More than anything else, India needs restoration of the 7 percent to 7.5 percent GDP growth trajectory because we have got almost all our macroeconomic parameters right.

India needs restoration of the 7 percent to 7.5 percent GDP growth trajectory because we have got almost all our macroeconomic parameters right, Abhay Laijawala, Head-India Research, Deutsche Equities, said in an exclusive interview with Moneycontrol’s Kshitij Anand.

Q) We are approaching Budget 2018 which would be the last full-fledged Budget for the Modi government. Will it be a reformist budget which we have seen in the past or a populist one?

We have written about this more in terms of what generally governments in India have done in the last year of every administration. We all know what happened in the Narasimha Rao government, the Vajpayee government, and in both terms of the UPA government.

We noticed that sectors that are focused on poverty alleviation, social inclusion, women’s empowerment, and rural India generally tend to get a lot of government focus. Therefore, next year should be no different.

GDP growth has slowed considerably on account of demonetisation and we do need to see agricultural purchasing power coming back. We do think that the government will focus more on agricultural and rural India amongst other sectors.

Q) If you were the Finance Minister, what would you have done considering the current economic situation?

More than anything else, India needs restoration of the 7 percent to 7.5 percent GDP growth trajectory because we have got almost all our macroeconomic parameters right where they should be.

We have managed to get inflation under control, we have also managed to get the current account deficit to very manageable levels, and we have got fiscal discipline.

For four years, we have not reneged on the fiscal deficit and as a result, what seems to be missing is economic growth.

For a populist country like India where there is the issue of demography and job creation is extremely vital, employment security is essential and that cannot happen until we get growth back towards the 7.5-8 percent mark.

We have seen some very transformational reforms and we should understand that many of these transformational reforms do have a transient impact.

GST, as well as demonetisation, have had a transient impact and once the transient impact wears off, then we will witness higher growth.

Getting growth back and putting India back on the 8 percent growth trajectory should be the vital objective.

Q) We are talking about 8 percent growth. So far, markets are discounting a double-digit corporate earnings growth. It is being slowly pushed to FY19 now. Do you think that euphoria will continue or do we see some arrest in the euphoria as we step into 2018?

Markets have re-rated this year because we have seen earnings growth being cut but yet the market has moved up. We have seen the Nifty now trading at 22 times one year forward earnings and all of this is on the back of surging domestic liquidity.

With the markets being at the current valuations, the threshold of patience cannot continue and therefore the return of earnings growth momentum is vital.

In our sense, what the market will be looking out for is the sequential improvement in profits on a quarter-by-quarter basis.

We are very optimistic about next year primarily because it is a pre-election year and in pre-election years, you do see growth-boosting initiatives being taken by the government.

Q) Right now, the government is is taking the lead in the infrastructure and realty sectoras. Private capex has not really kicked in as yet but  capacity utilisation has gone up. Where do you see this trend heading?

Our view is that overall capacity utilisation in India is still low and unless and until the industry capacity utilisation rates move up, the private sector is not going to be encouraged to launch a new capex cycle.

There are two sides to the corporate capex cycle - one is interest rates and the other is real demand. Interestingly, we have seen interest rates come down but that has not been seen as a catalyst for a revival in capex primarily because aggregate demand has been weak.

In our view, if rural demand starts to come back, that should be a very important catalyst for aggregate demand in the country and as a consequence, capacity utilisation rates.

In the year 2017, we have seen a slowdown in aggregate demand primarily on account of low rural demand. First, it was on account of demonetisation and then GST related transitional impact.

We have recently written that we find the increase in food price inflation as a very encouraging sign, thereby suggesting that the stress in rural India may be fading.

Q) Coming to the sectors, which sectors do you think will be able to take the lead in the next two years?

I think domestic cyclicals and infrastructure generally tend to do well in a pre-election year. As the government starts to focus on growth creation, and on growth creating incentives, this government has been very articulate on infrastructure investments.

Therefore, we think that there is a lot of energy right now in the government on giving out orders for infrastructure projects and on road projects.

We see a lot of that percolating down to sectors like capital goods and  sectors like cement. The government’s focus on social inclusion, poverty alleviation, rural development should all be positive for consumer companies.

Here we think that consumer discretionary companies will be bigger beneficiaries than consumer staples companies.

Q) Do you think over the span of four years, political equity has come down after some hard measures having introduced which created some sort of uncertainty?

A) Not really because if you see all the government surveys, they point to India being very patient with many of the transformational reforms. The average citizen also believes that transitional reforms come with a cost and it seems that the country is with the government on this.

Q) Foreign institutional investors (FII) are also looking at the same picture?

FIIs are looking at India in a relative context. There is a lot of FII interest right now in China’s internet sector.

They are looking more at China because Chinese internet and Chinese technology stocks have done very well and there is a lot of supply-side curtailments in China which are leading to interest in the material sector.

Q) Is that the main reason why we have not seen more flows in the secondary market from the FIIs?

Yes but it is a combination of two factors. One, from a macro perspective, the absence of earnings growth has also pushed FIIs. The locals have been large investors because they are receiving domestic flows.

Clearly, they have been compelled to invest. On average they receive USD 3-3.5 billion every month. Local mutual funds are receiving between USD 3 and 4 billion every month and therefore, the mutual funds have to invest in equities.

However, for the foreigners, there is no such boost of liquidity and there is a lot of value in Chinese and Korean markets.

I cannot comment on stocks, but there are certain companies in Korea which trade at valuations that are half the valuations of Indian companies.

Earnings growth in Korea is surprisingly on the upside and it is the same in China. So a combination of all of this has lead foreigners to be overweight the other Asian markets.

The rise in the oil price has also led to some concerns about India, but the overall faith in Indian reforms continues to remain intact and the world is watching India very closely. The belief is that these reforms will bear fruit.

As we saw in the case of Moody’s, they basically stated that they know that growth will be impacted in the near-term because of these reforms but these reforms are ultimately going to be growth positive.

 18 Dec 2017, 05:07 AM