In a chat with ET Now's Nikunj Dalmia, Prabhat Awasthi , MD & Head of Equity Research, Nomura India, talks about India's macroeconomic health and its impact on the equity markets. Excerpts:
ET Now:
Indian markets are up by about 12.5% from the recent lows in local currency terms. What has done the trick for us - environment, risk-on trade, or valuations?
Prabhat Awasthi : The large part of it I would ascribe to risk-on trade. So we have got three or four things which did the trick. First, commodities and oil prices fell and that is typically a positive for Indian markets especially in a relative context. There is enough evidence to show India tends to outperform regional markets when commodity prices are falling and vice versa because we are more sensitive regarding current account and inflation when it comes to commodity prices. Second, there was a risk-off and India is high beta to risk-off, so those selloffs were pretty strong. Third, the optimism on the policy front. And last, technically people have been underweight on India. As a result, when markets go down very quickly, they tend to bounce back a bit, especially because domestic investors were sitting on cash and global investors have been largely underweight. That was one of the reasons why you saw institutional buying come back into the market, which had relatively lower volumes. Still, the bounceback in the market has not happened with a massive degree of conviction. Otherwise, you would have seen far more participation in the market; participation has been reasonably weak given the volumes.
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ET Now: So do you think the best part of the summer rally is now behind us?
Prabhat Awasthi: It is very difficult to say for the short term. Regarding valuations, we are at 13 times now. If you look at India's average valuation for the last 10 or 5 years, we have been at 15.5 times, and we are about 15% away from that number. But that 15.5 came on the back of a very decent macro environment.
So we had 8% to 9% growth and we had a decent global economy at that point in time. Policy issues were not so stark. So given that, a discount is appropriate to long term average. So if you were to really look at where the markets could trade to an upside scenario, then even if you assume that you need a 10% discount your, best case will probably be about 10% to 15% in a 12-month period, which is not really that far off.
Bond returns and markets tend to perceive that very well. So to that extent, the upside starts getting liberated from here.
ET Now: When we started the year, the best-case scenario was that for the current calendar year, Indian markets will appreciate by about 15% to 18%. We have already appreciated by that amount in this calendar year. So I guess the best part is already behind us now?
Prabhat Awasthi: The best part of the rally was till March. We are still below that. So in fact when we started in January, we were bullish for some right reasons, some wrong reasons.
When we actually were bullish, we sort of thought that there will be a correction in interest rates because the economy is already slowing down and we thought as the economy slows down, current account issues will be less relevant and that will give a fillip to the markets.
What actually transpired is data points have been worse. So we were downgraded in March, which was primarily because of the external account and its consequences. The data points in global economy have been weaker. So you are right, the market has given 15%-18%. When you look at what is going to happen incrementally in the economy, it is likely that your earnings will not be as robust, given that the evidence of a slowdown in actual demand numbers for companies has been on the margin negative.
We have seen auto numbers deteriorate, we have seen a slowdown in cement, we are hearing about steel sector demand slowing down and we are starting to hear about the tech sector also getting impacted by the global slowdown and volume estimates too are going down.
So in an environment where earnings are not robust, it is very, very tough for markets to perform. In fact, earnings revision is an absolute necessity at times for the markets to actually move up. So if earnings revision on the balance starts moving down, then there could be some short downside as well.
ET Now: What about valuations? Historically, we have seen maximum money is always made when macro is bad and the environment is tough but valuations are attractive?
Prabhat Awasthi: Valuations have to be seen in a context. First, global valuations have come off far more than Indian valuations. So the fact is India's premium over the global market has come off but it sustained to a large extent.
There are markets which are available at 10 times, India is 13 times, so there is a 30% premium despite the fact that growth differential has shrunk quite a bit. The second problem from the valuations perspective will be that you are still evolving in terms of earnings. Earnings estimates have sort of been cut on a progressive basis. There is more optimism in the future because there is some inbuilt recovery in the economy that is built by analysts, I would not say by economists, but analysts have this bias of going back to 20% growth after a bad year.
Lastly, when you consider the earnings shield in India compared to corporate bond yields, I do not think you can make out the case that equities are cheaper than bonds. They are not. So with respect to bonds, equities have not become cheaper.
That typically is the best time to buy and that usually happens when people really give up or capitulate. So I do not think you are in a situation where you can say markets are so compelling that I am going to make tremendous amount of returns. They are not really cheap, they are cheap with respect to history and not with respect to bonds or regional markets.
ET Now: But in the near term, do you think globally markets are pricing in too much of risk? There are record inflows in German Bund, US bond yields are now offering less than 2% but still are getting inflows on a daily basis. Do you think such a high level of risk is unlikely to sustain and whenever money will come out, it will flow back into EM equities?
Prabhat Awasthi: That is an argument which has been made for a very long time now, because bond yields have been very, very low for a fairly long time.
The argument of earnings and bond yields that you are talking about, there is the classic argument that if bond yields are low, clearly economic activity will pick up. But the problem is that given the deleveraging that is going on, given the sovereign problems that are being faced, yields are low because there is so much risk to higher yields and to economic activity. The fact is that you are not seeing any growth delta even after such low yields, which essentially argues that if you did not have this yield support at lower levels, economic activity would probably have collapsed or you would have seen much worse problems.
So in such a situation, I do not think that argument is really that straightforward. In a normal scenario, bond versus equity argument is far more valid than in a scenario where you are sort of struggling to keep your head above water, as it is.
ET Now: If the investment cycle fails to pick up in next 6-12 months, do you think Indian markets could go through a permanent derating?
Prabhat Awasthi: From our perspective, permanent is probably three years. So it is quite possible that if the investment cycle does not pick up, then the growth trajectory that you expected of India will be more muted for a prolonged period of time.
So if you look at how growth expectations of India have changed, people started with 9%, then went to 8%, then went to 7% and have come down to 6%, but there is always a recovery expectation two years down the line. That is because you think that policy will be all right. The perennial argument is when India goes into turmoil everybody wakes up and start doing the right things.
That belief is why people continue to say that things will recover and that is a valid argument frankly, but the break in investment cycle that has happened because of last two years' of inaction will definitely tell on growth for a reasonably long period of time.
I will give you a few examples. Like in the power sector, so many generation capacities coming up but given the coal situation, I do not think anybody will get a bankable project for the next two years because there is no coal. So for three years, you will not have a new project being announced, which essentially would mean that with the lag, the entire execution cycle in power will start to follow.
The same thing is probably going to happen to sectors like telecom. In metals, look at the number of projects being put up by Hindalco and Vedanta. There is hardly anything slated regarding what they will do in the next two years. So the danger now is that because you have seen a break in the cycle, reacceleration of the investment cycle will also be a lag process. The more we delay in terms of getting the process back up, the more danger that we will have a prolonged slowdown.
ET Now: So based on the sound bites which we are getting from New Delhi, you are not confident that the policy reform will kick in?
Prabhat Awasthi: Let us look at what has been announced and what is needed. The announcements from Delhi so far have largely been towards easing bond markets and investment limits. So essentially what we are doing is trying to get capital because we have been short on capital and the rupee has been deprecating.
So attracting capital on higher yields frankly is not really something which is desirable in the long term because we do not want to take more debt. As it is, our external debt is going up.
The essential issue is that we need to have supply side reforms and demand control. If the fiscal issue is not addressed, then you cannot keep taking more debt to just fix the problem. At some point in time, it will come back to bite you again.
So I would like to see two serious reforms -- one is on the supply side. So that basically means that stable policies for investment should take off the ground across sectors. You cannot have a situation where I put a lot of money in a power plant just to find out that the return is not going to generate even a 2% ROE.
So what is needed is stability in policy and a clear-thought process about how to generate investment activity, especially given that globally there are no opportunities. You have got to create domestic opportunities through infrastructure and local sectors.
Secondly, as I said, to get the fiscal side right, not inflame consumption, emphasise investments. Till the time we see signs of that, just attracting capital will be a very short-term measure.
ET Now: Which sectors tend to do well in a market like this? So far, those who have invested in defensives have made money but now, for the first time, defensive trade also seems to be reversing.
Prabhat Awasthi: Consumption usually is far more resilient in the short term than investment. For example anecdotally, you know there is a labour shortage and that has not really eased. You are not seeing salary cuts in India, salaries are still rising though at a slower pace.
As the investment cycle starts to come off, it will have an impact on consumption, because job prospects will start fading, salary increases will reduce and stuff like that. Therefore, there will be a slowdown in consumption. Prices of consumer stocks were reflecting more of a fear premium than really the absolute level of fundamentals.
The question is in a slowdown situation, will that relative trade hold out or not? I guess if you are two years slow on growth, which is our forecast for example, closer to 6%, then that relative trade will probably still hold out. There might be periods when there is a risk-on and these guys underperform and people try to shift their portfolios away from defensives.
ET Now: So don't sell consumer names?
Prabhat Awasthi: Even if in a portfolio, it is still very advisable.
ET Now: Within the consumer space what are you hot on - discretionary, staples or autos?
Prabhat Awasthi: Discretionary is more risky because it has a more urban-centric sort of consumption.
Urban-centric consumption is probably suffering more on account of the fact that there is a clear shift towards rural consumption and the rural terms of trades have become better. We have seen a 20% increase in MSP and any impact of an industrial slowdown will be first felt in urban India, not in rural India because they are still far more insulated.
So as a result of this, discretionary probably will suffer more. If you look at the numbers of let's say a Bajaj Auto versus a rural focussed player, you can see a clear difference in growth rates. It might be more advisable to be lower in the pyramid chain and be in lower penetrated categories than the higher penetrated, more in rural and less in urban areas.
Nikunj Dalmia: What are your overweight recommendations? You are not hot on banks, you think the consumer sector is slowing down and it is too early to buy investments.
Prabhat Awasthi: The problem in markets like these, which are rangebound at best, is what to buy.
At the end of the day, it is a relative game when the overall environment is lacklustre and to that extent our view has been that you have got to buy companies where the earnings protection is high. This could be utilities, for example. Telecom is starting to stabilise...it could be pharmaceuticals, where there is a very clear and defined opportunity of patent expiries, rupee is in their favour and the sector dynamics for next three to four years are extremely favourable.
The penetration of healthcare in rural areas is still very small, so the growth in domestic market is still very strong. Obviously, you should not make 100% of your portfolio with these kind of names because the fact is that there is still a very large weightage of banks. So within banks, you need to be more defensive. You have to have some financials in your portfolio, you cannot ignore them altogether.
Nikunj Dalmia: Buy the private names, do not buy the PSU names?
Prabhat Awasthi: Yes that sort of a bias, correct.
Nikunj Dalmia: What are your high-risk, high-return ideas?
Prabhat Awasthi: Basically, high return in large caps is going to be very difficult from these levels. So if you are looking into high returns, then you will obviously have to tilt towards midcaps. So there is a bunch of midcaps we like, few of them have been destroyed by policy actions, like gas names have sort of evaporated.
For example, we really like Mcleod Russell because we think there is a global cycle in the offing and there is a big benefit happening. But you will get stock specific when the overall macro is very weak and you are not really bidding on an economy trend to make your returns, you are probably bidding on company-specific factors, some narrow industries which will do well in an overall environment where things are slow.
Nikunj Dalmia: So apart from McLeod, anything else in the midcap space which excites you?
Prabhat Awasthi: There will be some smaller banks which still have growth, for example IndusInd Bank.
In the tech space, even though there are some short-term headwind, we still like smaller companies compared to larger ones, where we think there will be more headwind.
There might be some case of gas names but obviously we need some clarity on regulation. Investors have become extremely wary of buying anything in India which has got any whiff of regulatory issues involved.
Power Grid for example, we really think that stock will do well. It has done really well. It has held on. It has really appreciated in the market which has gone down on an overall basis.
Nikunj Dalmia: What role do you think IT stocks will play in the next one year because the headline growth numbers for at least IT largecaps seem to be slowing down?
Prabhat Awasthi: There are two things which have happened in IT. Clearly, the global growth environment has weakened. European is in a funk and even in US the volume growth has not been as strong as was expected, despite the US recovery. So clearly that essentially means that from an 18% sort of volume growth, you have gone to 12% to 14%, even lower in cases and that has been a big disappointment.
On the other hand, the rupee has depreciated. However, if you look at the forecast of rupee, the belief of it sticking in this level is close to zero. So the fact is that IT stocks have not really benefited from the rupee's depreciation because there are people who say the rupee will go back to 50. In that case, you obviously would not buy IT stocks.
On a relative basis, the sectors should still be alright, especially from these levels. It could have a negative reaction to the current results which are coming up because there has been clearly a demand-side weakness and that might mean the stocks might be volatile, even down, after the results. So one has to be cautious around that time but in a relative context, IT is still fine. Actually they have done okay in a relative context to the market in last three-four months. They have outperformed in sorts.
Nikunj Dalmia: But within the IT space, is the pecking order changing, it is no longer Infosys on top?
Prabhat Awasthi: You are right, it is no longer Infosys. So our thing is in very absolute largecaps, TCS is what we have liked and in the midcaps or the second rung, HCL has been the top pick.
ET Now: What is your big call for FY 13 and then beyond -- sit on cash, protect your capital, time to go high beta has not come yet?
Prabhat Awasthi: Yes, I do not think this is really time for high beta. Our view has been that markets will be flat through the year. You can go wrong by 5%-7% here or there but the enabling conditions for the market to do well has to be the underlying growth and that is what you pay for, especially in an emerging market like India.
Till the time you get clarity on that and you are convinced that growth is going to come back -- and I am not talking of 8%-9% but 7%-7.5% visibility -- it is very difficult for the market multiples to move beyond 13-14 range, if not lower. They could probably be lower than this.
Nikunj Dalmia: But you will be very surprised if you go back to December lows, which is 4500-4600 on the Nifty?
Prabhat Awasthi: That typically happens when you have an external event on top of the local macro factors. The fact is you go down to those levels when you really have stress in the global environment. So every time Europe hits a crisis, you tend to deteriorate far more.
From a local investment perspective no, but from a foreign investment perspective we did touch those lows.
Indian markets are up by about 12.5% from the recent lows in local currency terms. What has done the trick for us - environment, risk-on trade, or valuations?
Prabhat Awasthi : The large part of it I would ascribe to risk-on trade. So we have got three or four things which did the trick. First, commodities and oil prices fell and that is typically a positive for Indian markets especially in a relative context. There is enough evidence to show India tends to outperform regional markets when commodity prices are falling and vice versa because we are more sensitive regarding current account and inflation when it comes to commodity prices. Second, there was a risk-off and India is high beta to risk-off, so those selloffs were pretty strong. Third, the optimism on the policy front. And last, technically people have been underweight on India. As a result, when markets go down very quickly, they tend to bounce back a bit, especially because domestic investors were sitting on cash and global investors have been largely underweight. That was one of the reasons why you saw institutional buying come back into the market, which had relatively lower volumes. Still, the bounceback in the market has not happened with a massive degree of conviction. Otherwise, you would have seen far more participation in the market; participation has been reasonably weak given the volumes.
��
ET Now: So do you think the best part of the summer rally is now behind us?
Prabhat Awasthi: It is very difficult to say for the short term. Regarding valuations, we are at 13 times now. If you look at India's average valuation for the last 10 or 5 years, we have been at 15.5 times, and we are about 15% away from that number. But that 15.5 came on the back of a very decent macro environment.
So we had 8% to 9% growth and we had a decent global economy at that point in time. Policy issues were not so stark. So given that, a discount is appropriate to long term average. So if you were to really look at where the markets could trade to an upside scenario, then even if you assume that you need a 10% discount your, best case will probably be about 10% to 15% in a 12-month period, which is not really that far off.
Bond returns and markets tend to perceive that very well. So to that extent, the upside starts getting liberated from here.
ET Now: When we started the year, the best-case scenario was that for the current calendar year, Indian markets will appreciate by about 15% to 18%. We have already appreciated by that amount in this calendar year. So I guess the best part is already behind us now?
Prabhat Awasthi: The best part of the rally was till March. We are still below that. So in fact when we started in January, we were bullish for some right reasons, some wrong reasons.
When we actually were bullish, we sort of thought that there will be a correction in interest rates because the economy is already slowing down and we thought as the economy slows down, current account issues will be less relevant and that will give a fillip to the markets.
What actually transpired is data points have been worse. So we were downgraded in March, which was primarily because of the external account and its consequences. The data points in global economy have been weaker. So you are right, the market has given 15%-18%. When you look at what is going to happen incrementally in the economy, it is likely that your earnings will not be as robust, given that the evidence of a slowdown in actual demand numbers for companies has been on the margin negative.
We have seen auto numbers deteriorate, we have seen a slowdown in cement, we are hearing about steel sector demand slowing down and we are starting to hear about the tech sector also getting impacted by the global slowdown and volume estimates too are going down.
So in an environment where earnings are not robust, it is very, very tough for markets to perform. In fact, earnings revision is an absolute necessity at times for the markets to actually move up. So if earnings revision on the balance starts moving down, then there could be some short downside as well.
ET Now: What about valuations? Historically, we have seen maximum money is always made when macro is bad and the environment is tough but valuations are attractive?
Prabhat Awasthi: Valuations have to be seen in a context. First, global valuations have come off far more than Indian valuations. So the fact is India's premium over the global market has come off but it sustained to a large extent.
There are markets which are available at 10 times, India is 13 times, so there is a 30% premium despite the fact that growth differential has shrunk quite a bit. The second problem from the valuations perspective will be that you are still evolving in terms of earnings. Earnings estimates have sort of been cut on a progressive basis. There is more optimism in the future because there is some inbuilt recovery in the economy that is built by analysts, I would not say by economists, but analysts have this bias of going back to 20% growth after a bad year.
Lastly, when you consider the earnings shield in India compared to corporate bond yields, I do not think you can make out the case that equities are cheaper than bonds. They are not. So with respect to bonds, equities have not become cheaper.
That typically is the best time to buy and that usually happens when people really give up or capitulate. So I do not think you are in a situation where you can say markets are so compelling that I am going to make tremendous amount of returns. They are not really cheap, they are cheap with respect to history and not with respect to bonds or regional markets.
ET Now: But in the near term, do you think globally markets are pricing in too much of risk? There are record inflows in German Bund, US bond yields are now offering less than 2% but still are getting inflows on a daily basis. Do you think such a high level of risk is unlikely to sustain and whenever money will come out, it will flow back into EM equities?
Prabhat Awasthi: That is an argument which has been made for a very long time now, because bond yields have been very, very low for a fairly long time.
The argument of earnings and bond yields that you are talking about, there is the classic argument that if bond yields are low, clearly economic activity will pick up. But the problem is that given the deleveraging that is going on, given the sovereign problems that are being faced, yields are low because there is so much risk to higher yields and to economic activity. The fact is that you are not seeing any growth delta even after such low yields, which essentially argues that if you did not have this yield support at lower levels, economic activity would probably have collapsed or you would have seen much worse problems.
So in such a situation, I do not think that argument is really that straightforward. In a normal scenario, bond versus equity argument is far more valid than in a scenario where you are sort of struggling to keep your head above water, as it is.
ET Now: If the investment cycle fails to pick up in next 6-12 months, do you think Indian markets could go through a permanent derating?
Prabhat Awasthi: From our perspective, permanent is probably three years. So it is quite possible that if the investment cycle does not pick up, then the growth trajectory that you expected of India will be more muted for a prolonged period of time.
So if you look at how growth expectations of India have changed, people started with 9%, then went to 8%, then went to 7% and have come down to 6%, but there is always a recovery expectation two years down the line. That is because you think that policy will be all right. The perennial argument is when India goes into turmoil everybody wakes up and start doing the right things.
That belief is why people continue to say that things will recover and that is a valid argument frankly, but the break in investment cycle that has happened because of last two years' of inaction will definitely tell on growth for a reasonably long period of time.
I will give you a few examples. Like in the power sector, so many generation capacities coming up but given the coal situation, I do not think anybody will get a bankable project for the next two years because there is no coal. So for three years, you will not have a new project being announced, which essentially would mean that with the lag, the entire execution cycle in power will start to follow.
The same thing is probably going to happen to sectors like telecom. In metals, look at the number of projects being put up by Hindalco and Vedanta. There is hardly anything slated regarding what they will do in the next two years. So the danger now is that because you have seen a break in the cycle, reacceleration of the investment cycle will also be a lag process. The more we delay in terms of getting the process back up, the more danger that we will have a prolonged slowdown.
ET Now: So based on the sound bites which we are getting from New Delhi, you are not confident that the policy reform will kick in?
Prabhat Awasthi: Let us look at what has been announced and what is needed. The announcements from Delhi so far have largely been towards easing bond markets and investment limits. So essentially what we are doing is trying to get capital because we have been short on capital and the rupee has been deprecating.
So attracting capital on higher yields frankly is not really something which is desirable in the long term because we do not want to take more debt. As it is, our external debt is going up.
The essential issue is that we need to have supply side reforms and demand control. If the fiscal issue is not addressed, then you cannot keep taking more debt to just fix the problem. At some point in time, it will come back to bite you again.
So I would like to see two serious reforms -- one is on the supply side. So that basically means that stable policies for investment should take off the ground across sectors. You cannot have a situation where I put a lot of money in a power plant just to find out that the return is not going to generate even a 2% ROE.
So what is needed is stability in policy and a clear-thought process about how to generate investment activity, especially given that globally there are no opportunities. You have got to create domestic opportunities through infrastructure and local sectors.
Secondly, as I said, to get the fiscal side right, not inflame consumption, emphasise investments. Till the time we see signs of that, just attracting capital will be a very short-term measure.
ET Now: Which sectors tend to do well in a market like this? So far, those who have invested in defensives have made money but now, for the first time, defensive trade also seems to be reversing.
Prabhat Awasthi: Consumption usually is far more resilient in the short term than investment. For example anecdotally, you know there is a labour shortage and that has not really eased. You are not seeing salary cuts in India, salaries are still rising though at a slower pace.
As the investment cycle starts to come off, it will have an impact on consumption, because job prospects will start fading, salary increases will reduce and stuff like that. Therefore, there will be a slowdown in consumption. Prices of consumer stocks were reflecting more of a fear premium than really the absolute level of fundamentals.
The question is in a slowdown situation, will that relative trade hold out or not? I guess if you are two years slow on growth, which is our forecast for example, closer to 6%, then that relative trade will probably still hold out. There might be periods when there is a risk-on and these guys underperform and people try to shift their portfolios away from defensives.
ET Now: So don't sell consumer names?
Prabhat Awasthi: Even if in a portfolio, it is still very advisable.
ET Now: Within the consumer space what are you hot on - discretionary, staples or autos?
Prabhat Awasthi: Discretionary is more risky because it has a more urban-centric sort of consumption.
Urban-centric consumption is probably suffering more on account of the fact that there is a clear shift towards rural consumption and the rural terms of trades have become better. We have seen a 20% increase in MSP and any impact of an industrial slowdown will be first felt in urban India, not in rural India because they are still far more insulated.
So as a result of this, discretionary probably will suffer more. If you look at the numbers of let's say a Bajaj Auto versus a rural focussed player, you can see a clear difference in growth rates. It might be more advisable to be lower in the pyramid chain and be in lower penetrated categories than the higher penetrated, more in rural and less in urban areas.
Nikunj Dalmia: What are your overweight recommendations? You are not hot on banks, you think the consumer sector is slowing down and it is too early to buy investments.
Prabhat Awasthi: The problem in markets like these, which are rangebound at best, is what to buy.
At the end of the day, it is a relative game when the overall environment is lacklustre and to that extent our view has been that you have got to buy companies where the earnings protection is high. This could be utilities, for example. Telecom is starting to stabilise...it could be pharmaceuticals, where there is a very clear and defined opportunity of patent expiries, rupee is in their favour and the sector dynamics for next three to four years are extremely favourable.
The penetration of healthcare in rural areas is still very small, so the growth in domestic market is still very strong. Obviously, you should not make 100% of your portfolio with these kind of names because the fact is that there is still a very large weightage of banks. So within banks, you need to be more defensive. You have to have some financials in your portfolio, you cannot ignore them altogether.
Nikunj Dalmia: Buy the private names, do not buy the PSU names?
Prabhat Awasthi: Yes that sort of a bias, correct.
Nikunj Dalmia: What are your high-risk, high-return ideas?
Prabhat Awasthi: Basically, high return in large caps is going to be very difficult from these levels. So if you are looking into high returns, then you will obviously have to tilt towards midcaps. So there is a bunch of midcaps we like, few of them have been destroyed by policy actions, like gas names have sort of evaporated.
For example, we really like Mcleod Russell because we think there is a global cycle in the offing and there is a big benefit happening. But you will get stock specific when the overall macro is very weak and you are not really bidding on an economy trend to make your returns, you are probably bidding on company-specific factors, some narrow industries which will do well in an overall environment where things are slow.
Nikunj Dalmia: So apart from McLeod, anything else in the midcap space which excites you?
Prabhat Awasthi: There will be some smaller banks which still have growth, for example IndusInd Bank.
In the tech space, even though there are some short-term headwind, we still like smaller companies compared to larger ones, where we think there will be more headwind.
There might be some case of gas names but obviously we need some clarity on regulation. Investors have become extremely wary of buying anything in India which has got any whiff of regulatory issues involved.
Power Grid for example, we really think that stock will do well. It has done really well. It has held on. It has really appreciated in the market which has gone down on an overall basis.
Nikunj Dalmia: What role do you think IT stocks will play in the next one year because the headline growth numbers for at least IT largecaps seem to be slowing down?
Prabhat Awasthi: There are two things which have happened in IT. Clearly, the global growth environment has weakened. European is in a funk and even in US the volume growth has not been as strong as was expected, despite the US recovery. So clearly that essentially means that from an 18% sort of volume growth, you have gone to 12% to 14%, even lower in cases and that has been a big disappointment.
On the other hand, the rupee has depreciated. However, if you look at the forecast of rupee, the belief of it sticking in this level is close to zero. So the fact is that IT stocks have not really benefited from the rupee's depreciation because there are people who say the rupee will go back to 50. In that case, you obviously would not buy IT stocks.
On a relative basis, the sectors should still be alright, especially from these levels. It could have a negative reaction to the current results which are coming up because there has been clearly a demand-side weakness and that might mean the stocks might be volatile, even down, after the results. So one has to be cautious around that time but in a relative context, IT is still fine. Actually they have done okay in a relative context to the market in last three-four months. They have outperformed in sorts.
Nikunj Dalmia: But within the IT space, is the pecking order changing, it is no longer Infosys on top?
Prabhat Awasthi: You are right, it is no longer Infosys. So our thing is in very absolute largecaps, TCS is what we have liked and in the midcaps or the second rung, HCL has been the top pick.
ET Now: What is your big call for FY 13 and then beyond -- sit on cash, protect your capital, time to go high beta has not come yet?
Prabhat Awasthi: Yes, I do not think this is really time for high beta. Our view has been that markets will be flat through the year. You can go wrong by 5%-7% here or there but the enabling conditions for the market to do well has to be the underlying growth and that is what you pay for, especially in an emerging market like India.
Till the time you get clarity on that and you are convinced that growth is going to come back -- and I am not talking of 8%-9% but 7%-7.5% visibility -- it is very difficult for the market multiples to move beyond 13-14 range, if not lower. They could probably be lower than this.
Nikunj Dalmia: But you will be very surprised if you go back to December lows, which is 4500-4600 on the Nifty?
Prabhat Awasthi: That typically happens when you have an external event on top of the local macro factors. The fact is you go down to those levels when you really have stress in the global environment. So every time Europe hits a crisis, you tend to deteriorate far more.
From a local investment perspective no, but from a foreign investment perspective we did touch those lows.
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