The first two quarters of the current fiscal year may remain difficult for corporate India, says R Sreesankar, senior VP & head, institutional equity, Tata Securities. In an interview with Devangi Gandhi, Sreesankar says that in the second half of 2012-13, inflation my abate as a result of slowing growth, resulting in lower interest rates.
The market was disappointed with the RBI keeping interest rates unchanged. What is your outlook on the interest rates?
In the recent past, we have seen the economic growth coming down to lower levels than expected. This slow-down is likely to have an impact on the inflation trajectory. With growth slowing down, the inflation level also cannot stay elevated. Further, international prices of crude oil, which is the key driver for India’s fiscal deficit with more than 80% of total requirement being imported, have been coming down sharply. This has lowered the future inflation expectations. These developments would have an impact on the policy rates going ahead when the interest rates fall in the comfort zone of the RBI. While the first two quarters of the current fiscal year are expected to be difficult, things may start improving in the last two quarters, starting with the inflation coming off that could result in the interest rates coming down.
Indian equities are believed to be attractively valued currently…
The market actually starts to discount what will happen in the economy six months down the line. If one believes that there is going to be sustained growth in the economy, the earnings growth momentum will result in an appreciation of the stock price along with price-to–earnings (PE) ratio expansion.
In absence of growth, however, stocks may trade at lower valuations for longer period. For example, most banks are trading at attractive valuation and, going ahead, the NPA levels do not look rising substantially. So, for an investor who is bullish on the long-term growth story of India, banking stocks look very appealing at this juncture. The real problem at this point is, however, low spending. When the spending cycle revives, the things could turn in favour of capital intensive sectors, such as capital goods, engineering and infrastructure.
What is your take on the defensive stocks, given that some FMCG stocks are trading at very high valuations?
In the beginning of the year, while FMCG stocks underperformed, they have maintained a strong performance in the last few months. The overweight in these stocks may reduce once the revival in the investment cycle results in a switch towards capital goods and infra companies. However, till the time we see an improvement in the economic growth, from strategic point of view, the overweight on these stocks may sustain.
What is your house view on the market?
The market continues to be in an environment that is very challenging in absence of a clear view on growth. We expect the market to move in a narrow range till the time the spending cycle turns around.
How do you see the European crisis affecting the Indian market? Can it have a similar impact like that of the Lehman collapse in 2008?
The 2008 event was one of its kind, where people lost their confidence in bigger banks present across geographies, which resulted in a fear of the unknown. I think that is not the case today. The current crisis is more country-specific and may not result in a 2008 kind of environment.
The economic crisis in EU, however, could affect companies that have business environment in Europe; a large amount of currency-fluctuations can affect the revenues of these companies. Companies that see a higher chunk of their exports coming from the region may get affected as they may not be able to do much besides offering large sops to their imports as the demand itself slows down.
What is positive for India is that 75% of our economic growth is driven by domestic consumption. However, a slowdown in larger economies like Europe and US could have bigger repercussions on the sectors that are dependent on these markets, in turn affecting the domestic economy.
