India structurally positive within EM funds: ICICI Sec

FIIs believe that the FMCG sector is rather expensive and are relooking at IT and pharma sectors. 

Below is the verbatim transcript of Anup Bagchi’s interview with CNBC-TV18's Menaka Doshi and Senthil Chengalvarayan.

Menaka: What is your take on the market is? We have had a not very encouraging earnings season so, it might give some market men reason to revise their market expectations a wee bit downward but then again it is in January that we saw a crazy run up almost to the 9000 levels. Now your yearend target for this calendar year is 9750. That looks easy to do, doesn't it?

A: The way it is moving is that in the emerging market funds there are not too many opportunities and within that India certainly stands out very positively. So, it is liquidity which is also driving up a lot of buying which is also making sure that any dip is getting bought in very aggressively. But there is also an issue about emerging markets getting funds. So, that is not such a rosy picture because developed markets are doing quite well. So, to that extent emerging markets are finding it difficult to attract a lot of asset allocation towards itself but within emerging markets very clearly India stands out structurally very positive. So, that is why markets are running up. In spite of the fact that earnings are catching up as fast as far as structurally the way things are panning out.

Menaka: At this conference that you all are hosting, is it the sense that you get from the variety of foreign investors that you are talking to that not only are India’s opportunities unlimited but maybe foreign portfolio inflows into the country could likely be unlimited this year?

A: No, that is absolutely true. One of the most important things that we are gathering now is that structurally everybody is very bullish and so they are willing to for a moment take eyes off earnings. So, the way valuations are getting moved up is that there is base valuation, on top of it India growth delta is coming in and growth that is expected growth is coming in then the balance sheet. So, strong balance sheets are getting bought into very aggressively and then finally leadership premium is also coming in because they are saying that if India comes in it is the leaders who are going to get the maximum benefit and that is what we have seen in the behaviour of buying as well. So there is a huge leadership premium, there is a huge good balance sheet premium and there is a huge market expected growth premium.

What investors, I must also say, are worried about or concerned about is the quality of fiscal and they are saying that we will have to look into the Budget very carefully as to how the fisc – and it is not just the fisc, it is the quality of the fisc as how it pans out and is the government able to push through the reforms and not through the ordinance route but through making sure that the bills are passed in the parliament in a proper way and if that comes through structurally of their reforms more and more funds will get allocated towards India.

Senthil: How important then is a Delhi elections? Are people talking about that?

A: No, Delhi election did not come up here at all actually. People are focused on Budget, people are focused on fiscal. People think that India has also got lucky because commodity prices are come off, oil prices are come off and people are expecting we must make use of this wonderful opportunity to get fiscal in order.

Good and service tax (GST) is something that came up quite prominently because many of them say that we are talking of free trade everywhere but we must have first free trade within our own country. We must reduce the friction cost. Our honorable minister for railways Suresh Prabhu was here for this keynote address. So that is something that got quite discussed extensively. So what is limiting the unlimited is our ability to push through reforms and our ability to sort of execute it on day-to-day basis.

Menaka: What is the concern on the fisc, is it to do with whether the government actually now starts stepping up spending in areas like infrastructure and where they get the revenue for that from?

A: The specific concern about fisc is on expenditure management. That the quality of expenditure management must be fixed, leakages must be fixed. There were questions around Jan-Dhan Yojana that direct benefit transfer must start, leakages must be fixed. So the issue is not so much about disinvestment targets or on the revenue side. They are keenly looking at the government’s will to fix expenditure management strategy and make sure that subsides reach where they are supposed to reach. That leakages comes down and we have more flexibility on the expenditure side and then they will be very happy. Structurally, I think lot more money will come in.

Menaka: What is the mood you are picking up on the expenditure side in terms of whether investors are open to us sort of readjusting our fiscal deficit targets so we bit so that public spending can lead the way for private spending in the months to come? The government putting in additional money into large infrastructural projects so to speak is there a sense of acceptance amongst the audience that you have been taking to there?

A: We were to privatise, the first priority that we are hearing is that 13 percent of GDP is stuck in various kind of projects. So de-bottlenecking is number one because 13 percent is a large sum. Secondly, on the expenditure side they want government to start spending. However, they want that it is directed and there is less wastage on that. So, that is something that they are focusing on.

Senthil: Will there be forgiven of a over shooting of the fisc if that money is being spend on investment expenditure because that is what the Chief economic advisor would like but would foreign investor be indulgent of India doing that or would they say no, no over shooting of fiscal expenditure?

A: The mood that we gathered was that it is not so much on number. So even if you sort of meet the numbers but it is of bad quality or some how meeting the numbers, they will be happier if public spending starts, directed property wastage is reduced and then it moves on. So they will be forgiving of that, of course if the slippage is here and there. If the slippage is very large then of course not. However, they are focusing on quality lot more than they are focusing on numbers.

Senthil: What is the sense you are getting of domestic inflows now because you also look at the markets from a domestic point of view?

A: Domestic; mutual fund flows have been very strong this month again but on the insurance side it is not that strong. Barring a few players, insurance inflows have not been that strong but mutual fund is still going great guns. So domestically savings is shifting to equity.

On the retail investor side also, we see some excitement coming in and I must say that I have seen the 2007 excitement. It is far subdued, I would say 40 percent lesser excitement at this point of time than it was in 2007 and people seem to have taken some lessons. We don’t know when that unbridled optimism will start, perhaps once it crosses 9000, maybe it will start but as of this point of time that hasn’t started which is good news actually because people are still not putting in all the money with unbridled optimism.

Senthil: You spoke about investors looking at leaders in sector but are there any sectors that they are specifically looking at and some sectors they are not looking at because perhaps they look overvalued?

A: FIIs clearly think that consumer staples, which is called fast moving consumer goods (FMCG), is very expensive. They are very solid companies, they all agree, but they are worried about valuations at this point of time. They certainly are relooking at IT, they are relooking at pharma but consumer staples FMCG they clearly find it very expensive because now the asking rate of growth to sustain these kind of valuation seems to be out of reach. At least that is what they think.

Menaka: Cyclicals and banking have been at the top of everybody’s buy list given the impending recovery in the economy but if you look at some of the earnings we have seen in the last few days with regards to public sector banks, they have been a definite disappointment and even some leading private sector banks like ICICI Bank have disappointed themselves. Would you rethink an entry strategy into some of these spaces at this point?

A: On public sector banks, the gross understanding or the gross view they have is that when the cycle was adverse you got hit, but when the recovery is happening you don’t seem to get out as quickly as one would have hoped or one should have thought that they would get out. So, PSUs and FIIs in general are underweight on the PSU bank space certainly, but we feel that growth hasn’t come in as yet and so as the growth comes in and it is also driven largely by ensuring that 13 percent of GDP which is locked in on small projects revenues have to start or cash flows have to start coming in from there. Once that starts and public spending starts some of the issues will get resolved.

Menaka: You continue to stay positive on banking, cement, capital good and the autos? Even the auto numbers are quite mixed. We are just looking through the numbers that have come in overnight and they are not looking very good across the board. Are these spaces that you are categorically positive on or are you picking very carefully stocks in theses spaces?

A: By and large as I said leaders in this pack, in this sector are certainly worth a buy on dips. There is no question because as the recovery starts they will be the biggest beneficiaries. Certainly selling is happening essentially on weak balance sheets. So if you see balance sheets which are high leveraged and balance sheets which have low return on equities (ROEs) those are the stocks which are not getting picked up by investors more and more.

Menaka: Are you rethinking IT, especially IT stocks not like TCS and Infosys but HCL Tech, Tech Mahindra, Wipro that have all out shown their peers group this time and may be are lot more inviting? HCL Tech had fabulous two trading sessions.

A: The way investors are looking at it even if they are trading at 20 price to earnings (PE) multiple just as an illustration you are taking an earnings yield as 5 percent. Earnings yield of 5 percent is not bad if you look at it from a developed country investor perspective. Plus they have got growth there, they are showing good momentum. This is why these are sectors that still did not get overvalued that much and they have got momentum, they have got tailwind so we are quite positive on that sector.