'Modi govt has delivered on early expectations'

'The system for business is becoming much more dynamic'.

'The market has rebounded and stock prices have moved up substantially over the year'.

'Excluding e-commerce, we think growth will be fairly well balanced and distributed across sectors'.

The markets have not had it easy in the past few days.

If the early signs are anything to go by, the earnings season isn’t expected to be good either.

However, this might well be a passing phase.

While a few experts believe the Modi government has not done much, Aditya Narain, chief strategist, Citigroup Global Markets, India, tells Business Standard that barring a few areas, the new government has delivered on expectations and quality of growth will be far superior in this growth cycle.

Excerpts:

Last year, the markets were rooting for Narendra Modi. Has the Modi government delivered on those expectations?

Yes, I would say.

All you need to do is check back on what reforms the market wanted before the elections and you will see almost everything has been done.

Although the Land Bill is seeing some challenges and goods and services tax is not done yet, they have got a lot done.

The government has also used the current macro situation to its advantage.

The big framework is set.

That said, it does not necessarily mean businesses will respond quickly and that is currently where the bigger challenge is.

We would believe that at an overall level, the system for business is becoming much more dynamic, and should over the medium term be supportive of decent quality growth.

You could possibly see this as a mix of the ability to start business/investing without it becoming inflationary and domestic money coming to the equity markets, which widens the pool and moderates the concentrations in either foreign money or bank debt, and policy changes.

All these should start adding up.

While expectations are usually a shifting target -- we would believe the government has delivered on early expectations -- and while the market is currently focused on the corporate response (investments, earnings and sentiment) and is showing signs of disappointment, the broader equity market should be supportive.

We have a December 2015 market target of 33,000 for the Sensex.

Is India’s equity market losing its sheen, given that revival in earnings is not happening soon?

There are two parts to this.

First, the market has rebounded and stock prices have moved up substantially over the year.

The macro environment is going to be supportive for a sustained period and while it can’t give a ‘pop’ from here, it will act as a cushion.

Second, what the market is watching out for is a pick-up in earnings, investment and corporate mood.

This will act as an overhang over the next three to five months and will keep markets flat during this time.

While everyone is focused on the level of growth, we believe its quality (higher returns on investments, lower levels of risk and an extended growth cycle) will be significantly better and will surprise on the upside.

So, if the market is losing any sheen, we believe it’s very temporary.

Earnings are expected to surprise negatively. What is your view on the earnings expectation for FY16?

We expect 13 per cent and 17 per cent for FY16 and FY17 (respectively).

We are at 12 per cent for FY15.

These are bottom-up numbers, and we will also take a re-look once the March quarter plays out.

As we look out, we believe businesses could do better than the broader trend in the economy.

So, effectively, earnings growth would do better than sales growth.

Citi does not have a very positive view on the information technology sector. Can you explain why?

For a while now, we have been seeing that while global companies were clocking decent numbers in terms of market share growth, Indian companies were not keeping pace, or growing their share of the pie.

In addition, more recently, the pie’s expansion itself has slowed.

So, this has hurt, and with market expectations on growth high and multiples suggesting as much, there has been a pullback, and the market has been disappointed.

We have been cautious and stay that way for now: but India’s IT companies have reinvented themselves very well in the past, and we will be keeping an eye out for any such signs.

What sectors will be the new sunrise sectors in the new growth phase?

In the previous growth cycle, there were a few sectors that were very hot at different stages (retail, media, real estate, infrastructure, financial services) and at different times drove the market.

This time, excluding e-commerce, we think growth will be fairly well balanced and distributed across sectors. We are overweight on autos, telecom, cement and banks.

There will be no pronounced lead sectors in this growth cycle.

What about public sector banks and their challenges?

While the challenges with government banks are a funding over-hang, it’s probably a lot less than their 70 per cent market share would suggest.

We also believe government banks don’t have to grow at 20-25 per cent.

If they grow at 10-12 per cent, which is what their RoEs (returns on equity) support, it would be fine.

This investment cycle will not be as dependent on public sector banks for growth as in the past.

The loan market is shifting.