‘Reform’ is loosely used in India

‘China is skilled but not educated, while India is educated but not skilled’ – that’s one of Sashi Krishnan’s favourite quotes. Birla Sun Life Insurance’s chief investment officer – he manages assets worth Rs22,000 crore – thinks the quote neatly summarises the difference between the dragon and elephant economies of Asia. His penchant for recognising differences, details and nuances explains why, in his dictionary, the recent government decisions on foreign direct investment (FDI) and fuel subsidy cut do not qualify to be labelled “reforms”. The CIO says the term would be more apt for measures like overhaul of land acquisition policies or labour practices. Such reforms would help India to fill the vacuum created by China’s exit from manufacture of stuff like shoes and toys. In this interview with Sachin P Mampatta, Krishnan explains why, in spite of the so-called reforms, domestic institutional investors (DIIs) are selling in the markets even as foreign institutional investors (FIIs) continue to pump in the mega dollars.

DIIs have been net sellers this month even after the announcement of reforms. Is this a case of portfolio churning? Or, are DIIs expecting more volatility in the days ahead?
DIIs appear to be reasonably bullish on Indian equities, especially given the series of measures taken by the government and various regulatory agencies in the past two weeks. However, they have been facing redemption pressure. DIIs have been sellers in equity because they have seen outflows from their equity funds. Mutual funds have been sellers to the extent of over Rs12,000 crore this year, of which over Rs2,800 crore has been in September.

What about FIIs? Inflows have been robust this year. Do you expect the trend to continue?
FII flows have been on account of two factors: the positive developments on the domestic front; and the global ‘risk-on’ trade driven by monetary stimulus measures announced by the US Federal Reserve and the European Central Bank (ECB).
India is well positioned among the BRIC nations (Brazil, Russia, India and China). China is facing a slowdown. Lower growth means lower demand for commodities. This is a negative for commodity-based economies like Russia and Brazil even though commodity prices may move higher on account of liquidity from central bank easing.

So long as the huge global liquidity play continues and India is seen to commit itself to the reforms path, these fund flows may very well sustain for some time.

How do you view the recent spurt in government action? Does the market expect more?
The word ‘reform’ is loosely used in India. Recent measures are more in the nature of decisions in the course of governance. Real reforms would be something like an overhaul of land acquisition policies or labour practices.

The revival of the investment cycle needs a series of reform measures, including reform in critical areas of labour, land acquisition, resource allocation, lowering interest rates, etcetera. The government has made some moves in this respect such as restructuring packages for state electricity boards (SEBs).

The government’s recent decisions are economically crucial, signifying its intent to kick-start growth. The reduction in fuel subsidies sends a strong signal that the government is willing to address the worsening fiscal situation. Markets will closely watch what the government does to set out a road-map for fiscal consolidation and to meet the fiscal responsibility and budget management (FRBM) targets.

The revival of the investment cycle will be key to an improvement in market sentiment and as will any reduction in interest rates.

Some changes are also being proposed in the Land Acquisition Amendment Bill which will make it easier to acquire land for setting up manufacturing facilities. The government also proposes to set up a National Investment Board to provide single-window clearances for large projects. These are positive.

Which sectors are you bullish on? And which sectors will you avoid? Are you taking contrarian calls?
Valuations at this point in time are not challenging, P/E (price/earnings – a measure of how expensive the market is based on earnings) multiples at 13 times forward earnings are lower than the long-term average. The Sensex P/B (price/book – a measure of the price that companies are trading at, relative to their assets) at 2.3 times, the market-cap-to-GDP (gross domestic product) of less than 70% and the Sensex dividend yield of 2.3% are all indicative of reasonable valuations.

Corporate fundamentals point to an improvement in earnings and Ebitda (earnings before interest, taxes, depreciation and amortisation) margins.

As insurance funds, day-to-day volatility does not worry us too much. We have exposure to sectors that are largely driven by domestic demand and reflect the long-term India growth opportunity – sectors like banking, consumers, pharma and IT. There may be short-term opportunities in shifting from these defensives to cyclical like industrials and infrastructure stocks as valuation differentials between the defensives and cyclicals have widened considerably.

What is your outlook on some of the ‘reformed’ sectors?
Though the reforms package announced for the power sector has raised hopes of a revival of the sector, there are still quite a few risks. Issues related to coal linkages, shortfall in domestic coal availability as well as issues relating to power tariffs need to be sorted out. As far as the retail and aviation sectors are concerned, we would have to await tangible FDI interest.

Valuation of bank stocks were severely depressed as there were concerns about the increasing stress in their loan books and fears of higher NPAs (non-performing assets or bad loans). Some of the recent steps taken, like the SEBs (state electricity boards) package, FDI in airlines, etc, will assuage fears on the NPA front. A revival of the investment cycle will also be a positive.