The Economic Times | 26 MAR 2019
India in the past has been a poster child of the emerging market world and we have our ducks lined up here for a very solid year, said Nandita Parker, Managing Partner, Karma Capital Management, in an interview with ETNOW.
Indices are at an all-time high in India. The screen is telling you that bulls are in a commanding position. But the level of participation, the leverage commitment by HNIs and traders does not feel like a bull market.
I am sure that will change and very soon. In the early stages, there is always a fair amount of scepticism on whether we have crossed and done away with the ills of the past. 2018, was a very challenging year for Indian equities. So, I am not surprised that the bulls are not gaining the traction that they have potential to gain this year.
I do believe that much of the global as well as domestic headwinds that India faced in 2018 are reversing and are in the process of correction. This will be a very strong year for Indian equities. We do have a big event ahead of us and some amount of caution is warranted given that elections are around the corner. But having said that, it is ju!–more–>st a < matter of time when the rally becomes more broad-based.
The more important thing to focus on is the fact that globally in the developed space, there is a slowdown. Oil prices are heading down. There is a weak dollar trade ahead of us and that is fuelling these flows into emerging markets.
India has been lagging but it is trying to play catch up and the flows in March are clearly showing that. We have the makings of a very solid scenario for the next five years and I would venture to say that if this government comes back, there will be a fair amount of continuity and that will be something that foreigner investors will look at very closely and provide the impetus for the next leg.
The current administration has enjoyed majority in parliament yet earnings recovery at the micro level has not happened. Some would argue that if the current administration comes back into power, what will change?
There are a number of things that people are not taking account of. Corporate bank earnings are scheduled to recover very sharply in FY20. Public sector banks have put their NPL accretion behind them, at least the pace of NPL in accretion. The provisioning will be much lower and they are coming back into the black and supporting the whole earnings growth story for FY20. In terms of the government, I do not want to sound political but there is something to be said for continuity.
If this government comes back, they will hit the road running. There will not be much delays in terms of what they want to do next. The market will be very watchful of what they do in the first 100 days, the kind of budget that they deliver in July and particularly foreign investors will look at what they do with tax policy.
This is one issue that really needs to be addressed for a much more consistent tax policy. If you look at corporate taxes, the finance minister had promised a reduction in corporate tax rates. There is possibly some room to do that going forward.
Secondly, the capital gains tax is all over the place when it comes to FPIs, alternative investment funds and individual investors. So, there is a lot of room to go there in terms of making a correction. In infrastructure development, there is potential to step on it. The Niti Aayog has set out their target for 75 years of Indian independence and what they want to achieve for the next five years. There is a lot that this government will be able to accomplish once the elections and whole political compulsions are behind us. I am very hopeful of seeing some activity there.
Are you saying that with regards to FII flows, a lot is subject to whether or not the current administration comes back to power?
I am not saying that it is dependent on the current administration coming to power exactly. What I am saying is that if there is continuity, there will be a very straightforward case for an acceleration in inflows. If there is not, then we will obviously have to wait and see what kind of government is formed.
But if you look at the macro picture, interest rates are headed down, inflation is benign, oil is a tailwind instead of a headwind, the Federal Reserve has stopped raising rates and in fact will stop removing liquidity from the system. All these are very big factors which will drive equities globally and especially emerging markets. India in the past has been a poster child of the emerging market world and we have our ducks lined up here for a very solid year.
Everyone was gung-ho on the consumption theme as a whole last year. Now with an acknowledgment of a slowdown coming in demand, how are you assessing the potential of consumption space as a whole?
There are some aspects which are mature and then there are parts of it which are emerging. For example, the whole Ayurveda and natural wellness area is certainly a fast growing part of consumption and we are very excited about that. There is retail which I am very positive on — whether it is brick and mortar brands or e-commerce and with it the whole supply chain buildout which will lead to more opportunities on the logistics side.
We have the dedicated freight corridor coming up in two years and that will make things more efficient for supply chains as well as for manufacturing. There is a lot to look forward to even on the consumption side.
Where is there scope of money to be made within the consumption space, specifically because that is the engine for the Indian economy? When you say that you like brick and mortar and such themes, would you be more bullish on staples or discretionary? Is India all about betting on the rural class or the middle class?
As I mentioned, we are betting on both retail as well as consumer discretionary. Media is a theme that we like very much. There is a lot of exciting stuff happening there. We tend to be value investors and we are not going to bid up companies which have shown growth in the past two years. We are not about to pay at 45 multiple.
We tend to be value pickers and we think that there are large swaths of the market, maybe in the small and mid-cap space, where growth is ahead of us and that could be led by lower interest rates and stimulation of housing demand and on the financial side — be it in the insurance sector, corporate facing banks and so on.
There are pockets of growth. I tend not to be thematic in investing. I look at where is the value-set emerging, special situations and value unlocking because of corporate events and so on. I am finding plenty of opportunities.
Are you hunting for some opportunities in NBFCs which is a bombed-out space?
The market always goes from one extreme to the other. There is room in the NBFC space as well. I cannot give you specifics because in the past few months we have been picking one particular NBFC that we like very much and in fact in the last month it has rallied about 30% or so. But that view is probably a little dated and things are looking up. You have to be very clear on what you are buying and why you are paying a certain price for it. You have to say you know what is so unique about it, what is sustainable about their business model and whether they have liquidity to ride out this very difficult time and also what are they doing about growth.
What you are going to see is in the short term, growth is a challenge but if you look further down and at the parameters of what is unique about this NBFC and can a bank replace this NBFC, that is the type of discussion you need to have because the NBFCs do reach the last mile. They are getting squeezed on the margins right now but going forward. you could expect some of them to do reasonably well.
Other than financials as well as consumption, are you finding special situations that are of interest to you?
Absolutely we are and just across the board it could be in the healthcare space, oil and gas, real estate. It can be a whole host of companies where some of the liquidity situation has to improve further and once we see clarity, a number of situations that we own are going to give us a very good upside for the next couple of years.