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| 'Liquidity inflow may make valuations uncomfortable' | | Q&A: Ravi Kapoor, MD, Head South Asia Capital Markets, Citi |
| Rajesh Bhayani / Mumbai Oct 01, 2009, 21:03 IST |
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 As benchmark indices Sensex and Nifty are at their recent peaks, valuations are looking a bit toppish. But despite this, most FIIs are overweight on India and the inflow of liquidity is continuing, says RAVI KAPOOR, managing director, head of South Asia Capital Markets Origination, Citi. In an interview with Rajesh Bhayani, he also foresees the Sensex to move in the range of 17,000-15,000 and the Nifty in the region of 5,000-4,500 in the near future. Excerpts:
The stock market is at its recent high. What is the way forward?
The market has risen on the back of a stable government at the Centre, the Indian economy continuing to demonstrate growth potential in a subdued global environment, an abundance of liquidity induced by central banks globally and the return of investor appetite for risk. With monsoon-related worries subsiding, companies are expected to witness better growth in profitability and investors are likely to continue putting liquidity in the Indian market. Although there are no negative triggers on the horizon, with the Sensex and the Nifty trading at around a forward price-to-earnings ratio of 19 times, I would say that valuations are looking a bit toppish and the outlook is that of cautious optimism. Most foreign institutional investors (FIIs) are overweight on India and the inflow of liquidity can further drive valuations upwards.
How do FIIs weigh India versus other markets, including China?
Looking at India's growth prospects, demographics and huge infrastructure opportunity, most FIIs are overweight on India. That is demonstrated by the foreign inflows coming into the Indian market despite rising valuations. Weightages depend on performance and potential of each market, and rebalancing of weightages is a continuous exercise. India and China are two important growth markets.
Can you predict high and low levels within which the market is expected to move in the next few months?
Directionally, we are in an upwardly sloping market with intermittent corrections. I believe that in the short-term, the Sensex will move in the range of 17,000-15,000 and the Nifty between 5,000 and 4,500. Since valuations are not outlandish yet and the market is expected to be range-bound in the near-term, I don’t see any asset bubble. Having said that, the incessant inflow of liquidity could possibly take market valuations and individual stock prices to uncomfortable levels where investors may have more downside than upside.
What are the signals to assume that liquidity is changing direction?
Any negative local triggers such as rising inflation, hardening of interest rates, less-than-expected economic/corporate earnings growth or better-than-expected growth in other developed economies could signal a change in the direction of liquidity. A large number of primary market offerings can also check the flow of liquidity coming into the secondary market.
How come new listings are getting lacklustre response at a time when the secondary market is doing well?
We have seen fund-raisings of nearly $15 billion (roughly Rs 72,000 crore) through IPOs, QIPs, rights issues and GDRs in the last four months. Going forward, funds worth $10-15 billion are expected to be raised in the second half of the current fiscal, including divestments by the government. Though some IPOs have not been very rewarding for investors, but then they should realise that equity is a risky investment and, therefore, they should take a medium-to-long-term view of their holdings. Having said that, I also firmly believe that issuers should price offerings attractively so that they create a sustainable, alternative source of capital to fund their growth needs.
As stock prices are rising, what is the status of foreign currency convertible bonds (FCCBs) issued by Indian companies? Will there be more market for such bonds in the near future?
With improvement in stock prices and contraction in credit spreads, most FCCBs are trading above par or, in some cases, above the accreted value. If this trend continues, there will be a fair chance of some of the existing FCCBs, particularly of companies with a good equity story, getting converted. However, going by past experience, I expect that this time issuers will be more prudent in managing their liabilities and treat FCCBs as debt till they are converted. This kind of financial discipline will help the issuers tide over turbulent times with relative ease. With contraction of credit spreads and high volatility in the market, I think the FCCB market will open for high-quality credit or good equity story. However, the days of zero-coupon and high-premium structures have gone. In the absence of credit protection bids, investors would expect issuers to pay coupons and they themselves would be reasonable on premium expectations.
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