Despite facing global economic headwinds and grappling with its own problems, G Chokkalingam, group chief investment officer, Centrum Wealth Management, tells Puneet Wadhwa he is hopeful the trend of inadequate reform measures and peak interest rate cycle in India will reverse soon. Edited excerpts:
How do you see the Indian markets panning out over the next few quarters in the light of developments at the domestic and global levels?
We believe the western world would eventually be forced to opt for fiscal and monetary expansions to tide over their crisis, which would eventually benefit emerging economies like India.
Recessionary trends, or moderation in their economies, would adversely impact India’s export opportunities. However, India will stand to gain from cost savings on import of crucial commodities like crude oil, fertilisers, coal, etc. Besides cutting down the trade deficit, this would also reduce the fiscal pressures and moderate inflationary trends in the domestic economy.
If monsoon’s performance doesn’t end up as a major failure in the remaining period of the current session, then the Sensex and Nifty should rally at least 20 per cent to 21,000 and 6,400 levels, respectively, by FY13-end.
So, it’s the right time for a flight to safety?
Yes. However, contrary to the larger perception. For the western world, the flight to safety would be the destination to Indian equities. India’s sole problems are inadequate reform measures and peak interest rate cycle – both would see trend reversal soon.
India would remain the second fastest growing economy. It continues to offer scope for large number of successful micro-stories to emerge from the mid-cap space and get back premium for the equity markets once the interest rate cycle gets reversed.
What key reform measures you would like to see get implemented at the earliest?
We believe at least four specific economic measures would be implemented – foreign direct investment (FDI) in multi-brand retail and passage of bills pertaining to Banking Amendment Law, Pension and Insurance.
The recent political realignment on the eve of the Presidential election should enable the government to successfully get these Bills passed. The compulsion to induce larger FDI inflows and also to improve employment opportunities as the growth of both IT and telecom sectors is tapering off, could force the government to open the doors for FDI in multi-brand retail.
What is your reaction to the recent announcements pertaining to the cement and telecom sectors? How should investors approach these now?
It is time for a flight to safety, as you asked earlier, for investors in the cement space. They would be better-off either shifting to other sectors or remain in cash, since the legal battle of the Competition Commission of India is likely to be a long-drawn affair. Capacity utilisation levels, too, are expected to remain around 75 per cent.
As regards telecom, we firmly believe the wealth creation story is over. The penetration level of mobiles is peaking out across the country and competition within circles is also increasing. Companies are unlikely to post impressive growth in their businesses, going forward. Since the government finances are also under stress, there would be a tendency to share – directly or indirectly – a larger part of their profits with the government.
Would it be a prudent strategy to look at infrastructure and power sector plays?
Investors should avoid companies that have any serious governance issues or very high debt in these two sectors. Look for companies where the order-book is more than one-year sales and have access to fuel. Such companies would be able to tide over difficulties arising from peak interest rate cycle, current slowdown in capex (capital expenditure) plans and uncertainties emanating from importing fuels from countries like Indonesia.
Neyveli Lignite, Engineers India, Siemens, Bhel (Bharat Heavy Electricals Ltd) and L&T (Larsen and Toubro) are the best bets both in terms of fundamentals and tactical opportunities.
What is your expectation from the coming results season?
Overall, the corporate sector may post around eight per cent year-on-year growth in net profit. Private banks, pharma, FMCG (fast-moving consumer goods), cement and IT (information technology) sectors should post better profit growth, compared to the industry average. However, telecom, construction, real estate, fertiliser and metal sectors could disappoint.
Any preferences from the sectors you highlighted?
We suggest playing on efficient private banks with special emphasis on old private sector banks, as we expect the cap on voting rights to be increased to 26 per cent during the monsoon session of Parliament.
Mid-cap IT stocks should do well. We expect further consolidation in the IT space since large companies are facing limits to organic growth and hence, could be forced to opt for acquisitions. Select pharma companies would also benefit from recent steep depreciation of Indian rupee.
The amount of loans referred to the corporate debt restructuring (CDR) cell has grown over four-fold in the first quarter of last financial year, compared to the same period a year ago, data suggests. How alarmed should one be given this?
I don’t think there is any need to panic about the rise seen as regards the CDR. While raw material prices have corrected to a significant extent, the interest costs are bound to come down once the interest rate cycle gets reversed. This, in turn, would lead to an improvement in the net profit margin. I expect the stress arising from CDR issue to recede within 12 – 18 months.
