 "Pre-election rally is unlikely this time around: Premal Madhavji")
Premal Madhavji, Head of Equities at Espirito Santo Securities, believes foreign investors continue to be optimistic on India and expects more money to flow in India post elections. In conversation with Sheetal Agarwal, he talks about markets, rate hikes and impact of tapering on Indian markets. Edited Excerpts:
What is your outlook on markets?
What is your outlook on markets?
We don’t have a Sensex target but I think we will see a lot of new money coming in from a lot of new investors, especially some of the sovereign wealth funds and private equity funds invested in their own countries which are looking to diversify into countries such as India.
How much rate hikes do you expect for the year?
We believe that rates will stay high for the major part of the rest of the year, and one more rate hike cannot be ruled out. The earliest we may see a rate cut will be in Q4.
Do you think the sentiment towards cyclical will change post this rate hike?
The valuation gap between the defensives and infrastructure stocks is probably at a record high. Still people are believing and buying these defensives at 35-40 multiples, ignoring some of these infrastructure stocks which have real assets and are trading at sub-5, sub-7 multiples.
The huge valuation gap between defensives (pharma and technology) and cyclicals is bound to narrow. Infrastructure companies that have high debt, will look to reduce the leverage by selling the real assets they own. This may trigger a fresh look by value investors.
What is the sentiment of FII investors towards India?
We have seen the INR pretty steady over the last six months which has given a lot of confidence to the foreign investors- especially to the new investors, who are waiting on the sidelines for stability at macro level. Macro hedge funds and even the private equity funds are sitting on the sidelines. They have raised lot of money which they want to deploy in India.
Today corporates are just focusing on how to hedge the currency exposures and not take a hit. Or they are focused on reducing their debt, their overall costs and not on real growth and production. That confidence needs to come back in this market somehow.
What will be the impact of tapering on FII flows?
We have already seen heavy selling by ETFs in Emerging Markets, including India, as a result of the tapering. This is likely to continue, but the impact may be mitigated as we hope to see new investors coming in to India as the macro situation improves. In the last couple of weeks, we have seen the Indian markets and currency outperforming the other Emerging Markets, despite selling by ETFs, again reflecting India's comparative macro strength. With insurance companies and mutual funds not seeing any fresh domestic inflows, the Indian market sentiment is driven by the FII flows. A stable government will also aid the sentiment and attract new investors which will absorb the ETF selling.
What strategy are you adopting in current markets?
We are focused on bottom up investing in stock ideas that would really make money for the investors. We have a lot of focus on corporate governance. That is the main criteria of stock coverage or recommendation to clients because that is one thing which has hurt foreign investors quite a bit in the past. That is a key reason some of the infra and real estate stocks are trading at such low multiples.
You think the run up in midcap and small-cap stocks was ahead of time?
I think the general trend for mid and small caps is upwards still. In the technology sector, small and midcaps were trading at 10x or even lesser earlier and largecaps trading at 30-40 times. Now that valuation gap has decreased substantially. The same thing has not happened in the infrastructure sector. Still hot money coming in is more index based. What is really coming into small and midcaps is the retail money which is more fickle in nature. In the mid cap space we like Rallis, Balkrishna, Motherson Sumi, ING Vysya, Gujarat Pipavav, Max India and Sundaram Finance among others
What is your view on the pharma sector, which has been facing issues recently?
I think at these high valuations there will be a lot of M&A in the sector in 2014. A lot of the foreign multinationals still want a presence in India. Some of the smaller players are trading at very high valuations and they might sell some businesses which do not fit into their core portfolio.
The domestic companies having manufacturing bases in India will attract investors given the cost benefit they offer. That’s where you will see some of the M&A happening. The bigger names though will just continue to grow on the exports front. Within the pharma sector we like Cipla and Lupin. Cipla is a leader in the domestic formulations market where growth has started to revive. We view its inhalers franchise as offering long-term sustainable competitive advantage. Lupin has transformed itself to being a fully integrated generics company with a focus on US generics and speciality branded markets.
Any key themes that you would like to play in these markets?
One big theme for the next 3-5 years is the insurance sector. We are hopeful the FDI in Insurance sector will be approved once the new government is in place and I think there will be a sea of change for general insurance, life insurance. We could see a few IPOs coming in once a new government comes in. I think life insurance will see a lot more money moving in and the joint ventures would benefit quite a lot. You are going to see a lot of increase in the AUMs of insurance companies and there will be a lot more products whether its equity linked or others. We see more stabilization on the regulatory front for the sector. Max india, Sundaram finance are our top picks.