Internal checks at the brokerages must be stronger: Dinesh Thakkar

Q&A with the Chairman and Managing Director of Angel Broking

While sounding optimistic about the road ahead for the markets, Dinesh Thakkar, chairman and managing director, Angel Broking tells Puneet Wadhwa in an interview that the recent flash crash on the National Stock Exchange (NSE) was a learning experience for the industry. Putting too many filters will impact liquidity, he says. Edited excerpts:

In terms of announcing reforms and actually implementing them, do you think that the Finance Minister has bitten off more than he can chew? Do you think that most of the measures announced will be hard to implement given the compulsions of coalition politics?

I don’t think so. India required these measures to kick-start the economy and get it back to the 7 – 8% growth trajectory. So, in that sense, these steps were essential. In fact, I expect more measures to be rolled out going ahead.

Since some of these proposals do not require legislative approvals, there will not be any problem implementing them. I don’t think that the government will find it difficult to get these measures cleared. The problem will be in the proposals that require Rajya Sabha’s concurrence. Even if 70% of the measures announced sail through, the markets will take it positively.

So, which measures do you think that will sail through easily?

I don’t think the foreign direct investment (FDI) in retail and aviation will be a trouble. However, FDI in insurance and pension could be a few sore points. If there is any problem in getting these cleared, the markets may not take this very positively. We are hopeful that reforms regarding the mining sector and land acquisition will see the light of day. The markets will take this negatively if these measures are not announced in the next few quarters. I feel that this is just the beginning and the expectations are high.

What about the timing of these announcements?

There was policy paralysis for two years and most measures have been announced in one go now. Earlier, it was getting increasingly difficult to manage the current account deficit in the absence of export growth. So, in that sense, even the timing of these announcements seems right. The measures announced will help the economy get back in shape.

We recently had a freak trade / flash crash on the National Stock Exchange (NSE), and there were questions raised as to why the circuit filters didn’t work. Do you feel that there something wrong structurally or in the mechanism that needs to be set right?

I think this is a one-off incident. Our systems have evolved over a period of time and have addressed issues such as punching errors, except for the institutional segment. But if we are doing a trade for a proprietary account or retail, it is mapped to the margins with the exchange. What happened was a systemic error. Fortunately, this time, the trade was in the broker’s capacity to pay.

We had addressed this issue of circuit filter long ago with the circuit getting triggered at 5 and 10%. But putting too many filters will impact liquidity. It’s actually a trade-off between what you actually want. I think the internal checks at the brokerage levels have to be stronger. Brokerages need to check and ascertain the limits they want to assign to dealers. This incident was a learning experience for the industry.

Where do you see the markets headed over the next 6 – 12 months?

I think that the Indian markets have discounted the current economic growth rates and will not react to the poor economic performance in this financial year. In terms of corporate India, although the bottom-line growth is just around 8 – 10%, which at the current market valuation of 14 – 15x one-year forward earnings, I don’t think that the markets expect this growth rate to continue.

Expectations for bottom-line growth are higher. Commodity prices are showing signs of easing out amid softening of interest rates. If we revert to the bottom-line growth of 14 – 15% next year, the market will be happy to give a higher valuation to our market in FY14. Given all this, we expect the markets to regain the all-time high level of 21,000 (Sensex) and 6,100 (Nifty).

What are your expectations from the upcoming policy review by the Reserve Bank of India (RBI) keeping in mind the IIP numbers for August released on Friday?

I don’t think that the market is expecting a cut this time. Recent measures to cut the subsidy will definitely have a bearing on inflation, which as is not yet under control. The central bank may cut rates in December when it has a firmer grip on inflation.

By the end of the current financial year, we hope to see a cut of 100 basis points (bps), but I expect this to happen in the January – March quarter. However, in the immediate term, do see interest rates softening given the falling credit growth and deposit rates remaining unchanged.

Infosys has kick-started the Q2FY13 results season on a disappointing note. Do you think results from other large-cap information technology (IT) companies will be better? What about the mid-caps?

Infosys has been disappointing since the last few quarters, while its peers have continued to perform well. So, this is an Infosys-specific problem. I don’t think that the company’s results are a reflection of the performance of the sector as a whole. I think that the rupee will continue to be weak, and in that sense, the IT industry will continue to grow at a decent pace. Resolution of issues in the US and euro-zone will also aid performance.

What are your top buys and sells in the current markets?

We have equal weight on defensive sectors like fast moving consumer goods (FMCG) and pharmaceuticals despite steep valuations. I think the growth story here will continue. On dips, I recommend buying ITC. Lupin and Cipla are our favourite bets in the pharmaceutical pack.

We also like the IT space and here we follow a top-down approach while selecting our picks. We also like the interest rate sensitive stocks and capital goods. Companies like L&T, Crompton Greaves and Voltas can give a good return from here on from a 12-month perspective. Among banks, we prefer ICICI Bank and Axis Bank. I would advise investors to be over-weight on rate sensitive sectors.

And among the mid-caps?

Mid-cap stocks, I feel, will outperform going ahead. However, one has to be very careful while investing in this space. United Phosphorous and Ashok Leyland are a few stocks that we like.

Fertiliser and sugar companies are back in the reckoning after the urea price hike and sugar sector decontrol talks. Do you think that these stocks are a good bet at the current levels?

Sugar and fertiliser stocks will take time to recover. However, basis the valuations, they appear to be a good bet if one wants to hold for two years.  Stocks such as Shree Renuka and GSFC would stand to benefit the most with a turnaround in the sugar and fertilizer sectors’ fortunes.

From an investment perspective, can you highlight the returns that one can expect various asset classes over the next two years?

I do not advocate investment in gold at these levels since it has already seen a sharp appreciation. Maintaining the same rate of return as seen in the last three years going ahead will be difficult. Over the next two years, equities (15% return) and real estate (over 17% capital appreciation plus 4 – 5% rental yield) will outperform gold and silver.