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India not expensive, to thrive if earnings deliver: Baring

Indian markets are on the path of improvement and if earnings growth are delivered as per expectations, then it will continue to remain buoyant, believes Ajay Argal, Head of Indian Equities at Baring Asset Management (Asia).

Argal doesn’t feel that Indian markets are expensive from a 3-4 year horizon but says that one needs to take a stock-specific approach this year as many stocks still look fairly valued. He remains bullish on banks and expects a pick-up in growth in four-wheelers.

Below is the transcript of Ajay Argal’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: Let me first start with the global cues. We have seen a bit of a negative growth numbers or pessimistic growth numbers coming in from both the United States and China if you please, the purchasing manager’s index (PMI) numbers are not looking too hot. Do you think we are going to see a longish bit of risk aversion or is this going to be just a brief dip and equities will be back in fashion?

A: You have to separate the various markets. The Indian markets are on the path of improvement and the market is always looking for direction of improvement in the economy and the direction of improvement for India is definitely positive. So India might be in a different position compared to some of the other leading markets. When you talk about the US, the US markets have already done phenomenally well last year and as most of us know, most of the performance came from the rerating of the markets rather than the improvement in the earnings growth and somewhat similar things have happened in India in anticipation of the earnings growth this year. So if the earnings growth which is anticipated in India is delivered then the Indian markets will continue to remain buoyant.

Latha: Are you not worried about the current valuations of the Indian market considering that Q3 numbers are worse than expected especially when you looked at the bank earnings, ICICI Bank  and Bank of Baroda  two big banks reporting 14-15 percent rise in non-performing loans (NPLs) in just one quarter, not giving you a feeling that markets are running ahead of themselves?

A: Definitely this year you need to focus more on the stock specifics. There would be differentiation in the stocks even within the same sectors, so the stocks which continue to deliver better growth which are more efficient when you are talking about the banks, the efficiency in terms of the asset quality and some of the banks are definitely growing faster even with better asset quality so even in the banks, there could be differentiation. So when you look at valuations, the valuations you have to look at it a bit longer-term. The valuations might look expensive on the near-term but that is because the earnings have been depressed in India over the last three-four years, we are just coming out of the huge downcycle. So when you need to look at valuations at a low point of the downcycle, you need to build in what the growth is possible, what the potential is over the next two-three-four years if not longer. From that perspective, the markets are not that expensive, they are definitely not as cheap as they were at the beginning of last year but definitely they are not on the very exorbitantly expensive zone.

Sonia: Automobile sector is one pocket that has delivered very good returns to shareholders in the last many years but now there is a big slowdown that we are seeing especially in the two-wheeler space, how would you approach this sector now?

A: If you look at the automobiles, even the four-wheelers, there should be a pick up in growth going forward. We have seen some of those things in the passenger car manufactures especially the market leader there is showing better growth numbers compared to the industry and gaining market share. Similarly, here, we have seen that some of the two-wheeler manufactures are gaining market share. Even if you look at a company like Bajaj Auto , you have to look at the entire business and in that business of Bajaj Auto for example there is predominance of exports. So the exports continue to do well but as far as the domestic two-wheelers are concerned, it is again part of the trend, which we have witnessed in lot of industries in India in the last three-four years that there has been a slowdown but if the economic growth picks up, which is what we are anticipating then definitely the two-wheeler industry as such will be showing healthy growth in times to come. So this is a sector definitely one should be present in as far as the portfolio is concerned.

Latha: What would be the other sectors that you are bullish on at this point?

A: We are bullish on the banks and within the banks as I mentioned, the banks which are more efficiently run which are growing faster, which are gaining market share as a result and at the same time they are amply funded, they have good capital adequacy ratios and on top of that their current account/saving account (CASA) growth is pretty good and we have seen that over the last few months because the inflation has come down, the real rates are very healthy and that is why the deposit growth has also picked up. So funding would not be concerned for the efficient banks so we are very positive on these efficient banks and more of them are in the private sector space.

We are also somewhat positive on industrials because going forward the order book of some of the industrials is going to pick up again you have to differentiate and you cannot put a broad brush and say the entire industrial sector would do well but we try to focus on the better companies there because as the economy picks up, there are already some signs of execution improving from the e-government side in terms of the bottlenecks, which were there but it will be slow and gradual process and that is why it is best to stick to quality and look at it from a three-five year perspective rather than try to time the stocks for the next one year only.

Sonia: I was looking at some of your stocks in the holding and you have from the IT space, Infosys  and TCS  that you hold but interestingly this time around it is HCL Technologies  and Tech Mahindra  that have performed well of course the others have as well but on the relative basis, what is your expectation of the IT sector and would you churn now to some of these stocks like HCL Technologies that have done so well this quarter?

A: The individual stocks we keep on changing. So we held HCL Technologies for most of last year and that was the best performing stock within the IT sector for the first half of the year and we continue to participate in that. After that we shifted more our weight towards, Infosys, which we thought was discounting a lot of pessimistic projections and most of the bad news was there in the price and that is the reason we increased our position there.

We also hold Tech Mahindra and in fact within the IT and that is the biggest overweight for us at the moment.

If you look at the entire IT sector as a whole, again we are very positive on it but the thing is some of these companies have become so large that the growth rate will not be what it used to be in good times five-ten years ago when the US economy picks up. So because of the large size, the growth rate would come down and we think that the growth rate for the larger and better run companies will be between 13 and 16-17 percent but the opportunities are much better in some of the other sectors. That is why we are underweight in the IT sector.


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