Corporate India has reported incredible numbers in the September and December quarters and the figures for the March quarter are expected to maintain that trend. But prices will move up and down; so, corrections should be seen as an opportunity to invest, Kotak Mutual Fund MD and CEO Nilesh Shah tells India Global Business Consulting Editor Arnab Mitra in an interview. Edited excerpts below:
INDIA GLOBAL BUSINESS (IGB): The economy is now expected to shrink a deeper than expected 8 per cent for the full year. So, even after factoring in the higher growth being projected next fiscal, the Indian economy will, on March 31, 2022, be back at the level it was at in 2019-20. That means two years of lost growth. Given this, why are so many experts so bullish about Indian stocks?
In the Indian stock markets, we have seen the convergence of three factors – flows, sentiments and fundamentals. In terms of flows, retail and FPIs have been big buyers of equities throughout calendar year 2020, especially in the second half. This trend continued into January 2021.
In terms of sentiment, month on month economic activity was improving and active cases were coming down. So, that also supported the bullish sentiment.
And most important are the fundamentals: The kind of profit growth that India Inc reported in the September quarter and the December quarter was incredible. This is the widest range we have seen in trailing PE and forward PE – in terms of trailing PE, the market is value between 40 and 50 times; in terms of forward PE, it is valued at between 20 and 30 times.
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So, markets today are supported by liquidity, sentiments and corporate earnings. The economy may have contracted in the past, but the market is looking at the future.
Before the Budget, many experts had been warning that the Indian stock markets were already overpriced. But after the Budget, there seems to a renewed enthusiasm about investing in Indian shares. What explains this? And are Indian stock overvalued or not?
I will dare say that Indian stocks are not overvalued. That doesn’t mean the markets cannot come down. We were not overvalued when we were at 10,000 (Nifty) in March, but markets still went down to 7,500 levels.
But purely from a valuation point of view, we are not overvalued at all. If I look at corporate profitability of Nifty companies, it was at Rs 58,000 crore in the June quarter. For the September quarter, it rose to Rs 104,000 crore; it went up further to Rs 121,000 crore for the December quarter; and people are expecting this figure to jump to Rs 129,000 crore for the March quarter.
Now, we have never seen this kind of profit growth ever. This is the highest profit growth quarter after quarter in September and December. So, people who are looking at the past, or people who are saying the markets are overvalued believe this profitability growth will not sustain.
They are saying profit growth has come because we have cut costs, because we have cut discretionary spending on business promotion, etc. Going forward, companies will be incurring those kinds of expenses, so this kind of profit growth will not be sustained. Hence, the markets are overvalued.
On the other hand, people are saying, if profits have risen despite sales being down 2-3 per cent, then imagine how much profits will grow when sales growth turn positive.
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So, there is a difference of opinion on the trajectory of profit growth going forward, which is making people say the markets are overvalued or undervalued or fairly valued. We believe earnings growth is here to stay. We believe liquidity is likely to sustain. Obviously, it will go up and own; so, there will be movements in the market. But overall liquidity will be supported by retail, HNI, FPI, mutual funds and insurance companies. All of this put together suggests that Indian markets are fairly priced. It is neither expensive nor cheap, it is fairly valued. It’s neither a bubble nor a steaming bath.
Rising US bond yields led to a sharp selloff in Indian shares on Friday. Indices fell about 3.8 per cent, their worst decline in about nine months. How do you see this factor impacting Indian share prices in the days ahead?
When people say markets have crashed, what are they talking about? We are 5 per cent below our all-time high levels. If you don’t have the stomach for this of volatility, please don’t come into the equity market. Please invest in debt mutual funds and bank fixed deposits.
The markets will go up and down. That’s the nature of the market. There will be events that will continue to impact our markets. Rising US interest rates is one such event. Is it the only event that will impact our markets? The answer is: No. There is talk that Janet Yellen may levy capital gains tax in the US. If that happens, could there be some more flows from the US to India? Possibly.
India will become the fastest growing major economy in the world. Will that lead to greater flows into the country? It’s quite likely. Is it possible that US interest rates will keep rising? The answer is: No. Interest rates in the US will rise and fall. And Indian markets will also move both ways.
There will be multiple factors that will continue to impact our markets, but as long as corporate India continues to deliver results like it did in the September and December quarters, all corrections will be an opportunity to invest in the markets.
The government plans to set up a bad bank to park the NPAs of banks. Can this be a magic bullet to resolve India’s banking sector crisis?
No. The magic bullet we need is to ensure that when companies go into bankruptcy, the promoters don’t prosper. They should also suffer the pain. We have seen many instances of promoters of bankrupt companies spending hundreds of crores on the wedding of their sons and daughters. In India, promoters never go bankrupt; it’s only companies that go bankrupt. That needs to change.
Secondly, we need to resolve our NPAs quickly. We have two models. One is the 1992 securities scam, where cases continue forever, the accused die before they are convicted, assets remain frozen and we keep pushing everything below the carpet rather than trying to resolve the issue.
The model is the Satyam model, where the promoter did something wrong… the government, the regulators and the private corporate sector came together and rescued Satyam in record time. That solution ensured that employees retained their jobs, shareholders benefited, the government gained by way of taxes, and most importantly, the Indian IT industry’s reputation didn’t suffer.
As a country, the magic bullet is the Satyam solution, not the securities scam solution. We can create a bad bank. Great! But we need to resolve the problems. We need to ensure that the asset that have become NPAs are sold and the promoters who have siphoned out money are made accountable.
Covid cases seem to be rising once again in Mumbai, India’s financial capital, and Maharashtra, one of the most industrialised states, as well as in some other places. What impact will this have on India’s economic recovery?
This is a very very serious issue that we have to monitor very carefully. It seems Covid cases are rising once again because we started local trains and people started commuting more freely. Now, we can’t allow the situation to become like that in Portugal, the UK or the US.
Fortunately, we have the vaccine. We can speed up the pace of vaccination and ensure that rising cases don’t impact the normalisation of day to day economic activity. This is one big risk factor that we must control and manage, like we controlled the first wave of Covid and the second wave of infection in Delhi.
What is the impact of Covid coming under control in the rest of the country?
Our population is huge. So, we have to measure ourselves in relative terms, rather than absolute terms. When the US vaccinates 350 million people, it will achieve 100 per cent coverage; when we do the same, we will not even cover a third of our population.
Secondly, there were benefits from the lockdown in controlling the Covid-19 outbreak, but there was a huge price that we had to pay in economic terms. In the first stage, we supported lives over livelihoods. But that can’t continue forever.
So, for us, vaccination is extremely important as it will allow people to resume normal economic activities and protect lives as well as livelihoods.