Gautam Trivedi, Managing Director and Head of Equities at Religare Capital Markets remains fairly bullish on Indian markets and expects strong FII inflow in India. He expects 100-125 basis points rate cut in 2013 and favours cyclicals as against the defensives. He also likes high deb companies focussed on deleveraging by selling off assets. In conversation with Sheetal Agarwal, he talks about the outlook for 2013 and themes to focus on from here on.
What will be the impact of US’ fiscal cliff issue on India?
A lot of US companies are putting off capex and postponing hiring until the fiscal issue is resolved. Thus, in December 2012 quarter as well we would not see any dramatic increase in topline of any of the Indian IT companies. I think to some extent that will also impact fund flows albeit only marginally.
What is your outlook on FII flows in India in 2013? How do you rate Indian markets versus other emerging markets?
Right now the mood to put money to work in India is actually huge. India has had a great run this year in dollar terms the markets are up a whopping 24%. So it has been the best performing markets in Asia by far, outside of Thailand and Philippines. India has accounted for 40% of all the FII inflows into Asia including Japan. I remain fairly bullish and expect strong inflows this calendar year as well.
At 12.5-13 times FY14 earnings, Indian market is not expensive at all relative to peers. We are still looking at about a 14-15% earnings growth given the low base this year. Throughout this year, India’s PMI has consistently been in the 52-54 range whereas China only recently made it to 50 and was below 50 the whole time. So as a function of that we think that India is very well positioned vis-à-vis other emerging markets.
Outlook on Indian markets for 2013?
We are actually very positive and I think Indian market has another 15-20% upside in calendar 2013. The VIX is at a life-time low of 15. So its not like the markets have been hugely volatile and I take that as a positive. Another factor in our favour right now is the fact that commodities are still very cheap so hopefully they end up bringing inflation down further. Further, RBI has not even started cutting rates dramatically, so if inflation remains benign and/or the RBI realises that we have to live with a higher level of inflation than what India was used to, the RBI will invariably cut rates. We expect a 50 basis points cut in rates by March 2013 and another 50-75 basis points cut in remaining part of 2013. If that happens, I think it will be a huge positive for India.
Which sectors are you bullish on right now?
We like cement sector. For the second quarter I think the minimum year on year growth in profits was 100% for cement companies. Also, the upcoming state and general elections would lead to higher cement consumption. We also like media and are selective buyers in the Auto space. We like two-wheelers like Bajaj but not Hero as it is significantly losing market share to Honda. We are still not very positive on the Indian domestic CV market and the pure play there is Ashok Leyland. We like Maruti but I think its run up a fair bit and I think a lot of good news is right now priced in. I think the bigger theme for 2013 will be to focus on stocks that have high debt and are looking at shedding assets. Wockhardt is a case in point – the stock is up 5 times this year as it successfully de-leveraged its balance sheet. So I think if companies with high debt wake up to the model that Wockhardt has followed these stocks could run up significantly. DLF and Jaiprakash Associates are other such stocks.
The Jaiprakash stock has surged from 60-65 levels to now 100. We believe it could go to 120-130 at-least as it seems to be serious about selling off its cement business.
Which are the sectors that you want to stay away from completely?
Some of the defensive names like ITC and Lever have had a good run and are very expensive now, though we do like a stock which is expensive is United Spirits. I think the defensives have done well this year are expensive and its time to book some profits and move into the high beta. Real estate again I think one has to be very selective. The other sector which I am not seeing evidence of yet picking up is capital goods. I think that recovery is some time away and the actual orders will take some time to come through. We prefer to stay away from Telecom sector. We don’t think anything is happening in the IT space at the moment. Mid cap IT stocks have hugely outperformed and I think the party in the midcap IT space is over. We still like Satyam as the TechM-Satyam combine is trading at a 30% discount to the big four, which is completely unwarranted. Satyam still gives a 2% arbitrage in term of getting in, so that’s a better way to play it until the merger consummates.
What are your areas of concerns right now on markets as well as macro front?
Indian market has been supported fully this year by the FII flows which could be affected by any unprecedented negative turn of events globally. Secondly, we do need to see return of the retail investor - that clearly is a cause of concern. Though retail investors have through mutual funds sold year to date over 10 billion dollars, we are now seeing some signs of retail interest coming back in the futures segment in mid-cap stocks trading below Rs 100 a piece. Third, we are not seeing evidence of return of the private sector capex. The fourth critical factor is the ability of the government to tackle the fiscal deficit. We just hope that in a pre-election year the government does not go berserk and starts writing off loans and does thousands of crores of splurging. As long as that does not happen I think we are on a very good course the next year.
Which sector do you rate as the next sunrise sector?
I think one of the most under-owned sectors this year and yet the best performing sector has been media. The digitisation theme has been the only successful piece of legislation that’s made it through parliament and got implemented. TV 18 is one stock we are very bullish on, though we don’t cover it. This company is going from EBITDA negative to net profit positive. We like Hathway in MSOs, in the DTH space we like Dish TV, broadcasters we like Sun TV over Zee because Zee I think has launched more channels every time it has cash in its kitty. So the cash-flow ends up getting used in that. But it is still a good company and will remain a beneficiary because it has got the largest suite of channels. I think FY14 and FY15 will be the two big years where you will see literally an explosion in the earnings growth for these companies.
