ET NowIn an interview with ET Now, Rashesh Shah, Chairman & CEO, Edelweiss Group, shares his views on the market as well as his expectation from the PM’s Independence Day speech. Excerpts:
ET Now: What is the call that you are taking firstly on the market? Do you think that this market is going to be ranged for a while before we can see any sort of trigger to take the markets higher from 7800, so for the interim, that is pretty much the top?
Rashesh Shah: The earnings and the fundamentals have to catch up. All the global investors, even the local institutional investors who are getting a lot of inflows, are positive. There is a sense of optimism.
But the hurry to invest, the hurry to buy almost any stock that was going up has gone away and most investors are saying they will study companies’ earnings growth, management etc. So it is going to be a slow and steady, very stock-selective investment regime for the next three to six months.
ET Now: There is a feeling in the market that tomorrow we will get something big-bang from Prime Minister Modi in his maiden Independence Day address. Should one expect something big tomorrow?
Rashesh Shah: There have been a lot of expectations and largely built up by the media. The Prime Minister has been fairly quiet on any announcement for some time.
There are a lot of expectations, but over the years, I have not seen any PM making big economic announcements on August 15th because August 15th is not the platform for economic policy announcements.
Currently the government is trying to go after the low-hanging fruits. A lot of incremental improvement is where the focus is and there is a school of thought amongst investors that maybe the big bang announcements will come after the state elections are over because until the state elections are done, the government may not want to take the risk of alienating anybody.
ET Now: The pointer on the expectations from tomorrow’s speech is really to do with the fact that the Prime Minister is a media savvy person, he is known to take time, his statement of intents well. So do you think that is part of the expectation that maybe in terms of not direct economic reform but he could state his broad vision for the economy, especially the sector that he supports so strongly, which is infrastructure?
Rashesh Shah: If you go back and see, over the last 20-30 years, no Prime Minister has used August 15th as an economic agenda pronouncement platform. He will obviously speak about growth and development, but to expect specific economic policies around infrastructure, that would be too much.
He is really media savvy, but his eye will be towards India as a whole, including the communal issues which are currently in the news, the social issues, the coming state elections, the global affairs.
ET Now: But does it seem like a black hole right now because just when things seemed like with the new government, policy initiatives, recapitalisation measures, asking PSU banks to sell non-core assets, raise their own funds that this just comes as a bit of an uncertainty, their investors potential may not want to deal with?
Rashesh Shah: One of the few issues that the Indian banking sector has is that they are undercapitalised. They do not have enough capital for growth as and when credit growth comes back in the economy and they need a fair amount of equity capital. So that is a large issue and there are some answers to that, but I do not think a complete answer to that problem has yet emerged.
The other is the current bad assets that they have. As I said, partial revival restructuring, partial recovery, partial selling it off to ARCs and this coupled with recapitalisation is where the banking industry will get back on strong footing.
ET Now: What is happening to the capital market business? Given the way how market volatility has been, is your margin funding book coming under pressure?
Rashesh Shah: No, overall as the stock prices have gone up in the last three-four months and if you have good risk management and collateral cover as you would have seen in our analyst presentation in most of the loans and margin funding book, we have between 1.82 and 2.5 times kind of collateral cover. So you are adequately covered, you have to do risk management.
Ultimately all credit is the risk business, but overall, things have gotten easier. Even liquidity has become easier. The last five-six months has seen very good liquidity environment in India.
All the small caps, midcaps are still trading fairly high than what they were about five-six months ago.
ET Now: I am talking about a specific exposure what Edelweiss has to Bhushan Steel?
Rashesh Shah: We have more than 100 companies as clients and we usually avoid talking about specific cases because there is no point heading to speculation in the market.
We are one of the leaders what you called structure credit opportunity, and in structured credit you have to closely monitor risk, manage risk and all, but there is always media speculation.
We have not been affected for the last eight years through the bad volatility in the market and I am confident we will continue to manage it, but yes, there is risk in the book that is always there because as I said earlier all credit is about risk and about risk management.
ET Now: Fair enough, but given where the market is right now and your business being a derivative of what the financial markets are doing, do you think that this a right time to kind of reset the model across businesses to kind of prepare yourself for the next turn, the next up move and if so, how are you doing that? How are you kind of preparing yourself or conditioning yourself to benefit from an up cycle?
Rashesh Shah: Over the last about four years we have re-engineered the business from being only capital markets. So now what we have achieved in the last few years has been a broad based and fairly well-diversified business model. All these businesses are obviously India-centric and they are correlated to the economic growth and the economic activity in India.
Each of the business has its own nuances, its own cycles. So we are fairly well diversified and for the last three years we have been able to manage an average 25% to 30% growth rate, which we think will continue and fortunately we have not scale back from any businesses.
During the last couple of years we have added to capacity even in the broking and investment banking business because we do believe that about a year ago India’s fundamentals started improving a little bit and we believe over the next 8-10 years Indian economy will grow and there is going to be a lot of activity in financial services, there is going to be a lot of opportunity for growth.
ET Now: If Rashesh Shah, the investor, has to invest right now, where would he invest in this market?
Rashesh Shah: What we are advising to most investors is a broad portfolio allocation and about 40% to 50% should be in the global oriented sectors like IT and pharma. They have been ever green and we do feel that the scope or even growth for the next five-seven years in these sectors is very good.
The other half should be India-led sectors which are more correlated with the economic growth, especially sectors like Indian private sector banks, which we think are very strong and still fairly reasonably valued.
ET Now: What is the call that you are taking firstly on the market? Do you think that this market is going to be ranged for a while before we can see any sort of trigger to take the markets higher from 7800, so for the interim, that is pretty much the top?
Rashesh Shah: The earnings and the fundamentals have to catch up. All the global investors, even the local institutional investors who are getting a lot of inflows, are positive. There is a sense of optimism.
But the hurry to invest, the hurry to buy almost any stock that was going up has gone away and most investors are saying they will study companies’ earnings growth, management etc. So it is going to be a slow and steady, very stock-selective investment regime for the next three to six months.
ET Now: There is a feeling in the market that tomorrow we will get something big-bang from Prime Minister Modi in his maiden Independence Day address. Should one expect something big tomorrow?
Rashesh Shah: There have been a lot of expectations and largely built up by the media. The Prime Minister has been fairly quiet on any announcement for some time.
There are a lot of expectations, but over the years, I have not seen any PM making big economic announcements on August 15th because August 15th is not the platform for economic policy announcements.
Currently the government is trying to go after the low-hanging fruits. A lot of incremental improvement is where the focus is and there is a school of thought amongst investors that maybe the big bang announcements will come after the state elections are over because until the state elections are done, the government may not want to take the risk of alienating anybody.
ET Now: The pointer on the expectations from tomorrow’s speech is really to do with the fact that the Prime Minister is a media savvy person, he is known to take time, his statement of intents well. So do you think that is part of the expectation that maybe in terms of not direct economic reform but he could state his broad vision for the economy, especially the sector that he supports so strongly, which is infrastructure?
Rashesh Shah: If you go back and see, over the last 20-30 years, no Prime Minister has used August 15th as an economic agenda pronouncement platform. He will obviously speak about growth and development, but to expect specific economic policies around infrastructure, that would be too much.
He is really media savvy, but his eye will be towards India as a whole, including the communal issues which are currently in the news, the social issues, the coming state elections, the global affairs.
ET Now: But does it seem like a black hole right now because just when things seemed like with the new government, policy initiatives, recapitalisation measures, asking PSU banks to sell non-core assets, raise their own funds that this just comes as a bit of an uncertainty, their investors potential may not want to deal with?
Rashesh Shah: One of the few issues that the Indian banking sector has is that they are undercapitalised. They do not have enough capital for growth as and when credit growth comes back in the economy and they need a fair amount of equity capital. So that is a large issue and there are some answers to that, but I do not think a complete answer to that problem has yet emerged.
The other is the current bad assets that they have. As I said, partial revival restructuring, partial recovery, partial selling it off to ARCs and this coupled with recapitalisation is where the banking industry will get back on strong footing.
Rashesh Shah: No, overall as the stock prices have gone up in the last three-four months and if you have good risk management and collateral cover as you would have seen in our analyst presentation in most of the loans and margin funding book, we have between 1.82 and 2.5 times kind of collateral cover. So you are adequately covered, you have to do risk management.
Ultimately all credit is the risk business, but overall, things have gotten easier. Even liquidity has become easier. The last five-six months has seen very good liquidity environment in India.
All the small caps, midcaps are still trading fairly high than what they were about five-six months ago.
ET Now: I am talking about a specific exposure what Edelweiss has to Bhushan Steel?
Rashesh Shah: We have more than 100 companies as clients and we usually avoid talking about specific cases because there is no point heading to speculation in the market.
We are one of the leaders what you called structure credit opportunity, and in structured credit you have to closely monitor risk, manage risk and all, but there is always media speculation.
We have not been affected for the last eight years through the bad volatility in the market and I am confident we will continue to manage it, but yes, there is risk in the book that is always there because as I said earlier all credit is about risk and about risk management.
ET Now: Fair enough, but given where the market is right now and your business being a derivative of what the financial markets are doing, do you think that this a right time to kind of reset the model across businesses to kind of prepare yourself for the next turn, the next up move and if so, how are you doing that? How are you kind of preparing yourself or conditioning yourself to benefit from an up cycle?
Rashesh Shah: Over the last about four years we have re-engineered the business from being only capital markets. So now what we have achieved in the last few years has been a broad based and fairly well-diversified business model. All these businesses are obviously India-centric and they are correlated to the economic growth and the economic activity in India.
Each of the business has its own nuances, its own cycles. So we are fairly well diversified and for the last three years we have been able to manage an average 25% to 30% growth rate, which we think will continue and fortunately we have not scale back from any businesses.
During the last couple of years we have added to capacity even in the broking and investment banking business because we do believe that about a year ago India’s fundamentals started improving a little bit and we believe over the next 8-10 years Indian economy will grow and there is going to be a lot of activity in financial services, there is going to be a lot of opportunity for growth.
ET Now: If Rashesh Shah, the investor, has to invest right now, where would he invest in this market?
Rashesh Shah: What we are advising to most investors is a broad portfolio allocation and about 40% to 50% should be in the global oriented sectors like IT and pharma. They have been ever green and we do feel that the scope or even growth for the next five-seven years in these sectors is very good.
The other half should be India-led sectors which are more correlated with the economic growth, especially sectors like Indian private sector banks, which we think are very strong and still fairly reasonably valued.
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