Now is the “best time” to buy into equities, feels Rajat Rajgarhia, Chief Executive Officer (CEO) – Institutional Equities at Motilal Oswal Securities.
In an interview with CNBC-TV18, Rajgarhia says corrections over the last month have been excessive and long term investors should take advantage of them.
Rajgarhia is hopeful of an uptick in corporate earnings over the next two quarters, and expects oil marketing companies, media, automobile sector and private sector banks to be among the big beneficiaries. Rajgarhia is bullish on Zee Entertainment , ICICI Bank and Yes Bank .
For growth to happen, banks need to improve their asset quality and corporates need to start investing, Rajgarhia says.
Below is the transcript of Rajat Rajgarhia’s interview with CNBC-TV18’s Nimesh Shah.
Q: You have been at the forefront of this two day large conference that you have been holding in India right now. First on – what is the general mood towards India? Are we done with the correction or do you think there is more pain left at least in the near term?
A: It is kind of funny that for the last six years when we have been doing this conference, typically in September or the first day of the conference, the market goes through a classic bottom formation. I am no specialist in technicals, but I just think that the last one month of correction has been excess. It has corrected many of the previous excesses which were being made on the basis of hope.
The general mood amongst the corporates is very clear that today they are more positive on the growth over the next 6-12 months than what last 6-12 months have been. India has been just painted with the same brush amongst all other global markets as far as the selling is concerned, but as and when rationality starts prevailing in people will believe that this is one market which probably looks the most attractive amongst the options that we have.
I won’t read too much into what is happening today in terms of a big recovery but if there was ever a better time to buy equity in India in the last one year this is the day.
Q: We read your strategy note as well. You said corporates are little confident, but is it going to get spillover into the earnings as well because ultimately it is the numbers which can take this rally towards sustainable levels so in that context do you think earnings are just at the cusp of a turnaround in terms of earnings as well?
A: While we have lived through a downgrade cycle for quiet sometime and the last six months have also seen a lot of downgrades, we keep on reiterating that the most important component of this downgrade has been the global commodity.
When oil falls from USD 100 per barrel to USD 50 per barrel – that first leads to downgrades in all the producers, but the benefit of that lower commodities takes some time to trickle in and that is what the India story is. I think you are just one or two quarters away from a double digit earnings growth coming into corporate India.
Q: In terms of sectors, what are you recommending clients?
A: When you come to look at investing in India or within India, you have to look at stocks which will benefit from both combination of volume growth and better margins. Many of the companies, in autos, private financials, oil marketing companies we keep on talking about – we think that there is a long way to go for them. Select consumer discretionary items.
It has to be somewhere a very bottom-up approach because there are enough companies in this slowing growth environment which are still doing very well and this is the time to buy into them.
Q: I was just going through the two day list that you have. You had some interesting private sector banks like ICICI Bank and Yes Bank representing the banking sector so to speak. Broadly, given that the way the bank stocks have corrected especially the private banks have corrected from the peak, do you think there is an investment rationale now to buy into those private sector bank stocks?
A: Yesterday, Chanda Kochhar presented that how she has doubled the return on equity (RoE) of ICICI Bank in the last six years and they have a guidance to improve this RoE further with capitalization, which is one of the best.
I don’t see how perceptions can carry the de-rating far than the underlying improvement into the fundamental ratios. Rana Kapoor did present that how they continue to be at the top end of the RoE curve of this banking system over the next few years. We had Ramesh Sobti who reiterated that his outlook on his growth and asset quality is better today than what it was one to two years back.
The only thing as an investor that you should be excited and not worried about is that the valuations today are far better for you to buy into these names. When you buy today, you make a lot of money over a period of time.
Q: The other thing which even I noticed getting lot of clients as well as corporates into conference was there seems to be a bit of dichotomy between what the FIIs think at this point of time and what the domestic funds think at this point in time. While the domestic are seeing inflows because of redemption pressures the FIIs seems to be on the sell side. What is that you have been advising especially on foreign clients as to what they should look at when they look at India at the current levels?
A: India is being painted with the same brush that all the other global markets and emerging markets are being painted with but more importantly and if I am running a USD 5 billion fund, I get a redemption of USD 0.5 billion. I can’t be so rationale on what to sell and what to hold because that is a large part of my fund which is getting redeemed.
That is the story of most of the global emerging market funds and India is seeing its own share of pain in that. Once this pain is over and it will be over soon, the continued domestic buying itself can take this market quite respectively higher than what it is trading today. Foreigners love to buy equities in India just that this is a very big macro global headwind which is leading to outflows from them.
Q: The other interesting aspect which I want to ask you was on the PSU side or on the government side. You have heard a lot about Make in India theme, government is looking at pushing the coal production higher, and you had the Coal Minister at your conference yesterday. As far as the policy is concerned, we understand that some of the foreign institutional investors (FIIs) have started getting a little disappointed on the policy front, what is your sense and what is the assessment that you make while talking to these policymakers?
A: This is more of a question of a lot of expectation and delivery happening at a reasonable pace. It is somewhere good that the expectations are getting reset. Now, when the delivery will move at its own pace, people will be more excited. However, coming back on the policy delivery, lot has been happening but just that the problems have been so much more that you want all the solutions to happen very quickly.
We can talk about goods and services tax (GST) not happening through but we had many other bills which we had spoken a year back which have seen passage through the parliament. Suppose GST will happen then maybe we will move to the next area of concern; that is what we like to talk about.
I think there is enough happening but more importantly this is the time when corporates, banks, all will have to put their act together. Banks will have to clean up their books and corporates will have to start looking at some investment cycle returning back for this aggregate growth to get better from where we are.
This is a very opportune time for India when we are not just beneficiary of a very positive monetary policy that has been led by RBI but also on the right side of this global commodity collapse. Imagine a saving of almost close to USD 50-75 billion happening annually which you are going to start spending on capital expenditure. The triggers are many, sentiments are weak today but sentiments take very quick time to change.