India story good, but near term weakness seen: Ambit

A: Ambit hosts an annual conference in London and it is typically held towards the last week of June and first week of July. Our focus is to invite a few mid-market corporates and then give them an opportunity to meet with several global investors who all converge to London at that point of time. The investor group is represented largely by Europeans both from the UK and the rest of Europe but this time around we also have quite a few investors flying in from the US as well as from Singapore.

So I would say a group of 25-30 investors interacting and engaging with 10-15 corporates. The format is typically one-to-one meeting which allows investors direct access to and quality time with promoters and the promoters in turn get to meet high quality investors on a one-to-one meeting, which allows them adequate time and opportunity to both explain about their company as well as provide clarifications that the investors may seek. This is the fifth year that we are hosting this conference in London and as I said it is now an annual event for Ambit.

How do I see the markets currently and what do I see as the investor interest? The markets are and shall continue to be both rangebound and volatile, there are several factors external and internal to India which are causing this volatility and I don’t see either those factors getting addressed in the immediate term or therefore the volatility getting addressed.

Anuj: Global factors are not in our hands but do you get a sense that India has lost maybe a bit of an opportunity over the last one year?

A: I have just come back from a two day trip to Singapore and I was able to meet almost 10 very high quality investors who believe in India and have invested significant amounts of money in India. The general consensus is that a year from the time the Modi government came to power, we haven’t seen the type of dramatic change and reform that we expected at one point of time but they very quickly add to say that any expectation of a magic wand was truly an unfair expectation and reality is that India is and shall continue to be a challenging economy and there is no single reform or no single party or no single individual who can make transformational changes in the short period of time that the Modi government has been in power.

There is also general consensus that both in the medium-term and certainly in the long-term, India is a very good bet that these investors will continue to hold long positions that these investors will at each opportunity when the market dips and corrects deploy more money in India and therefore I would like to believe that high quality long-term investors certainly believe that India has a very bright future certainly better than all other emerging markets and believe that any aberration or any dip at this point of time is a short-term aberration, some believe it is medium-term aberration but I did not hear anybody who said that in the long time, we would not like to be significantly invested in India.

Ekta: Do you think that we will need to do something dynamic to get back foreign institutional investor (FII) inflows?

A: I think we need to think about why both equity and debt inflows have suddenly tapered off and I would like to believe that it has left to do with Indian market or Indian economic order and a lot more to do with global factors -- I mentioned Greece as one factor and until now let us say that Fed would come out with some serious changes on an immediate basis was the other factor that make sure that money was flowing back towards United States versus flowing into emerging markets.

Second one certainly has been addressed temporarily and hopefully the first one, the Greek issue will also get addressed in the short-term and once these external factors are addressed, I think you will see greater flows coming back to the Indian market both debt and equity markets. Can we do more in India to make India more attractive destination? Absolutely yes. I think we need to do whatever we need to do to support and augment consumption at this point of time whereas we all keep talking about investment cycles and how investment cycle has slowed down or has not been reignited, we tend to ignore the fact that we also need to do some more to prop up consumption and once the consumption cycle starts firing and if you think through the period 2012-2014, it was the consumption engine that fired well for India despite the fact that we were going through what I would think one of the worst periods from an investment climate perspective.

Having said that, government's plan to set a smart city announced by Prime Minister today are focused on infrastructure and all the indications that we see the Bombay coastal road being a very good example of that. I think government is ensuring that they announce important infrastructural projects but only after they have done enough thinking and homework such that there is credibility and implementation of those projects. Government make these announcements one at a time rather than transformational announcements but focus a lot more on implementation plan, which is what the government seems to be doing now.

Ekta: Getting your sense on earnings then, do you think that earnings will become worse before they get better?

A: I am not sure it will worsen but for sure, I do not see a serious increase or a very visible increase in earnings in the immediate future. Earnings have been muted, shall remain muted for a period of time. I think companies will have to see how they can get more efficient, hopefully they will be a great consolidation play, I think all the factors in India today including relatively muted earnings call for a much more significant merger and acquisition (M&A) activity, a consolidation play which will create synergies, deliver efficiencies and allow organisations, efficient, well-run organisations, well-capitalised organisations to use that as a mechanism to prop up their earnings in the short-term to medium-term.

I don’t think government policies can have a serious and immediate impact clearly government policies will have a gestation period and one hopes that proper implementation of those policies will result in growth in earnings through that period and sometimes medium-term to long-term -- so companies will have to deal with alternate strategies on how they deliver superior earnings to what has happened thus far.

Anuj: Since you look at taxation issues quite closely do you think they have put issues like minimum alternate tax (MAT) on FIIs on back burner or do you think it could come back to haunt us at some point over the next two or three months?A: On a lighter note, for years I have been trying to tell people that I am now an investment banker and that I left taxes 15 years ago but for whatever good reason, my past reputation still continues to be that I am a good taxman. So, I will attempt to answer that question for sure. I think the Finance Minister has been very specific, very direct and all actions whether by the revenue department or by courts seem to be in the direction that MAT which became a significant issue thanks to one advance tax ruling will get addressed, is being addressed in the best possible manner.Once the matter goes into litigation, given the Finance Minister’s commitment that he is not going to make retroactive amendments, good or bad I think it becomes very difficult to make legislative changes. So, one hopes that the judicial process that has commenced in the matter through intervention of several other companies who have been issued notices, will come to a logical end. I think the government is interested and inclined towards bringing it to that logical end. So, one would argue that that certainly is a matter that will get addressed soon.On, other issues even during his present trip the United States the Finance Minister has categorically stated that India will not pursue retroactive amendment strategy going forward. Now will he be able to transform that into legislation at some point of time, I would like to believe that when a Finance Minister makes a public statement of that nature, we need to trust him for what he is saying versus insist upon that getting converted into writing. I would like to believe that the government’s action going forward will more than satisfy all concerns and all investors that issues like MAT and retroactive amendments are hopefully deeply buried and that we are now looking at a regime which will implement what it promises.Anuj: What kind of activities do you see for the rest of the year in terms of mergers and acquisitions since you alluded to that earlier as well?A: I would say there is enhanced interest in deal making at this point of time. For a long time strategic interest in terms of cross border acquisition, foreign companies acquiring Indian assets had I think been relatively subdued. If one saw M&A activity, it was largely led by financial sponsors who were happy to take controlling interest in Indian companies.Over the last six months one has seen enhanced activity in particular Japanese investors have shown serious and very keen interest in making strategic acquisitions in India. I see large pools of capital flowing from Japan to India and I see significant partnership opportunities between Indian companies and Japanese companies. I would also think that US companies which are very cash rich particularly in the whole pharma and pharma related sector would be very keen to make acquisitions in India. We just need to ensure that there is ease of doing business and making acquisitions through a more transparent approval process.I think there is still some bureaucracy that needs to get addressed between investment approvals and related regulatory barriers. As these regulatory barriers ease out with the Prime Minster committing to ease of doing business in India, you will see many of these interested companies convert their interest into real acquisition opportunity.Ekta: What about the IPO market, we haven’t had any one big single IPO as yet, do you see that changing?A: History has shown that capital raising by listed companies starts the process in the primary market and the issuance pieces. Fresh IPOs, public offerings always follow suit. We saw a spate of activity in the whole QIP business between of July of 2014 and February of 2015 and then we saw this volatility and saw this correction. People were a little confused, a little concerned about this volatility being long drawn and the correction in market being more than just an aberration. So, those who were looking at filing for IPOs or for those who had even got the approvals for IPOs kind of withdrew a little from that opportunity.We have seen some very successful IPOs, I believe that there is a queue of very good quality IPOs waiting to come to the market. As soon as we see some stability in the market you will see a spurt in primary issuance of fresh public offerings. I believe that that could happen somewhere between October of 2015 and October of 2016. So, I continue to hope that we will see many good quality companies coming to market soon.Ekta: What about the market levels to watch then, do you think 9,100 is now a top and more importantly maybe 7,900 is in fact a durable bottom?A: My two bit contribution to your question would be I believe that Nifty is going to be a bit of range bound. It has remained in that 7,800 to 8,300 type range, it hasn’t broken either side to this corrective phase. I would like to believe that at least in the near-term, the Nifty will be range bound. However, my qualification to that response is I am certainly not an expert and therefore do not take my response very seriously.Anuj: In your opinion is the India story intact or in other terms are we currently only witnessing a bit of a speed breaker and is the overall story still intact?A: I think most long-term investors recognize that investing in India comes with a set of conditions and one of the conditions that it comes with is that there will be temporary aberrations, that there will be factors that are relatively unpredictable that will happen during any run. What we have seen over the last three months is no different. What we shall see in the future will be no different.Therefore long-term investors budget these aberrations in their process of investment. The story that India is a great investment destination continues to be intact and unless we see some significant challenge coming out of some of the current political developments, I don’t think the investors are going to change their opinion about India is a good market to invest in the medium to long-term.