Markets have been trading on a cautious note ahead of the crucial Greek elections. At the domestic level, market participants are also keeping a tab on the rupee and what could be the Reserve Bank of India (RBI)’s next move at its upcoming policy review. In an interview with Jinsy Mathew, Destimoney Securities’ Chief Executive Officer and Managing Director, Sudip Bandyopadhyay, shares his outlook n the markets and the sectors that look attractive in the current scenario. Edited excerpts:
How do you see the markets panning out?
To a great extent, the Indian markets are still co-related to what is happening to the global markets. For the first three months of the 2012 calendar year, the markets rallied as foreign institutional investors (FIIs) were buying. Across the globe, everyone was under the impression that the situation in the euro zone was getting settled and there was liquidity in the system. So, FIIs were on a ‘risk-on’ mode. However, the fundamentals remained unchanged all this while. After April, FIIs have become net sellers.
In India, we have several domestic issues, including inflation. Even if the problems get sorted out, the Indian markets will not be a major attraction for FIIs due to the global situation.
By June 17, when the Greece elections and the RBI credit policy get over, things will start improving. The euro zone will probably agree to some European bond, just to ensure that there is liquidity back in the system, as Spanish banks are on the verge of a collapse. We will get a signal in June whether we are moving in the right direction, or we are doomed for the time being.
Assuming Europe changes for good but the situation in India remains the same, do you think FIIs will look at India as a possible investment destination?
We’ll miss out a huge opportunity because world markets will look at India, but with all current problems and the growth rate slowing down significantly, it’s a bad picture. If this continues, it’s going to be very disappointing. If the global liquidity improves, India stands to get a share, though a much smaller one, even if the domestic situation doesn’t change for good.
How do you see the troubled sectors like aviation and telecom?
Everything that could go wrong in aviation has already happened. Kingfisher could close down operations, and that’s the only thing that can go wrong now. However, Jet Airways and SpiceJet will continue to be fine. So, things will improve from here on. Also, aviation fuel prices have come down to an extent. But the issue of foreign direct investment in aviation has to be sorted out. Logically speaking, foreign investment in aviation is allowed, but one cannot buy an airline company, which is absurd.
Regarding telecom, the government is expecting to auction spectrum at an unrealistic price. This doesn’t make commercial sense beyond a point and such a stand cannot continue for long. We are probably near the bottom in the telecom space.
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I think telecom companies Reliance Communications and Bharti Airtel that have a huge customer base and good infrastructure will recover faster. The sector as a whole, though, may take some more time to recover.
Banking is a space that has been beaten out of shape since the past month. What’s your view?
I don’t think the correction is unfair. If the economy is in a tailspin, as it is today, then manufacturing is down in the dumps. Banks, especially public sector units (PSUs) like State Bank of India, have exposure to almost all sectors. The difference between a PSU and private sector bank is in its management, so we see PSUs have a bigger non-performing asset (NPA) problem as compared to private banks. It’s not the net interest margin, but the NPA that will hurt PSUs the most. If the economy is bad, it will come back to haunt the banks.
What would you buy in today’s market?
I think pharma is a good bet, as the Indian companies have a cost advantage. A sheer arbitrage advantage like we saw in information technology companies is going to take the Indian pharma space ahead. Companies which do contract manufacturing, clinical trials and research and development are looking good at the current juncture.
How do you see quarterly earnings panning out?
We are going to see the same kind of results that we saw in the fourth quarter of the last financial year. There is nothing good happening in capital goods, infrastructure and real estate that can change their numbers dramatically. However, fast moving consumer goods and cement will be under pressure.
What about the rupee?
The rupee shouldn’t depreciate further beyond 56-57 against the US dollar. All this is sentimental impact and due to FII flows. The central bank has to intervene to stop this fall. If FIIs think the rupee will continue to depreciate, then they will sell now and buy later.
Had the RBI started controlling when the rupee crossed the 50-52 mark, then the cost of containing the situation would have been significantly lower as compared to what RBI is forced to spend now.