Foreigners' interest in India continues to remain high: Kenneth Andrade

Interview with founder, Old Bridge Capital

After the recent assembly election outcome, there have been concerns that the government may resort to populist measures in the upcoming budget in February, which may upset the fiscal balance. KENNETH ANDRADE, founder, Old Bridge Capital tells Puneet Wadhwa that closer to an election year social sector spending picks up and this time will be no different. “This is largely expected by the market and I don’t think this singular event would have any material impact on the sentiment,” he says. Edited excerpts:

Given the rally thus far in calendar year 2017 (CY17) and the outcome of the recent assembly elections, can we now see a time-and price-wise correction over the next six months?

Corrections have always been difficult to predict. The biggest risk to market valuations remains interest rates. And while they trend higher the risk on high valuations will continue to increase. Increasing geopolitical risk could also lead to turmoil in asset markets globally.

The situation for India remains the same. Valuations are expensive. But unlike 2007-08, corporate balance sheets are much healthier than they ever used to be. Over the past two year a lot of cash flows from the private sector has gone to pare down debt and deleverage balance sheets. If the trend continues for the next two years, the debt to equity ratio would be at its all-time low. 

While in this cycle, markets remain steeply valued, mortality risk for corporates at least in India is much lower than the last cycle. So, while we argue on valuations being high the counter argument remains that we are investing in the corporate sector where the underlying balance sheets have never been as robust. So even in the event of a significant disturbance in global macros, it is unlikely we will see any solvency risk like in the past, which also means that we could bounce back much faster.

How do you see flows into Indian equities playing out over the next one year?

Given the lack of alternative investment opportunities, domestic flows into the capital markets should remain robust. The overall interest in the Indian economy by foreigners continues to remain high, except for the valuation of this market. Should this correct; we should see the return of foreign capital into the cycle. 

Do you think the markets will react sharply negatively in case the government does not adhere to fiscal prudence in the next budget?

Closer to an election year, historically, social sector spending picks up. I don’t think it would be any different this time around. This is largely expected by the market and I don’t think this singular event would have any material impact on the sentiment.

How do you see corporate earnings shape up in FY18 and FY19?

For the remainder of the next 12-month, earning growth would be historically higher than the last three years; the main reason being the low base. The economy went through an almost negligible growth phase from December of 2016, a lot of this would be corrected over the next 12 months. I don’t think we should be surprised with an above average growth in the near term. Social sector spending by Governments would be a key driver for profitability of companies in the near term, addressing the population at the bottom-end of the economic pyramid. 

From a longer term horizon, the collapse of the investment cycle (private sector capex) could lead to higher capacity utilisation for existing companies on the ground. Asset turnover ratios (capacity utilisation) for manufacturing sector is at 70 per cent, which is lower than what the ten year numbers have been at. GDP (Gross domestic product) growth of 5 per cent would take utilisation rates somewhere close to 80 per cent plus in the next four years. The material difference this time is no incremental capacity is being set up.

Can you share more details about Vantage Equity Fund?

The Vantage Equity Fund is a continuation of our investment process through an AIF vehicle. The portfolio will have around 25 stocks, where concentration would be in industry verticals. This is very similar to our existing Portfolio Management Strategies, which have been in existence for the last 14 months. The product has tenure of three years. On the investment process and the build-up of the portfolio, we tend to be a bit valuation conscious. We tend to look for industries that are in a consolidation mode, which would eventually lead to pricing power.