Moody's rating upgrade will help push FII flows: Arun Thukral

Interview with MD & CEO at Axis Securities

Ratings upgrade is a welcome move as it will bring down the cost of overseas borrowings for Indian corporates, especially the ones with high-cost domestic debt on their books, ARUN THUKRAL, managing director and chief executive officer at Axis Securities tells Puneet Wadhwa. He also shares his market outlook for the next year and the sector preferences in this backdrop. Edited excerpts:

What is your reading and the likely impact of the recent India rating upgrade by Moody's?

Moody’s India ratings upgrade is an acknowledgment of the economic and structural reforms undertaken over past few of years. It concedes that reforms have reduced the risk of a sharp increase in debt even in potential downside scenarios. They have indicated further upgrade if there are material strengthening in fiscal metrics, recovery in investment cycle supported by additional reforms. 

Ratings upgrade is a welcome move as it will bring down the cost of overseas borrowings for Indian corporates, especially the ones with high-cost domestic debt on their books. It will have a positive impact on Indian banking system, corporate borrowing programmes and initiate the much awaited private capex cycle. This will further add a fillip to FII inflows towards Indian equity markets.

What is your market outlook for calendar year 2018 (CY18)? 

We are buoyant on Indian market prospects in coming years. India is one of the very few economies growing at upwards of 6%. The reforms were undertaken by the Government in the last couple of years have been structural in nature thereby preparing the economy for a longer haul. Recent Moody’s ratings upgrade after a gap of 13 years is an acknowledgment of the efficacy of these reforms. 

What are the key risks?

On the risk front, barring geopolitical risks which are difficult to be predicted, we feel that the tightening liquidity at global level due to rate hikes and balance sheet contraction in US and tapering of QE in Europe would likely dampen the sentiments globally, India included. Though India may not get directly impacted by the geopolitical disturbances, the rise in crude oil prices is likely to hurt as India imports 80% of its crude oil requirements. Any sharp rise in crude oil price is expected to cause risk aversion in domestic markets. 

Markets will also closely watch the election outcome of 2 state elections viz. Gujarat and Himachal Pradesh. The lower tally for the ruling party at centre could be considered sentiment dampener.

What are your earnings estimates for FY18 and FY19? 

We expect earnings to revive from the second half of FY18 on the back of demand revival following a good monsoon. The recent rationalization of GST tax rates would also help improve the demand pick-up. We expect mid-teen earnings growth over the FY17-19 period with a majority of gains coming in FY19 led by Auto & auto ancillaries, FMCG, NBFCs and Pvt. Banks, materials & resources and upstream Oil and Gas companies. 

By when do you see a revival in private capex cycle?

We expect the private capex cycle to resume in around 15-18 months from here on. Indian economy is now on right course of growth leveraging the demographic dividend, educated & skilled workforce and growing opportunities for them with improved and reformed infrastructure.

What has been your investment strategy over the last 6 – 12 months?

We are positive on domestic consumption cycle and the export potential of the Indian economy. The structural reforms undertaken by the Govt. is putting the Indian economy on an accelerated growth path. We like companies which have high growth potential and have sufficient pricing power along with quality management who have the vision to take the company to next level.

We are optimistic about the consumption sector be it select FMCG companies and consumer durables, automobiles and auto ancillaries, discretionary consumption, housing-related segments like housing finance, home improvement etc. on back of expected rural economic revival following two consecutive good monsoons. 

Similarly, we like select NBFCs and private banks with retail focus given the huge opportunity available for serving the underserved bottom of the pyramid segment of the society after the financial inclusion mechanism has been put in place. 

Given that state elections are lined up in 2018 and state and general elections are scheduled for 2019, we expect infrastructure sector to benefit from rising governmental spending on infrastructure build-up and select media who will benefit from the electoral spends of political parties. 

We also like the textile and chemical sectors where Indian companies have an advantage over their Chinese counterparts in the exports market. Following the recent recapitalization move by the Govt., we have incorporated select Public sector banks that have better potential to attract growth capital infusion from the principal shareholder- the Govt.

Is there more steam left in the mid-and small-caps?

We are bullish on select mid-caps where we see substantial growth potential and are available at reasonable valuations. We keep on monitoring the progress and developments every quarter and recommend accordingly. Given the growth opportunities and the capabilities of these business entities, we feel they have a long way to go and hence, though trading at elevated valuations we recommend them to be added to declines.  

What is your advice to investors in the debt segment? Is it time to lock in gains and shift to equities?

The interest rate cycle in India is at or near its bottom; interest rates are expected to stay low for a prolonged period if inflation is contained or may perk up if the inflation rears its head. Hence, the potential for debt instruments to make substantial gains is limited and the golden period to make money in debt instruments is behind us. In the backdrop of this fact, equities offer ample opportunities to invest and multiply the corpus, if invested properly in right stocks / sectors for long-term (5-10 years). Hence, we are of the opinion that it makes sense to shift from debt portfolio to equities and make the money work for you.