The soft-spoken Nilesh Shah, Deputy Managing Director, ICICI Prudential AMC, tells Shobhana Subramanian that this time around, the market is being driven by event risks which is why it's hard to tell where the bottom is.
Did anyone think India could be so vulnerable to the sub-prime crisis?
The market has made us look stupid because we couldn't predict the global crisis. We should have been cautious but we believed that if sovereign funds were writing out cheques to bail out banks, things must be fine and that we were somewhere near the bottom. But that was not true; we should have looked at other data too.
We were, I think, somewhat overawed by the bull run of the past few years, and under-estimated the sub-prime crisis. At 21,000 everyone was cautious but most people felt that the downside was about 15 per cent. No one really believed the market could come off like this.
So, what's your reading now?
In the short run, the market is being driven by technicals. Both long-term and short-term fundamentals are comfortable, currency reserves are at an all-time high, there is enough liquidity to fund growth -- there's an amount of $100 billion in MSS and WMA -- savings and investments are running at 30 per cent plus, the rupee is already overvalued, so there's little downside now.
Of course, we will not grow at 9 per cent but we will still grow at 8-8.5 per cent and that will be good enough, the deceleration is already factored into the prices. But the market is being driven by event risks, which is why people are uncomfortable predicting the bottom.
What are these event risks?
The first is the farm loan waiver, though the market has factored in most of the negatives. The next is a rate cut. Till the Budget, we were reasonably sure that the RBI would cut rates, directly or indirectly because of the differential between the US and our market.
But now that the Budget has provided a consumption stimulus, the RBI may want to wait and see how inflation pans out. If there is a cut, the markets will get some support, otherwise the anxiety will increase.
Further, if the monsoon forecast is good, then again the market will have something to cheer about, otherwise no. Then there are the elections.
On top of this, the global uncertainty continues. The total losses are about $600 billion and the write-offs are about $215 billion. The capital raised is between $85-100 billion, so how does the remaining $400 billion get funded?
Even if the Fed cuts rates, we don't know when we will see the impact of that on the market and the sentiment. If these events turn out positive, then the market can shoot up, but if there are negatives, the market can go down further.
The impact of quarterly results?
Much of the bad news of the results is already factored into the prices. Even if we prune our estimates, we will have a worst-case scenario of Rs 950 earnings for the Sensex for FY09, at a 10 per cent earnings growth. If I adjust 2,000 points from the Sensex for embedded values for insurance, gas reserves, and other such non-profitable businesses, then I'm still trading at 15.5 times forward earnings.
Are valuations at a disaggregated level now reasonable?
At an overall level, yes. Is the market cheap and a crying buy like 9/11? No. Then we were trading at 10 times forward earnings but the growth rate was 6-7 per cent and interest rates were at 10-11, and we were not getting money from the foreigners like we are today. But we are not in a 9/11, so 15 times is reasonable. Our numbers show that the universe of the top 200 companies is probably trading at less than 12 times.
Are you concerned about the slowdown in retail credit?
True, there is a slowdown but we are looking at just 10-15 per cent earnings growth, not 30 per cent, and we have factored in the reduction in credit. Now we may need to upgrade the numbers to accommodate the Budget incentives.
Will the Budget boost consumption?
Definitely, because at a Rs 500,000 salary, the additional income will be about Rs 5,000. It's possible that the money freed up could be used up by inflation. But had the Rs 5,000 not come, consumers would have had to reduce their standards. So, while there may not be any volume growth, there will still be value growth. Nominal growth will be high and a 10-15 earnings estimate for FY09, for the Sensex, is conservative.
What is your view on real estate companies?
Prices have softened everywhere except Mumbai. So far, real estate developers have been valued for their land holdings rather than execution. That won't last for long and the execution track record for most companies is not up to the mark; we have companies that want to double and treble the space developed, that's not possible. Also, land bought by a developer for Rs 50 per sq ft becomes Rs 1,000 per sq ft overnight. There's no business where you put in Rs 50 and make Rs 950, it doesn't work that way.
Which is the best market in the world?
Probably Brazil, it's already at an all-time high in this crisis. God is probably Brazilian. They have just discovered a huge oil field; they have all natural resources one can think of and not so many people. They are the lungs for the world and the day they say we produce oxygen and the rest of the world produces carbon dioxide, so please give us carbon credit, no Brazilian will need to work. So, Brazil is probably more attractive than other emerging markets. India is certainly number two. We have the entrepreneurial spirit, Brazil has the natural resources. Let's see who wins.
Would you advise investors to start putting money into the market now?
Most people must be already invested and worried about the losses. Our call is that there are event risks; the market may be range-bound and volatile. But the long-term fundamentals are intact, so equities will continue to give decent returns.
Are you worried about foreign inflows?
Every dollar that FIIs brought in last year was more than matched by local investors. Yes, FIIs are welcome, they are needed, and they own 22 per cent of my market, so I have to worry about them. But tomorrow if they don't bring in money, the local $35 billion that came in to the market in 2007, compared with the $30 billion brought in by FIIs, can still support the market.
Then why isn't that money coming in now to support the market?
Domestic investors are not here to give the FIIs an exit. If I have money to invest, I will probably wait for 10-20 per cent from current levels before buying him out.
Are the FIIs the only sellers?
No, in January they were sellers but in February they were buyers. It's the speculative positions that have been unwound.
