While China will continue for some time to be a pain area for global markets, as its issues are structural, India is cushioned if reforms are implemented, says Dharmesh A Mehta, managing director and chief executive officer, Axis Capital, the country's top investment bank, in an interview to Rajesh Bhayani. He also believes 2016-17 will see several good initial public offerings of equity. Edited excerpts:
How did Axis Capital manage to top the league of investment banks in a short span of time?.
Enam/Axis Capital was always the leading investment bank. We continued the same journey and the dominance is much stronger. Axis Capital was Number one last year, with 20 equity capital market deals, 19 merger & acquisitions, six structured finance and three private equity (PE) transactions, the most anyone has done. Our better execution skills have resulted in this success and we have a very good team.
What are the prospects for fund raising in 2016, given that the year has started with poor sentiment?
You will witness higher equity fund raising, with large-size deals to hit the market from the insurance, telecommunication and infrastructure verticals. The outlook is very positive, though most of these will come after the financial year begins in April. Even debt raising can be higher, once the confidence in India is back, making Indian paper attractive after risk reduces.
How long will China continue to haunt global markets?
China's issues are structural and will take a long time to resolve. Hence, there will be more pain. However, for India, this is a good time as we are not impacted by the factors plaguing China i.e. shrinkage of global demand and a dire need to shift its growth engine from exports to domestic consumption. Lower commodities and oil prices are good for India's twin deficits and inflation control. China, Brazil and other economies are in trouble because of lower global demand and low commodity prices but India will be a beneficiary, provided the right things get done in the right manner.
China's issues weigh heavily on index heavyweights like metal companies. Even banks have not done well.
That is why I say, don't look at indices only to gauge India's performance. There are opportunities outside it. Banking should be a favourite from a valuation point of view. All woes like non-performing assets (NPAs), etc, are expected to bottom out. The Reserve Bank and the government have taken the lead in addressing the NPA issues. (The) Risk to reward (ratio) is much better in banking. Reliance, a heavyweight in the Sensex, is another large beneficiary. While pharma and consumer stocks continue to be favourites, I think this year belongs to Reliance, banks and infra plays, with the government pushing the reform agenda.
In the near term, with sentiment negative, there is talk of the Nifty falling to 7,000 levels. Your take?
Short-termism is traders' point of view, which investors should not look at. Short-term issues in the market keep changing. Last year, the market kept fretting about the US raising rates but after one hike that happened eventually, no one even talks about it. So, short-term problems and opportunities keep changing. Even in India, everybody wanted interest rate cuts and despite 125 basis points of rate cuts by RBI, the market later fell.
The focus now has to be on reforms and governance, which should result in demand being created. The government will have to take the lead in revival and we are already witnessing this in certain sectors.
Is the market turning cheap from a valuation perspective?
I would say the Indian market is not expensive, currently trading at 16 times the FY16 earnings. However, when you look at it from next-year valuations and if you think the reforms process will fall in place, then the valuations at 13.5 times the FY17 earnings look cheap. Importantly, the economy has to do well to see earnings improving and there is enough money to be made in the market.
What will trigger the next up-move for Indian equities? Earnings?
We are very good in acting in a crisis. There is a global crisis and lower confidence locally. Hence, government will take steps to counter the slowdown due to global and other factors. No, earnings won't be a trigger but the budget could well be. There were no expectations from the December quarter earnings. However, the Union Budget, which should ideally be a non-event, will be keenly watched this time for clues on how the reform process moves and how dynamic it turns out to be. There could be capital market sops to spur savings and rural props to support broader demand. It could also reinvigorate the capex engine through various measures and take the lead in kick-starting infra spending.
Importantly, the earnings this season would be muted. In fact, we estimate zero growth in earnings along with only one per cent top line growth and flattish margins for our coverage (163 companies, excluding the oil marketing companies). Everyone is buying India for FY17/18, not the current year. Come April, India will suddenly look cheap.