Foreign funds see great potential: Sunil Shah

Market Moods - IV

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He talks on the importance of providing innovative services at a reasonable price and the need for a strong and reliable brand name in a market that attracts maximum attention, including the big ticket foreign funds.

He says credibility, trust and financial strengths are key competitive advantages that differentiate institution-backed brokerage houses from others, adding that the institutional brokerage houses are also able to attract the best talent from the market to boost their services.

How do you see the markets behaving in the short term and in the long-term?

Broadly, the equity markets are expected to move upwards in the long term. However, short-term volatility will be high, which is likely to create confusion in the minds of investors, time and again. But, given our view that underlying fundamentals of the economy are positive, the outlook remains bullish. Two key factors that will give direction to the market are election results and a decent monsoon this year.

Do you have any advantages in attracting institutional clients because of your parentage (institution-promoted brokerage)? Also, how are foreign institutions viewing India?

Mutual funds, financial institutions and FIIs prefer to deal with well capitalised institutional brokerage houses. The HDFC brand does help attract new institutional clients. However, superior quality of service is the key to retaining clients.

Foreign institutions are seeing India as a great potential investment destination. The primary reason is that the economy is in a growth phase with the index of industrial production (IIP) and GDP growth looking up.

Moreover, India is being considered as a global manufacturing and outsourcing base for various industries such as textiles, autos, and auto ancillaries and IT enabled services continue to grow. Indian steel, non-ferrous metal companies are benefiting from the commodity boom.

The beneficial impact of good monsoon last year and the government's focus on reform and infrastructure has made a number of infrastructure companies attractive for investment.

In the last twelve months the number and nature of FIIs that are investing in India have gone up substantially. The number of new FIIs that are looking to invest in India is bound to grow over the next few years.

In our opinion, this trend will continue and FIIs will also look to increase their exposure to India. Surely, volatility will be higher. But, with more FIIs participating, we foresee the market maturing over the next 2-3 years.

How do you see the Indian markets developing in the next few years?

The Indian markets will continue to attract a lot of FII interest as compared to other emerging markets. We believe the increased FII and hedge fund participation will drive up overall valuations.

A large number of quality PSUs such as NTPC, Power Grid Corporation are outside the ambit of the capital markets. These public floats will attract more FII money. The government is also proposing to bring down its minimum holdings in PSU banks from 51 per cent to 33 per cent.

This change is expected after the general election. That will also enhance FII participation in the market. As a result, overall availability and liquidity of quality stocks pertaining to the core sectors will grow.

Further the government's efforts to improve technical facilities, bringing in T+1 settlement systems, will have a positive impact. Long-term players like insurance companies and banks would also be increasing their share of investments in equity as is the global trend.

What is your investment philosophy?

Our investment philosophy is to focus on fundamentally strong industries and companies having a competitive edge and scale to fight global competition. Look at industries going through a structural change due to change in global industry dynamics.

These would include textiles, auto, and power. Also look at the sectors that have benefited from efficiency gains and a fall in interest rate. It would be safe and rewarding to invest in mix of growth and bottoms-up investment ideas for achieving a reasonable return of 15-18 per cent per annum over the next 3 years. The top five large cap stocks we like are: State Bank of India, M&M, Grasim, Oriental Bank of Commerce and HPCL.

What is your investment advice to the small retail investor? What is your take on IPOs from the investor's perspective?

We see a number of small cap IPOs coming into capital markets as in the past. However, our advice to investors would be to selectively subscribe to IPOs after carrying out complete due diligence.