Hope rally over, ground realities will drive equities now: Dharmesh Mehta

Q&A with MD & CEO, Axis Capital

Equities market have seen a sharp correction in recent weeks. But Dharmesh Mehta, MD & CEO, Axis Capital feels the downside risk is limited now. In an interview with Rajesh Bhayani & Vishal Chhabria, Mehta says some positive developments could take the markets to newer highs. Edited excerpts:

Market have fallen nearly 10% in the last two months. If equities remain muted, will the IPO market see more offerings?

There is strong interest in initial public offerings (IPO) and QIPs by investors. Axis Capital has already signed 50 mandates in the current year for fund raising and we are pitching for further mandates daily. Our view is very optimistic on fund raising and if valuations are reasonable, one will see huge demand in the deals. Also what is exciting is we have so many new businesses coming to capital markets. It's exciting and challenging but the good news is that equity markets are open to raise money, which is very important for a growing economy and corporate industry.

RBI has raised monsoon concerns and forecasts have said it will be below normal. Will it take the market further down?

I believe it is too early to take a guess on how the monsoon will be this year. We have seen projections going horribly wrong in the past. In fact the RBI has said if the economic data is better, monsoon is not as bad as predicted and crude price is stable, they can look at further rate cuts. But India’s long term story is intact and the government is better prepared this time for any abnormal situation. Hence I am not that worried about the monsoons and we will use this fall to load up on equities.

But do you see recovery coming in the near future?

The trend is still positive and it is a healthy correction, which was important. Overall long term bullish view on the Indian market has not changed as risk to reward is very favourable. The confidence comes from government putting things in order which don’t make headline news. Also key issues that have triggered the recent fall are rising crude oil prices, weakening currency, taxation issue etc which I believe are behind us.

Falling currency can trigger outflows from debt as it increases hedging and other risks and arbitrage also reduces. Isn’t it a looming danger?

We think that with inflation subsiding in India and interest rate differential between US and India still being very high as compared to previous cycles, it is unlikely that debt flows will shun India like in 2013. Moreover, higher crude oil leads to increase in inflation and in that case interest rate cannot be reduced. But in my view crude oil has topped out as at higher levels US shale gas supply becomes more viable, which will cap the crude upside. Indian currency has outperformed its peers and still looks like a better option, hence we wont see massive outflows from debt unless there is a huge global crisis and complete risk aversion.

So things are looking good from here?

Monsoon is a big uncertainty as of now. Monsoon can trigger great bullish or bearish views. Poor monsoon can limit interest rate cuts and weigh on the currency and so on. However, if monsoon remains fairly distributed and crude oil remains capped, things will turn for the better as the steps taken by the government will start yielding results.

But there is no demand, investment intentions are not materialising… ..

To kickstart investment and demand one will need to see Change In India first before Make In India. The government is working hard to Change India and one has to be patient. Improvement in demand takes time, especially coming out of the tough few years.  

For example, lagged effect of fall in interest rates, low inflation and well distributed monsoon will help rural demand and next two quarters are crucial for that. Capex will improve when there is confidence on sustainability of demand and conviction that the government is fast executing on promises. 

India Inc will not increase capex just based on hopes and rate cuts. That is why I say hope rally is over and now recovery will be based on improvement in ground realities and improvement in speed of execution of reform measures. Ease of doing business is another big thing and when it happens it could bring in more investments in large projects. So Change in India is very important. 

What do you advise investors?

This is now a higher top, higher bottom market hence any dips like current one should be used to acquire equities. The last quarter earnings were not as bad as feared and when one sees the revival in Indian economy, suddenly markets and stocks will start looking cheap on FY17 earnings .

But current valuations are reasonable?

I say this is now a stock-specific market. Sensex is not cheap, especially the stocks you want to buy are very expensive like IT, Consumer,  Pharma while other sectors are very cheap. Overall valuations are reasonable especially after the recent correction and individual stocks can still give you outstanding returns in few years.


Axis Capital has won the Finance Asia award for Best Investment Bank and Best ECM House for 2015 and as per Prime database, Axis Capital is number 1 Investment Bank and ECM house.