Corrections are healthy for markets, macros favourable for India: Anup Bagchi, ICICI Securities

In an interview with ET Now, Anup Bagchi, MD & CEO, ICICI Securities, shares his macroeconomic outlook and talks about the markets. Excerpts:

ET Now: Risk off seems to be the new global mantra. There is a proper global growth scare which is haunting us now. Do you think one should get worried about global growth scare?

Anup Bagchi: No, I do not think one should get worried about global growth scare. The market had a fast run up and it needs some correction. The correction is good and things are good for India. Global commodity prices are soft. There is a lot of optimism. Of course, some more work needs to be done to see it on the ground, but it is good.

For India, I do not think it is an issue. If you look at the IMF latest upgrades, among the BRICS countries, it is the only country which got an upgrade in the growth and globally growth momentum is still there in the US, which is a large market of IT or pharma.

The revenues for half of our companies are coming from overseas. So we are linked there. Half of the companies have domestic consumption. So we have a good portfolio of companies in our index. There are stocks of all kinds.

ET Now: Good news always comes with bad news and vice versa. The good news here is that global commodity prices have come down, but typically when global commodity prices come down, they do so in a synchronised manner along with equities. Historically, we have seen that emerging market equities and crude have a direct correlation. So are you worried about the market behaviour?

Anup Bagchi: No, it gives us a fantastic opportunity. With all the diesel hikes we will turn from deficit to perhaps surplus and that gives a big fillip to the fiscal deficit. A large part of our issues is also internal. At the end of it, there are two matrix, that I personally always look at. What is your market cap to GDP. Essentially, it has been around one. So if GDP slows down, there is absolutely no way in which your market cap can go up.

Also, market cap does not go up because the supply is not there. The supply also dries up. Secondly, I always look at what is the premium over bond, what is the bond premium over equities. So, if you look at the current PE and you invert it, bond premium is still 30-40% up.

I would say interest rates have to come down. If interest rates have to come down, then obviously inflation and fiscal deficit have to come down. Current account deficit is more or less under control. So there are things that we have to do internally before global forces start to pin down our issue.

Thirdly, look at the structure of shareholding. The structure of shareholding in India is almost 50%. If you look at BSE 100 or if you look at Nifty, 50% is promoter. So take that out, it does not come into the market. 25% is FII, around 12% to 13% is retail public holding and the balance is domestic.

ET Now: But FIIs are selling...

Anup Bagchi: First of all the headroom in many of the stocks is limited in FIIs. Will we be able to really get in too much into the market from FIIs. One does not know. Second, where does it then get support from? The support obviously comes from domestic investors. Either they will start to pull in retail allocates more towards equity. Both is a function of optimism first and then supported by earnings because unlike debt where interest rates is the support, the support for equities always has to be earnings.

But we still have many things that we can do – controlling fiscal deficit, reducing interest rates.

ET Now: Are we at the crossroad right now because for the moment, earnings have bottomed out, but expansion has not started, interest rates have topped down, but the contraction has not started?

Anup Bagchi: Absolutely. So we are at a good phase from where things can takeoff. Just pull back the clock by one year and replay the discussions that all of us were having. Fiscal deficit was completely out of control, current account deficit was always out of control and things were bad, but now the current account deficit is largely under control, fiscal deficit is also largely under control.

ET Now: But how much of the good news is already in the price because what you are making is a rather bullish case and the case, what you are highlighting is pretty much seems to be the consensus view with other brokerages as well. So my question to you is, at 29,000 or at 28,000 on the index and closer to 8000 on the Nifty, are the markets pricing in all the good news?

Anup Bagchi: No, I do not think the markets are pricing in all the good news.

ET Now: Why do you say that?

Anup Bagchi: The markets have certainly not priced in the fact that interest rates can go down in a hurry or even go down. Actually the patience has run out. We have been expecting interest rates to come down for the last two-three years, but it has not come down. So, patience is running out somewhere.

The export has also started to pick up because US growth is coming. There is a large part of our market cap which is linked to global growth. That is also getting supported from there. I do not think optimism has got priced in. Mortality risks from the economy have gone out. Multiplies do not look as if it is overpriced.

ET Now: 15-16 times.

Anup Bagchi: No it is not overpriced.

ET Now: That is not cheap.

Anup Bagchi: No, but it is not overpriced. I mean it is not that kind of enthusiasm that we think. This is not the enthusiasm that we used to sense in 2005, 2006, 2007. Earnings in the meantime over the last four-five years have gone up. GDP to market cap is still there.

The last bull run was also supported a lot by global liquidity. This time around, I do not think we are going to have that kind of global liquidity. If at all, there could be a bit converse on that which could be a negative. At this point of time, where is the allocation coming from? Promoters’ 50% share is locked. So we must talk about FIIs, the second largest one at 25%. Then I will come to domestic and then perhaps I will come to retail.

From the FII perspective, allocation is coming because upgrades are coming to India and you were underweight on India. So that correction is happening. A bit of that correction has already happened, which is why we have seen in last 10-15 days with all the global softness etc. The velocity of money coming in has also softened a bit. Having said that, we have seen that it does not take time for them to pick up at all.

ET Now: You are making a case that the incremental flows for Indian equities will come from local investors and that essentially would come from retail participants?

Anup Bagchi: One, emerging market allocation and second, if the optimism and earnings continue, we have hit a low in equity assets of direct equity. I am talking about direct equity plus mutual fund plus insurance companies, because insurance companies are the perennial source of money.

See, we talk about mutual funds, but the largest pool of equity funds is in insurance companies. It is not in mutual funds.

ET Now: Do you think the bulk of the gains for this year is behind us?

Anup Bagchi: Maybe. There could be a time correction, but the bulk of the gains is behind us. But I would say that if the earnings get supported, the markets will move up.

ET Now: In general, are markets expecting too much earnings?

Anup Bagchi: No, I do not think the markets are expecting an abnormal growth in earnings in this quarter.

ET Now: If Q2 numbers are gangbusters, that will not disappoint market?

Anup Bagchi: It will not disappoint the market because I do not think anybody, at least the street, is not expecting some gangbuster growth in profits this quarter. But next to next quarter I think it will start to pick up.

At this point of time, we have not seen too much of increased cash flows in the corporates. We will see only modest increase in profits of the cash flow, but this is all there in the market. If you speak to people, nobody is seeing some huge cash flows flowing in. People are saying that optimism is there, but it has to finally get supported by cash flows, it has to get supported by earnings and it will start to get supported.

ET Now: Do you think bulk of the money will still be made in IT and pharma?

Anup Bagchi: If I take a one-year view or a two-year view, the theme of this government is shifting towards investment rather than consumption. IT and pharma are not driven much by the domestic factors. It is independent and if it is independent, it is independently getting driven by the global growth.

So, there is no case for it to really come down too much. It will remain supported because of global growth. This government seems to be investment focussed and not so much consumption focussed.

ET Now: The criticism for the Modi government is that after almost four months into the new regime, there is no big or original idea and they have done nothing to revive the investment cycle.

Anup Bagchi: Among the big reform ideas, land acquisition, debottlenecking of projects and retrospective tax are the three demanding more attention than others.

ET Now: Yes, but nothing has happened.

Anup Bagchi: Nothing big can happen in such a less time.

ET Now: Intent is what we want to hear.

Anup Bagchi: No one is intent. I must also say that some states are experimenting with new forms of land acquisition. States like Rajasthan, etc, experiment even new forms of land acquisition. Land acquisition is for future growth, future expansion.

Second on debottlenecking, some debottlenecking has happened. I know a few companies personally where they have got approvals. What is also getting lost in this whole discussion is the whole governance structure. There is a great push to improved governance structure, to create smart cities, etc. These are all engines of growth.

ET Now: But there is a gap between implementation and real recovery and that is the waiting period.

Anup Bagchi: Large market cap is coming from pharma and IT. Potential large market cap can also come from banking.

ET Now: So is it a good time to buy a private bank or PSU because for the longest time you have always advocated that one should buy into private banks?

Anup Bagchi: I have advocated private banks and large public sector banks. I continue to maintain that. That thesis is still intact.

ET Now: What advice do you have for retail investors?

Anup Bagchi: We are talking of people who manage relative to index. They have to create their alpha. Large alphas will get created from midcaps.

ET Now: What is the bullish scenario for PFC and REC because ultimately, they are power companies and the Indian power sector currently is broken down? There is excess capacity, there is no fuel linkage and there is lot of demand. So in an environment like this, why do you think a company like REC or PFC, which is financing the sector demand, why will they benefit?

Anup Bagchi: The issue is that what kind of risk-adjusted returns you want to make. PFC, REC are not going to be multibaggers, but they give you 15-20% kind of ROEs. Book values have increased by 15-20% consistently and are trading at one time book or slightly less than one time book. So, those are the companies that we should look for compounding purposes. Then there are multibaggers because of de-stress. That stress suddenly gets removed.

ET Now: Two more sectors, the seasonal flavour at least for this quarter seems to be auto ancillary. Do you think it is a rising tide phenomenon which is there in auto ancillary? I know auto demand has made a comeback but not every auto ancillary company will benefit?

Anup Bagchi: When sentiment comes up, the consumption space starts to move first. It moves first because retail and everybody starts to think that my income is going to increase, I am not going to lose a job and confidence into future increases. That is why you start to take loans and that is why you start to buy these kind of assets which are essentially consumption driven.

Auto is also consumption driven asset, which is what has happened. Now it may start to get muted a bit.

ET Now: What is your Sensex or the Nifty target for this financial year?

Anup Bagchi: Within 12 to 15 months, there is a chance that it goes up to 9000 plus.