The worst may not be behind us: Anup Bagchi, ICICI Securities

In a chat with ET Now, Anup Bagchi, MD & CEO, ICICI Securities, says wherever the loan or debt on the balance sheet is low and it is a B2C businesses, those sectors are still good

ET Now: It is getting slightly hard to predict what is coming next. In the morning when we walked up to trade, it appeared that world would react or over react to the ECB communication. Asia is down, European futures are down, Dow futures are down and Indian markets are up.

Anup Bagchi: No I think the reaction to the ECB got finished very quickly both in Europe as well as in the US last night. India, of course, is now singing to a slightly different tune than the rest of the market because the factors here are slightly different from the vectors of rest of the world. So yes, in the short run, it is about liquidity. So if somebody is selling and buying support is not happening, then it will crack but in the medium to long-term it is about the way the Indian economy is moving. It is the way the various sectors in the Indian economy are moving and clearly you would have seen that there has been an overhang of stress in the banking sector. Some of those sectors are exposed to the banking sector and together if they comprise almost 40 per cent of the index. So if there is a feeling that the stress either will get alleviated or it will get reduced, it will sing a very different tune. Forty per cent, of course, is directly global if you look at IT, etc. These are all globally linked sectors so they sing to that tune. But rest of the sectors clearly cleave an independent path.

ET Now: So you are reasonably confident that worst of the print for the year is behind us?

Anup Bagchi: No I am not too sure whether the worst is behind us. I think it has to break through this resistance once again at around 7500. I do not think the worst is behind us but certainly I think things are becoming delta better than what it was. So if the fall happens, I do not think it will be very drastic and it would be very deep. I think we are moving in the right direction and I think it should be fine and from a retail investor’s perspective, SIP is the way to go. On an average, the earnings growth is 8-10 per cent. Tax-free return of 10 per cent is fantastic over medium or long period of time because indices will hug the earnings growth. If we have tax-free getting oversubscribed 10 times, 5 times or 20 times in these segments, clearly it shows that there is a lack of available opportunity or there is fear of investing in other sectors and the outlook does not seem to be as bright. Of course, we have to see that 7.5 per cent is completely safe in the sense that there is no volatility but if somebody gives you a choice of even 10 per cent earnings growth, one must look at it and one must invest there because even though there will be volatility, it will hug the earnings growth.

ET Now: Let us look at the global construct. Liquidity has been a challenge for emerging markets. World is a very volatile place. You do not know what is coming next, you do not know what the Fed will do, what bazooka ECB is likely to fire. So in a very flat world, where it is impossible to predict globally what could change, should one be worried about liquidity and the effect of that on emerging markets like India?

Anup Bagchi: In the short run, it is about liquidity. It is not about earnings. It is not about anything because if there is a selling and there is no sort of subsequent buying, obviously things will fall but we must not invest. If you are a trader and if you are investing for 2-7 days, then certainly these factors must overweigh. Actually it should have 80 per cent weightage in your decision on whether to buy, sell, go short or go long. But if you are investing to create wealth, if you are investing for a financial future in the medium to long term, it has to be earnings. There is nothing else in the long run. So these sectors and from that perspective, India is much better off. So even if there is 8-10 per cent earnings growth, continuous earnings growth and valuations are okay, it is good to enter into that sector. Do your SIPs and you will get that kind of growth. Now in equities, obviously the expectation is 15-20 per cent type but I am saying even 10-12 per cent tax-free is not a bad investment.

ET Now: Give me two sectors or ideas where you think wealth can be created in the course of next two quarters?

Anup Bagchi: Wherever the loan or debt on the balance sheet is low and it is a B2C businesses, those sectors are still good. FMCG is still good even though one may argue that it is slightly pricey. It is still good because you have the Seventh Pay Commission coming in and surpluses coming in the hands of people and consumption sectors should do well. B2B businesses, metals etc are good trading stocks but they are not compounding stories. Real estate is an asset class. If you want to invest, I think they are good buys. Tax frees are fantastic instruments. So look for good balance sheets in every industry, wherever you see good balance sheets and just invest. Wherever you get good balance sheets, you will see them trading very well.

ET Now: So which are some of the good balance sheets?

Anup Bagchi: I think FMCG is a good balance sheet.

ET Now: Which companies have good balance sheets?

Anup Bagchi: No, no, all sectors, you know, which does not consume too much of capital and which has got B2C that has demand coming from consumers typically and where the capital expenditure intensity is not very high and you have fairly predictable revenues -- these are all good balance sheets. Pharmas have good balance sheets, IT have good balance sheets, FMCG have good balance sheets. Very large B2G (business to government) businesses which consume a lot of capital are not the best compounding stories. Companies will become large but from an investor perspective you may not get that kind of return.

ET Now: When you say pharma, what is it that one sticks by? Does one follow the largecap companies or does one worry about the USFDA clampdown even now? Or do you think because of the USFDA overhang, right now is a good time to lap up pharma shares?

Anup Bagchi: I think this question is best answered by a pharma analyst, they track the sector much better than I do. But from an allocation perspective -- and I think money is made in allocation more than picking up -- if you ask me about USFDA, I think large companies which have good compliance culture, will fix these issues and if there is an opportunity of buying into these companies, one must do so as these companies have a long history of operations and they are not going to jeopardise the operation just because they do not want to invest to fix some of these issues. Things will get fixed. Actually if you look at all good companies, it is not that crises do not come, but good companies fix the crises and emerger stronger and that is a blessing in disguise, I think it will take us to the next phase of pharma and real investment will come along with real culture of compliance and companies will become very strong. So I still say that leaders are always very good companies. If there is a crisis in a leader, you get the stock at a slight discount. I think these are the companies to get in. Leaders do not give up leadership that easily. History has shown not that in a good, strong balance sheet companies, leaders do not give up. Maruti has not given up. HUL has not given up.