Q&A: Nirmal Jain, Chairman, India Infoline

'One should diversify assets'

The swift rise in key asset classes like real estate, gold and stocks worries Nirmal Jain, chairman of India Infoline (IIFL), who founded the Mumbai-based financial services firm more than 10 years back. The alumnus of IIM Ahmedabad, who started his career in 1989 with Hindustan Unilever, says in an interview with Mehul Shah, that one needs to diversify and expects the Sensex to go past 25,000 in the next year. Edited excerpts:

The market is nearing its previous highs. Is there any fundamental justification for this kind of movement?
Fundamentals do justify. India’s macroeconomic fundamentals are very good. The economy can now sustain growth of 8.5-9 per cent a year in real terms for the next five to 10 years. This has started in the past five years. In the early first few years of eight-plus per cent growth, people were sceptical and thought this may not sustain when the monsoon was bad or if there was a global financial crisis. But, that has not happened. Now, most global investors have started understanding and are having more confidence that this is a sustainable growth rate.

This kind of sustainable growth can do magic to the economy. In real terms, the economy is already $1.2-1.3 trillion, which in 10-12 years can become a $4-trillion economy. It is a very significant thing. Other than macro, if you look at corporate earnings, they will also sustain a 20 per cent growth rate. In the world, there are very few economies or markets that can give you this kind of growth. So, equity capital will tend to flow more towards India.

There will be concerns about hot money and money that can move out because of an event risk. That risk is always there because if the market rises at this speed, it can always hit a speed breaker and wobble. But, if you are an investor for 5-10 years, you don’t have anything to worry. You can actually look forward to very good returns from Indian stock markets.

So, in case of a major event risk, how much downside can we see in the market?
I would say 10-15 per cent.

Can we expect the Sensex to go past its all-time highs before Diwali?
There is a good possibility. By this financial year, certainly, we should see it. In the next one year, the Sensex can go up to 24,000-25,000.

However, one worrying thing is that all key asset classes are in a phase where they are rising very swiftly, to the extent of bubble proportion. Real estate is bubbling. Gold is going through the roof. The stock market is also going like this. We’re again back into the asset inflation-led scenario. Structural adjustment of the global excesses which started in 2007 is not over. We will probably see some more accidents, some more problems, over the next 5-10 years. So, one key thing is that you should diversify your assets. Equity will still be safer in the India context. But you should diversify in equities, fixed income, real estate and gold.

Any sectors or stocks investors should avoid?
I am still a bit sceptical about the real estate sector, although it is doing well in real terms. The problem with the sector is that most companies have huge debt and a very complicated structure of subsidiaries. Other than that, on commodities I would be sceptical because, globally, so many things can go wrong. It is better to invest in domestic or inward looking companies in sectors like FMCG (fast moving consumer goods), automobiles, auto ancillaryies that are more dependent on local automobiles, and banks. These are better sectors.

Auto and banking stocks have already run up quite a lot. Is there further room for them to go up?
I think the larger stocks have some room. Stocks like Tata Motors and Bajaj Auto still look good. In PSU banks, there is still some room. People should look out for opportunities in corrections but there are still opportunities.

Most retail investors have not participated in the rally. Should those who missed it start investing now or wait for a correction?
Retail investors missed the rally because they were very sceptical after having burnt their fingers. My view is that Coal India can be the game changer. This is a good IPO, unlike some earlier large issues which were exorbitantly priced. It is a fundamentally great stock. Pricing of the issue is fairly good. Investors will get allotment in this IPO and, hopefully, will make money. That will give them more confidence to come back to the market.