Given the near 80 per cent returns the BSE Sensex has delivered since the beginning of 2009, it is quite likely that the current year’s performance would turn out to be the third best in almost three decades. But, as the dawn sets on the New Year, there are many questions about how the year 2010 will be. Raamdeo Agrawal, managing director, Motilal Oswal Securities spoke to Vishal Chhabria on recent market trends. He also shared his views on what he expects in 2010 in terms of returns, stock picking strategies, policy initiatives, corporate earnings and concerns among others. Excerpts:
Markets have been range bound off late. What do you make of the situation?
We had a good party in the last 12 months. To say anything about the short-term, one would like the recent trend to continue. A big thing is that the market is holding at high levels of 16,000 plus. It is recalibrating how the corporate earnings are going to shape up, how interest rates move, when GST will be rolled out, withdrawal of stimulus packages, etc. I think the market is just taking a pause. So, keeping all these things in mind there are some forces which are positive (economy is growing), while on the other side markets have moved up so much. Due to these counter forces, some profit-taking is also happening right now.
But, I think we have seen the worst and in the next 3-4 months hopefully, corporate earnings outlook for 2010-11 will be very clear. You will also get to see how US markets behave. I think, we have done well for 2009 and now it is the turn of 2010. May be, it could be a very modest year, because typically after a big year, you get to see a modest year, unless earnings surprise big time.
Are valuations expensive at current levels?
It’s okay. It’s not very cheap either. But, select stocks are a bit pricey due to strong earnings growth expectations. Overall, stocks are priced for the known current earnings performance.
What are your expectations from the markets in 2010?
Individual stocks will do well. There will be a lot of divergence in the returns. So, adopting a bottom-up approach will the best way. Overall, the market may not make a very big move in 2010 from the levels of 16,000-17,000. I don’t think it is going to make a new high very quickly. Because, in 5-6 months there are a lot of things expected to happen. I am more concerned about corporate profits. It looks like there are lots of teething troubles regarding GST rollout. So, how things shape up over there? So, till the Budget and GST roll-out, I think markets are not going to make a move. There are a whole lot of things happening in global markets also. If they go up or if US growth picks up big time, you cannot hold back the Indian market.
By December 2010, markets could move plus or minus 15 per cent from current levels of 16,500.
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What are the key events to watch for in the next year?
On the positive side, the GST rollout will be a big move. How well it is rolled out and what is the impact of it; that will be very big for corporate profits. The second big reform is Direct Tax Code. Based on the road map the government gives out, the market will start building into it. Their rollout plans should be clear by the time of Budget.
I think one should look forward to the next budget, which is going to be truly the first budget of the new government.
The other thing is the global economy and how the world behaves. If the world economic growth picks up well, which I am hopeful, then it will help our exports and will further boost the GDP outlook.
What are your expectations on inflation and interest rates in 2010?
Inflation has to come back at about 4-5 per cent. But, I’m not too happy with the government’s supply side management; there has not been de-clogging the supply chain. I don’t think the economy (infrastructure or input wise) is ready to supply all the inputs in the system. For instance, steel production is still at 50-55 million tonnes whereas the demand is 65-70 million tonnes. The implementation of the new plants is not happening as definitely as it should. The government helping the supply chain is very important, otherwise growth might suffer.
Interest rates would however, remain stable. That’s because, unless the global interest rates go up we cannot take our (India’s) interest rates up. Worldwide, interest rates are almost zero and there is huge liquidity. The moment we up interest rates by 2-3 per cent, lot of money will flood into the country, which will fuel inflation. So, what is thought as an anti-inflationary exercise will become an inflation boosting move. Overall, I don’t think we are going to see any major spike in interst rates.
Can we sustain 8-9 per cent growth rates?
I think every aspect of infrastructure will disappoint us. I am very clear about this. The key concerns are infrastructure shortage and lack of policy clarity by government; it will kill the growth initiatives. Bad policy is one thing, but lack of policy clarity and lack of predictability of government policies and lack of adequate infrastructure are the biggest challenges to sustained good quality growth in the Indian economy.
What are your estimates for India Inc’s earnings for 2009-10 and 2010-11?
For 2010-11, our Sensex earnings’ projections are about Rs 1,025, which is almost 25-26 per cent growth over 2009-10. I can’t say what the 2011-12 EPS will be, because that will depend on many factors. But, there’s no concern on that. What trend do you see in FII flows in 2010?
There’s no reason why the flow should be any lower than in 2009.
Many public and private companies are lining up for IPOs. Will the market be able to absorb the supply?
There is a lot of liquidity and appetite. And, if the PSU divestment is done at a reasonable price, they should get very good response from the public at large.
What were your best and worst bets in 2009? And, if there is something you would want to correct or improve up on in 2010?
The best call was to buy in the pessimism when things were falling apart in January-March 2009. I was very clear that it was a god-sent opportunity to buy into stocks.
The change you need to do in the years ahead is, at least, what I would like to concentrate on my portfolio a lot more, like if I had 25-30 stocks, I would like to bring it down to 10-15 stocks. So, during the year, as the market picks up, concentrate on few stocks where your knowledge is better, franchise value is better, entry barriers are high and growth expectations is good. Putting on few bets will be more important than bothering about the market.