Gautam Trivedi, managing director and head of equities at Religare Capital Markets, remains fairly bullish on Indian markets and expects strong FII inflow. He expects a 100-125 basis points rate cut in 2013 and favours cyclicals as against defensives. He also likes high debt companies focused on deleveraging by selling assets. In conversation with Sheetal Agarwal, he talks about the outlook for 2013 and themes to focus on. Edited excerpts:
What will be the impact of the US fiscal cliff on India?
Most US companies are putting off capex and postponing hiring until the fiscal cliff issue is resolved. Thus, in the December quarter as well, we would not see any dramatic increase in top line of any of the Indian IT companies. I think, to some extent, that will also impact fund flows, albeit only marginally.
What is your outlook on FII flows into India in 2013? How do you rate Indian markets versus other emerging markets?
Right now, the mood to put money to work in India is actually huge. India has had a great run this year. In dollar terms, the markets were up a whopping 24 per cent. So, it has been the best performing market in Asia by far, outside of Thailand and Philippines. India has accounted for 40 per cent of all FII inflows into Asia, including Japan. I remain fairly bullish and expect strong inflows in this calendar year as well.
At 12.5-13 times FY14 earnings, the Indian market is not expensive at all, relative to its peers. We are still looking at a 14-15 per cent earnings growth given the low base this year. Through this year, India's PMI (purchasing managers' index) has consistently been in the 52-54 range whereas China only recently made it to 50 and was below 50 the whole time. So, as a function of that, we think India is very well positioned vis-a-vis other emerging markets.
And, outlook on Indian markets for 2013?
We are actually very positive and I think the Indian market has another 15-20 per cent upside in the coming calendar year. The VIX is at a life-time low of 15. So, it's not like the markets have been hugely volatile and I take that as a positive. Another factor in our favour right now is the fact that commodities are still very cheap. So, hopefully, they will end up bringing inflation down further. Also, RBI has not even started cutting rates dramatically, so if inflation remains benign and/or the RBI realises that we have to live with a higher level of inflation than what India was used to, RBI will invariably cut rates. We expect a 50 basis points (bps) cut in rates by March 2013 and another 50-75 bps cut in the remaining part of 2013. If that happens, I think it will be a huge positive for India.
Which sectors are you bullish on?
We like the cement sector. For the second quarter, I think, the minimum year-on-year growth in profit was 100 per cent for cement companies. Also, the upcoming state and general elections would lead to higher cement consumption. We also like media and are selective buyers in the auto space. We like two-wheelers like Bajaj but not Hero, as it is significantly losing market share to Honda.
We are still not very positive on the Indian domestic CV market and the pure play there is Ashok Leyland. We like Maruti, but I think it's run up a fair bit and I think a lot of good news is right now priced in. I think the bigger theme for 2013 will be to focus on stocks that have high debt and are looking at shedding assets. Wockhardt is a case in point – the stock is up five times this year as it successfully de-leveraged its balance sheet. So, I think if companies with high debt wake up to the model that Wockhardt has followed, these stocks could run up significantly. DLF and Jaiprakash Associates are other such stocks. The Jaiprakash stock has surged from Rs 60-65 levels to Rs 100. We believe it could go to Rs 120-130 at least, as it seems to be serious about selling its cement business.
Which sectors do you want to avoid completely?
Some of the defensive names like ITC and Hindustan Lever have had a good run and are very expensive now, though we do like a stock which is expensive, United Spirits. I think the defensives have done well this year and are expensive. It's time to book some profits and move into the high beta. Real estate, again, I think, one has to be very selective. The other sector which I am not seeing evidence of yet picking up is capital goods. I think that recovery is some time away and actual orders will take some time to come through.
We prefer to stay away from the telecom sector. We don't think anything is happening in the IT space at the moment. Mid-cap IT stocks have hugely outperformed and I think the party in the mid-cap IT space is over. We still like Satya,m as the TechM-Satyam combine is trading at a 30 per cent discount to the big four, which is completely unwarranted. Satyam still gives a two per cent arbitrage in terms of getting in, so that's a better way to play it until the merger consummates.
What are your areas of concerns on the markets as well as the macro front?
The Indian market has been supported fully this year by FII flows, which could be affected by any unprecedented negative turn of events globally. Second, we do need to see return of the retail investor - that clearly is a cause of concern. Though retail investors have, through mutual funds, sold year-to-date over $10 billion, we are now seeing some signs of retail interest coming back in the futures segment in mid-cap stocks trading below Rs 100 a piece.
Third, we are not seeing evidence of return of private sector capex. The fourth critical factor is the ability of the government to tackle the fiscal deficit. We just hope that in a pre-election year the government does not go berserk and starts writing off loans and does thousands of crores of splurging. As long as that does not happen, I think we are on a very good course next year.
Which do you rate as the next sunrise sector?
I think one of the most under-owned sector, and yet the best performing, this year, has been media. The digitisation theme has been the only successful piece of legislation that's made it through Parliament and got implemented. TV18 is one stock we are very bullish on, though we don't cover it. This company is going from Ebitda negative to net profit positive.
We like Hathway in MSOs. In the DTH space, we like Dish TV, broadcasters we like Sun TV over Zee because Zee, I think, has launched more channels every time it has cash in its kitty. So, the cash-flow ends up getting used in that. But it is still a good company and will remain a beneficiary because it has got the largest suite of channels. I think FY14 and FY15 will be the two big years where you will see literally an explosion in the earnings growth of these companies.