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The Axis Bank QIP, the largest ever in India, received a fabulous response. What has changed for such a strong response?
Many thanks. We worked in a targeted manner with key anchors following the large block sale in September that was poorly distributed and left an overhang on the stock. We were able to show how the bank was building traction on the retail front even as its use of capital and balance sheet was much better than perceived. Therefore when we launched the deal we had a strong interest already in place. I have never seen such strong and high quality demand for any QIP so far. All the large Global Investors, Pension Funds Domestic Mutual Funds, Insurance companies etc came in with a strong demand which led to such a huge success. Valuations also remain very attractive and investors could see a good upside from the QIP price. It was virtually a India call as Axis Bank is the best play on India’s growth story.
Markets have been struggling lately with weakness in mid and small caps. What do you read into this?
India had a great run last year and people have made good money. Markets have moved up due to the announcements made by the new FM but the fundamentals haven’t caught up yet. Unlike earlier, there is a lot of supply coming into the market, especially OFS, Govt Paper and QIPs. We expect supply of at least $15 billion hence some profit booking was expected.
The next leg of rally will depend on the budget. Once it is out of the way you will see corporates planning their expansion plans based on budget announcements. Hence, March onwards you will see investors taking a fundamental call based on India Inc. actions. Equity investors now need something fabulous to justify these valuations. Hence, markets can remain flat until people see fundamental changes like improving growth rates, interest rates coming down, infra and power reforms etc. It’s only then that a fresh round of buying will take place with a view that earnings will surprise the market and not just PE expansion like it has been thus far.
On small caps, they usually go up when there’s a very strong GDP growth, when they expand both their volumes and margins. Obviously this is not the case now. However, there are good midcaps we track with good management, with steady secular demand and reasonable valuations, or passing through temporary problems, which can provide great returns for long term investors with the patience to wait for good times when they will undoubtedly multiply.
What are your expectations from the Budget?
Many expectations are already delivered like FDI in Retail, GAAR postponement, Banking Regulation Act, Insurance Bill tabled in Parliament, hike in diesel prices, hike in railway ticket prices and most important the key concern on fiscal deficit has already been aggressively articulated that it will be controlled. So now it has to be a big surprise for the markets, like a Dream Budget for a huge rally. I expect some good announcements for equity investors because at the end of the day as the FM has already advocated, you want domestic investors getting into equities as well, rather than just gold and real estate.
Given that we have a wide Current A/c gap which is currently being financed by foreign capital inflows so some positive measures to continue to attract that. He should also articulate some roadmap for key items such as the GST. We would also like to see an investment-led budget wherein corporates feel confident to put more money on the ground.
What do you read into the recently concluded Q3 results, and the way ahead?
The results were decent given the conditions we had. For example there were severe power shortages in most of South India, which was exacerbated by higher bulk diesel prices for captive power. Consumer demand also started slowing massively last quarter (due to inflation and poor rains), adding to India’s woes of weak capex. Thus, one has to see that the recent quarters were among the toughest we have had, where the environment was most challenging.
Going forward, things are not going to be as bad as it has been; and are going to improve, if not in one, but next 2-3 quarters. This may be the bottom of the earnings cycle, and then you will see things improving, depending how fast interest rates go down, etc. The key advantage for India is that it doesn’t have a demand problem like other countries but a supply problem across sectors. If India Inc is confident of expanding and producing more, then earnings are going to improve and the key factor for that is interest rates moving down, which hopefully has already started. But as rates going down depend on crude prices, markets are cautious. Recently, it has gone up and if this continues, it will be a big worry. The current rally has been dependant on foreign flows and hence global market conditions will also impact India in a major way. Markets always move up ahead of change and the same is true on the downside as well; hence expect a lot of volatility going ahead.
The FM has announced various measures. But, how are things at the ground level?
Unless at the ground level things change fast, money is not going to come in. At the ground level, though things are not as bad as they were earlier, it’s not as great as we want it to be. We are somewhere in the middle. Now we need speedier implementation of measures and execution, especially in the Power and Infra space. But on global comparison India is in much better shape and Indians are rich. For eg, Globally people don’t have jobs, have high debt and higher mortgages, interest rates are low so no great income on savings, banks are in trouble so money not safe, no big savings in gold/other assets and economy in trouble, while in India every Indian owns gold, savings are higher proportion and FD rates are high so steady income, salaries are near all-time highs, skilled labour has huge demand, real estate prices which majority of Indians own as lesser mortgage ration is all-time high and most importantly, economy is still growing at 5.5 per cent.
Among the harder measures, where do you see the action taking place first?
Power is the space which needs to be sorted out first. Unless power reforms are implemented urgently, growth will falter. In India, its proven time and again, that it’s not only about its price but more important is its availability. People are ready to pay higher prices subject to being assured of uninterrupted supply of power. Companies have been complaining about the lack of availability and not the price. They have to sort out things faster, because without that we cannot increase growth rates. Without power, manufacturing supply would only get worse in coming quarters. Next is the infra space, as you need better ports, roads, etc for higher growth. Thus, Power (including coal supply) and infra are the two crucial things for the economy, and then, GST implementation.
What is the sense you are getting from your institutional clients?
Obviously, there is a sense of cautiousness, but if there is a supply of good quality paper then we have seen huge demand. You have seen that in Axis Bank, NTPC, NMDC, Oil India, etc. offerings recently. Demand was huge as valuations were attractive. There have been record issues in just two months, totalling about $4-4.50 billion. Despite all the concerns, all these deals went through very well. Investors were not taking a macro call, but stock specific calls. On the other hand, investors don’t mind paying premium valuations for businesses which are not affected by government policies and has strong demand. India is THE place wherein investors want to invest for the long term, subject to their seeing a strong push on the policies front and timely implementation of the same.
Going into FY14, what is the pipeline of new offers?
I think the ability to absorb new issuances is there, given that globally liquidity has been very strong subject to attractive pricing. The bigger disappointment has been domestic demand and we need to do something that will attract or give incentives to domestic/ retail investors to buy equities. Even the FM has stated that we want people investing in equities rather than investing in only gold and real estate so we are hoping for some incentives there. Giving retail investors only a discount in an offering is not the right way, because that 5% discount could vanish in one day. What we need to give is some good incentive to invest in equities from a long-term perspective. In case something goes wrong globally then a lot of money could start flowing out of India and cause panic in the markets hence we need to make our domestic base strong enough to absorb such sell offs which are bound to happen from time to time in a fragile global environment.
What is your take on the proposal of providing a safety net to investors?
I’m not an admirer of safety nets or discounts as Equities is a risky business and there is no Free Lunch. It’s better to give incentives to investors to come via Domestic Mutual funds or Insurance companies which take more informed decisions.
The US and China have shown some recovery off-late. How sustainable are these?
There is lot of optimism about the recovery seen in the US. It is again good for India as global liquidity will keep on flowing in and we pray that Europe too recovers. Though the Indian markets could see some short-term underperformance as other markets with lower base eg China which underperformed last year will rise faster, in the long run India needs sustained and good equity markets as a lot of money raising has to happen and a lot of comfort factor comes from equity markets.
We have seen a lot of asset quality pressure, especially for the PSUs. Will the pain increase from hereon, or have we bottomed out?
I think incremental pain will be much less as the incremental lending is very cautious. Incrementally, the quality of assets will be far superior so the pain will be mainly of past decisions.
What’s your take on commodities?
Commodities will come back only if global growth comes back in a big way. If US growth continues to improves, then it will recover as manufacturing demand recovers around the world.
What’s your advice to investors?
Markets will be very volatile and the easy hanging fruits are gone. The big buy India macro call has already played out hence it will be Stock and Event specific calls going ahead. For investors who are not well educated about the markets should go in for professional help via Mutual Funds / Insurance only.
From a broader perspective, if you look one year down the line, we expect interest rate sensitive stocks to move up. Hence banks, infra, power, real estate etc look more attractive. Most of these stocks have already been beaten down hence the valuations are in your favour and you are just waiting for conditions to improve for a Rerating.
