Kapil Bali, executive director and chief executive officer, YES Securities (India) tells Financial Express online that PSU banks could still see stress on the asset quality side in the short run and a devaluation of the yuan increases the risk of “dumping” from China which in turn would increase the burden on sectors like metals, tyres and construction equipment.
Here are excerpts from the interview:
Q: Yuan devaluation has heightened global market volatility. How it can impact domestic equity markets?
A: Devaluation of the yuan has lent to volatility in two ways. The first is the impact on the Indian currency.
The rupee too has reacted to the movement in the yuan. While this is beneficial to the exporters in the country; however a sharper than expected decline can be viewed as a short term negative by the markets. What one needs to remember is that this is a natural reaction to ensure that the rupee remains competitive. We believe that the RBI has enough in its war chest to prevent rupee from spiralling downwards. But this is certainly something that would keep short term investors on the edge.
The second impact is more sector specific. A devaluation of the yuan increases the risk of “dumping” from China which in turn would increase the burden on sectors like metals, tyres, construction equipment, etc. Particularly in case of metals and commodities the pain would be relatively more severe. The slowdown in China has led commodity prices to spiral down. Persistent slowdown in demand means that revival in global prices is not on the anvil. Domestic cost of production is higher as compared to that of global peers. As a result, users of metals and other such commodities prefer to import it rather than source from local companies. With the depreciation in yuan, the dumping from China is expected to go up further which in turn would add further pressure on domestic metal companies.
Q: How do you see the first quarter earnings of India Inc?
A. The earnings season has been yet another tepid one for India Inc. Earnings have either missed or just met expectations in most cases. The important thing to note that these expectations were toned down post the March quarter earnings. As such volume growth has remained an issue as demand and investments in the economy are yet to pick up. FMCG companies in particular have benefitted from lower commodity prices which has helped their margins and bottom lines. However, volume growth has lagged behind. Most companies are yet to see visible signs of recovery on the ground. However, they are expecting things to improve around the second half.
Q: Mid cap and small cap stocks have been outperforming blue chips in the ongoing calendar year. What are the reasons?
A: In the current calendar year, we have seen sluggish earnings growth for most large cap companies. On the other hand, mid cap and small cap companies with strong business models have managed to grow their earnings at a relatively better rate. In addition to the earnings growth, there are growing expectations that mid cap earnings growth should continue to outperform that of the large cap names in the near to mid- term. This expectation has in turn led to a re-rating of multiples for most names as well. This has led investors, institutional and retail, to focus on the mid cap and small cap companies which in turn has led to the rally that we have seen till now.
Q: Can you suggest some mid cap and small cap stocks for our readers?
A: We are bullish on Motherson Sumi Systems, PI Industries and Cummins India.
Q: How do you see equity markets movement going forward? Where do you see Sensex by the end of March 2016?
A: We believe that investors should take a long term fundamental view of the markets when it comes to investing as that yields the best returns in the long term. From the fundamental point of view, India and Indian markets are in a sweet spot. There is an expectation of economic recovery driven by measures to strengthen infrastructure, smoothen out supply chain bottlenecks; all driven by the government which is trying to come up and enact reforms that would be conducive to the economic and capex recovery. And these are expected to result in a healthy growth in corporate earnings as well. And it is with this view that stocks should be looked at for investing. Any targets for the broader indices are not very significant because what matters is valuations or the intrinsic value while target are just the price that one is paying for the value. And as far as value is concerned, we do think that Indian stocks and consequently the markets are in a sweet spot to deliver high returns to investors.
Q: Do you expect further rate cuts from the Reserve Bank of India in the next monetary policy?
A: We believe that the continued negative print on wholesale inflation supports the view that the upside risks to CPI inflation remain contained, cementing our view that Jan-16 CPI inflation is likely to undershoot RBI’s 6 per cent target by 40-50 basis points creating room for additional 25 basis points rate cut.
Q: How do you see inflows from foreign institutional investors this year? Can we see some more foreign money inflows this year?
A: Interest from foreign investors appears to have waned off in recent times. Some reasons for this have been domestic as earnings growth has disappointed but the greater factor for this is global volatility. Issues in the eurozone, slide in the Chinese markets and expectations/timing of rate hike sin the US has led foreign investors to remain cautious.
However if we look at the longer term picture, India would emerge as a preferred investment decision for not just domestic investors but also for the foreign ones.
Q: How do you see PSU Bank stocks going forward? Are you bullish on any public sector bank?
A: The reforms announced by the government are a step in the right direction and should improve the overall functioning and quality of PSU banks over time. However this would take time to translate into visible recovery in their numbers. We believe in the short term, PSU banks could still see stress on the asset quality side. But in the long term, these reform measures should help them improve their functioning. This in turn should also help them see better valuations. Currently PSU banks trade at a deep discount to their private banking peers. As an example, SBI trades at a price to book value of 1.32 which is at a discount to banks like HDFC Bank and ICICI that trade at 4.3 and 2.1, respectively.