'Another 250-400 points up move for Nifty is on the cards'

R. Venkataraman, MD, IIFL tells Puneet Wadhwa there is a strong chance of backlash, corruption issues will return to haunt the govt

The markets have been on an upward trajectory on the back of positive sentiment across the globe and policy initiatives by the Indian government. While remaining bullish about the prospects, R. Venkataraman, MD and CEO, IIFL tells Puneet Wadhwa in an interview that there is a strong chance of backlash and corruption issues returning to haunt the government. Corporates would like to deleverage and also wait to see sustained uptick in policy before making fresh investments, he says. Edited excerpts:


How convinced are you that the current market rally will sustain? What factors, according to you, can spoil the party going ahead at the global and domestic level?

An open ended third round of quantitative easing (QE3) programme by the US Federal Reserve and similar actions by Japan and the European Central Bank (ECB) have enthused the equity markets. The Fed has also promised to keep interest rates low till 2015.

Back home, sudden policy moves by the government have been a welcome surprise. Further action on the policy front is anticipated in the coming weeks, which will keep sentiments high. With Nifty valuations at 13.5x FY14 earnings, another 250 – 400 point up move is on the cards.

Talking about party spoilers, the QE money creating commodity asset bubbles is a concern. After the initial excitement, world markets will also need to see a reduction in deficit levels and unemployment in global economies. Similarly for India, structural imbalances like the ballooning fiscal deficit, current account deficit; sluggish deposit growth and capex cycle need to be watched.

What is your advice to the investors now?

Tactically, we have recommended higher weightage for high beta stocks and reduction in defensive positions to our clients. Gold has been another asset on our buy list due to easy monetary policy across the globe.

The next few months are crucial for the government as it rolls out more policy measures before starting prepare for the Union Budget. How do you see the December quarter panning out for the Indian economy, markets and the foreign flows?

It is very difficult to predict movement of foreign flows quarter-on-quarter. One can be hopeful of some long-term flows in the form of foreign direct investment (FDI) in the coming months though. In terms of GDP (gross domestic product) growth, the quarter will not see huge improvement as steps take time to shape the economy. While the policy action so far has been encouraging, there is a strong chance of backlash and corruption issues returning to haunt the government.

The government has outlined an ambitious divestment agenda. Will these plans materialise given the investor’s appetite and risk aversion levels, or do you expect the domestic financial institutions to save the day yet again?

The pricing of issues will be the deciding factor for retail participation. But if the positive sentiment continues, the government will be able to do much better figures from disinvestment than it managed last year.

What are your expectations from the Reserve Bank of India’s (RBI’s) policy review on October 13 and for the interest rate outlook for FY13?

We expect the RBI to keep policy rates unchanged in the upcoming meeting. WPI inflation is likely to remain above central bank’s projected level of 7 per cent in the near-term. However, bank lending rates could decline due to weak credit demand and softening deposit rates.

 How one play should banks, auto and realty stocks given this?

One should start adding beta within banking portfolio by buying ICICI Bank, Axis Bank, ING Vysya Bank and select public sector (PSU) banks like Bank of Baroda (BoB) and Dena Bank. ICICI Bank and Axis Bank are trading at historically steep discount to HDFC Bank. For ING Vysya, BOB and Dena Bank, incremental stress on asset quality is likely to be limited.

Valuation of Auto stocks no longer appear cheap post the recent run-up. Relatively, we prefer staying invested in M&M (continued volume outperformance) and Bajaj Auto (high exposure to export markets).

We like the auto ancillary space as the replacement demand is expected to pick up given robust auto sales in the past three years. Our top picks in this space are Motherson Sumi, Amara Raja Batteries, Exide Industries and Apollo Tyres. We remain averse to the real estate sector due to sluggish sales volumes, delay in project execution, levered balance sheet and weak corporate governance. 

What is your view on the mid-cap space, especially the mid-cap information technology (IT) and the cement sectors?

The IT mid-cap space has been abuzz lately. Niche focus, broadening services portfolio, strengthened front-end and ability to scale up effectively have helped to grow revenues faster than larger peers over last three years. Breaking down of larger deals in more palatable deal sizes of $25 – 99 million, too, have helped these mid-cap companies win more deals.

Also, sequential margin improvement and better cash flow generation have helped improve the valuation of these companies. Amongst our coverage, we like MindTree for its improved client mining as well as Infotech Enterprises with improving outlook on its non engineering business.

Mid-cap cement companies are trading at 50-60 per cent discount to large peers. We like JK Cement, JK Lakshmi Cement and Shree Cement based on regional presence, earnings visibility and valuations.

Despite the positive sentiment in the markets, most companies are still cautious regarding their capex plans. Do you see this changing anytime soon?

Constraining factors for corporate India has not only been weak policy environment but also their high leverage. Before corporates commit to new investment, they would like to deleverage and also wait to see sustained uptick in policy. It appears that there will be some relief on the margin front due to softening commodity prices.

Around 69 companies were referred to corporate debt restructuring (CDR) in the September 2012 quarter, data suggests, with steel units being hit the hardest. Do you see fortunes changing for the industry?

We don’t expect non-integrated small and medium sized steel players to turnaround in the near-to-medium-term as availability of key raw materials, iron ore and thermal coal remains a concern.

Supply of iron ore has declined significantly due to clamp down on illegal mining activities in the states of Karnataka, Goa and Orissa and that of thermal coal remains tight due to rising demand from power producers. Additionally, the recent appreciation of the rupee against USD would push steel prices lower, which would further impact the margins of steel producers.