Urjit Patel's appointment as Reserve Bank Governor will ensure “institutional and policy continuity that will make the investor comfortable” says Arvind Sanger, Managing Partner at Geosphere Capital Management. While some slight volatility might be seen in near-term over the news, Sanger says it will be a buying opportunity for investors. Most investors will be happy with downward inflation trajectory over a longer period. Growth in India is starting to improve. However, valuations continue to remain a challenge, Sanger says. Sectors like public sector banks and cement can be looked at as growth stories. While cement has seen a run-up, valuations have become dearer at current valuations, he says. Below is the verbatim transcript of Arvind Sanger’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy. Latha: Dr Urjit Patel is seen as a person who will definitely chase inflation down to 4 percent in its own time certainly will not suffer it rising. Your first thoughts as an equity investor.
A: There were a lot of qualified people in the running, none of them necessarily having the global stature of Raghuram Rajan, but that is neither here nor there, at the end of the day we needed somebody who would bring credibility. I think they were good candidates but what Urjit Patel brings in addition to creditability is continuity and therefore as a person who has helped set the 4 percent inflation target, he is not a dove who is going to roll over and satisfy the cravings of many in the private sector to have a sharp current in interest rates no matter what the inflation is. So, he is going to be tracking inflation and if the data supports and the monsoon should obviously help.
If all of that follows through then I think he will not hesitate to cut but I think that is no different than what Raghuram Rajan was doing. So, I think in that sense there is institutional and policy continuity that I think will make investors feel comfortable that India is not going to go down a path where inflation is something that we have to worry about because there is any loosey–goosey action as far as central bank is concerned in fighting inflation.
Anuj: In the near term is there likely to be an impact on the debt market and because of that the impact on currency market because the market may have started to factor in maybe a slightly more dovish governor. So just in the near term, could there be a bit of a risk?
A: Maybe. I am not sure where the market expectation on the debt side were and it should certainly help the currency but will it hurt a bit on the bond market, possibly to the extent that Urjit Patel represents the hawkish end of the names that were being speculated, but that is likely to be relatively modest and short-lived, but yes that is possible.
Sonia: And even if it is modest and short-lived, if there is a dip in this market, would you suggest that investors get into it and buy that dip because that has been the strategy that has worked so far this year?
A: As an equity investor I have to say that I am perfectly happy with somebody of the credentials of Dr. Urjit Patel. So any selloff - because some private sector companies and therefore some investors were hoping for a dove who would come and cut interest rates willy-nilly; I think any selloff on that basis is a buying opportunity because over the medium and long-term and even on the short-term most investors are going to be happy with a stable rupee, downward trajectory on inflation and a growth which has driven bottomup and not because RBI is fanning the flames of growth and ignoring inflation. And remember, one of the thing that Dr. Urjit Patel is going to be dealing with or working with which is unique in the RBI is there is going to be monetary policy committee. So he is going to be the first one living under the regime of a new monetary policy committee and we will have to see how that plays out but that is not going to be today's reaction but that is going to be a reality that will drive policy making in ways. Hopefully that is more visible and transparent as you get a committee.
As is a case in many of the global major central banks, so that is a step that is going to have an effect as we go forward that won't be immediately visible.
Latha: One must worry about the macros of the country and that is very safe with people like Dr Patel, immediate jitters notwithstanding. I don’t know if you were on call when Anuj started speaking in the morning, the big point that he made and very correctly is at the moment this market is 95 percent perhaps only moved by liquidity and any immediate announcements are going to have only a passing impact on the market. That said would you think that foreign investors like yourselves would be particularly happy with Patel because the rupee will be kept very stable. If the purchasing power of the rupee internally is going to be Dr Patel’s concern, it will also buy the same amount of dollars and therefore do you think stability of the rupee is the very big gift that probably this new appointment gives investors?
A: Absolutely, I think there is a bit of a trade off between some of those who are hoping for a dovish governor and certainly some in industry have been vocal about it. However, that would be negative for rupee and therefore as investors we want growth. When we are investing in equities we are looking for growth, but we are also looking for growth not just in rupee terms but growth in dollar terms and therefore the trade-off in trying to fan the flames of growth while letting inflation go haywire, would be a weakening of rupee. Therefore, I think it is a fine line. I think we are happy with growth coming from factors which are driven by the broader economy rather than having Reserve Bank of India (RBI) become the cheerleader of growth; that is not the RBI’s job.
Latha: Now let me come to the immediate issue which Anuj has been speaking about this flood of liquidity. At current levels with or without Patel, with or without Rajan are you a little worried about valuations or are you buying because this doesn’t seem to be ebbing away?
A: This is one of the biggest conundrums I guess we faced in markets not just in India but globally. Certainly in the US, the valuations are being driven to the levels which are somewhat discomforting except for the fact that liquidity has to go somewhere. So, this is one of these rallies where you are riding the tiger that is an investor, one is completely scared to get off but at the same time one has to be cognisant that valuations are certainly not in the broader market sense our friend but the really question in India’s case and our opinion is growth going to follow in such a way that the companies can grow into these valuations. I think the concern is at these valuations growth has to deliver and therefore we watch closely for data points that suggest the growth is starting to moderately improve and in some sectors more than moderately improved.
However, it is clear that valuations do create challenges so I am not going to deny that but we are still finding selective opportunities. But many of the sectors like non banking finance companies (NBFCs) and even some cements stocks and some others stock that we have bought in the past have had huge moves and therefore it is hard to make a broad based buy decision on India without having to look very closely at where growth expectations are not fully baked in.
Anuj: Let us talk about two pockets, your thoughts on the fact that Infosys is close to 52 week low while the market is at 52 week high and the other part the kind of re-rating that we have seen in State Bank of India (SBI) and whether that is justifiable?
A: Those are very interesting questions because as I said earlier this is a market and this is not just in India but globally that is willing to pay ridiculously high multiples of growth. So, the fact that Infosys is at low levels is because growth is not visible. Therefore, you have this bifurcated market where anybody promising growth is being bid up at very high valuations and you can see that particularly in the consumer stocks which are trading at 30-40-50 time earnings.
You have sectors like that where valuations are at nosebleed territory and recently some of the IT service companies particularly Infosys as an example which have given a much challenged outlook for growth. However, taking the other example that you gave State Bank of India, I think that is one where people are betting on where the next growth driver could be and we are not completely unsympathetic to whether it is a private bank like an ICICI Bank or public sector banks like State Bank of India where if we are going to turn the corner of inflation.
If inflation does show moderation and we believe we are towards the peak of the non performing assets (NPA) cycle as either passed us or around the corner, then in an economy where growth is going to recover NBFCs already reflecting pretty benign outlook. Frankly, their market share growth that they have enjoyed with public sector banks, have lagged. So, I think everybody is looking for laggards while we are not yet there. In the public sector banks, we are willing to look at some of the lagging banks for the same reason because we are looking for where there might be value on the long-term perspective and where there could be a turn in the growth trajectory or the lack of growth trajectory till recently.
Sonia: Two other pockets that have done phenomenally well lately one is the cement space where most of these stocks are at all time highs and the other one is the monsoon related themes the tractor sales, some of these fast moving consumer goods (FMCG) consumption stocks. Are these spaces that still offer value?
A: From a long-term standpoint we think cement cycle has a lot of room to run. However, at this level of valuations the stocks are clearly not unaware of what is going on. So we still own some exposure in the sector but we would necessarily be chasing after stocks of these valuations.
As far as the rural FMCG plays; I think the FMCG market and the consumer stocks in general are running well ahead of growth and fundamental and so we are even less attracted there. There are some NBFCs with exposure to rural where we think there is probably better valued than in the FMCG. So, that could be an area of interest but again it is much harder to find screaming buys. One has to find relative buys in this market and that is always dangerous in terms of that is when the risk reward can get somewhat less favourable.
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