Q&A: Ridham Desai & Chetan Ahya, Morgan Stanley

'Confidence in growth is the biggest capex trigger'

On the sidelines of Morgan Stanley’s 13th India Summit 2011, Ridham Desai, head of India Equity Research, and Chetan Ahya, Asia Pacific and India economist, shared their views on the outlook for India’s economy and equity markets with BS Reporters. Edited excerpts:

Do you think Indian equity markets have discounted expected margin pressures?
Gross margins for Indian companies are at a decade’s low, as companies have not exhibited pricing power. However, we feel this will be arrested and the margin fall seen over the past one year will slow down. We may actually see margins go up. This, we feel, has not been priced in by the market.

How do you see the FY12 panning out?
The second half of FY12 will be much better than the first due to the base effect. There will be mild acceleration in the next two to three quarters, which will get more pronounced in the second half. However, this is based on the assumption that commodity prices will not go up sharply from the current levels and oil prices are stable.

Which is the bigger trigger for revival of capex, which has slowed down — commodity prices or interest rates?
Actually, confidence on growth prospects is the biggest trigger for companies’ investment decision. Between commodities and interest rates, the former has a larger bearing.

What is the outlook on the rupee and bond yields, which hover around 8.5 per cent?
The rupee is expected to remain stable over the next one year, as the current account deficit is expected to be 2.5 per cent of GDP, which is still manageable. Bond yields will also remain in the range of 8.5-8.75 per cent.

Which sectors should investors buy on dips? Which ones do you think should be avoided?
From a long-term perspective, we are bullish on consumption and investment themes. For the short term (12 months), we are positive on industrials (engineering, capital goods and infrastructure) and constructive on autos, as we feel interest rates have peaked out. As regards sectors to be avoided, we are less positive on materials and consumer staples.

Why are you positive on small-cap stocks when they are at greater business risks in a slowing economy?
From 1-1.5 year’s perspective, we are positive on small caps, as on a relative basis they have penetrated December 2008 lows. Their valuation at sub-10 times is attractive.

What according to you, should the government do to revive capex?
The government needs to speed up steps on infrastructure spending, foreign direct investment in retail, auctioning of coal blocks and timely clearance of projects.