While sounding optimistic about the road ahead for the markets, Dinesh Thakkar, chairman and managing director of Angel Broking, tells Puneet Wadhwa the recent flash crash on the National Stock Exchange (NSE) was a learning experience for the sector. Putting too many filters will impact liquidity, he says. Edited excerpts:
Do you think the reform measures recently announced by the government will be hard to implement, given the compulsions of coalition politics?
I don’t think so. India required these measures to kick-start the economy and get it back to the seven-eight per cent growth trajectory. So, in that sense, these steps were essential. In fact, I expect more measures to be rolled out. Since some of these proposals do not require legislative approvals, there will not be any problem implementing them. The problem will be in the proposals that require the Rajya Sabha’s concurrence. Even if 70 per cent of the measures announced sail through, the markets will take it positively.
Which measures do you think will sail through easily?
I don’t think the foreign direct investment (FDI) in retail and aviation will face any trouble. However, FDI in insurance and pension could be sore points. We are hopeful reforms regarding the mining sector and land acquisition will see the light of day. Markets will take this negatively if these measures are not announced in the next few quarters. I feel this is just the beginning and the expectations are high.
What about the timing of these announcements?
There was policy paralysis for two years and most measures have been announced at one-go now. Earlier, it was getting increasingly difficult to manage the current account deficit in the absence of export growth. In that sense, even the timing of these announcements seems right. The measures announced will help the economy get back in shape.
We recently had a freak trade/flash crash on NSE, and there were questions on why the circuit filters didn’t work. Do you feel something went wrong structurally?
I think this is a one-off incident. Our systems have evolved over a period of time and have addressed issues, such as punching errors, except for the institutional segment. But if we are doing a trade for a proprietary account or retail, it’s mapped to the margins with the exchange. What happened was a systemic error. Fortunately, this time, the trade was in the broker’s capacity to pay.
We had addressed this issue of circuit filter long ago, with the circuit getting triggered at five and 10 per cent. But putting too many filters will impact liquidity. It’s actually a trade-off between what you actually want. I think the internal checks at brokerage levels have to be stronger. Brokerages need to check and ascertain the limits they want to assign to dealers. This incident was a learning experience for the industry.
Where do you see the markets headed over the next 6 -12 months?
I think Indian markets have discounted the current economic growth rates and will not react to the poor economic performance in this financial year. In terms of corporate India, although the bottom line growth is just around 8-10 per cent, which at the current market valuation of 14-15 times one-year forward earnings, I don’t think the markets expect this growth rate to continue.
More From This Section
Expectations for bottom line growth are higher. Commodity prices are showing signs of easing out amid softening of interest rates. If we revert to the bottom line growth of 14-15 per cent next year, the market will be happy to give a higher valuation to our market in FY14. Given all this, we expect the markets to regain the all-time high level of 21,000 (Sensex) and 6,100 (Nifty).
What are your expectations from the coming policy review by the Reserve Bank of India?
I don’t think the market is expecting a cut this time. Recent measures to cut subsidy will definitely have a bearing on inflation, which is not yet under control. The central bank might cut rates in December when it has a firmer grip on inflation. By the end of the current financial year, we hope to see a cut of 100 basis points, but I expect this to happen in the January-March quarter. However, in the immediate term, I do see interest rates softening given the falling credit growth and deposit rates remaining unchanged.
Infosys has started the Q2FY13 results season on a disappointing note. Do you think results from other large-cap information technology (IT) companies will be better?
Infosys has been disappointing since the last few quarters, while its peers have continued to perform well. So, this is an Infosys-specific problem. I don’t think the company’s results are a reflection of the performance of the sector as a whole. I think the rupee will continue to be weak, and in that sense, the IT industry will continue to grow at a decent pace. Resolution of issues in the US and Euro zone will also aid performance.
What are your top buys and sells in the current markets?
We have equal weight on defensive sectors like fast-moving consumer goods and pharmaceuticals despite steep valuations. I think the growth story here will continue. On dips, I recommend buying ITC. Lupin and Cipla are our favourite bets in the pharmaceutical pack. We also like the IT space and here we follow a top-down approach while selecting our picks. We also like the rate-sensitive stocks and capital goods. Companies like L&T (Larsen and Toubro), Crompton Greaves and Voltas can give a good return from here on from a 12-month perspective. Among banks, we prefer ICICI Bank and Axis Bank. I would advise investors to be over-weight on rate sensitive sectors.
And among the mid-caps?
Mid-cap stocks, I feel, will outperform. However, one has to be very careful while investing in this space. United Phosphorous and Ashok Leyland are a few stocks that we like.
Fertiliser and sugar companies are back in the reckoning after the urea price hike and sugar sector decontrol talks. Do you think these stocks are a good bet at the current levels?
Sugar and fertiliser stocks will take time to recover. However, they appear to be a good bet if one wants to hold for two years. Stocks such as Shree Renuka and GSFC (Gujarat Stare Fertilizers and Chemicals Ltd) would stand to benefit the most with a turnaround in the sugar and fertiliser sectors’ fortunes.
From an investment perspective, can you highlight the returns that one can expect from various asset classes over the next two years?
I do not advocate investment in gold at these levels since it has already seen a sharp appreciation. Maintaining the same rate of return as seen in the last three years will be difficult. Over the next two years, equities (15 per cent return) and real estate (over 17 per cent capital appreciation plus four-five per cent rental yield) will outperform gold and silver.