India is likely to come back to higher growth trajectory in next three years, believes Rakesh Arora, MD & head of Research, Macquarie Capital Securities. In an interview with Devangi Gandhi, Arora says cyclical companies still look attractive given their historically low relative valuations.
How do you think the December quarter results have played out so far?
The expectations from this quarter were not very high as the earnings growth was seen advancing by 8% to 9%. Though largely results are in-line with expectations, after a period of two years, very evidently upgrades are seen equaling downgrades during this quarter. There is a high possibility that the upgrades would continue as the expectations getting into 2013-14 are extremely conservative. The street is expecting about 13% of earnings growth based on flat Ebitda margins and close to 9% of revenue growth. As soon as the interest rate cuts accelerate and the benefit of lower non-food inflation gets reflected in the Ebitda margins, the momentum of upgrades may rise.
What is your expectations on the growth momentum given the grim outlook on FY13 GDP numbers?
There are few government measures which make us confident on the growth returning to 8%+ trajectory in next three years with the backdrop of past reforms measures and their impact on the GDP numbers. The key reforms like having cash transfer subsidiaries, cutting down fiscal deficit, possible implementation of GST and also railways getting back on track could propel India towards higher growth. Based on, historical regression of the GDP growth and market multiples, the current price to earnings ration seems pricing in 6% GDP growth. Our estimates is of 6.7% GDP growth in the next fiscal which would then extend towards 8% or higher trajectory in the next three to four years. Hence we see the P/E multiple to re-rate significantly form the current levels.
Do you see FII inflows maintaining its pace during rest of 2013?
In the near term we are expecting the FII inflows to continue strongly mainly because we see the quantitative easing the foreseeable future given the targets set in for US unemployment rate are unlikely to be met in next one year. Also, globally there is a big shift happening globally from bonds to equities that is already evident in 2013 so far as the fresh flows in the equities have surpassed that in bonds for the first time in many years. India may continue to get a major share of this inflows as the initiated reforms agenda also adds to its visibility in terms of an improvement in the GDP numbers going ahead. Historically, we have seen that whenever FII inflows are stable which is the case currently, they are quite sticky because of their long-only in nature.
How soon do you think the investment cycle would revive?
The projects under completion have jumped up quite meaningfully in the recent past but new order inflows are coming at a slower pace. The impact of measures taken in the last four months has thrust sentiments but are yet to result into private sector raising its capex activity. From our interaction with the industries we infer that inquiry levels have improved, and order inflows are likely to pick up in the next one or two quarters. The improvement in order inflows in sectors like cement, captive power etc is likely to trickle down in other industries also as government has cleared the new fertiliser policy. Clearance of the gas pricing issue could also generate more orders in exploration while the new steel policy if gives clarity on allocation of iron ore resources, could also aid inflows.
How are you treating interest rate sensitives or cyclical sectors?
We are very bullish on real estate, auto and banking stocks to play the interest rate cut expectations also as they are likely to benefit from the revival in demand that would set in post the rate cuts. Even high leveraged companies from the real estate sector would benefit from both, higher revenue growth and lower interest rates aiding their profitability. The current momentum on these stocks is just a beginning of interest in these stocks and investors could look into buying these stocks at dips. Even in valuation terms, the relative valuations of cyclicals against defensives is near a twelve year low and compared to market it is at a ten-year low. So they appear hugely undervalued at the moment with expectations of another 35% cut of earnings cut which we don?t think can materialise.
Do you think the market may get volatile pricing in populist measures in the coming budget?
We think that chances of large populist measures from upcoming budget are remote given that time and again the FM has reassured the foreign investors of the government?s intention to contain fiscal deficit even in the next fiscal. Also, the execution of cash transfer subsidiaries in itself is a populist step that reduces the potential of other populist measures to come in. We are expecting only one such major scheme in the form of food security bill that we think will come in a very water down format and more target oriented. There also could be a lot of blending of the existing schemes into one big scheme as suggested by an expert committee.
