While the year 2008 was a disastrous one for the Indian and global markets, 2009 has started off with India Inc reporting its biggest financial fraud, even before the markets were coming to terms with a disappointing outlook on Q3 numbers. In a depressed macro environment and slowing demand, we caught up with Raamdeo Agrawal, managing director, Motilal Oswal Securities for his views on the markets.
He spoke to Vishal Chhabria on issues pertaining to Q3 results expectations, the impact of various measures undertaken by the government and RBI, the way ahead for the markets, investment opportunities and return expectations among other issues.
Your views on the Satyam Computer episode.
It is a one-off kind of incidence, a fraud case and, nothing to do with the industry or the government or the country. Now the government has also stepped in. I hope they put in very credible directors. One good thing is that in the entire episode the clients’ interest has never suffered. Nor have they duped banks. The whole fraud is confined to equity side. If you are holding Satyam shares, then get out.
With respect to Q3 results, where are the pain points and surprises?
Banks will provide the biggest surprises. Telecom too is in good shape. IT could also be positive on rupee depreciation. But, it will be tough going for auto, real estate, retail, metals and, oil and gas. Profits will go down by a percentage point at the EBIDTA level and 6 per cent at the net level on an 11 per cent y-o-y, quarterly growth in sales.
Will the measures taken by RBI and the government work?
These packages are going to make available a lot of liquidity and there is a concerted effort to bring down the cost of money to the public at large. I think many more steps are going to come, may be by the new government, but the time frame is also required for recovery. Just because the economy is going down vertically, just about two quarters old, I think it may take more quarters before it finds the bottom. Money at a low cost, a lot of it, is the first requirement for economy to grow or even think about turnaround.
But, aren’t low confidence levels and demand slowdown the key issues?
One of the things is how do we create consumer demand, how do you make projects viable? Any project investment is viable only if there is a differential of 3-4 per cent in returns. So, an entrepreneur might be able to make 14-15 per cent returns. If the cost of money is 14-15 per cent, it will not be a profitable venture. But at 10 per cent returns will look attractive and hence the investment will happen and then you see the impact on jobs and salaries.
But, along with this, the government has to deregulate some more sectors of the economy. So, entrepreneurs get fresh pastures to invest in. Like in banking, I think competition is very limited because they are not giving license to foreigners, or to big domestic houses. So, once they bring competition, the intermediation cost of money in India will go down significantly.
When would these measures yield results?
This quarter in any case is a wash out. Next quarter would probably see a recovery. But, I think, from April, we should clearly see a distinct improvement unless the global economy completely slumps, like we had 11 per cent slump in the exports. But, if it becomes even more severe, we don’t know but otherwise, what is non tradable, what is happening to the domestic market, I think I see a recovery in demand.
Do you see the markets recovering or at least bottoming out in 2009?
My sense is that we have seen the worse in stock market as far as India is concerned. The 7,700-8,000, we have seen is the bottom kind of range. I will be very surprised if it significantly breaches and goes below 7,700. Particularly, the proactiveness with which liquidity has been released and the cost of liquidity has been brought down. In relation to that, interest at 14 per cent and 7 per cent, these are two different worlds.
When do you expect foreign investors to return to the markets?
Once the fear of deflation gives way to stability and then to inflation, then people will move away from bonds. Bond yields have already gone down, so the market is expecting very low yield for a very long time. Now, the moment this deflation stabilises and inflation emerges again, due to additional liquidity demand for other asset classes should improve. It is just a matter of time, maybe 6-8 months, nobody knows.
How do you expect commodity stocks to fare over the next one year?
Commodities is one thing that is physically required only when manufacturing expands and manufacturing expands only when the demand expands and we are still seeing demand contraction. So, probably, we are yet to see the worse of the commodities, but commodity stocks have seen the worse and it may remain here for quite some time till you see a turnaround.
For the market, how long will this pain last?
Two years is typically the time frame. The first year is a complete wash out, which is happening now, and the second year is the year of consolidation. But things are moving rapidly. Like interest rate reduction is happening very fast and people are also taking losses in their books. So, it may be another 6-8 months. As the US starts finding a bottom, I think we will have a very huge rally worldwide in equities.
What returns can one expect in 2009?
From the current levels, I will be surprised five years on if the index does not go to 20,000 from current levels. So, one can expect 15 per cent compounded returns, not in 1 year, but over 3-5 years.
Your estimates for FY10 earnings and P/E.
Earnings in FY10 would be around 8-9 per cent higher at Rs 970 compared with Rs 894 for FY09. If this kind of earnings growth starts materialising then of course the PE multiples may tend to stabilise at around 12-13 times.
Themes or sectors that will play out in CY2009.
We are pushing banking, which looks to be most attractive right now. The money supply is above 15 per cent, so banking growth is at least at about 15 per cent. You broadly have clean books. NPAs are very little or if anything comes up, so they need to provide for it. There is scope for re-rating. And, in the next five years when the index probably doubles, you may make at least 4-5 times. That is the kind of potential with very little downside. Even automobiles, consumer and pharma companies could do well on the back of consumer demand.
Your view on how mid-caps would do in 2009?
Once market stablise, it should fly as it has been depressed so much. If somebody holds them till full revival then returns could be quite fabulous.
Any sectors one should avoid?
The companies which have not allocated capital well, they will have a tough time because if the business conditions don’t improve, the servicing cost will be high for the debt they have taken (for big ticket acquisitions) in their books – like Hindalco and Tata Motors.
India’s valuations vis-a-vis other markets?
Right now, every country’s valuation is aligned at about 10-11 times. So, I think there will be some break-off. Some changes. Pakistan is also 11 times, India is also 11 times. That doesn’t make sense. So, that differential will come.
