the quality of IPOs improving and a strong pipeline in 2018, the FII investors are excited about this new option of investing, he adds.
However, FIIs are yet cautious on consolidation/mergers happening in the PSU oil and gas space and would have a wait and watch approach, says Rajgarhia.Below is the verbatim transcript of Rajat Rajgarhia’s interview to Nigel D’Souza and Sumaira Abidi.
Nigel: Has anything changed after meeting investors there and also if you could tell us, you must have spoken to a whole host of corporate so how did it go?
A: The one common impression that I gather from the 100 plus investors that have come to our conference is that a lot of them believe that India is in a right spot in the entire global environment right now. So, while the phase of demonetisation was a temporary setback from a market point of view, we have recovered quite well and that is what they are focusing while meeting companies also that how are the companies seeing the recovery phase and I think the data points, etc. are indicating that things are beginning to look up now.
Sumaira: Is the best case that the earnings have bottomed out and probably the upside will start from the next quarter now?
A: At the aggregate level, the earnings keep on facing so many moving parts that some headwind keeps on impacting the aggregate. However, there are enough number of companies within the market which are continuing to guide very well and that is what investors are essentially focusing on. At this point of time, yes, I do think that the aggregate growth will be better in the next 12 months but there are pockets of opportunities where growth will be even better.
Nigel: How big a game changer will goods and services tax (GST) be for foreign institutional investors (FIIs) looking to invest into India?
A: I think right now most of the investors know that GST is a landmark reform from an economy point of view. However, no one has clarity on what is going to be the impact of GST on - first the economy, second the companies, and third the market. I think they are waiting to hear the final details and then they would be putting, at least for the first 12 months, a lot of the watch-list where they would like to monitor how the key variables are moving. So, yes, it is an important milestone, but the impact is not clear yet.
Sumaira: What is the general mood towards financials as far as the larger investors are concerned?
A: If you look at the entire portfolio of FIIs, a significant part of that portfolio constitutes financials. Over the last 15-20 years, they have created enormous wealth investing through the HDFCs, or IndusInds, or Yes Banks, etc. Now, in the last 12 months, they are beginning to see many new opportunities coming up in financials again. So, you have the mid-sized housing finance companies, we have Dewan Housing Finance Corporation and Indiabulls Housing Finance, both participating here. There is RBL Bank, its initial public offering (IPO) came last year but is already up 100 percent since the IPO. We have many other diversified financials or niche financials, we have Capital First, we have Piramal Enterprises where a large part of the value comes from financials and all of these have very strong growth rates that they are continuing to guide for the coming years. So, foreign investors are very excited about the emerging growth companies within the financial sector to invest from the next 5-10 years point of view.
Nigel: What is the general prognosis as far as global setup is concerned at this point of time?
A: I think people are generally quite positive on equities; you have commodities which have bounced back from the lows. So, the global trade is beginning to look good. You have the Fed rate outlook definitely seems to have got well discounted into the market and yes, the new policies that the Trump administration is going to unveil should have its own positive impact on the US corporate sector. So, all-in-all, all this augurs well for equities globally and hopefully India has its own story to be sold right now.
Sumaira: Is there a sense amongst the larger investors that they feel that they have missed out on this big rally in the Indian market?
A: First of all, the foreign investors are very positive in the way the domestic equity allocation has been changing over the last two years. So, our own monthly domestic flows of just about at least USD 1 billion making the annualised flows at anything between USD 12 and 15 billion itself provides a strong support to this market.
As far as the foreign investors are concerned, I think it is just a matter of time when we will start seeing the taps opening again. Last three to four months, we had some country specific issues and we had some emerging market specific issues because of which the flows were moderated. However, we should prepare for a time when you may have a period of both foreign and domestic investors being net buyers in the market and that would be the period that markets will get quite excited about.
Nigel: Second half of the year is going to be quite interesting, so you have investors spoken about events that may impact emerging markets like India in the second half of this year?
A: I think the most important risk that I may see for India is at some point of time the aggregate earnings has to come. If you look at the Nifty from January 2008 at 6,300, we are at 8,900 now. So, that is a gain of just about 2,500 points which is just about 40 percent over eight year period. That is a compound annual growth rate (CAGR) of just about 3 percent. So, big money flows in when the aggregate market makes returns. That has not happened in India for the last eight years.
It has largely been specific sectors which have been benefitting from the specific flows. You need the aggregate growth to return and then once you cross through FY18, I think FY19 the noises of the 2019 elections will start doing rounds. So, the next six to nine months are pretty important for us to come back to this 15 percent earnings growth era, otherwise, there would be some phases of disappointment for an aggregate market.
Sumaira: What are the sectors that you are recommending to the larger clients at the conference?
A: First of all, the big sector of interest continues to remain financials and within that you have private banks, especially the private banks where the market share growth is significant from the next five years point of view and whoever has managed the asset quality issues very well. You have many non banking financial companies (NBFCs) starting from housing finance to companies like Bajaj Finance and other niche financiers. This quarter results came out better for almost everyone which was supposed to be a difficult quarter. So, this is one space where people are quite excited about.
Second, I have started to see insurance becoming an important theme because now you have the two largest private insurance companies which are listed or you have a way to play them. So, that is the second theme which people are excited about.
Third, the entire discretionary pack, that is also an important space because ultimately India is a consumption story and that is spreading from one sector to another.
Fourth, I think a very important piece that investors are excited about that the quality of IPOs which are coming in India which we have seen in the last 12-15 months, and the pipeline for 2017, it is giving new investable options for large investors to put money and benefit from the high growth.
Nigel: There have been reports of mergers in the banking public sector undertaking (PSU) pack as well as the oil PSUs. Are investors really looking at them?
A: As far as bank PSUs are concerned, that is still not on the radar of the offshore investors yet because I think the basic challenges of asset quality and low capitalisation levels are still constraining them.
As far as the oil PSUs are concerned, that has been a space which has created enormous wealth over the last three to four years specially the downstream companies. Now, in what structure and shape the entire consolidation happens, needs to be seen because every week we hear a new story coming out. I think people are going to be into a watchful mode, will see the actual event happening and then will decide whether how good or bad it is for which company in that space.
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