India an attractive market despite expensive valuations: Ambit

Basic fundamentals are not determining valuations anymore, says Ashok Wadhwa, Group Chief Executive Officer, Ambit Holdings. If valuations were based on fundamentals and earnings, then the market is already very expensive. But India is the most attractive destination of the emerging markets. So all the the large amount of liquidity in the world has flown into India, says Wadhwa."As long as excess liquidity prevails and India remains attractive, we will continue to see capital," he says.He expects the next quarter to see stronger demand, a better sentiment and more consumption across sectors. If demand continues to sustain, he feels foreign investments will start to increase. He sees a pick up in investments by FY20.Below is the transcript of Ashok Wadhwa’s interview to Latha Venkatesh on CNBC-TV18. Q: Do you think a bit of a global meltdown as well as a problem on the border could take us much lower? A: Geopolitical situation are a bit unpredictable and clearly have direct impact on the market and the sentiment. Should the geopolitical tension continue, I guess the markets will remain a little depressed. My own view is, it is perhaps a one-off response and good sense will prevail where it must prevail so that this issue can come to an end and the markets can get back to being normal and hopefully bullish. Q: But do you get the sense that you could use this situation to buy into stocks or would you think that value is already stretched? A: Our view is that the markets are already expensive very clearly. Having said that, there is so much liquidity in the world and India seems to be the one isolated destination that still is an attractive destination certainly within the emerging markets that I do not think basic fundamentals are really determining valuations today. Valuations are as much determined by liquidity and India’s uniqueness as an attractive proposition. And so long as the liquidity continues and India continues to remain a more attractive destination, you will continue receiving capital, I would believe that at every sell down, there is an opportunity to buy. Having said that, let us not forget that the market is truly expensive looking at the earnings today. Q: Since we are talking about valuations, CNBC-TV18 did a poll of a wide-swathe of CEOs, 50 top CEOs and the result we got was that 80 percent said FY17 is better than FY16 and 44 percent said that they expect double digit earnings growth. Now what is your comment on basically their quality of their economic recovery? How good will it be in FY17 itself? Is it a V-shaped recovery? A: There is no debate that FY17 is a better year than FY16. What has really happened is that government’s support to direct benefit transfers is fully kicking in. If you look at the two-wheeler recovery in the last three months, and I always say, look at the two-wheeler recovery and if it is sustainable and over a period of time, it is perhaps the best indicator and where the economic demand is going. I would like to believe that in the next quarter, which is the October to December quarter, you will see even better and stronger demand. And I believe the recovery in terms of better sentiment and higher demand and higher consumption is across board which effectively means that at least one engine of the government, of the economy is firing strongly and that is the consumption engine. What worries me even today is that with all the recovery, we still do not see an uptick in the investment cycle. Now, that is perhaps because there is already so much capacity. We need to see this demand sustain itself for a period of time before people talk about capital expenditure (Capex). We also know that government’s sustained attack on black money is creating at least temporarily an environment where people are not sure whether they want to remain invested in India long-term. It is a short-term phenomena. If the demand continues to sustain itself, the investment cycle will come back and when the twin engines tart firing, you will really see a double digit growth. Q: So, investment in FY18 or FY19? A: A little difficult to predict. I would say certainly FY19. The only challenge is that FY19 would be an election year and we have seen that around the election year, it does not matter which geography, the investment sentiments tend to be a little weak in which case, perhaps FY20. Q: Will the cost of money matter? How many rate cuts? A: Cost of money always matters, but right now, the equity markets are so bullish and so strong that every good company is able to raise enough and more capital and so long as the equity markets continue to remain bullish, there will be lesser and lesser dependence on the banking sector, the banking sector has a little more distance to go before it is fully revived. The stress is fully addressed and while that continues to go, there will be a rate cut, there is no debate. There will be a rate cut sooner or later. That is one rate cut of a relatively larger piece or two rate cuts, I do not know. But I would say over the next 12 months, a 50 basis points reduction is certainly welcome.