I don't see a steep market correction coming: U R Bhat

Interview with Managing director, Dalton Capital Advisors (India)

The Indian market is not very expensive, believes U R Bhat, managing director, Dalton Capital Advisors (India). Corporate earnings growth will support valuations and investors can expect steady returns over the next three years, he tells Chandan Kishore Kant. Edited excerpts:

How does the economic situation look?

There certainly does not seem to be a big downside for the economy from here. Many leading indicators suggest India is on a recovery path. It might not be an immediate and robust one but, rather, a gradual change for the better. Although the monsoon has not been that good, business confidence has revived and the economy should be able to clock a growth rate of six per cent or so in 2015-16.

What did you make of the recent correction and volatility in the market?

We should not be reading too much into this. An interest rate rise in the US is at least three or four quarters away and given the state of the European, Japanese and Chinese economies, the withdrawal of the US stimulus programme might be compensated by additional monetary stimulus elsewhere in the world. Inflows from foreign institutional investors (FIIs) should, therefore, continue at a reasonable pace of, say, an average of a billion dollars a month.

Will India be able to attract robust foreign inflows, as in the past few years?

The prospects of good growth in India in an increasingly growth-starved world would continue to attract foreign investors. That said, the critical risks could be inability to control the outbreak of the ebola virus, further delay in addressing the problems of the European economy and the continuing tensions in West Asia and Ukraine.

The Indian market is trading above its long-term average. Will this limit the upside?

At about 15 times one-year forward earnings, the Sensex is not a terribly expensive zone. There have been bull phases when the price to earnings ratio (PE) has been much higher. PEs must always be seen in the context of potential earnings growth. Though they were much lower a year before, earnings growth prospects appeared dismal at the time. Today, we have a situation where investors are penciling in an earnings growth of 15-20 per cent. The markets are not cheap, for sure, but if we have a positive surprise on earnings growth, with appropriate policy interventions, there is a possibility of further price appreciation.

Should investors be buying at these levels?

If someone is waiting for a steep market correction of 20-30 per cent to enter, I do not see it coming. Investors must start nibbling now, with at least a three year investment horizon. Look for companies with a good record of delivering value to investors. Generating a 20 per cent return every year for the next two or three years should not be a problem.

How do the September quarter earnings look like?

It's too early to see robust earnings growth across the board. However, with the economy likely to clock a gross domestic product growth of around six per cent in 2015-16, corporate earnings can reasonably be expected to grow in excess of 15 per cent in FY16. There are already early signs of growth in automobiles, information technology and cement.

The situation can only get better from here, aided by helpful government policy initiatives. The Supreme Court ruling on coal allocation has given the opportunity for a complete overhaul of the policy on natural resources and this can put several sectors such as metals, mining, oil & gas and power on a robust growth path. While bottlenecks in existing projects are being addressed, we can see accelerated growth momentum when the new projects start taking shape. Entrepreneurs seem confident that the government is on their side in pursuing a path of growth and all-round prosperity.