Foreign investors are here to stay, India story remains intact: Jigar Shah

Interview with CEO, Maybank Kim Eng Securities

The recent developments in Greece and China have impacted market sentiments. Investors are also eyeing the outcome of the US Federal Reserve’s meeting later this month for clues on the lift-off in interest rates. Jigar shah, chief executive officer, Maybank Kim Eng Securities, tells Puneet Wadhwa the volatility seen recently in the Chinese markets is not there in India, which should also benefit from lower commodity prices. He maintains a March 2016 Nifty target at 9,540. Edited excerpts:

Do you think the worst has already played out with respect to Greece or could there be more shocks in store?

The direct impact on account of Greece is minimal. From what it appears, it doesn’t look like anyone is in a hurry to sell. One must also understand that the Greece issue was in the know for quite a while.

Can developments in China trigger a risk-off trade in equities?

China is now an isolated market. India is a big importer of energy and metals. A correction in commodity prices will benefit India. There may be some short-term impact of the sell-off like a contagion but there is nothing alarming.

What about India?

Till now, the issue foreign investors had with India was the probability of a monsoon failure and inflation creeping up. This has also been the concern of the Reserve Bank of India (RBI). Other than this, there wasn’t much to worry about. Having said that, there were some worries about corporate earnings growth not picking up and big-bang manufacturing improvement happening. But investors are ready to give more time to the country.

Everyone knows this is one large country and an economy that can continue to improve its growth rate. Even China, after a very long and successful growth period, is cooling off. So, everyone is looking to be a little bit tolerant with India. The Narendra Modi government is doing its bit, though the results are yet to be seen. I won’t be overly worried about India on account of Greece.

But aren’t foreign investors getting second thoughts now on whether the ‘India story’ will play out or not?

Investors are here to stay and the India story remains intact. No doubt, there is some delay but there are no worries that the India story won’t play out. It will, albeit with some delay.

Is it a good time to buy from a 12-month perspective?

Purely from an India standpoint, the valuations were quite attractive when the Nifty slipped below the 8,000 mark. Now, we are trading at 14-15x one-year forward price-to-earnings ratio (PER). While these valuations are not cheap, they aren’t frothy. The volatility and  frothiness seen recently in the Chinese markets is not there in India. A lot of investors also like India as there are a number of individual companies that are already doing well. From that viewpoint, there is a lot of interest in India which is not going to reverse.

How do you see corporate earnings growth panning out going ahead? What are your targets for the Sensex/Nifty for the next 6-12 months?

For FY16, 10-12 per cent earnings growth is likely, with a possible pick-up in the second half. There are expectations that corporate earnings growth would pick up with an overall lift in the economy. A decline in interest rates will start benefiting the companies. The benefit of decline in energy prices will also be visible in the manufacturing sector in FY16. Thus, we should see an improvement in profitability which we haven’t seen thus far. This should be visible from the second half of this year. Our Nifty target for March 2016 is 9,540.

Is the easy money-making phase which we saw in the past one-and-a-half year over?

It is definitely a stock-pickers’ market now and we have very little money-making ideas. In a market, there are always some sitting ducks and there are reasons they remain sitting ducks! This is a very competitive market even from (the viewpoiint of) generating decent absolute returns. Having said that, there is scope. The economic performance seems to be improving. If the monsoon performance remains good, the number of concerns will abate.

Which sectors and stocks are you overweight and underweight on?

We like select automobile stocks that have an export focus. Here, we like Tata Motors and Bajaj Auto. In consumers, we have a contrarian view on ITC, for which we feel that the worst is over. The stock has slipped sharply from its peak. At 19-20x forward PER, ITC is considerably undervalued to its peers and even its own past valuations. The worst of the cigarette volume decline, we feel, is already factored in the price.

By when do you see the Reserve Bank of India cutting rates again?

Our view is that RBI might not cut rates this calendar year unless they see more evidence of the inflation coming down. The central bank will also be eyeing the monsoon’s progress. There is a remote chance that of a 25-basis point cut this year, but that will be data-driven.

What is your view on the capital goods, banking and finance sectors?

These are early days for things to change in a big way as regards the capital goods sector. However, we are positive on banking and financial services. We like state-owned banks as the valuations seem to be at a trough and the worsening of asset quality might just have peaked. They are likely to start showing an improvement going forward. Private sector banks are as it is doing well though from a stock perspective, there is more potential for an upside for the SOEs (state-owned enterprises). Our top picks include State Bank of India, Bank of Baroda, and Axis Bank.