Manish Chokhani, MD, N Subramaniam and Dharmesh Mehta, Head Of Broking of Enam Securities comment on the effects of CRR and repo rate hikes on sectors and markets
Chokhani feels that reserves must be absorbed better and it is harsh to blame the RBI. The monetary policy may ease by October. Earnings might slow down in the second-half.
According to Enam Securities, a correction in the real-estate sector might be in the offing, pointing out that pockets in North India show excesses in real estate.
The rate hike will hit the interest rate sensitives, as the rate hike was unexpected. They comment that speculators have vanished from realty and investors are using dips.
Excerpts from CNBC-TV18’s exclusive interview with Manish Chokhani and N Subramaniam:
Q: The mood is bad in real estate right now. How badly do you think this whole interest spiraling interest scenario could dent the real estate story?
Chokhani: I think real estate has corrected already and some of the companies that presented yesterday are doing quite well. So, to put it in perspective; the interest rate hike on Friday was unexpected.
Interest sensitive stocks are banks, real estate and autos. They are bound to get hit in the short run. But if you take a view of where is wealth going to be created in this country long-term? Where is wealth parked? - it is in real estate, banks and in financial savings and real estate will be a very large and important component of the Index going forward and some of these companies will be big winners as time goes by.
Q: Even so, has the scenario changed a bit - both in terms of what they can do by way of financial performance and how high appetite might remain?
Chokhani: One of things that is coming out clearly is that there are pockets in North India and other parts of India where there is excess build out taking place. Second is that the announcements, which were made of the construction, which is going to happen are probably not going to get executed at the pace at which people were projecting or expecting. Therefore, this whole demand-supply imbalance, which one worries about in the next year and a half, is not likely to happen.
The third thing is that the first flush of developers who raised USD 8 billion from the local equity markets, from the overseas equity markets as well as private equity, they do not have funding issues or financial issues, so they are going to go ahead and create the supply and the underlying demand has not gone away. Even Mr. Mistry, from HDFC was vouching for that.
What is happening is the end speculator who had come in and who was booking in anticipation of prices going up - those people have pretty much vanished. What is happening in our equity market is that people who are leveraged traders, in the future side of the market, are tending to withdraw whereas the longer-term investors are using these kinds of dips to build-up their portfolios.
So on balance, these are times people like us love because you can sit back, relax, take a view of what is going to be a long-term winner and back that horse. So time actually if you are on the buy side.
Q: Where is this whole SEZ story right now, because if there is another aside of interest rates which is spooking sentiment in this sector, it is the uncertainty on the SEZ front?
Subramaniam: On the SEZ front, it is now coming clear from what every announcement has been made, that as long as the company has land and as long as this land is purchased by them, rather than through an acquisition through a government order, I think SEZs will continue and where the land is going to be purchased through government order, I think you need to make sure that the displacement is fair and the payout for the displacement to come as well.
There could be delays on that end but those who have purchased land privately without SEZ orders; those permissions will come through quickly.
Q: What is the call on the market now, in the next one year, do you see some new fundamental challenges now for the market, which it has to overcome?
Chokhani: Well, there surely will be, we have spoken for the last one year, almost since last May. In a sense, we have been flummoxed by the way the market bounced back so sharply but as one kept digging, it was only 7-8 key stocks in the Index, which were showing a higher Index, whereas the broader Index had not really participated and therefore, most funds had not performed well last year.
It seems to be a cyclical slowdown in a longer-term secular story. Having said that, if you step back and think what is going on, we have effectively imported the US fiscal stance into India by moving our interest rates cycle according to them and also got trapped on the currency side by what the Chinese are doing.
If you put currency as a determinant and inflation as a determinant, the only factor which can then move and which is in your control, is interest rates which is what we seem to be doing.
However, while the Americans are using whatever they are doing with their printing presses very effectively to recycle debt which goes back into the economy to buy equity in other countries, the Chinese have similarly used the flows of equity to their country to build infrastructure and clean-up their entire banking system.
What we in India seem to have done is just accumulated reserves and then fretted about the inflationary pressures because we have not made the mechanism which can absorb this money, whether its SEZs or large FDI projects or infrastructure. We do not seem to have the mechanism to absorb the money, which the world seems to want to give us and it is harsh therefore to blame the RBI for doing its job.
One has to look elsewhere for answers here because you have this peculiar situation of USD 200 billion of forex reserve and yet we talk about a rupee, which could weaken in the short-run and high interest rates whereas the situation should be exactly the reverse. The rupee should be far higher, interest rates should be far lower and stock market property infrastructure, FDI, all of it should be booming.
So, all we seem to be saying with timidity is that we can not run fast enough and therefore, let other people run faster, we are happy to run at our own slow pace.
Q: What do you expect to see in terms of money flows? The same point you were making about global corporate debt hitting record volumes, do you expect to see a shift into debt versus equity or do you expect to see this market just living on a lot less money?
Chokhani: The market hates uncertainties; the minute you create some level of policy uncertainty, because of macro-economic fiscal stance and so on, as well as at the corporate level, it was quite clear that the next big bulge of capacity creations are only going to come in FY09-FY10. Therefore, this market will in a way have to tread water and look beyond earnings for the next year or year and a half, you do not like living in that period of uncertainty.
As far as domestic interest rates are concerned, it does not matter to the large corporates because they now have great credit outside. Every bank that one talks to overseas is happy to increase its loan book into Indian corporates, taking a longer-term view on the Indian economy and the currency. This is why one saw in Q1 of this year alone, India did USD 40 billion of overseas mergers and acquisitions and that is not a trend which is going to reverse.
Similarly, at the bottom end, the end-user of housing loan is not going away. HDFC still feels that they are going to compound in excess of 25%. So what you have really done is squeeze the middle size companies which do not have access to either equity markets or bank finance by charging them higher interest rates and move the trading community out from the economy and that will shave off a few points from GDP and from growth as well.
Q: Just to get back to that real estate point. For companies that will now hit the market, there have been some changes recommended by the SEBI, in terms of land banks and how it might be valued or announced. Do you think that will change the game a bit?
Subramanium: Not too much, only marginally. I think what SEBI wants to do is standardized disclosures. If you take all the four IPOs which have come on the real estate sector, the disclosures have been reasonably robust but not exactly the same across the board.
So SEBI wants a standardized disclosure, so that investors can clearly understand and differentiate one company against the other. We are still waiting for the fine print but what SEBI wants to do is standardize it and it is going to be good for the industry rather than bad.
Q: What is your sense of how much more this market needs to adjust to factor in higher interest rates, maybe even higher from where we are now, and the prospect of a growth slowdown both economic and in terms of earnings?
Chokhani: Two things will happen now. One is earnings will start getting downgraded and even while corporates will not see it, earnings towards the later half of the year will start slowing down.
The conundrum here though is in the second half of the year, one is expecting rates in the rest of the world to soften, particularly in the US as they slow down. If indeed, we continue to follow that cycle probably by the October Credit Policy time, you might see ease off of monetary measures here in India.
The markets will then start looking ahead at what lies in FY09. So you currently are going to get a compression of PE multiples. Because of higher interest rates, you would probably see some downgrades of earnings and people will just forget about what happens in the earnings season, which happens now because you are looking with uncertainty at next year. But I suspect, by second half of the year, people will start looking ahead at FY09 and things should be okay.
This market anyway being a disguised kind of bear market since last May because if you exclude the two telecoms, two ITs, L&T and cement, even the index stocks have not really participated since last May.
The broader market, the midcap index has not even crossed the January 2006 highs. The market in a sense has already discounted lot of this, even in slowdown. A lot of the actions which are now coming are really serving as confirmations of what in its wisdom the market had anticipated.
Q: Do you expect this market to amble around in a range for a while or seek lower levels while it adjusts to all these concerns?
Chokhani: One will always tend to overshoot on the upside and similarly, I think we will overshoot on the downside. There are seven companies, which really have been propping the market up.
When you see these seven companies giving way that is when you see the market making a fresh low, which would serve as a firm bottom for this year. Now where it goes and stops, whether it is 500 points low or 1000 low, I do not know. It is the same way on the upside, I have not ever in my wildest dream imagines that we would be at 14,500 index. So, I do not think, I am qualified to answer how far we can go on the way down.
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