Q&A: Motilal Oswal, Motilal Oswal Financial Services

The effect of the global economic crisis on India will be much less than that of the developed economies, says Motilal Oswal Financial Services CMD Motilal Oswal. On the sidelines of a five-day Global Investor Conference, he tells Ashish Rukhaiyar that while foreign players are ready to invest in India, they are worried about inflation, high interest rates and corporate profitability. Edited excerpts:

Markets have corrected in the recent past, but investors still appear wary.
Investors are ready but the question is when the markets will stabilise. While everyone knows there are problems globally, they feel India could see a lesser impact. My belief is that even if interest rates go down, by a small quantum, we would see huge inflows in the Indian market. One thing is for sure, that what is happening on the ground is much better than what is being made out. It is a challenging environment, no doubt. There is a fear that growth will not happen the way they were expecting. What we are saying is that corporates are ready to spend, their business is going on as usual, even while there has been an impact of higher rates and oil. For instance, Bharti raised prices after 7-8 years. It is a good sign. I think there is some perception reality gap.

What are key worries for investors?
Foreign investors are most worried about inflation, interest rates and corporate profitability. We are already seeing shrinking margins. But yes, they are still excited about the India story as they think India’s relative performance will be good. In a worst case scenario, they expect India to grow at 7.5-8 per cent.

Are foreign investors worried about the Anna Hazare movement? What could be its impact on the market?
Indians know that corruption is a big issue. The good part is that we are looking for some kind of a solution. I do not expect any big impact on the economy or even the political establishment. There is no question mark on the Lok Pal, it is the form that is being debated. Global investors also ask us about this issue. Whatever they know is based on media reports and they ask us more about the ground realities.

In the recent past, we saw a few brokerages downgrading the earnings projection for Sensex companies. What is your take?
We have also done some downgrading but we feel this year the earnings growth will be 16-17 per cent for Sensex companies. This is lower than the 18-19 per cent expected earlier, so there has been some downgrading. I think no one expected interest rates to rise so much. But, there are some silver linings even while we talk about downgrades. The monsoons have been good, domestic consumption is holding up, corporates are currently better prepared than they were in 2008 and international commodity prices are now coming down, which can result in lower inflation and interest rates. We should also remember that foreign direct investment is still coming in.

Given the current valuations, which are the sectors you would advise your clients to look forward to?
Banking looks good at the current levels, though some brokerages have downgraded the sector. Select auto, telecom and FMCG companies are also attractive. IT looks good, though there have been some sector downgrades. We still maintain a ‘hold’ rating on the IT sector. On the other hand, infrastructure and real estate suffered the most. There are two reasons — high interest rates and government inaction. But, I think current levels provide good opportunity to look at some of the large, reputed companies.