Sanjay Sinha is the chief executive officer of DBS Cholamandalam Asset Management, a joint venture between the Murugappa Group and DBS of Singapore. Prior to taking over as CEO a year ago, Sinha was the CIO of SBI Mutual Fund. In an interview with Ram Prasad Sahu, he talks about the global recovery, the need for support from the regulators, macroeconomic environment and investment themes that would play out over the medium term.
Given the state of the world economy what kind of recovery do you expect?
Right now we are at a phase where there has been a significant recovery from the pessimistic picture that was painted six months back. The big question today is whether this will take a ‘W’ shape or will it be something that will be sustainable from the point where we are today. In isolation, it is difficult to sustain this recovery which is why there is a need for continuous support from central bankers and governments to keep the integrity of the financial sector intact. The recovery in the form of a ‘W’ shape springs from the fact that when the financial sector and economies have shown signs of recovery, the commodity prices have moved far ahead of what the fundamentals would have justified.
What kind of impact will the deficient rainfall have on the economy and corporate earnings?
About ten years back, the Kharif crop (sown in summer/monsoon season harvesting in October) used to be 66-67 per cent of the entire agricultural production. And this crop is largely dependent on monsoon. Now, proportion of Kharif is down to 53-54 per cent, almost equal to the Rabi crop (sown in winter, harvesting in spring). Though the delay in rainfall will have an impact, if we do get rainfall before the season is out, a large part of the Kharif crop would have been saved. Impact would have been much larger if we did not get any rainfall now, in which case even the Rabi crop would have been at risk. The fact that we have widely dispersed rainfall through the country now means that the negative fallout which was earlier forecast would be lower. It is estimated that about 50 bps to the GDP growth rate is at risk because of the delayed monsoon and the cascading impact the rural economy has on consumption.
Is there more steam left in the markets?
Market levels are a function of liquidity, valuations and events. The primary driver for the markets recovery in the initial phase has been liquidity. The Indian markets started moving up from the early part of May. And it was not due to election outcome as results had not been announced but the rally was in tandem with the rally in the global markets. The second phase got accelerated due to an event which was the strong mandate for the UPA government. However, this was not an uninterrupted rally, there have been event risks which have put short term breaks on the market.
For example, the budget not measuring up to expectations did retrace the market. Thereafter, government actions in terms of policy be it the intention to roll out the GST or the New Tax Code have been positive for the markets. As far as valuations are concerned they are not static in time. What may be appearing to be fairly valued or expensive at a point may not be the same after two quarters have passed between that point of view and the earnings being generated by the corporates. If we are in a range bound market, earnings would have moved up in the three to six month period and the visibility of the future quarters would make that level justifiable.
For example, the budget not measuring up to expectations did retrace the market. Thereafter, government actions in terms of policy be it the intention to roll out the GST or the New Tax Code have been positive for the markets. As far as valuations are concerned they are not static in time. What may be appearing to be fairly valued or expensive at a point may not be the same after two quarters have passed between that point of view and the earnings being generated by the corporates. If we are in a range bound market, earnings would have moved up in the three to six month period and the visibility of the future quarters would make that level justifiable.
Considering the EPS estimates for FY 10 and FY11, are the markets jumping ahead of fair valuations?
Earnings expectations for FY10 would be flat to slightly positive while that for FY11 would be growth of 15-20 per cent. If you look at a 10-year average for Sensex, the P/E ratio has been 15 times. So a Rs 1,100 EPS for FY11 would be discounted by about 15 times at 16,500 levels for December. However markets also move up and down due to liquidity. If there is liquidity there could be a premium to this number in the short to medium. Unless we get into the exuberance phase with P/E at 21 times or so, the momentum would still be strong.
Which sectors which would be lead the recovery?
We can sum up investment opportunities across four themes. The first would be domestic consumption, the second would be commodities, third would be infrastructure while the fourth would be linkages to global recovery. These four would cover all the available opportunities in the market Across sectors, from a risk return perspective the scale is tilted more towards the midcaps than the large caps irrespective of sectors.
The large caps have already shown discounting of the optimism in their prices, the midcaps are just about catching up. In the process, the valuation difference that had emerged between the large caps and the midcaps were not justified given the change in environment. Under the circumstances midcaps would perform better. Within the domestic consumption, there is today room for it to be stable part of a portfolio. In 2006, 2007, FMCG and auto took a back seat but in 2009 they are back in the reckoning as far as the core portfolio is concerned.
The large caps have already shown discounting of the optimism in their prices, the midcaps are just about catching up. In the process, the valuation difference that had emerged between the large caps and the midcaps were not justified given the change in environment. Under the circumstances midcaps would perform better. Within the domestic consumption, there is today room for it to be stable part of a portfolio. In 2006, 2007, FMCG and auto took a back seat but in 2009 they are back in the reckoning as far as the core portfolio is concerned.
You should always play the contrarian. Today, there is a unilateral point of view that the IT sector is vulnerable because the order flows are at risk due to protectionism or due to shrinkage of company budgets. Both these negatives are being played up more than what they should be.
What are the challenges for Indian corporates?
The high cost of borrowing is one as the lending activity in India has not come back to levels witnessed in the early part of 2008. Last year we were clocking 22 per cent growth in credit and now down to 15-16 per cent. There has been a lull in capacity expansion because of the environment. The positive side of this has been that corporates have been able to conserve capital at a time when it was desperately needed. The negative could be if they have delayed capacity expansion, they may not be able to meet demand which is likely to emerge and of which there are early signs. The passenger car sales in the current financial year are up by 24 per cent. In cement, while capacity expansion has slowed down, dispatch numbers continue to be strong.
Should one invest in gold while its prices have passed the $1,000 mark?
Gold price domestically is more a function of the currency movement. In dollar terms, the gold price has not moved significantly but in rupee terms it has moved a lot. This is a commodity which is inelastic in supply and it has traditionally been a hedge against inflation and if there is a feeling that commodity prices would shoot up then this could be a hedge.
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