Dharmesh A Mehta (below left), deputy chief executive of Axis Capital Ltd, speaks to Rajesh Bhayani and Vishal Chhabria on the trend in capital markets, the outlook for equities and the sectors he is bullish on. Excerpts:
With markets doing well, how has Axis Capital done? And, what is the outlook?
Axis Capital has dominated the capital markets, managing seven of the 10 deals till July.
The outlook is very bright, especially with the new confidence in India Inc and investors increasing their equity exposure.
Now, companies are happy to add equity, to not miss out on India's projected growth and, in some cases, to correct the leverage in their balance sheets.
Therefore, their dependence on capital markets should remain very strong through the next few years.
Several companies are raising money through qualified institutional placements (QIPs) at very high prices, after which these are correcting. Are they getting away with better pricing, while investors buying those stocks are stuck?
Short-term gains are always unpredictable.
There are innumerable cases in which money is made with a lag, including Infosys. Large investors are buying equities for the long term.
Companies are also raising funds for projects that are long-term and/or reducing their debt levels.
Therefore, one might not see an immediate upside, but in the long term, these companies should provide good returns.
I see the QIP market remaining robust, as companies need money and this is the fastest and easiest route to raising money. However, not all companies will be able to raise funds at high prices.
With the Indian market at its peak, how do you see it moving in the near future?
While the indices are at their peaks, looking at the rear-view mirror, valuations haven't reached previous peaks or anywhere near any crazy level.
Today, the market is just negating the bearish factors seen globally, including geopolitical issues. The markets are reflecting the simple fact that the gloom and doom is over.
If, by any chance, profit-booking or some global event brings it down, it will be a buying opportunity.
However, the fundamentals of the Indian economy haven't changed yet, and that is yet to be reflected.
We have a whole line-up of domestic triggers to go — from the consumption cycle recovering this festive season to policy changes and implementation in key sectors such as banking and infrastructure, the capex cycle improving, and Japanese funding coming in. We will see the markets rise further.
That will not happen in 2014-15; look for real returns from the market in and after 2015-16.
So you don’t feel markets are over-valued?
No, the market is now fairly valued. At present, the market is discounting valuations on near-term outlook, which is in turn based on past growth and improvement on that.
Earnings are not reflecting the change yet as the big fundamental change is expected next year. Markets are in a cautiously bullish mood and valuations are only fair and in no terms overvalued.
What is the advice for retail investors? Should they buy at dips?
Advice for retail investors is to go overweight in equities. They will not be able to judge the levels to enter and will always wait for a correction.
Best way for them is to come via mutual funds who are not only capable to take such decisions, but also diversify risk and in tune with the flow of events which is rapidly changing these days, as the government and Judiciary make announcements on various issues.
We have seen huge foreign investments entering India in past five-six months.
That will continue. I believe we will see substantial increase in foreign direct investment (FDI) in the next two-three years, as we'll need such investments to build infrastructure.
As announced, we will see huge FDI coming from Japan in the next few years, especially in infrastructure and power.
I think FDI flows might exceed inflows from foreign institutional investors in the coming years, as India's regulatory paradigm becomes more welcoming and growth more optimistic, albeit from a very low base.
But will it be easy to allow higher FDI in these sectors, given the government saw pressure from the Opposition on the insurance Bill?
Opposition to the insurance Bill was expected. The road might not be easy and there will be delays. Nobody in the Street thinks things will change overnight.
Even the GST (Goods and Services Tax) Bill will see hurdles. While the government has a majority in the lower House, as well as on a combined basis, it is not practical to take every Bill to the combined House.
So, it is likely it might have to look for a compromise in the short term. But broadly, are we going in the right direction? The answer is a big 'Yes'!
What could be a trend-setter for markets?
FDI flows will be the game-changer for markets. Also, we are lucky the monsoon has revived and made up for the huge deficit — it stood at about 43 per cent in June-end; now, it is just about 16 per cent.
If you look at the monetary policy, it signals a more bullish stance than earlier.
To ensure banks don't have issues relating to non-performing assets in the future, the Reserve Bank of India is taking various measures to safeguard against the ensuing bull market. This time, we will be better prepared to address asset bubbles.
For the markets, we need to realise when you come out of a prolonged slowdown, things take time to change.
And, people are still in a cautious disbelief mode; they have forgotten 2007, as they have seen the 2008-2014 phase. But again, somewhere down the line, they will forget 2008-2014 and start believing in the ‘India growth’ story. I strongly feel a big bull market is already overdue.
If you look at history, every seven years, there is a bull market — 1993, 2000, 2007 and now, 2014. The reasons will be different.
What is your sense of the earnings season, and are there any green shoots? And, in the current context and the way things are shaping up, which are the sectors you are bullish on?
We have definitely seen some green shoots on the macro front with a nine quarter high GDP growth in Q1.
There are palpable signs of a recovery gaining momentum if one looks around ie look at auto sales, diesel consumption, IIP growth, consumer confidence index and lead indicators, etc.
However, I am not looking at the recent earnings season, nor the current fiscal year earnings to invest in the markets, as the impact of what the new government is doing will only be felt only next year. One will witness earning upgrades as the economy picks up.
Among sectors, banking and any domestic consumption (retail, media, etc.) related sectors remain the favourite, because there is huge pent up demand.
Media looks very good. It’s a bull market, so everything will move though some may underperform at some point in time.
There will be a rotation of performance so even defensives like IT and Pharma will do well in some phase.
But, I am more bullish on mid-cap stocks. Generally, mid-caps do very well whenever there is stability in government and policies.
They benefit the most and they are still reasonably priced as a class. When growth comes back it will have a huge impact on their earnings which is not factored in in current valuations.
However, while this is true as a class, midcaps have to be selected very judiciously.
Consider the case of banks. Historically, banks have traded at more than 3 times their book value.
The earnings of banks haven’t started to kick in as we are yet to see the Investment phase by India Inc.
There will be corrections mid-way on NPA concerns etc. But, if one considers from a two-year perspective, there is enough upside.
On the whole, the real economic growth of India has still not started. Only sentiments have changed, the fundamentals haven’t yet. It will change over a period of time – in six to twelve months.
What is your assessment of the impact of Supreme Court ruling on the coal blocks? And, which companies do you think will be the most impacted?
The long term impact of the recent Supreme Court ruling is very positive for India as in future there will be no ambiguity on the licenses and corporates can invest capital in the power sector without any fear of projects getting stuck for a long period.
To achieve the targeted growth it's very important that we resolve the power crisis and ensure proper supply of coal.
Hence, it's very positive and a game changing judgement for India. On impact on companies, it's difficult to comment in the current stage as the final judgement is still awaited
Photograph: Arko Datta/Reuters
