'See crude @ $60 in H2 '16; cautiously optimistic on banks'

Below is the verbatim transcript of Arvind Sanger's interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.

Sonia: Wee always speaks to you over seven seas, so it is generally hard to get the mood, but now that you are right here with us, Merry Christmas to you first of all, and what is the mood like on equities?

A: I think the mood on equities is generally, it has been a tough year and I think looking at 2016, we are optimistic that will be a better year. But I as far as India is concerned, I think I have said this before, I see some green shoots and I think those green shoots will hopefully build. And those green shoots, let us be clear are not because of anything going on or not going on in Delhi, they are because of what is going on in the broader economy. And I think people get excited about things like Pay Commission, but at the end of the day, Pay Commission was always expected and people used to get excited about Mahatma Gandhi National Rural Employment Guarantee Act (NREGA), then we found out that NREGA was not so good.

So, just government transfer payments is not what is exciting. What is exciting is bottom up consumer demand, some productive parts of the economy recovering whether it is auto demand or more importantly commercial vehicle demand or roads backlog in orders or electricity demand or even passenger traffic as far as airlines are concerned, those are all signs of increased economic activity. And that is all good signs for the virtuous cycle as I would like to call it of economic recovery and I guess I have always believe that unfortunately, the base effect of the new data series on gross domestic product (GDP) has been one of the worst things that has happened to India, because has trader complacency in that, oh we are growing the fastest in the world, we are growing at 7-7.5 percent. So, there is no urgency to do anything. The unfortunate realities under the old data series, the growth has been disappointing over the last 3-4 quarter as it has been over the last five years. So, that has been part of the challenge for the Indian markets, is no matter what the headline GDP is printing, the company earnings are not printing anything to be writing home about.

And so the optimism about 2016 lies in the fact that whether it is in the December quarter earnings or going into next calendar year, we are expecting the earnings cycle to start generating some upgrades and that would be the single biggest factor for the market.

Latha: I do not think anybody is being taken and not the policy makers by that 7-7.5 percent number at all. They like to use it for sloganeering. But, if you saw the financial stability report yesterday that came from jointly the reserve bank and the other regulators, it is scathing on the extent of indebtedness and the terrible position of the asset book of banks,. So, nobody has lost sight of the fact that corporate India is also beleaguered in certain parts. But, I want to get two big themes out of the way first. We have been discussing the with our technical guys as well, the last six weeks have seen a fairly decent resurgence in metal prices. The London Metal Exchange (LME) is back to its mid November levels after touching for instance, copper going all the way down to almost USD 4,000, it is now rebounding rather smartly. Is metals a place you would look at, at all, at least as a tactical buy?

A: I would say metals is probably very small moves tactically, but I think the steel sector for instance, and everything affiliated with the steel sector in China is in so much overcapacity that any rallies that come are going to be short-lived. So all the other metals like copper are closer to where the marginal cost is there, so you may be bouncing along the bottom, but for any big resurgence, I would say that that is probably not at the top of my list for 2016. On the other hand, the one that people have given up on which is oil is going to be, and frankly we have been surprised with how low it has gone. But I have a very simple rule of thumb, that the lower it goes, the sharper will be the rebound when it happens and so, I think that, if I were to pick is going to be the single best performing sector globally in 2016, because I think oil is going to be, we would be lucky if it stops at USD 60 per barrel on the way up and therefore, that is a big call I am sticking my neck way out on which is very non-consensus.

Sonia: So, USD 60 per barrel on the way up is what you are expecting?

A: At the minimum.

Sonia: By when?

A: By second half of the year.

Sonia: it is good to hear that you are talking about some green shoots in the Indian economy, because we sitting here sometimes do not get the best bird’s eye view of what is happening. So, this time when you have travelled to India, what have you noticed differently from the last time? How have things picked up?

A: I have just been here 24 hours, so I have not had a chance to travel around. I am going to be travelling around and I can tell you more about it after my meetings, both this afternoon and over the next few days that I come back with. But, as I mentioned earlier, I think the data series which we are seeing which has nothing to do with the meetings that I have had are showing that what I am hoping to hear, if you ask me what I expect to hear, I am hoping to hear from more corporates across at least a few of the sectors about green shoots. I do not know if the cement sector is yet ready to say it yet, but I know I am meeting with road companies, construction companies, I expect to hear more of that. I am meeting with some of the companies in consumption, urban and rural consumption based mix, but I am expecting to hear more about the urban consumption side of the story, more green shoots there.

A couple of areas where I remain somewhat cautiously optimistic, but do not see signs yet is the banking sector. I do not think the banking sector is a very big one and there I would hope we would see signs that the loan demand is starting to turn. Obviously, it is the private sector banks that are going to lead the way, the public sector banks are clearly way too much in trouble with the indebted corporates to have the same green shoots show up for them.

Latha: What about consumption? Is that where you would look for buys?

A: Absolutely. The problem with consumption in the broader sense is that stocks are not cheap.

Latha: I was going to say that. They are all at 30-40 times.

A: Yes, the fast-moving consumer goods (FMCG) stocks and the consumption oriented stocks. So, one has to find ways to play the consumption story without necessarily having to pay an arm and a leg. And maybe it is auto, maybe it is two-wheelers which have been disappointing for while, commercial vehicles (CV) is doing well, that is an area of, not consumption but, the question is are there consumption stories which are available at reasonable price and that is one of our challenges as finding special situations where one can find that.

Sonia: Just talking a little more about the reform momentum, this morning, we have Coal India which is one of the biggest gainers because overnight we have had news that there is a big joint venture with the Indian railways that Coal India has signed, so rake availability will now increase, thereby increasing offtake as well. Is this is a space that you would be bullish on?

A: Coal is one of the most oversupplied commodities in the world right now. So, I guess to the extent that Coal India has pricing which, there are companies going bankrupt in the US every month. One company goes bankrupt, Australian Coal prices are collapsing, Chinese coal prices are collapsing. So, fixing coal availability in India is a great 2013 solution, which is not a 2016 problem.

Sonia: Too little, too late?

A: Too little, too late, I mean right now, the problem in the power sector, we love to invest in companies that benefit from the overall reform of the power sector but that solution is not coal availability. The solution is fixing the State Electricity Board (SEB), their indebtedness and there is this project, Ujwal DISCOM Assurance Yojana (UDAY), so there is always a new acronym. It used to be Estimated Power Development Reforms Programme (EPDRP) to whatever and now it is UDAY. I am tired of acronyms, I am looking for action on the ground and I would like to see and we would like to see actual – the tragedy of India is that on one hand, you have surplus coal availability, I mean surplus power availability, under-utilised power infrastructure and you have massive power shortages on the other side and you have companies which are generating power at three times the cost of what they could buy from the grid and you cannot figure out a way to get the two sides to meet and that is a huge economic loss to the country. And unless that gets tackled, that is one of the low-hanging fruits.

Latha: So, power is not what you are buying now? You will wait to buy?

A: We have got a small little exposure to it, but it is one to have bigger because it is one that does not require legislative action. It requires some hard headed decision between the state and the centre, but they both should be n the same side on this in terms of wanting to fix it. So, that is an area where we look for things, but unfortunately, so far it has not happened and banking sector, PSU banks, if they fix some of the problems there in terms of their own bad debt situation and availability of capital adequacy to be to be able to lend again, but on the other hand, the demand side, so meeting with the private banks will give a sense. when the demand story turns, those are two big areas that we have been emphasising for several months now that we need to see more visible action that will help some of the green shoots grow much faster.

Latha: 2015 was actually a year of midcaps. Anuj was giving us an interesting formula yesterday. If you had put your money in the top-10 Nifty stocks and the bottom-10 Nifty stocks, the top-10 would have given you a gain of 19 percent but the botton-10 would have taken away 38 percent, so net-net you would still be at a loss. Whereas, in the midcaps, even if you had put equal amount of money in all the 100 midcap stocks, you would be 24 percent in the money. So, is 2016 also the year of midcaps and avoiding big boys?

A: I will tell you just for our experience, we had decent part of returns in India because we largely own midcaps because as I say, India is a story of bottom-up. And in the bottom-up segment that you are talking about, we are looking for companies which are showing growth in their niche whether it is because they are gaining market share at the expense of somebody else and it maybe a non-banking financial institution (NBFC) or it may be a company in the CV vehicle space or it may be a company in the other parts of the economy including one of the cement stocks that we have done well with. So, I think that it is really a story has remained in 2015 a story of bottom-up midcaps. But, I would think that if the green shoots that we are right about to work in 2016, then it could turn into a broader based benefit for the overall market and it may not remain, it does not mean that the midcaps will not do well, but it means that some of the broader sectors may start to work, but it still remains where one has to pick the right company in the right sector to make money because there is no visible macro story.

And frankly, if I am right about oil prices, that could remain one possible macro challenge. I do not think it derails the Indian economy if oil goes to USD 60-65 per barrel or USD 70 per barrel, but it would remain a potential thing to manage in terms of the inflation story and some of the easy gains that the government has been able to do on the budget deficit side because of all the increased taxes on petrol and diesel.

Sonia: You did say that 2016 is expected to be a better year than 2015, but if you had to guess, what would you guess? By the end of the year, where will the Sensex be?

A: I pay attention to the Nifty, so I will give you my Nifty target. I would say that by the end of the year, we would expect Nifty to be in the mid to high 8,000s. So, that should be a nice recovery.

Sonia: That is not very far from here. So, you do not have a very bullish view?

A: I remain a bottom-up view because parts of the Nifty or the Sensex are not areas where we see as much excitement. So, I think if we got to 9,000, that would be a really good year in our opinion in the Index. And again, I talked about oil and others as being headwinds fir a broader sector, but making 15-20 percent return in investing individual companies in India remains to us, a much more believable concept than making a Nifty or a Sensex bet than talking about 15-20 percent returns on the index.