The recent set of strategic open offers may be the starting point of a bull run, says Saurabh Mukherjea, head of equities, Ambit Capital. In an interview with Devangi Gandhi, he says global economic conditions are finally swinging in India?s favour.

After a slowdown in April, FII flows have regained momentum in the last two weeks…

There have been three developments that bode well for India. When commodity prices come off, it not only helps us from the current account and the budget deficit perspective, but also eases input price pressure, thereby, increasing headroom for further interest rate cuts. This is resulting in FII flows getting redirected from commodity exporting nations like Brazil and Russia towards India.

The second trend is that corporate results are showing signs of bottoming out and there is a growing belief that the growth will turn either in Q4FY13 or Q1FY14.

Thirdly, both in terms of easing commodity prices and the action the government is taking to curtail gold imports, there is a sense that the rupee would settle around 55. This is comforting for a section of FIIs who were worried about rupee going into a meltdown mode. That being said, some FIIs may choose to wait until the Q4 CAD data comes out in late June.

Easing of commodity prices is an external development. What about domestic factors?

I don?t think that even in the growth phase of 2006-08, the government was actually doing that much to take the economy forward. The main difference between that phase and the last three years is that there has been a virtual blockade on economic activity by the government, which is now deeply factored into market prices. Until the 2014 election, there is little chance of this economic blockade being lifted.

In the last two years, global economic conditions have turned hostile for emerging markets in general. In particular, as commodity prices rose in the wake of QE, commodity dependent countries like India suffered. What investors are trying to understand now is if that scenario is unwinding. There is a growing sense that the global macroeconomic conditions in terms of US growth and the easing of commodity prices are finally swinging in India?s favour. Also, what people have understood is that the RBI and the finance ministry are the only two sources of domestic policy dynamism. Both these sources are in delivery mode and there is a relatively strong investor confidence on them.

You hold an underweight on the banking sector…

As for public sector banks, our view is aligned to that of the Street. The credit quality of PSBs is compromised so profoundly that it is very difficult to buy them without a very substantial discount to their book value. We, however, beg to differ with the consensus, with our view around the top six private sector banks that continue to post strong results. Our thinking is that they are exposed to a high risk not so much with regards to credit quality but with regards to fee income; the private sector banks? fee income generation is in a different league compared to PSBs.

Almost, all of the 60 bps of premium RoA that these banks generate come from fee income. We believe that the aggressive accounting and sales practices through which the extra RoA is generated are not sustainable. Hence, in good time, we expect RoA of private banks to return to the sector average. So, we stay underweight on the banking sector.

What do you read into a rising number of open offers by MNCs to acquire stakes in Indian companies?

In the last six months, we have seen five big strategic deals in which the offer price was significantly above the market price. Between these five deals, nearly $11 billion dollar of capital is committed to India. In totality, these deals give several messages. First, sensible MNCs find India to be immensely attractive. Second, the prices bid for all of these stakes clearly suggest that the Indian market is significantly undervalued. Third and most interestingly, even after bids at a premium to market prices, some of the Indian investors have chosen not to sell, presumably because they are expecting even higher prices ahead.

It appears to us that due to negative psychological traps, Indian investors are caught in a downward spiral. Just like in a bull market investors get overly excited, in a bearish environment investors stop thinking rationally about the valuations. These strategic stake purchases may be a starting point of a fairly long bull run.