He notes the Reserve Bank of India’s intervention to check speculation has helped the rupee stabilise — and hails the move. Yet, fund redemption and rising import bills would continue to put pressure on the Indian currency, predicts Vivek Mahajan, head research, Aditya Birla Money. In a interview with Ujjval Jauhari, the expert notes that the economy’s fundamentals are weak. Edited excerpts:
How do you expect the equity markets to pan out in 2012?
Things could deteriorate further before getting better. We expect 12-15 per cent growth in earnings for FY13, and no major expansion in multiples. The growth in earnings too would be back ended -- that is, H2FY13 would be better than H2FY12. The upside risk to our hypothesis is steeper than anticipated fall in interest rates domestically.
How do you see the December ’11 quarter results?
Markets are going through a turbulent time. We saw corporate India struggling with inflation and high interest rates in the first half. We expect Q3 results to be worse than Q2, led by continued demand pressure and sharp rupee depreciation. This would not only increase input prices, impacting operating margins, but would also lead to continuing mark-to-market losses on foreign exchange borrowings and short-term acceptances for the second quarter in a row.
We saw IIP (index of industrial production) slipping by 5.1 per cent for October, compared to the year-ago period. More surprising and a major cause of concern was that consumption was at minus 0.3 per cent — a fall seen for the first time in the last three years.
The rupee has depreciated sharply and more than expected. Are there any chance of further depreciation?
The rupee has depreciated way beyond market expectations, slipping to a new low of 54.7 to a dollar on December 15. In a very sensible move, RBI’s intervention to check speculation saw the rupee stablise.
However, the fundamentals are weak and fund redemption, rising import bill would continue to put pressure on the rupee. Volatility in the currency market is likely to continue for some time. It is likely to face resistance around 56, though in the near term, it could possibly stabilise between 50-52.
What is your takeaway from RBI’s mid-quarter monetary policy review?
The RBI kept all the policy rates unchanged, though it changed its stance from inflation-targeting to growth-preserving, announcing that future rate risesare unlikely and that future policy action is likely to respond to risks to growth.
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Faltering growth is emerging to be a major cause of concern. Declining investment is causing industrial growth moderation. Also, the global situation is fragile on account of the EU debt and growth crisis. In our opinion, RBI would adopt a dovish stance, though the degree of it would be determined by how inflation behaves.
Cement sector has surprised all, with frontline stocks outperforming the Sensex. Do you see the performance continuing?
Cement stocks’ outperformance has really surprised market participants. The demand for the year is expected to taper off to six per cent. Slow progress in infrastructure projects, falling demand for real estate is likely to keep the demand moderation well into FY2013. Also, increase in input prices has put pressure on the margins and profitability. We believe the sector is likely to underperform for the next couple of quarters.
How should investors approach current markets? What are the sectors or stocks one can look at for investments and what are to be avoided?
Currently, markets are not only dealing with several domestic issues of slowing economic growth and corporate earnings, a widening fiscal deficit, government policy inaction, rising NPAs in the financial system and ambiguity in capital flows, higher trade deficit and a consequently higher dollar but also a highly risk-averse environment globally. The sovereign debt crisis in the EU, if not handled properly, could lead to sovereign debt defaults, bank runs and consequent de-leveraging in the asset markets worldwide.
Looking at the current scenario, cash clearly seems to be the king. Investors taking a short-term view would do well to sell on every rise. However, the near-term challenges juxtaposed with the long-term attractiveness of India, its attractive valuations at Rs 12x FY13 earnings and expected monetary easing would provide a lot of trading/investment opportunities.We advise traders/investors to trade and invest in companies with high quality managements and low debt. Sectors like FMCG, IT and healthcare, and companies with high cash, integrated models and exposure to domestic consumption are likely to outperform.
Sectors like power, aviation and metals are likely to continue to underperform with perhaps the exception of companies with high cash on their balance sheet. In the second half of 2012, with interest rates softening, cyclicals like banking, consumer durables and autos could out-perform.
Should one invest in debt, given the choppy equity markets?
Depending on the risk appetite, 30-60 per cent of the portfolio could be invested into debt.
