Whatever Fed does, I don't see people selling off India: Motilal Oswal

Interview with chairman and managing director, Motilal Oswal Financial Services

As the markets gear up for the outcome of the US central bank meeting on Thursday, Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services, believes even if the bank raises rates, the markets will not fall dramatically. An interview with Puneet Wadhwa and Vishal Chhabria. Excerpts:

 

You recently held a global investors’ conference. What are your key takeaways?

The conference was well attended, with 120 Indian companies and over 700 investors from across the world. I perceived a lot of optimism but received mixed views on the recovery timeline and earnings growth. The outlook for metals companies, especially steel and aluminium, appears uncertain, given the developments in China. Telecom companies are optimistic on the road ahead. Corporates are happy that the government is listening to them actively and decisions are being taken faster.

This optimism is not getting reflected in foreign institutional investors (FIIs), who have been big sellers.

Occasional selling by FIIs, who have been buying Indian equities for several months, is natural. I wouldn’t read too much into their recent selling. FIIs are optimistic about India, given the relative growth here as compared to the other markets. The government is also doing all the right things. The direction of a lot of flows will also depend on the interest rate decision by the US Federal Reserve.

What if there is a rate increase by the Fed this week?

The uncertainty will be over. My sense is that even if they increase the rates, it will not result in a dramatic fall in the markets. It is better that this uncertainty gets cleared, sooner rather than later. I feel the FII flows will resume after this event and the markets will stabilise. I don’t see people selling off India. Rather, it is a question of when they buy and how much they buy.

Did you utilise the recent correction to add to your portfolios? Are there any redemption pressures in your equity related schemes?

It is difficult to time the market and we never predicted such a dramatic fall. Having said that, we are not facing any redemption pressure.

The July quarter put a dampener on corporate earnings. Could the September quarter be worse? By when is an earnings pickup likely?

The earnings momentum is getting postponed. We had earlier thought that the September quarter should be able to give us some visibility of an improvement in earnings. However, this doesn’t seem to be the case. One must also remember that we started from a lower base. I expect an improvement from the December quarter. This financial year, we expect a 10 per cent growth in EPS (earnings per share) and remain optimistic for 18-20 per cent growth next year.

But a lot of brokerages have lowered their earnings forecast to single digits. How do you respond to that? Where do you think will this growth come from?

Like I said, this year the growth should be around 10% and should pick up to 18% – 20% in the next year. Last year, the growth was stagnant. We think information technology (IT) and private sector banking companies should show good growth. Two-wheelers are already showing a good growth. Telecom companies are also doing better than before. FMCG (fast moving consumer goods) and pharmaceutical companies should also grow well. The biggest growth, however, will come from the oil marketing companies (OMCs). Having said that, the four-wheeler pack may not be able to show exciting growth numbers. Here, Maruti Suzuki is an exception.

Markets were optimistic about when the new government assumed office. This ‘hope rally’ seems to be fizzling out. What have been the key areas of disappointment?

We all thought that the new government, over the next few months, will go big in terms of infrastructure spend besides other things. But it took a lot of time to take control. Having said that, there have been bright spots as well. Coal allocation policy, for instance, has seen a change. The government has now started pushing in money into the infra sector, especially on the road construction side.

One thing we didn’t see coming was the serious collapse in the commodity prices. While the fall in oil prices is a boon, the fall in metal prices has not augured well for manufacturers like Hindalco, Vedanta etc. Steel and aluminium producers will be negatively impacted by all this.

But there is a general sense that the Narendra Modi government hasn’t done much to kick start growth.

I think the initial pace was good. The government brought the Insurance Bill and the Coal Bill. However, post that they could not push the GST Bill and the Land Acquisition Bill in the Parliament. So whatever is in their hands, they have done. But the big ticket items – the Land and the GST Bills – are still pending; and that’s where the disappointment is. Another disappointment is that while the inflation has come down, the interest rates haven’t come down much. At a time when the oil prices are down and the government has been able to manage its current account and the fiscal situation well, there was an expectation that the RBI will also cut rates.

Can you explain the strategy of getting into housing finance business? Is the increase in debt in your balance sheet attributed to a foray into this segment?

We have put in over Rs 200 crore into housing finance. (Regarding the debt), our whole proprietary investments book has changed. Earlier, the excess capital we were deploying through the futures and options (F&O) route. Now that capital, around 50%, we have put into the stocks and our own mutual funds. For the working capital, there will definitely be leverage in the short term.

So the increase in the debt increase is due to the increase in the working capital requirement of the business. Though we have an approval for Rs 300 crore, we have deployed only Rs 200 crore till now. In the cash arbitrage business, the post-tax yield was around 6%-7%. While we are advising the world to invest into equity as an asset class, it makes more sense for us to also deploy our excess funds there. We may deploy more funds in the housing finance business going ahead.

What made you diversify into an unrelated area like housing finance? What is the strategy here?

All our businesses are cash generating. So, either we retain the capital or deploy. Since the businesses are cash-rich, we need a vehicle to redeploy those funds. We looked at businesses related to the financial services segment. Instead of lending to gold or small-scale industries, we thought of tapping a segment where penetration was still low but the potential is huge and one can further leverage on that.

Housing finance is a high RoE (return on equity) business and it is a good capital deployment strategy as far as we are concerned. One can put as much capital as one wants. Compared to the global trends, mortgage businesses are very small. The overall industry is growing at 22 to 23 per cent. We are in the low income/affordable housing segment, which is growing even faster. There is no shortage of demand but there is a question of how you manage your risk.

But, builders are sitting on huge inventory. What explains the slack demand there?

That’s in the case of large metros. In the affordable housing segment, the average size is around Rs 10 lakh. With the government’s thrust on housing and in the affordable segment, this will grow. It is the higher-end segment where there could be an inventory pile-up issue.

How has the digital (mobile) strategy played out in your businesses?

We have been using digital platforms in our broking business for some time. In retail broking, we do about 25 per cent of our volumes seamlessly online. Our mutual funds business, however, is happening largely through distributors.

With your other businesses growing fast, what is the revenue mix you are expecting a few years from now?

Currently, equity broking contributes about 60 per cent. A few years down the road, this could decline to 40 to 45 per cent, with housing finance, asset management, investment banking, etc, contributing the balance.