Sanjay Sinha, who recently took over as the chief executive officer of DBS Cholamandalam Asset Management, commands respect within the industry because of his well-rounded experience in almost all aspects of the fund management business. In this wide-ranging interview with our correspondents, he outlined his goals for his fund house, why the intensity of the global crisis isn?t abating, its impact on India, and the prospects of different sectors.
What do you see as your key goals as the chief executive officer of DBS Cholamandalam Mutual Fund?
My goals pertain to three areas. In the area of investment my goal is to clearly define the investment strategy for all the funds. The second goal is to get the right talent into both debt and equity.
In the area of marketing, certain product gaps exist. These need to be filled up with the launch of new products, so that very soon we can offer investors a complete suite. We have already filed the application with Sebi for the launch of a close-ended tax saving equity scheme. We also aim to launch a balanced fund, an index fund, and an arbitrage fund. Second, at present our connect with distributors is very low, which is the result of a small sales and distribution team. So we need to expand the team, which we are doing.
Third, in the area of operations, we aim to reach out to a larger number of retail investors. We need to make our operations more efficient and cost-effective, and we also need to be more responsive to customers? needs. Towards this end we have hired a specialist to design our IT infrastructure, who was a member of the team that did this job for the largest mutual fund of Malaysia.
Now Citigroup is in trouble and has been bailed out by the government. The severity of the global financial crisis shows no signs of abating. Why?
Two things have happened together. One is that asset prices have collapsed. And as most of these institutions were overleveraged, the pain has been far more. Moreover, after the collapse of very large institutions like Lehman Brothers, which had been in existence for more than 160 years and had survived the Great Depression, the confidence of the financial sector worldwide was shaken. Extreme risk aversion developed and flow of credit almost dried up. If the flow of credit does not revive, the crisis will continue.
The magnitude of the problem is so large that there can be no overnight solution. It will be a long-drawn process. The first step in the process will be to bring confidence back. Only then will the normal flow of credit resume.
Very few businesses have enough funds to meet both their working capital needs and capital expenditure needs. So businesses inevitably take recourse to credit. If the supply of credit dries up, it is like a car running out of petrol. Even if you keep turning the ignition the car cannot run.
In what ways is the global financial crisis affecting India?
The crisis has led to large-scale portfolio selling by foreign institutional investors (FIIs). This has put pressure on the rupee. In a globally connected financial market, there had to be some impact on India of events in other parts of the world. These events have led to rise in risk aversion and shortage of liquidity in the Indian financial sector as well.
At the same time, the general contraction of credit has reduced demand. And the rise in interest rates has forced many corporates to delay their expansion plans. This is being reflected in the lacklustre growth of the index of industrial production (IIP).
In what ways is currency depreciation affecting the real economy and corporate performance?
The sharp depreciation has increased the burden on those corporates who had borrowings and interest liabilities denominated in foreign currencies.
How dependent is the recovery of the stock markets on the return of FII investments?
Besides the selling that has been happening from January onwards, more concentrated selling of Rs 22,000 crore has occurred between the beginning of September and the middle of November. This has largely been absorbed by domestic institutions, such as insurance companies and mutual funds. Significantly, Rs 5,600 crore worth of net equity was bought during this period by retail and HNI (high net worth individual) investors in India. This shows that the future of stock markets will be influenced more by domestic players than by FIIs.
However, before the stock markets begin to recover, they need to stabilise. Volatility is a larger part of the concern of Indian investors. I travel widely within the country. When I speak to investors, all of them agree that equities are at an attractive level at present. But they want the sharp rise and fall to come to an end. They want a more stable market.
The sharp fall in the market is likely to get arrested at the end of the selling spree by FIIs. As it is, the amount outstanding with FIIs is not very large ? $60-70 billion. And all their holdings need not be sold for markets to stabilise. Not every FII in India is selling, only those faced with redemption pressure.
How has the crisis affected investments? There are reports that wealth destruction of promoters (due to decline in share prices) is causing them to slow down on their capital expansion plans.
Some of the projects are now getting postponed both because of high interest costs and the perception that demand will contract significantly. High commodity prices may have also played a role in the past. But the outlook on commodity prices, inflation and interest rates appears benign now. Interest rates, it appears, have peaked and can only come down from here. Therefore, it is likely that demand will revive. Supported by lower interest rates, projects may come back on track in the next few months.
What has been the impact of this slowdown on corporate performance? And how are corporate results expected to be impacted going forward?
Q2 results have brought home the point that high interest and raw material costs were beginning to bite into profitability. The profits of Sensex companies grew by about 10-12 per cent. Going forward, it is possible that the slowdown may affect profitability in the next couple of quarters. Beyond that two things will come into play: lower raw material and interest costs will contribute to more manageable margins. The base effect of lower profits of FY09 will also show corporate profitability of FY10 in better light.
Which are the sectors whose prospects have clearly turned negative?
In the current scenario, very few sectors should be seen as having a bearish outlook. These are metals and real estate. In the case of metals, a large part of the globe is confronted with a recession, so metal prices are unlikely to rally. Therefore, profit margins in the sector, both ferrous and non-ferrous, will contract.
Secondly, those companies that have highly leveraged balance sheets will come under severe pressure in the current scenario.
In the case of real estate, there is a huge pile up of inventory in both residential and commercial space. This inventory is putting pressure on companies that had a highly leveraged position. In the current environment, the inability of many companies to hold on to this inventory is very limited. If credit is not forthcoming, real estate prices should come down very significantly from the current levels.
And which are the sectors you are bullish on going forward?
Value is emerging across sectors. During the last three years growth was the predominant style of investing. But now value is expected to play a major role. The sectors in which valuations are attractive include banking, engineering and capital goods. As domestic demand is intact, consumer non-durables also remains attractive.
Do you see a likelihood of interest rates declining further?
Yes, there are fundamental reasons to support the view that rates could decline. One reason is that inflation can only moderate from here. And second, if credit growth begins to slow down, there will be pressure on lenders to bring down the lending rate to grow their lending activities.
One reason for high credit growth so far has been the high borrowings of oil companies. In future, due to the decline in oil prices, these companies will borrow less. And remember that the base effect will also ensure that the credit growth rate comes down.
Any estimates of by when markets will recover?
This will depend on three factors: liquidity, valuations, and events. Liquidity is important because during the whole of CY08 FIIs have been selling and domestic institutions were buying. But of late even mutual funds have turned net sellers. Liquidity has to return to a more balanced position before recovery can happen. As far as valuations are concerned, the markets have factored in the new earnings expectations. And as far as events are concerned, these are beyond anybody?s ability to predict. Over the last few months the pace of negative news flow has been very high. This has to subside before markets can recover.
