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Long-term bullish on India; see recovery in Q1: Chandgothia

Binay Chandgothia, Principal Global Investors, HK clearly believes that Moody’s upgrade itself may not impact markets majorly because it is just a change in outlook with a view that Indian policymakers are establishing a framework that would allow India’s growth to outperform that of its peers over the medium-term. However, it does reaffirm that the government is moving in the right direction in terms of fiscal policy, better monetary and more importantly inflation management.

Rating agency Moody’s Thursday affirmed India’s sovereign rating at BAA3, but raised the rating outlook to ‘positive’ from ‘stable’.

According to Chandgothia on a long-term fundamental growth oriented basis, India presents a better structural story when compared to China, although tactically China offers a better set of short-term return dynamics.

From an equity perspective, return would be a function of the progressive policy steps and also depend on what happens in the global equity markets.

Although he believes that fourth quarter earnings could be same as that of last quarter, the recovery would start from the first quarter of next fiscal.

Below is the transcript of Binay Chandgothia’s interview with Anuj Singhal and Sonia Shenoy on CNBC-TV18.

Sonia: What is your view on India post the Moody’s upgrade that we had last week on the outlook of India? How high is the probability now of a ratings upgrade in the next 12-18 months?

A: The overall sense we get on the Moody’s upgrade is that it is an affirmation of the policies that the government has taken over the past 12 months. Having said that, there is a lot of road to travel, the upgrade itself will not have a major impact on the markets because it is just the change of the outlook. They are saying that they will take about 12-18 months – if the growth trajectory, if the inflation management trajectory of the fiscal path is solid then you might see an upgrade from them, at the end of 12 to 18 months period,.

However, it does reaffirm, what the Modi government is trying to achieve, which is a better fiscal policy, better monetary management and of course very critical thing is inflation management because that has often been the problem for the Indian economy in the past.

Anuj: As a portfolio manager then who has invested into India for so many years, how are you tactically positioned in terms of regional allocation and in terms of India versus China, do you like China better than India right now?

A: We are positive on India. We have been positive on India for the past few months. Currently, in terms of regional allocations, we believe that maybe China tactically offers a better set of short-term return dynamics but fundamentally we remain very positive on India and we believe in India as a long-term story.

Sonia: Recently we have seen offshore markets in China rally considerably, Hong Kong was up so much last week, what are the average returns that investor should expect from China versus India by the end of 2015 you think?

A: Short-term the reason why China is going up is simply because of the fact that they are losing the liquidity tabs. They had a big announcement in China a few days back where they are going to allow domestic onshore fund managers to invest into the offshore market and therefore you have seen the offshore markets rally. However, clearly, some of the movements we are seeing in China this year are a catch up of the lagged performance of the China equity indices. India significantly outperformed in 2014 and China is beginning to do well this year.

On a longer-term fundamental growth oriented basis, we think India presents a better structural story.

Having said that, Chinese gross domestic product (GDP) growth which was at 7 percent last year, the target from National People’s Congress (NPC) is also 7 percent, we think it will be lower than that more closer to 6 percent than to 7 percent. Having said that valuations are very cheap in China and in India they were already capturing in a lot of the growth expectations. In China, they were not capturing in any growth expectations, so there is a readjustment process going on right now. On the short-term basis, China could outperform for this quarter but we ultimately think that towards the end of the year, India should do okay.

Sonia: So if you are more bullish on Indian equities versus debt, what kind of returns do you see the next two years and what should the allocation be between sectors?

A: How much returns you will get from equities is going to be a function of the progressive policy steps that you get in of course it is also going to be a function of what happens in the global equity markets. Our sense is that so far Indian earnings have disappointed and the last two quarters were bad. The coming quarter we will probably get a negative earnings growth if you include energy stocks and material stocks.

However, we are at a point where the bottom of earnings environment needs to improve. So let us assume that India’s GDP growth is at about 7.5-8 percent in real terms, which is also a nominal GDP growth of about 13-14 percent and there is a sense that after the adjustment for inventory write-offs is over, the earnings could go a little higher than that which means that if India grows at about 15 percent compounded for the next two-three years, the market should return that much because valuations as compared to historical trends are pretty much in line, they are not too expensive, they are not too cheap obviously. So we think India could deliver that kind of a return going forward in the next two years.

Anuj: We hit earning season next week, last quarter was quite abysmal in fact Q3 revenue growth was just about 8-9 percent, all time low, what is the prognosis for Q4?

A: Our sense is this quarter is going to be as good or as bad as last quarter because you still had disinflationary tailwinds from the cyclical sectors – as in product prices coming down and you will still have some more of inventory write-offs from people carrying inventories which should built at much higher cost levels.

Our sense is if you could get a revenue growth of 2-3 percent, you would probably get a profit growth which is flat of slightly negative on a broad market basis.

The recovery has to start showing from first quarter of next year. We don’t think you will realise the full extent of 14-15 percent earnings growth expectation for next year immediately, it will be built up gradually. But there have to be some signs that we are leaving behind the two quarters of flat to negative earnings growth. So Q1 for next year is going to be very important.

There are also signs that some of the commodity price disinflation, which hit the global economy into Q4 of last and Q1 of this year, some of that is easing off as prices aren’t topping any further which should be good from a corporate bottomline perspective. It gives more stability and it creates environment where you don’t have to write-off the value of your inventories any further.


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