‘We are still fairly priced, not at a significant discount’

Sameer Kamdar, the chief executive officer of ASK Investment Managers, is nursing an old sports injury. But his most pressing concern has nothing to do with the sling around his arm; it has to do with oil prices. The spread of civil unrest to major oil producing countries and its effect on the Indian government, which is yet to replace its pricing mechanism, is a big worry, he says in an interview with DNA. Running one of the largest portfolio management service (PMS) providers in the country in terms of assets under management, he lays claim to assets in excess of  Rs2,000 crore in a fragmented industry. Excerpts:

What are your expectations on the fiscal situation likely to be outlined in the budget. Will government borrowing continue to crowd out the private sector in the new year?
The government’s fiscal position is quite challenging. With no major disinvestments like 3G and Wimax spectrum (that fetched  Rs1.10 lakh crore last year) on the anvil this year and with oil prices skyrocketing beyond $100 a barrel, the fiscal condition can get out of hand. With a patchy track record of maintaining fis cal discipline and a serious slowdown of foreign institutional investor (FII) and fireign direct investment (FDI) money, the government will have its work cut out in balancing its finances. Since finances will get stretched due to the continuing high oil prices, there is all likelihood that the government may be a year-round borrower.

How long would you expect the elevated crude prices to persist?
Crude oil prices are surging more on negative sentiments than on real demand surge. That is the only solace for the markets in the near term. Considering the widespread disturbances across the oil producing nations and more such nations joining the ranks, I don’t see any immediate cooling off of the oil prices. In fact the markets risk a higher blowout of crude prices should any major oil producing nation or a group of nations encounter significant political disturbance in the coming days. There are no easy solutions in the short term and the government will have to abandon short term electoral concerns in favour of dismantling the administered pricing mechanism to structurally reduce the pressure on its finances from oil subsidies.

The market has crashed instead of registering its customary rally ahead of the budget. How would you characterise sentiment and expectations around the event this time around?
We are going into the budget with fairly low expectations, and hence any policy announcements which the market feels are realistic would be cheered. Strong focus on execution in the infrastructure space including thrust on roads, power, clear policy on coal linkages, renewed policy fillip to agriculture, dismantling of administered pricing on petroleum products, reduction of subsidies, higher FDI cap on sectors like insurance, aviation etc would be reasons for the market to feel positive. On the other hand, the markets would be sorely disappointed if the government resorts to populism and lip service rather than pay real focus on execution and reforms in areas mentioned above.

After the recent correction, are we at a stage where valuations sufficiently discount all negatives?
I am not sure if valuations are very attractive yet. This is because on a trailing price to earnings basis, Indian markets are approximately at 17 times which also happens to be the long-term mean since markets have oscillated between 12-24 times in the past. Hence, just from a pure valuation perspective, we are fairly priced and not at a significant discount. Also, there is a very real chance that industry may face higher inflation on account of wages, raw-materials and interest costs. While a large part of the negatives are factored in oil, inflation, interest rates, fiscal deficit and governance would continue to dominate market sentiments in the near term. Investors would have to look at valuations sectorally and on a stock specific basis to evaluate the relative attractiveness of the same. Investors would do well to be greedy in fearful times by loading onto ideas which are of a strong quality and character to build a portfolio of blue chip businesses by buying into them at times when markets are jittery and valuations attractive from a long-term standpoint.

Which are the sectors that you are bullish on?
I continue to be bullish on India’s consumption theme encompassing pharma, fast moving consumer goods (FMCG) and banking besides IT (information technology) and export related sectors. Metals also present a reasonable opportunity, though they require much more nimble footedness due to the vicious volatility in global metal prices. I would also selectively bet on some part of the infrastructure story where there is strong visibility of earnings growth, healthy orderbook pipeline, significant size of opportunity and fairly attractive valuations. I would also keep an eye out on strong auto growth despite the increasing interest rates.

With advance tax season coming up, what are your thoughts on the liquidity situation?
Liquidity is a worrying factor in a theatre of increasing interest rates. The central bank will require to be ahead of the curve in providing liquidity lest it chokes the growth feeding the economic buoyancy. This is tricky in such a strong inflationary scenario, and hence I am circumspect about how liquidity will pan out in the short term. I foresee the liquidity situation tightening further in the near future.

Do you expect interest rates to go up faster in light of the crude oil situation?
Interest rates are currently chasing inflation which is highly dependent on oil and gas, agriculture and commodity prices. All these are in the negative zone, and hence there is a possibility that interest rates may have to be tightened further to arrest violent inflationary movements. The worry would then be on whether this would hurt the growth prospects of the economy overall.

What could this mean for banking stocks?
Banking stocks have already sold off considerably in anticipation, and hence I foresee lesser damage in the coming quarters. Having said that, if the tightening turns from benign to aggressive, then it could hurt banking sector and stocks quite badly. From valuations perspective, banking sector presents a reasonably attractive investment opportunity currently.

Do you expect to see major earnings downgrades in the days ahead, with margin pressure rearing its head?
Industries are facing strong headwinds in terms of high inflation in raw material cost. So far most producers have been able to pass on price increases but there will come a time when it may not be possible and this may lead to de-rating of earnings. Some sectors will face significant pressures while others will be relatively less impacted, hence it will have to examined specifically, company-wise or sector-wise.

The jury is still out whether industry will face major earning downgrades. I, for one, believe that any such downgrades will be sectoral rather than a broad swathe across the economy and industries.

A lot depends on the economic policy to be set out by the government and its resolve in tackling inflationary pressures through a series of direct and indirect measures.