 "We are actively scouting for acquisition of other players")
Low entry barriers, high cost of compliance and lower margins has seen the broking industry go into consolidation mode of late. Amisha Vora, joint managing director at Prabhudas Lilladher, tells Manu Kaushik why she thinks consolidation is good for the industry and what is in store for the markets. Excerpts:
What’s your outlook on the brokerage sector with respect to the recent bout of consolidation in the retail brokering space?
It’s a welcome move and the industry needs it. Because of the low entry barrier, there are too many players right now because of which yields have gone down. Even the compliance and operation costs are not easy to cover. There should be further consolidation.
We are actively looking for acquisition with other players as we offer a national reach along with the advantage of research.
The benchmark indices touched an all-time high in 2013. What is the road ahead for 2014?
Markets began year 2013 on a hopeful note with economy having bottomed out – both in terms of inflation and interest rates after P Chidambaram took over as Finance Minister in October. However, inflation played spoilsport and things didn’t turn out that well.
Having weathered an entire year of high inflation, not to mention the government’s tight rope walk on the current account deficit (CAD) front, the investments got choked from all quarters. Overall, liquidity remained tight and the economy suffered.
Going ahead, the fundamentals will continue to remain tepid and economy will take its own sweet time to recover. And even now, there are no signs of recovery. For three-four months now, inflation has been way above comfort levels.
While earnings growth could be a lukewarm next year and with hopes of a strong government at the Centre, the market sentiment can improve. We feel the Nifty range for 2014 should be 5,800 to 7,200-7,300. So, even from the current levels, 14-15 per cent returns next year is not ruled out.
Are foreign fund inflows in 2014 be as robust as in 2013 with tapering kicking in soon?
Tapering will, to some extent, constrict liquidity globally and the flows to emerging markets. Liquidity always chases high growth and, therefore, a lot of this fund flow got directed toward those markets which perform well. Going ahead, the rub-off effect of better performance and relative growth by developed markets will be felt by emerging markets.
What are the key risks for markets in 2014?
The current bull run is very much threatened by weak fundamentals of the economy. It’s going to be long before the economy moves into the high growth trajectory path. Even early signs of a turnaround are not visible as of now and low growth, tight liquidity and high inflation are the prime reasons.
In case we end up having a weak Parliament or a Third Front kind of scenario after the general elections, it will be big setback for the markets. Volatility in oil prices will be another major threat. Brent oil could keep hovering between $108-110 a barrel. A spike there will be very bad for the economy.
What are you expecting on the interest rates front then?
For the last three years, inflation has been above the comfort zone. Going forward, I am hopeful on the inflation front - because of a high base effect and overall demand collapse, it should start softening. In the RBI’s January review, however, we expect the central bank to maintain the status quo on the interest rate front.
What are your expectations from third quarter earnings? Do you expect downgrades in FY15?
I don’t see any further downgrades as weak fundamentals are already priced in. We expect the growth trajectory of Nifty companies to continue on expected lines. Autos, capital goods companies are still reeling under slowdown, inventory pile-ups and domestic steel and cement is low demand and margin contraction, too. While banks are reeling under restructuring, asset quality and NPA issues, real estate, too, is hit. So the pain experienced by these sectors will certainly be reflected in third quarter as well.
Do you see defensives going on a back foot and instead cyclicals to be the name of the game in 2014, as recent trend suggests?
I am more interested in looking at select mid-cap companies among the cyclical sectors. Certain steel and metal along with capital goods companies have done better in terms of stock performance. I expect these to perform better next year.
Realty stocks have started running after the recent uptick in credit disbursement to the real estate companies and hopes of a pickup in FY15. Do you like anything from this space?
No, I am not in a hurry to jump on real estate sector stocks because till the time interest rates, demand, job creation, income, demand are conducive, there isn’t much promise there. I am not hopeful of a recovery in the sector anytime soon.
What about banks?
In FY14, I expect one or two bouts of outperformance in the public sector banks. Hopes of either bond yields coming down or if infrastructure-related projects by various companies take off, then banks’ NPA related issues are expected to come under control.
Also, we expect the general pressure on the economy to come down over the next 12 months. Based on both these assertions, we believe some of the large PSBs (public sector banks) which are available at 0.6-times their price to book values (P/BV), offer very good opportunities. These could be trading opportunities as they can give a 20-25 per cent return on a spurt then sober down again.
Which sectors are you bullish/bearish on?
The information technology (IT) sector will continue to do well, but the returns could be milder compared to 2013. Select stocks from media should do well. Certain education related stocks could do well, too. As a theme, select cyclical are also good on a 12-month basis. On a turnaround basis, capital goods MNCs (multi-national companies), select metal companies and select PSBs should do well, too.
Could you be stock-specific?
We like Wipro in IT. Dish TV has come to be a good inflection point where they will start generating cash flow after their capex and the stock should do very well. We like Cummins India from the capital goods as revival will be very well reflected. We also like ING Vysya Bank that has a clean balance sheet and there is M&A (merger and acquisition) potential in the stock. On a trading basis Bank of India could be a good bet.
What’s your outlook on the brokerage sector with respect to the recent bout of consolidation in the retail brokering space?
It’s a welcome move and the industry needs it. Because of the low entry barrier, there are too many players right now because of which yields have gone down. Even the compliance and operation costs are not easy to cover. There should be further consolidation.
More From This Section
Is Prabhudas Liladhar scouting for any acquisitions?
We are actively looking for acquisition with other players as we offer a national reach along with the advantage of research.
The benchmark indices touched an all-time high in 2013. What is the road ahead for 2014?
Markets began year 2013 on a hopeful note with economy having bottomed out – both in terms of inflation and interest rates after P Chidambaram took over as Finance Minister in October. However, inflation played spoilsport and things didn’t turn out that well.
Having weathered an entire year of high inflation, not to mention the government’s tight rope walk on the current account deficit (CAD) front, the investments got choked from all quarters. Overall, liquidity remained tight and the economy suffered.
Going ahead, the fundamentals will continue to remain tepid and economy will take its own sweet time to recover. And even now, there are no signs of recovery. For three-four months now, inflation has been way above comfort levels.
While earnings growth could be a lukewarm next year and with hopes of a strong government at the Centre, the market sentiment can improve. We feel the Nifty range for 2014 should be 5,800 to 7,200-7,300. So, even from the current levels, 14-15 per cent returns next year is not ruled out.
Are foreign fund inflows in 2014 be as robust as in 2013 with tapering kicking in soon?
Tapering will, to some extent, constrict liquidity globally and the flows to emerging markets. Liquidity always chases high growth and, therefore, a lot of this fund flow got directed toward those markets which perform well. Going ahead, the rub-off effect of better performance and relative growth by developed markets will be felt by emerging markets.
What are the key risks for markets in 2014?
The current bull run is very much threatened by weak fundamentals of the economy. It’s going to be long before the economy moves into the high growth trajectory path. Even early signs of a turnaround are not visible as of now and low growth, tight liquidity and high inflation are the prime reasons.
In case we end up having a weak Parliament or a Third Front kind of scenario after the general elections, it will be big setback for the markets. Volatility in oil prices will be another major threat. Brent oil could keep hovering between $108-110 a barrel. A spike there will be very bad for the economy.
What are you expecting on the interest rates front then?
For the last three years, inflation has been above the comfort zone. Going forward, I am hopeful on the inflation front - because of a high base effect and overall demand collapse, it should start softening. In the RBI’s January review, however, we expect the central bank to maintain the status quo on the interest rate front.
What are your expectations from third quarter earnings? Do you expect downgrades in FY15?
I don’t see any further downgrades as weak fundamentals are already priced in. We expect the growth trajectory of Nifty companies to continue on expected lines. Autos, capital goods companies are still reeling under slowdown, inventory pile-ups and domestic steel and cement is low demand and margin contraction, too. While banks are reeling under restructuring, asset quality and NPA issues, real estate, too, is hit. So the pain experienced by these sectors will certainly be reflected in third quarter as well.
Do you see defensives going on a back foot and instead cyclicals to be the name of the game in 2014, as recent trend suggests?
I am more interested in looking at select mid-cap companies among the cyclical sectors. Certain steel and metal along with capital goods companies have done better in terms of stock performance. I expect these to perform better next year.
Realty stocks have started running after the recent uptick in credit disbursement to the real estate companies and hopes of a pickup in FY15. Do you like anything from this space?
No, I am not in a hurry to jump on real estate sector stocks because till the time interest rates, demand, job creation, income, demand are conducive, there isn’t much promise there. I am not hopeful of a recovery in the sector anytime soon.
What about banks?
In FY14, I expect one or two bouts of outperformance in the public sector banks. Hopes of either bond yields coming down or if infrastructure-related projects by various companies take off, then banks’ NPA related issues are expected to come under control.
Also, we expect the general pressure on the economy to come down over the next 12 months. Based on both these assertions, we believe some of the large PSBs (public sector banks) which are available at 0.6-times their price to book values (P/BV), offer very good opportunities. These could be trading opportunities as they can give a 20-25 per cent return on a spurt then sober down again.
Which sectors are you bullish/bearish on?
The information technology (IT) sector will continue to do well, but the returns could be milder compared to 2013. Select stocks from media should do well. Certain education related stocks could do well, too. As a theme, select cyclical are also good on a 12-month basis. On a turnaround basis, capital goods MNCs (multi-national companies), select metal companies and select PSBs should do well, too.
Could you be stock-specific?
We like Wipro in IT. Dish TV has come to be a good inflection point where they will start generating cash flow after their capex and the stock should do very well. We like Cummins India from the capital goods as revival will be very well reflected. We also like ING Vysya Bank that has a clean balance sheet and there is M&A (merger and acquisition) potential in the stock. On a trading basis Bank of India could be a good bet.