India will continue to attract money from foreign institutional investors as differentiated growth is the buzzword for the country with six per cent gross domestic product growth, says Gautam Trivedi, managing director and head of equities, Religare Capital Markets. In an interview with Jitendra Kumar Gupta, he says it will take two-to-three quarters for earnings to bottom out. Edited excerpts:
Where do you think is the earnings cycle at this point? Do you think there is a room for further downgrades?
We are two-to-three quarters away from bottoming out. We will have one more quarter of poor performance. In terms of the impact of monsoon, we have record reserves of food grains, pain will be in terms of food inflation. In May, water level was at a five-year high, now reservoirs are coming down. Globally also, the US is in drought, Russia crop conditions are not good. So, food inflation will be high. In the CPI (consumer price index), food has a higher weightage as compared to WPI (wholesale price index). So, central banks cannot reduce rates. While we agree with RBI (Reserve Bank of India)’s point that the real interest rates today are lower than they were in the boom years, for smaller firms, interest cost to sales ratio is much higher at 10-12 per cent than the larger firms. Larger firms have alternative methods of financing, for smaller firms funding is an issue and will lead to asset quality becoming worse. Capex (capital expenditure) growth is coming down. Poor sentiments, which we have in the capex space, will percolate to the consumption space, threat on employment and threat on consumption.
What would you look for an economic turnaround?
I would take cue from the currency deposit ratio. Currency usage has to rise. If business activity rises, cash usage rises. As in M3 has 3 parts – first is currency with public, second is demand deposits and thirst is time deposits. Term deposits are overwhelming large part at around Rs 70 lakh crore. Currency with public is about Rs 10 lakh crore and demand deposits are Rs 2-3 lakh crore. Currency with public should rise. It has been a decent indicator. Today, the indicator is at low as the public is keeping deposits in the bank. In monsoon, currency usage falls and in Diwali it will go up.
Do you think there is more scope for India to attract FIIs money?
As the situation in other markets is even worse, India has been the key beneficiary. I was analysing some days back of all the FII investment coming into Asia (excluding Hong Kong and China) India accounts for 37 per cent of the total investment in Asia. Total $18 trillion has been put into the global economy since 2007. All this liquidity is not having any incremental higher impact on the markets. QE1 (quantitative easing) lead to four times multiple, QE2 lead to 1.5 times multiple, operation twist is leading to 1.5 times multiple. So, the multiple expansions in markets are falling and earnings are not growing. Fed (US Federal Reserve) has downgraded US GDP twice from three per cent to 2.4 per cent and they may end the year with 1.9 per cent or below. Growth is not happening despite pumping in money. So, definitely India will attract money as differentiated growth is the buzzword for India with six per cent GDP growth. Other countries are not growing even this much and the other alternative is China where people do not know how bad the situation is yet.
What would you buy in so-called defensives or less risky where the valuations are already high and fear is that slowdown is going to impact even the consumption stocks?
Even though the FMCG (fast-moving consumer goods) stocks have outperformed (with many of them trading at life time highs) and the BSE FMCG Index up 33 per cent year to date (vs. 15 per cent for the market), investors are in no mood to sell them. Hence, we would continue to recommend names like Hindustan Unilever, ITC, Emami, Marico and Bata. Moreover, the monsoon seems to have revived in the last two weeks, which will be positive for the FMCG stocks. The one defensive sector that we have advised investors to stay away from is the telecoms sector where the regulatory overhang, sky rocketing spectrum costs and the arrival of RIL (Reliance Industries Ltd) will limit upside for the incumbents
Do you think there is buying opportunity in beaten down mid-cap companies?
Right now, the appetite for mid-caps is not there. But this is the place where you can differentiate. Due to poor performance a stock is forgotten and if identified at the right time the stock can give a return of two-four times also. I call these stocks as fallen angels – they have fallen out of favour, but it is important to keep an eye on these stocks. A great example is Infosys. It has not performed in the last three-four months, not because the sector is doing bad but due to some issues with the company. When the management solves these problems the stock can take a u turn.