Manishi Raychaudhuri, managing director and head of research, BNP Paribas Securities India, tells Sheetal Agarwal he believes sectors related to consumer discretionary spending and lifestyle could drive the next leg of growth for India Inc. He also believes Indian markets would be better off when compared to the 2008 crisis. Edited excerpts:
After the recent turmoil in Indian and global markets, are we going the 2008 way?
In 2008, the problem started in the credit market and banks stopped lending to corporates and between themselves. In 2011, the problem is in sovereign credit. Here, Europe may be in bigger trouble than America, because the entire US debt is denominated in US dollars. The US can print as many dolars as it likes. But none of the European countries can print the euro; that is the prerogative of the European Central Bank. So, European countries only have fiscal policy at their disposal.
The second difference is the response we can expect. In 2008, most of the sovereign governments came up with not just the monetary stimulus but also a significant degree of fiscal stimulus. This time, the same governments are under pressure to reduce their fiscal deficits, which may lead to either an increase in tax rates or decline in government expenditure. That is an additional risk to consumer retrenchment, which essentially means consumption expenditure going down.
In terms of equity market performance, most emerging markets are not really coming down from a level of severe overvaluation. In January 2008, it (India’s) was about 27 times the one-year forward price to earnings (P/E) multiple. Today, the peak of the recent market was around 17 times. Which means the consequent decline in equity prices may not be really that much. Further, we think that even the earnings estimates downgrade may not be as severe this time. As against 23 per cent and 31 per cent downgrades in 2008-09 and 2009-10, respectively, this time we think it will possibly be about 10-15 per cent. For, companies are much less leveraged and, second, the driver variables like commodity prices or bank credit growth are not really coming down from the stratospherically high levels. We think the worst case for the Sensex is a decline to around 14,000 levels.
Everybody is chasing safe havens. How will that impact emerging markets like India?
In times like these, India could also qualify as a safe haven. First, if you have severe consumer retrenchment in the developed economies like Europe and the US, then the export-driven economies would suffer disproportionately more than India. Second, a global demand slowdown will lead to commodity prices declining, which will reduce our manufactured products inflation, current account deficit and fiscal deficit. So, a global demand slowdown is actually good for the Indian economy. Paradoxically, it may not be so good for Indian markets, because close to 30 per cent of the equity market in terms of market cap or earnings is driven by the commodity producers and the globally driven part of the market will be 40-45 per cent. That is why in 2008 the Indian macroeconomic parameters did better, but the equity market declined 60 per cent from peak to trough. So, I think within India there are certain sectors which would qualify as safe havens.
What are these?
We are significantly overweight on the telecom sector, Bharti and Idea in particular. Within automobiles, two-wheelers tend to be relatively immune from the fluctuations in interest rates and, we have also seen, the policies of the government have been supportive of rural demand. So, the demand for tractors or two-wheelers has been quite robust. And, these companies are users of commodities like steel or aluminium. We also like Asian Paints and Godrej Consumer. Some of the utilities like Power Grid Corporation, GAIL and NTPC could also do well. So, those are some of the hiding places in the Indian context.
How does India stack up vis-a-vis other markets?
In terms of valuations, India remains expensive. Today, India trades at close to 13 times the one-year forward P/E multiple. That is about 20-25 per cent costlier than the Asia ex-Japan average. India’s average premium is in the range of 15-16 per cent. That premium is shrinking; historically, the gaps between the ROEs (return on equity) for India and Asia ex-Japan used to be higher. That is converging now. It seems pretty clear the present level of 20-25 per cent premium should decline slightly.
What could be the next sunrise sector?
Maybe lifestyle, education and health. Today, an average Indian spends 54-55 per cent on basic necessities. This was exactly the case in China in the mid-90s (60 per cent). By 2010, that (for China) fell somewhere close to 40 per cent and what gained was consumer discretionary spending, education, health and lifestyle-related expenses. That is exactly the way India is also going. So, the expenditure on the basic necessities of life possibly comes down as the population becomes more affluent. So, companies like Jubilant FoodWorks or Talwalkars could do well, thematically.