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Mkt performance to continue, see Sensex at 33K in Dec: Citi

With the launching of wide ranging eco socio schemes like Jan Dhan (fin inclusion), Swachh Bharat (Clean India), Make in India (manufacturing), Digital India (access), India is witnessing more than reforms, says Citi India. There is a firm faith that these programmes should bolster India’s ecosystem and business prospects.

In total agreement to Prime Minister Narendra Modi led NDA’s reforms agenda, Aditya Narain, MD & India Strategist at Citi said the government approach is credible. As a proof of government’s seriousness he cites the example of just-concluded Budget wherein Finance Minister Arun Jaitley has strongly pushed for transformative agenda further. He lauds eco-socio initiatives like inclusion of housing and security (insurance/pension) and the step to raise investment spend.

Speaking about the RBI’s out-of-policy rate cut, Narain said he expects further 50 bps cut this year as CPI inflation is likely to average around 5 percent in FY16.

His enthusiasm is palpable when he says market has only one direction to go, i.e, upwards. Personally, Narain sees Sensex scaling 33000 in December of this year.He also sees Axis Bank growing in future.

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

Latha: Every time you have come in the last three times you have been guest editor twice, the market has been higher and higher, next time you come, what may the market be, six months down the line?

A: I think it will be higher. By December 2015, I would say it would be at 33,000 because that is my target but I think we will be somewhere between where we are today and 33,000, six months from now.

Sonia: Six months ago when we were speaking with you, you had indicated that FIIs are most aggressive in the Indian market out of the emerging market basket and since then things have only gotten better. So do you see increased allocation of money into India?

A: If you were to look at the pure benchmarked people, I would be surprised if there is too much more allocation because they are already sitting 400-600 bps overweight. When it comes to more marginal money, which is global pools and potentially hedge funds, I would say there is scope for more allocation particularly with the global funds.

Latha: A lot of global markets are doing well, so is the Indian outperformance at an end, is that what you are saying?

A: I think you have to start measuring Indian performance in absolutes rather than relatives because the big relative gain has happened over the last 15 months and relative at the end of the day is about how some of the other markets effectively do.

So I think you will find the odd market, the odd asset class that does materially better than India but at an absolute return level, India should continue to do reasonably well.

Sonia: I was going through your strategy report and you did a road trip recently to Rajasthan, tell us about whether you noticed any changes on the ground as far as the reforms are concerned because everyone keeps saying that although there are no big bang reforms by the government, there are certain steps that the government is undertaking to improve the ease of doing this?

A: The big takeaway from this trip and we drove 700 kilometres, we met businesses, we went to SEZs and we met a lot of government officials, the big takeaway was that government quite honestly is bending over backwards to facilitate and incentivise business. So this mindset that government is the problem in setting up businesses, that is history. So this we saw in the case of Rajasthan but from what we hear and we had Chandrababu Naidu at our conference, there are enough states, it won’t be all states but there are enough states that are bending over backwards as I said to get business. That means business is being facilitated at the approval, at the basic execution level substantially better than what it has been in the past and relative to what people believe.

Latha; So in that context, if the states are going to get a larger amount of money, which is going to be untied, I don’t know whether they get absolutely more money but they certainly get all the money without any caveats and conditions, what is the sense you got both at Rajasthan if you met the political heads and from Chandrababu Naidu, which are the sectors that from an investors’ angle interesting?

A: Quite honestly, the easiest ones and the most visible ones tend to be manufacturing. So the focus will tend to be in a certain amount of infrastructure facilitation in terms of smaller roads, access roads, water, electricity but most important in terms of the process which doesn’t necessarily involve so much money. The aggregate though it will continue to be a balance between physical infrastructure and social infrastructure to start believing that it is going to go all towards business and all towards industry, that would be to one sided and maybe simply not appropriate.

Sonia: In terms of individual stocks, not getting into the specifics but I noticed that you have a large presence in the auto ancillary space and last year these guys had their time in the sun, do you expect further outperformance this year as well?

A: In fact in some senses that is an area where we focused on a little bit more. Our sense here is that this is an area that ties in very well in terms of the ‘make in India’ theme which we think is actually pretty strong. So to some extent, the gains out here will be linked more to that initiative and those opportunities rather than purely in terms of auto ancillaries per se.

Latha: Since you are speaking about the governmental themes, let me take one-by-one, how should an investor play the digital India theme because that obviously has many stocks?

A: The easier ones as far as that is concerned is data, telecommunications to some extent and some of the more net based opportunities and businesses that tend to expand including the banks where Axis Bank is becoming bigger and bigger thing. So that would be the space where digital will effectively give you gains.

Latha: You were speaking to us about digital, it is even banks that you would play?

A: Effectively yes, the thing about digital is it is not going to be as discrete as some of the other themes or governmental pushes that you get. However, its broader push up or leg up to the ecosystem is going to be very significant and that is what you need to watch for. In fact this piece we did recently which we call ‘Nation Changers’ where we have focused on this entire Digital India, Make in India, Swachh Bharat very importantly and Jan Dhan which we believe are massive enablers in terms of the ecosystem and I think that is something that over a period of time can significantly add to effectively the growth that you get.
I think the economic survey made a significant reference to it in another form. However, I think this ecosystem that is building on top of reforms, is something that you got to keep an eye on. Not in the form of a discrete takeaway but in the broader spread that you get from it.

Latha: Does that make you feel that we are in the throws of a much longer bull run because the ecosystem is meaningfully improving?

A: The way I see it, we are in the throws of a much longer and a stronger economic cycle. Whether it is going to be as accelerated as the market sometimes hopes for and the double digit numbers that are put out, I am not so sure, I don’t know that path. However, from an ecosystem perspective, the moment it is getting facilitated the way it is, that growth can be much longer, much stronger and most importantly better distributed and more stable.

Sonia: I don’t mean to pour cold water over our enthusiasm but the one thing that hasn’t picked up is earnings just yet and in fact this quarter gone by is one of the worst we have seen in a long time. Are you expecting things to improve anytime soon and when the turn comes which pocket it will come in first and which quarter?

A: I don’t think you are going to see this pickup upfront. I think at best it is going to be back ended into FY16. So, it is going to be a more slow and a more measured kind of a pickup. I would make the argument that this entire trajectory is going to be more stable, more sustained but not necessarily as sharp on the upside as people might hope for at points in time. However, it is the second half of 2016 that you should look at the first signs of numbers tending to move up.

Latha: What are you working with in terms of FY16 earnings?

A: We are looking at about 14 percent growth and about 17 percent for the year and thereafter. If you were to ask me how could these numbers move, I think FY16 could potentially have a downside risk and FY17 could potentially have an upside risk.

Latha: What about the rate cycle, we got an unexpected one in terms of timing but perhaps the cut was always there, how many more are you factoring in and how do you play that or is it already played out? 

A: Specifically we are looking at another 50 bps for the rest of the year. We also believe that generally if there are to be risks, they are going to be on the upside. In terms of playing them I think the pure rate trade per se has largely played out and the markets reaction to yesterday’s cut is reflective of the fact that that is in some senses in the price per se.
However, at the end of the day at a portfolio level the way we are looking at it is that we have got an overweight on banks, we have got an overweight on cement, we have got an overweight on the broader transportation theme and pharmaceuticals. So, a lot of these tend to tie in with better and broader growth rather than them being very mono line or very sectoral growth pushes.

Sonia: I noticed in your note that you see direct beneficiaries in the real estate sector but you don’t have any positions or any allocations towards real estate just yet. Everyone is talking about this housing for all theme, etc do you suggest retail investors buy real estate stocks given the history?

A: We are running a neutral on our portfolio. I would say there are two elements to this, I think the big thing is that it is going to be at the mass level and a lower ticket item and it will actually surprise once the program is in place in terms of the scale of it. However, the best way to play it is through cements rather than try and search for businesses that make money on it; that is one bit.
Within the real estate space if you are looking at opportunities, our sense is the commercial theme is going to be much more vibrant, much sharper than the residential one.

Latha: Why don’t you split for our viewers how you would say put an additional Rs 100, sectorally how would you divide them?

A: We would put about 25 percent in the banking space, we would put about 18-20 percent in the tech space, about 15 percent in the pharmaceutical space, about 10 percent in the cement space, we would keep about 10 percent in effectively the consumer staples space which we are a little underweight on, about 10 percent between auto and about 6-8 percent for the capital goods space amongst the larger sectors.

Latha: I just want to pan out and look at the global ambience. We are getting lower growth numbers – China is just said that it will manage a growth of 7 percent from 7.5 percent and even in the US every year we start with forecast of 3.5 percent or 3.4 percent and every year end at 2.2 percent or 2.4 percent, Europe is in deflation so we have still seen almost all equity markets reaching out to new highs. How are you looking at the global situation? Do you think this goes on because of the note printing or do you think that there will be some very sharp corrections?

 A: I think by and large you will tend to get an upward bias as far as markets are concerned and that is simply because return on fixed income is just falling of so much that there is just an allocational swing towards businesses or equity or where yields are effectively higher. So, to some extent that trend is going to effectively continue.
The other thing which is pretty important to note also in this entire theme and this might apply to India also, that businesses are not doing as badly as economies. So at the end of the day that is where some of the value is going to go. I suspect you would ask me this question about gross domestic product (GDP) growth, I think in India as far as GDP growth is concerned it is going to be stronger for longer but won’t necessarily be sharp.
I think the upticks that you might get on earnings beyond the next 6-12 months could tend to be a little sharper. Just to push that further, if you were to look at the US example and the US economic recovery, things went down in 2008-2009. Even now you are talking about 2-3 percent growth numbers and for five years you have had very little growth but the market has continued to do well, equities have continued to do very well and so have businesses actually done pretty well. So, that theme of business is doing better than the economy is something that is potentially supporting stocks and could go on further.


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