Expect FII inflows of $30-40 bn per annum for next 2-3 years: Vivek Mahajan of Aditya Birla Money

Indian markets will outperform in the medium term. The recent correction is largely healthy and the mood remains upbeat, says Vivek Mahajan, head, fundamental research, Aditya Birla Money. He tells Ankit Doshi that investors should focus on companies with low debt, spare capacity and relatively better earning visibility. Mahajan, who is in charge of generating research ideas to wealth and institutional clients, expects an inflow of $30-40 billion each year for the next 2-3 years. Excerpts:

How are the Indian markets placed following the US FOMC meeting and other major developments like India-China relations, the Scottish referendum and various geopolitical events. Are markets still jittery?

The recent market correction seems to have its genesis from last week?s US FOMC meeting, which reiterated reversal in interest rates, raising the target rate for CY15-end by 25 bps to 1.375%. The dollar has strengthened as a result, leading to general risk aversion. Given the exuberance in our market over the last six months, the greed and fear factor will make the markets more volatile. But the mood is upbeat at the core among large investors. We strongly believe that weaknesses will be bought and India will outperform in the medium term.

What are the key events in India that investors are watching. Will the RBI policy be a non-event? What about the state polls?

Investors will be eyeing the stance of the RBI governor. The RBI has highlighted the risks of rapid tightening by developed markets after adopting a loose monetary policy. Tightening could add to the volatility of the EM currencies. However, governor (Raghuram) Rajan has stayed ahead of the curve by keeping rates high and stacking up forex reserves.

An early resolution on the allocation of natural resources (coal and gas, and decision on gas pricing) with the concerned parties is key to instilling investor confidence. This is after the Supreme Court decided to deallocate all private coal mining permits and impose a $1.3-billion penalty, which will have a significant impact on metal and power companies.

The outcome of state elections is yet another event likely to have a bearing on the market sentiment. If the BJP and allies win comprehensively, they would have larger representation on the Upper House going forward, which is good to have from a legislative perspective.

The result season also kicks off in two weeks. As far as corporate earnings are concerned, we expect significant re-rating. You could see upgrades as early as this quarter. This will further strengthen the overweight stance on India and confirm that India is among the best emerging market destinations to invest.

What is in store for Indian equities for next 6-12 months? From a longer-term perspective, there is a lot of noise about a possible bull run in Indian equities, one that is going to be bigger and longer than the previous run in 2003-04 to 2007-08. What’s your view?

After a decisive election victory, the new government is well placed to pursue reforms and lead a massive turnaround in the economy. Reforms will spur investment ? both in the infrastructure and manufacturing space. Brent crude has fallen to lowest level in two years, which relieves the pressure on twin deficits. Sustained low prices can quicken the pace of fuel reforms. FY16 GDP is expected to go past 6.5% when benefit of reforms begins to trickle in. Nifty earnings are expected to see a CAGR growth of 18-20% over FY14-16. So, after accounting all of these, we expect Nifty to double by March 2018. The change in sovereign rating, after the change in outlook by S&P, will be the icing on the cake. We are placed somewhat similar to 2010 when the world around us was not doing great, leading to benign commodity prices, but the domestic demand was strong.

How are you devising your long-term strategies. What are you recommending to your clients?

Investors should focus on companies with low debt, spare capacity and relatively better earning visibility. Earnings and multiple expansion happens simultaneously. From top down approach, exporters are leading the charge with pharmaceuticals, textiles, automobiles and engineering sectors doing phenomenally well. With domestic recovery starting, these sectors are the best bet.

How are institutions looking at India after May 2014, especially the foreign ones? Are they inclined towards allocating more funds to India?

We expect an inflow of $30-40 billion each year for the next 2-3 years. This is based on our estimates that equity issuances worth over Rs 2 lakh crore will hit the market over the next three years. Year-to-date inflows stand at $13 billion, the highest in Asia-Pacific. Flows are largely in line with the three-years average flows. As the reforms gather momentum and visibility on the growth increases, we believe that the inflow will gather momentum. India has already seen a commitment of $55 billion towards FDI from China and Japan. Modi?s US visit is expected to see further commitment and partnership in strategic areas. Stability of the government at the Centre is the single biggest reason for the optimism among global investors. It is also expected that more sectors would be opened up, leading to more opportunity for investors.