)
Despite several government policy announcements, particularly on infrastructure, the share prices of related companies continues to drift down. Nor have the markets paid much attention. Vibhav Kapoor, chief investment officer & Director, IL&FS Group, speaks to Jitendra Kumar Gupta on these and related issues. Edited excerpts:
The government has recently taken policy initiatives on coal imports and price pooling, and to revive stalled road projects. Are we heading the right way for the infrastructure space?
Clearance of coal for the power sector is the first positive and real initiative on the ground. It will really ease the sector's problems in a big way. The process will restart in stalled projects and cases where entrepreneurs were not really coming forward. On the road sector, my feeling is some of the problems are not really related to the government but to the developers themselves, as they'd really bid atrociously at onet point, landing into problems. At ITNL, we did not bid for many months because these were being done at such ridiculously unviable prices. There are some problems from the government side about land, environment and forest clearances, which it needs to sort. But this issue of projects being awarded and developers now asking to change the terms is entirely the fault of companies.
Stocks are not reflecting the optimism?
More From This Section
So, should one invest in construction companies?
This is the right time to accumulate gradually but only in the top traded and well managed companies. Some will take a longer time to recover but the better managed ones will turn around early. Companies will have to put their house in order, like reducing debt, selling some assets and bringing equity into the business.
Is liquidity shaping markets or fundamental changes?
I think it is both. In the past few years, domestic factors or issues have played a key role, which is why the broader markets have not gone anywhere or are trading lower. In the past month, global factors like fear of liquidity reduction, selling by foreign institutional investors, fear of the US Fed reducing its stimulus, etc, have been playing out. Second, while the money is going away, it has impacted the economy in terms of currency depreciation. When that happens, there is fear of inflation. It becomes difficult to cut rates. The oil subsidy, which was going down as the government took initiatives, will again go up. So, it's a combination of these issues.
How long could this scenario prevail?
A lot of this depends on the sentiments. Whatever has happened in the past few days, like (US Fed chief) Bernanke talking about the tapering (of its monetary easing), there is nothing bad. He is going to cut the stimulus only when the economy improves, which is good. He is not reducing liquidity immediately but putting down $85 billion every month for another three to four months, and later maybe $50 bn for three to four months and after that, $25 bn for another three-four months before finally ending it. He said he'd stop in mid-2014. There is still going to be inflows. However, it is going to be difficult, as this overhang will remain on the markets. The market sometimes starts to discount the news in advance. Over the next one or one-and-a-half months, we could actually see this process of discounting continue.
What is the probability of domestic issues improving?
If the government continues to do what they have done recently, which I believe they will, that should solve some of the fundamental problems the economy is facing. One serious problem is inflation and, then, RBI's ability to cut rates. Inflation is a more complicated issue because it is partly structural in nature and partly policy- based. People keep on saying RBI should cut rates but real interest rates are negative today-I am comparing the interest rate on a one-year deposit with the consumer price index. You are actually losing money in real terms. Therefore, if you cut rates further, it will disincentivise savings.
What are the triggers for recovery as we come closer to the election year?
That is an issue, a problem. As we come closer to the election year, that is definitely going to have some impact on the sentiments. People are going to be more nervous. Hopefully, we will live through this period. Look at it this way; on the one side, maybe over the next 12 months, the US fiscal stimulus actually comes down.
On the other hand, during the same period, we could see uncertainty over the elections coming to an end.
Hence, I do not expect a major bull run to start this year. At best, the markets will remain range-bound. In terms of the Nifty (the National Stock Exchange;s benchmark), it might be 5,500 on the downside and 6,200-6,300 on the upside.
