In India for more than a decade now, Andrew Holland has watched the Indian stock market from close quarters. After a long stint at brokerage Merrill Lynch, Holland recently moved to Ambit Capital as CEO-Equities. Ask him what has changed most about Mumbai in all these years and he’ll tell you it’s the number and variety of restaurants; while in the 1990’s it was just Trishna and Trattoria and a few others in the five-star hotels, today there’s an Indigo, more Lebanese and Japanese joints and also many lounge bars. In a conversation with Shobhana Subramanian, Holland says the Satyam fraud shouldn’t really hurt corporate India’s reputation too much. As for the market, he says earnings for the Sensex stocks in 2009-10 could fall to as low as Rs 650-700. That’s down a fifth from the current consensus of Rs 860 for 2008-09, and around half from the consensus estimate in September last year.
What do you think has changed in the stock market since the early days?
Well, when I came here in1997, India was really not on the foreign investors radar, nobody thought it was going anywhere. I remember, we did a couple of conferences in Delhi and Bangalore and the total number of investors was 12, of which six were FIIs. At the time, the bigger foreign investors were GIC, Capital and Schroder. Obviously, everyone knows the India story now and as a result of strong GDP growth and corporate earnings, FII inflows and the breadth of clients have steadily increased over the years.
Will the recent terrorist attacks hurt India’s reputation as an investment destination?
Foreign investors have been living with terrorism in the US, UK and Europe for some time now and while the recent attack in India had a short-term negative impact, it did not last for long. Investors continue to look at the long-term fundamentals of a country. Obviously if there is a belief that attacks would continue on the same scale and on a regular basis then this would be of concern to the investors, but again this would be factored into how GDP may be affected on a long-term basis. So the recent attacks may make FII and FDI investors somewhat more cautious but will not hurt India’s reputation as a long-term investment opportunity.
War is good for the markets, isn’t it?
(Laughs) Usually you have to rebuild all your roads.
What do make of the $500 million FII inflows in December?
I think that would be short covering, it’s difficult to work out how much though. But $500 million out of net sold amount of $13 billion in 2008 is a small amount. So there could have been a bit of cherry picking. But, I don’t see that foreign investors would have, all of a sudden, fallen back in love with India.
So how do you read the Indian market over the next six to 12 months?
From a global point of view, I don’t think the problems are over yet, and global markets could test new lows. And that will highlight the risks and people will take some more money off the table. Today, there’s nowhere to hide really, it’s not as though you can buy gold or commodities, there’s no real asset class that one can invest in.
What usually happens, in my experience, is that when interest rates go all the way down, it’s really the treasuries where you make money, then you move towards corporate debt (AAA paper), make money, and then you finally get to equities. But corporate debt rate spreads are still high, so there are still some problems out there. Treasuries have been the safest haven so far, and that should be followed by money in corporate paper, but that’s not happened yet.
Do you think the fall in corporate earnings is built into the prices?
We came out with a report in September-October last year when the consensus earnings for 2008-09 was about Rs1,200 for the Sensex — we came with a figure of Rs 800. For 2009-10, we came out with Rs 750. I think GDP growth could actually be five per cent or below in 2009-10, and if that proves correct our EPS of Rs 750 could be still too high, it could be between Rs 650-700.
Won’t the monetary stimulus have an impact on the economy?
Are you spending more than you did a year ago? You can’t suddenly give people confidence because interest rates have fallen. So even if you’re not too leveraged, you don’t spend so much, you save. The banks aren’t lending to everybody and neither should they be since that’s how the problem started in the first place. Corporates themselves are now saying we’re not going to spend on capex, we’ll see how the economy goes. So, you can’t blame the banks, nobody’s borrowing. This stimulus package is all very good but it has come too late and then you have to implement it. How long does it take to put up a power plant? A long time.
Is it going to be some time before things get back to normal?
The financial services industry has been hit and now it’s hitting the corporate world and the consumer, You won’t get to see confidence for some time, for a long time. We haven’t really seen pain in terms of earnings in emerging markets, we haven’t seen any particularly bad quarter. Managements till recently were saying it’s alright; prices are falling but we have cash flows. Now reality is starting to bite in India with people losing their jobs and beginning to take pay cuts.
What do you make of corporate governance standards in India?
Corporate governance in India has been relatively alright. You’re always going to get companies that are trading at a discount partly because of the lower quality of corporate governance. Within a sector, the companies with better corporate governance will get a premium. But I don’t think India as a whole needs to be downgraded because of one instance. It’s not like Korea, which trades on a discount, because of corruption that seems to occur on a reasonably regular basis.
Do you think foreign investors are happy with regulators?
I think what’s happened over the past five to ten years is that institutions have taken on the role of corporate governance without necessarily waiting for the regulator.
So when do the markets turn?
I hate to be pessimistic because that’s not me, but the first quarter will be bad. My biggest concern for India is we have the elections coming up — the outcome is not so important, the concern is how delayed the policies are going to be. For now, I’m discounting the emergence of a Third Front, though I could be wrong. But the market will discount that unless there’s a complete shock during election time. But if policy implementation is slow, then GDP will definitely be negatively impacted and that would again impact earnings.
Are you looking at any specific policies?
The reform process has to continue in the financial services sector.
