Indian equities to impress for next 1-2 yrs: Axis Capital

The top bosses at brokerage firm Axis Capital are super bullish on India and expect 2015 and 2016 to pan out in favour of the equity market.Speaking to CNBC-TV18's Latha Venkatesh on the sidelines of the India 2020 Star Conference, Dharmesh Mehta, MD and CEO, Axis Capital, says he is bullish on the market for the next 1-2 years. Mehta believes the slump in commodity prices will aid the market, as will the government's reforms push. Mehta believes the Bihar elections were stalling reforms and now that it is out of the way, more progress can be expected on that front. On the road ahead, Mehta says there are a number of engines working for India at the current moment and the thrust on 4G and Digital India will help accelerate growth further.Below is the verbatim transcript of the interview..Q: The markets and retail investors are eager to hear how Samvat 2072 will pan out. 2071 was flat as far as the index was concerned. However as far as mutual funds and retrial investors are concerned I think people are still in the money. Nevertheless, what is the sense you are getting from the big FII and domestic investors whom you have invited for the conference? Are you getting the sense that the Modi premium which we started off with 18 months ago is waning?Mehta: Obviously the premium has gone away and the expectations have toned down which is good for the markets. Unfortunately last year, we were all on the Modi premium and a lot of expectations were built in. Hence, you did not see a great return on the index; but you also have to dissect the index, because index has a lot of commodities, especially Reliance and ONGC and some state owned banks which have underperformed with the kind of environment we were in, hence, the index does not show a great performance, but if you dissect them out, index has done definitely very well.The current year and the next one or two years are looking very bullish, because you got two-three engines running for India today. The global environment is choppy as you know, hence, there is no safe haven to go except India or more likely India rather than any other country. So, the commodities are still going to be bearish, or you are going to be on weak commodity cycle, which benefits India in a big way for inflation. Other side, the government is pushing all these reforms you have been hearing for the last one week, the big election is out of the way, which was actually stalling the reforms and now we are back to the development and growth agenda, especially knowing the verdict which has happened, government will be more intense on ensuring that the reforms which they announced are executed on time.The third which we are very bullish on, is this whole invention of or the implementation of the 4G and the digital space which you are going to look into in the current year and the next year, I believe the businesses will change big time, and the technology and this whole data, will definitely benefit all the corporates; especially banks, content provider companies, whoever is on the digital space; so India will benefit the most; so there are three engines running for India this time.Q: We have seen a good, nearly 6-8 percent, rollback from even the recent highs of 8300. Is there more of that Modi Magic to roll back before growth kicks in and brings back the investors? How much deeper can the cut be?Anirban: Modi magic and all these things, now it is really going to happen reform based. It is not just the word, now it is actual ground reality. So once you see, on the ground things are happening, then definitely the investor is keen on India, India story is sold. So if the reforms really kick in the on the ground level, then interest will definitely be there. I am also bullish because I am also getting a sense that things are happening in the road sector, railway sector is about to start, defence sector is also getting opened, because the Foreign Direct Investment (FDI) is coming, they are open for the defence sector. So, I am very positive for that and things are going to happen in the future.Q: Ultimately as Anirban is saying, investors will want to see the actual numbers. How disappointing was the second quarter and when is that growth generating quarter?Nandan: Both for the economy as well as for the markets, we have gone away from incrementalism. So incrementalism is over, now you are looking at transformation. So wherever you see, for example in the last couple of quarters, you have had companies which are doing well when their margins have gone up. You have very few bright spots where the volumes are going up. The Diwali sales, they have finally picked up. So you are seeing volumes going up.So the way that you look at companies and choose companies, is going to be very different over the next 12 months compared to the past 12 months and what I talked about was just the short term, which was in terms of volumes versus margin and so on. Even in slightly longer term, you are going to see major transformations in both the economy as well as the markets, I mean the one follows from the other. For example in banking you have UDAY and so many other things, you have the new bankruptcy law in place, so you will see sector by sector, you are having so many transformational changes, that you are not going to be able to play the same thing and say this is the way to play the markets. So, one has to go far more micro, as a matter of fact, just to give you an example, why were mid caps doing better than large caps? It is not that the mid caps as a class were doing well, it is basically the ones that you have chosen are doing well than large caps in general. Because many of them were solid business models and many of them were instrumental in transforming the economy.Q: There were some signs of  cyclicality and pickup in commercial vehicles. The CV cycle was the first to pickup and Ashok Leyland was an outstanding performer in the year gone by. Is that cyclicality now showing in other areas? Will we expect bank credit to pickup. Therefore will you be solid on bank stocks or two wheelers? We saw the first signs of  passenger cars doing well in the month gone by. Is that a theme to play, where is the growth showing?Nandan: Cyclicality - what happened was there is a little bit of  base effect. So, there was some effect in cyclicality but cyclicality  has not shown yet. Having said that there is no choice but the cyclicality to show in the next year. It was anyways always envisaged that 2015 is going to be year of  reform of consolidation in terms of the economy. You have the best macro that is possible. So, you have a case where going forward you have interest rates which can only go down. You have capex which can only go up. You have consumption which was absolutely troughed out. So, you have everything going for you in. So, the best time to invest normally is when the macro is okay and the micro is starting to pickup. So, to answer your question cyclicality has been a problem and we are still hoping  that cyclicality will come back and it has started with consumption and that is the great part. We were expecting the cyclicality to start with government spend, while that has happened we don't know the month to month breakup of how much is  gone where. On the other hand we do know large orders like the huge locomotives order in Madhepura with Alstom, there are massive orders some Rs 30000-40000 crore and some of those are going to be exported even in time to Australia and so on. So, that is big stuff, when you talk of Make in India, that is really big stuff. So, things are happening and cyclicality will play itself next year as it was expected to in any case.Q: You spoke about transformational  themes as the theme of your conference. Tell us about it, what are the transformational themes that you are exploring in the conference?Mehta: As a house we are very bullish on this whole digital transformation which India will go. Initially when the rates had dropped for voice calls Rs 16 to 54 paise and 10 paise you had a huge boom in the country. I think we are going to see a similar theme in the data side. When the data prices collapse and when the 4G platforms are installed in by the Reliance Jio's, Vodafone's and Airtel's you are going to see a transformational change on business will be done on the internet or on the digital platform. So, it is not only about e-commerce companies, it is also about banks, about large companies or logistics, all of this will benefit from the data reform. This will go deep inside the country, not only in urban India. So, the kind of impact which you saw on the voice calls in the early telecom days, we are just going to witness the same kind of happenings in the next one or two years.Q: So, the bet will be on telecom?Mehta: The bet will be on all the ancillaries who are going to provide on the digital space. It can be telecom, it can be  content providers, it can be banks. Nobody goes to a branch now, everybody wants to do their transactions online. Imagine if this goes into rural areas later on, that will be transformational. Q: What are your investors telling you about the banking sector itself. On the face of it 45 banks is becoming 66 banks, 21 banks more, that is 50 percent more competition. In almost any sector that will mean thinning of margins. So, would you not worry about the banking space, would not everyone's margins be impacted?Anirban: Margin may not be impacted for true performing bank, bank which is backed by technology, which is an efficient bank, for them it is an opportunity. If you look at how the governor has done it, in all segments he has structured it properly. So, there is a representation of SME segment who will focus only on SME segment, where large sector bank is not able to reach. There is a payment bank which is mainly technologically driven, they will concentrate only on payment solutions. They are not giving advance to anybody, their investment would be in government securities and all these, even their deposits would be insurance backed. So, they are protecting the investor money. Side by side they are also catering to all the segments uniformly. Every segment who will be real performer, really technology driven and efficient their margin will be intact. Healthy competition will really bring out that.Q: You don't think the top private sector banks are in danger?Anirban: I don't think there is any challenge for any top private sector bank.Mehta: In fact the volume will just go up Then the  mens will be separated from the boys. So, clearly you are going to benefit with the whole technology space, where they can reach in today's date where PSU banks are. So, clearly there will be huge benefit whoever is using technology - a new bank or a old bank.Anirban: Another thing is that a lot of  un-banked population will come to the banks gambit, which is very important. India has a huge base, we have not touched 50 percent of that base.Q: Would that benefit consumer companies, FMCG, they are ones who don't seem to be seeing the volume pickup. Are you expecting FMCG to be benefited?Anirban: Definitely. It is a comprehensive growth. The moment you reach the maximum segment of the country, particularly rural segment which is untouched, so there is a huge scope of opportunity.Q: How would you interpret transformational in the digital space?Nandan: When you talk about banks, first thing to remember is India is underserved compared to the rest of the world. So, it is like when I read a book, am I competing with some other book, I am not. One book leads me to read another. So, these are all different segments, like different books and one is leading to another. It is not just the pie getting bigger, I am saying these are all different ways of convenience. Therefore it will lead you into greater profits to the guys who are the big boys. It is not that these new gen banks and the smaller ones would not make money, they will also make money but what will happen is they will lead you into the main banks. I think that is the overall picture. The one sort of caveat that I need to give in overall sense is I think investors should not get caught in any cross currents. What I mean by that is when your economy and markets are going to be not incremental but transformative, there will be lot of times when you are moving against the trend. Hopes will go up, hopes will come down and stuff like that, may be GST happening, not happening whatever. Suppose there is a massive injection of liquidity in China, should you go around buying metals? These things will keep happening both in India and abroad and therefore in 2016 it is very important to keep the big picture in mind, that there is transformation happening, there are large segments like banking, auto and all which are basically rate sensitives where credit growth will be the key. Even if you leave alone all these NPAs and other stories, if you just concentrate on credit growth, that is the big story. So, invest in banks not because NPAs are coming down, that is a smaller story. The bigger story is credit growth. So, keep to the big picture and don't get confused  by the  contra trends that will keep happening.Q:  At the end of the State Bank of India results press conference Arundhati Bhattacharya actually said that she sees a 14 percent credit growth and that is a big base. You think therefore that you are seeing credit offtake very soon in a quarter or so?Nandan: We are not seeing it yet, but the signs are there. Now the framework is in place for credit growth to start. What had happened so far  was promoters were a bit anxious in terms of what will happen, what will not happen. Going forth if you look at for example oil marketing companies, they have been more or less freed. The pricing was probably delayed because of Bihar elections and so on. Now that one part is over politically, lot of things will start happening now. See what they have done last weekend.Q: Clearly legislative reforms could take some doing because now you have to reach out for a parliamentary consensus. We don't have such a good record so far. Do you think there is more to wane in terms of market levels before the market starts buying. The market may want to buy the transformational idea but it may believe that there is more fall to come. Is it 7500, can it go even below you think?Mehta: I always tell the investors no pain no gain. So, obviously you have to take some pain on your chin saying in case the markets correct it is not only with India. Something happens in US, they pull out liquidity from the system and people start going again back to dollar you are going to see this volatile environment. So, unless and until you don't have that money and a position to hold on to your stock investments you better not be in market. It is not like a one way ride, a lot of issues which will keep on coming.Q: But nevertheless will pin you down. How much do you think the market can lose weight?Mehta: Nobody knows a percent but the downside I have seen the downside upside ratio the risk to reward is in your favour. It is one of the best situation today so your risk can be anywhere between 5-10 percent but your rewards can be any much higher than 20-40 percent. That I am talking of the index but on individual stocks the returns can be as high as 100 percent on good decent investments. What we have seen in last 2-3 years lot of large caps have given you a multi bagger returns. Look at Maruti Suzuki before one year or you can look at a lot of private sector banks before one year. So, if you want to make that kind of returns obviously there is going to be some risk. And any opportunity which comes because of global environments and all one should use to buy into that.Q: Why I am asking you this is that it is possible that emerging markets are going to be shunned for another one quarter perhaps or even longer. So, even without that FII money - this year has been a record in terms of the absence of FII money. Will we still be able to make market gains. Are you that confident that the DII money will be strong enough?Mehta: I am very confident that India will keep on making money for investors. Don't forget that last one year was huge expectation, that is why you didn't see the market performing and as I said the commodity stocks were weighing on the indexes but this year the expectation is low. The elections are out of the way. The government has already announced huge reforms. Few of them implement, not all of them it itself is good enough for this economy to grow higher. If we didn't have corporates in the situation in which we are in all the large infrastructure and power India would have been the hottest destination in the world. That is where you are actually getting in an opportunity with these problems to make money.Q: Let me touch on the power reforms. I don't see any specific reference on power though you have some people coming in for infrastructure itself. Is that going to be transformational you think? Will it succeed where 2003 and 2013 did not?Nandan: Two things, one is we are more bullish on power transmission and distribution (T&D) for now. So, except for the fact that there is a huge overhang somewhere that is a different matter but power T&D is like nice and close. As far as power generation is concerned it may take a little time because at the end of the day it depends on how each state implements it and that still is an open question. But in general I will tell you the ones that I am bullish on. One is all the rate sensitives because of credit growth which includes autos and banking. Second will be oil marketing companies (OMCs), third will be infra and engineering, procurement, construction (EPC) companies, then pharma what is happening is a few companies now are getting more and more hassled by the US FDA. So, you are getting a few which are left. So, a lot of money is concentrating in those and there are good bets there in those. Finally, cement, more of south India cementQ: The pharma companies that are in distress, are they opportunities to buy?Nandan: Depends on pricing and time frame.Q: Anything that your colleague left out in terms of what should be on the investor's radar in 2016?Mehta: The investor has to take some risk. That is evident, because of global choppiness. But if he is able to take that risk, because we do not really know if the market is going to collapse in a big way. So you have got a very limited downside and his vision is for one or two years, India is the best place you can be, especially equities. So, I very strongly recommend people should go via mutual funds, not try to act over smart and go directly, because it is a tough market, tough environment, and mutual funds are much better equipped to go through this volatility phase and SIP is the safest thing. And as you have seen last year, we do not need foreign money, there is enough Indian money which is out there. So imagine if this money doubles or triples going forward. Do not forget when mutual funds will start distributing on the technology platform, so the reach is going to go everywhere. The bigger game and the bigger theme for the country is how are you going to get everybody inside this whole economy, which has stayed out for so many years, and obviously young India. There is nothing better than India is in the global map today.Nandan: I am dying to add one sentence which is FY16-FY17, the earnings per share (EPS) growth is set to almost double.