India should see over 20% equity return in 2018: Motilal Oswal

In an interview, Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services, tells Puneet Wadhwa that with Moody’s upgrading India’s sovereign rating and earnings growth coming back, the country will remain a hot destination for foreign investors. Edited excerpts:
 
Moody’s has upped India’s rating, while S&P kept it unchanged. What is your interpretation of their moves?
 
Moody’s rating upgrade is a positive step from two aspects. First, India becomes a better investment destination from a long-term perspective. Given this, not only portfolio money but a lot of sovereign and foreign direct investment will chase the ‘India dream’. Second, the upgrade will help reduce the currency risk perception and improve availability of debt money to Indian companies from global markets, at a relatively cheaper rate. As regards S&P, it is just a matter of time before they, too, upgrade the rating.
 
Your outlook for the markets for next year?
 
There are multiple introvert and extrovert events and actions that will help India remain a sought-after investment destination for the next few years. India should see over 20 per cent equity return in 2018. The challenges we could face in the near-term are related to earnings growth. That apart, if infrastructure spending gets delayed, it will take a toll on the investment cycle. Banks will not be able to pass on the benefits of a cut in interest rates if there is a delay in resolution of non-performing assets (NPAs).
 
To what extent are markets discounting a Bharatiya Janata Party (BJP) victory in state elections, especially Gujarat?
 
The markets are definitely counting on a BJP victory in Gujarat, but the margin is debated.
 
Your expectations from the Union Budget? Can the government alter the fiscal deficit target to prop up growth?
 
Mostly, all major issues/policy measures are getting addressed throughout the year now – like goods and services tax (GST) rates, and the direct taxes ordinance, public sector banks recapitalisation, insolvency Act, etc. Hence, very little remains to be addressed through the Union Budget.
 
That said, the fiscal deficit target might be changed to a higher level, to accommodate the ‘infra thrust’, as that is the best way for the government to put momentum back into the economy by creating more jobs. In fact, a marginally higher fiscal deficit in this Budget will be received positively, as that will speak about the direction of government spending and intentions.
 
How do you see foreign institutional investor (FII) flows over next year? Will MF flows continue to support?
 
For FIIs, India will remain a positive destination. Even as FIIs were net sellers in the secondary market, the same money has come back to the system through the primary market. So, technically, not much money has flown out of Indian equity markets in 2017. However, with the rating change and earnings growth coming back, India will remain a hot destination for FIIs in 2018.
 
Which stocks will lead the next phase of market rally? What are your projections for earnings growth in FY18 and FY19?
 
India is an undernourished financial market. While we have seen a lot of paper flowing into the equity market, the financial market will become bigger and stronger. We will have variety of opportunities like non-banking finance companies, new private banks, companies in the payment gateway business, insurance companies, etc. There will be a lot of excitement among these. FY18 will see over 14 per cent earnings growth, while FY19 will see 18-plus per cent.
 
The banking sector has seen a slew of initiatives. What are your views? Has the rally in banking stocks run its course?
 
Many initiatives targeted towards reforms of the banking sector are very positive and welcome. These will help the sector and economy in two ways. First, they will help bring order in the larger system so that the business environment changes for the better. Second, it will create a robust framework for future operations that will help genuine lending; due to that, the banking system will be able to pass on lower interest rate benefits. Recapitalisation and the insolvency Act are two very positive initiatives and they will reap benefits for many more years to come. The rally in banking stocks is for real and has a lot of steam left.

Do you see the appetite for equities (IPOs, FPOs etc) to be better / more in CY18 as compared to CY17?

There will be more appetite for various offerings in CY18. After a long period of contraction and pale business environment, the economy is opening up. More money is getting channelised in equities and organised portfolio management. Markets will have an appetite to look at more such offerings going ahead.

What’s your view on the recent macro-economic data (IIP numbers, GDP, inflation etc) and how should investors look at manufacturing related sectors / stocks in this backdrop? What about commodity related plays, especially oil?

Taking a myopic view of these broad economic data is not the right way to look at them. We should look at this data in broader perspective and take a view on whether the things are improving or not. In the perspective of various policy initiatives this data will fall in place eventually, at this juncture lot of adjustments are happening to the speed of economy and the way Indian Inc has been conducting its business, so at times the macro data may not be in sync.

What are your targets and plans for your business for the next fiscal? What are the key areas of growth that you will focus on?

We have six different businesses in MOFS, we strongly believe that each one of them is well positioned to take the benefits of elevated interest in the equity as a class, we also believe that our AHF business is well positioned with the thoughts of this government of offering affordable housing to masses.