What are your impressions of the Budget?
While the Budget gave a boost to small cars, we believe that the growth prospects for the economy as a whole have been switched from a small car to a Ferrari. The focus on infrastructure is crucial and will attract huge amounts of FDI. Increased spend on rural infrastructure, ports, roads and so on, from $2.7 billion to $4.2 billion, will have a multiplier effect. What encourages me is that on the day of the Budget there was an advertisement for expressions of interest for some mega power projects (4,000 MW costing around $5 billion) and the finance minister also talked about five such power projects. Due to the multiplier effect that spend on infrastructure will have, I think we could easily be looking at a 9 per cent GDP growth by calendar year 2007.
The other important proposal talked about by the finance minister is that of making India a hub for textiles and manufacturing - I'm reading between the lines and hopeful there could be some kind of labour reforms in the offing. The opening up of the food processing industry - which is a $100 billion industry - is again encouraging.
What would this faster growth of the economy mean for the performance of the corporate sector?
We have been projecting GDP growth at between 7.5 to 8 per cent and consequently earnings growth has been forecast at around 15 to 17 per cent for the next few years. However, if GDP growth is going to move up to 9 per cent, there's no doubt that analysts are going to have to upgrade their earnings estimates. If one considers the potential for growth in farm incomes following the investments that are taking place in rural infrastructure, companies active in the rural space are going to do extremely well. And these are big companies. I believe earnings for the corporate sector could well grow in the region of 25 per cent.
You appear to be very confident that corporate earnings will grow at 25 per cent.
Consider this: the infrastructure spend is going to trigger demand from sectors such as steel and cement. Once the construction is ready, you are going to need paint and furniture and so the multiplier effect comes into play. So, I think corporate earnings are bound to grow faster. If one were asked three years ago if cement prices could hit Rs 200 per bag, if mobile subscribers could reach 65 million and so on, most of us would have been sceptical. Therefore, the pace of change will always be quicker than we anticipate.
What is driving consumer demand?
India's demographic and consumption story is now well known, but there's also the feel-good factor. Prices have gone up across asset classes in the last couple of years - at today's prices, around $200 billion of extra wealth has been created and that encourages people to spend more.
How do you view liquidity flows into the stock market in 2006?
For the retail investor, equities account for the smallest portion of assets (2 per cent of household assets). One reason for that also is that three years ago there were not that many mutual fund products to choose from - most schemes were plain vanilla funds. Today, there are many more options and many more ways to play the market. Last year, we saw local inflows into mutual funds of about $3 billion. This year we expect this to double to $6 billion. As for foreign institutional investors against last year's $10 billion, this year we expect a similar amount. So there will be both local and global liquidity.
How do you compare India with global markets?
The Sensex trades at around 16.5 times the financial year 2007 estimated earnings. If the assumption's for GDP growth hitting 9 per cent, that means earnings could grow at around 25 per cent. That would imply that price earnings multiple would fall to 12-13 times. That is close to the multiples of other emerging markets. And Indian companies have better return on equity. In fact, there is huge value in mid-cap companies and in the emerging sectors such as media and textiles. Some mid-caps are growing their earnings at 40 per cent. It's not unreasonable to imagine a Sensex of 12,000.
Has the Indian market been re-rated?
Most definitely. A lot of investors are asking where the growth engines are and Asia is considered to be one big growth area, especially with Japan picking up. The question being asked is: Is Asia today where the UK and US were in 1983-84? If so, trying to put P/Es and valuations is a moving target. Of course, there will be ups and downs. But if Asia is a growth area, India is the second-fastest growing country in the world, even without a 9 per cent GDP growth. So, that's why I believe that FDI will come in - at $4 billion it's a tenth of what China gets and it's half of what the FIIs bring in. There's something wrong with that number. FDI is the missing ingredient.
