Investors lacking confidence to bring money into markets: Deven Choksey
June, 07th 2011
In an interview with ET Now, Deven Choksey, MD, KR Choksey Securities , talks about the global environment, global equities and Future Group. Excerpts:
First of all, the global environment. One is getting a sense that the global news is not looking all that strong. US economic data of late has been weak and wrinkles once again have surfaced up when it comes to the European region?
I would say that the American economy data and the European economies are not doing anything better than what probably anybody would imagine. Probably they are languishing, they are lying around the same level as they used to be. May be the hopes and the expectations were that they should have started improving and they are taking their own sweet time. If I read in between, I find that most of the regulators and the people out there are of the view that they would probably be showing some amount of better performance in the quarters October to December and till September or so I think it would continue to move in the same direction.
So would not think that anything major would come out from that front. Yes, on the QE3 front, some better news are expected that if QE3 is not announced then slowly and gradually probably this economy would start showing some amount of stability and that is where the larger confidence would be determined and investor would probably have more courage thereafter to start putting in money into the various asset classes. So we will have to wait for that scenario to emerge. As of now I would say the situation is not changing as much and the investors are lacking confidence to bring money into the markets.
There are two ways in which global equities could move. One all markets could come in a synchronised manner or second is that developed markets could underperform and emerging markets could outperform?
It is an ideal situation that all of them start moving in a synchronised manner and obviously for it to happen that way probably we would like to see a normal behaviour of particularly the currency dollar. And if that particular thing happens, then you would probably see a synchronised kind of a behaviour taking place, but we do not expect a normal behaviour of currency dollar because dollar, depite having all said and done, should have gone down. It is still staying firm because in absence of any other currency emerging stronger this is the kind of an advantage that the dollar is getting.
So till that point of time you are not going to see a kind of synchronised moves. In my view point even if see some amount of normalcy returning back into American markets, you would start seeing the flow of money coming back into the system and start getting invested.
The premises which I am drawing out here is that American companies are sitting on large cash and they are looking for some kind of inorganic growth. They are not confident about the currency behaviour itself. That is why they are not bringing out the money, but the moment they see some amount of stability that money should flow out and that is where you should see larger amount of actions happening in markets like ours where the valuations are abundantly cheap at this point of time.
In many of the midcaps and some of the small caps also, the valuations are going very very cheap despite of high growth that they assume and could be some amount of M&A actions which would probably start taking place in this particular period.
So I would think that today we are basically a little bit detached compared to the other markets of the world more because much of action is not taking place on to the investment side, largely the actions are on trading side. The moment the confidence returns, the actions would return back to the investing side and that is where you would see the opportunity. I would think the timing for that could be the end of the second quarter or may be the beginning of the third quarter of this financial year.
The EGoM for this week on oil has been deferred, but the hope is that it is going to happen sometime this month. What can one expect?
I do not know. I think the government is too busy fighting out too many other issues. I think they do not have any attention going on for the normal issues that are requiring the urgent attention of the government. Somewhat disappointed honestly, but I do not think that the EGoM meeting is going to do anything different than what they have been doing in earlier in the past because they are probably lacking in that particular courage to bring this particular petro fuels to the market given prices. And if that does not happen, we will continue to run into a situation of deficits and probably that would be a kind of disappointing news for more investors who are watching India from outside.
I am not totally expecting anything radical happening, but in diesel as market expects you could have around Rs 2 to Rs 3 kind of increasing price of per litre of diesel. And not too sure whether kerosene and LPG they would increase it substantially. But all said and done, if you factor that some amount of increase taking place, then the overall benefit is not basically more than 30,000 crore as far as deficit reduction is concerned.
That is what I have calculated and probably that is not enough. If you just bring down deficit by 30,000 crore, it is certainly not enough. I think you are still on a larger side of deficits. So to an extent I would like to see larger actions coming from their side. Till that time I think the speculation will be to keep playing around on the news, but that time it is not something which we enjoy anyway.
What is the way forward for the Future Group? One is getting a sense that these stocks now come under the avoid category because they are not generated free cash flow and all the Future group companies have higher debt on their balance sheet?
Yes, I think you said it all actually. I think the higher debt component and not generating enough amount of cash flow is probably choking the growth for this particular company in a sector which is fast moving. Probably you would be in a more happy situation if you end up having the high margin cash and carry business in your portfolio which cannot be substantially ramped up, but for that you are required to have freed financial resources which are unfortunately not seen available. At the same time when you look at the companies and the stock prices, probably they are adequately priced.
Today in the market nobody is so gung-ho about this particular sector because everybody knows one thing very clearly that even if you create point of presence, ultimately what is more important is the kind of a bottom line. So in my viewpoint the models of Bharti, Wal-Mart or for that matter Reliance Retail, where I think they are talking of cash and carry, could probably be substantially better model comparatively for the growth in the bottom line going forward. So may be one would like to see that happening with some other retailers also. Till that time I do not think they will be returning to the favour with the investors into the markets.
Sectorally where do you think the next leap of leadership is going to come in from?
I do not think that in this market you are going to see many more leaders changing over a period of time. The leaders are going to be seen may be in a rotational manner. They probably would come back and give chance to somebody else to come up. You may probably find the banking space once again returning back to favour moment you see some amount of stability returning into the market. Probably the banking stocks would once again be in the asking mode with the portfolio managers. So they would probably once again go into the investment into the banking/NBFCs, which are catering to the infrastructure. So that could be the one area which certainly looks quite convincing and positive.
The other area which looks convincing and positive to me is the area where infrastructure activities are happening and that is capital good segments. Though some of the companies have corrected and the valuations have come down, I would still think that time correction is required of around 1 to 2 quarters after which Larsen, BHEL kind of companies would certainly demand relook for the portfolio investors because those companies are going to be showing the growth consistently for the next two years from now onwards.
So you are going to see some of these companies coming up, may be Bharti kind of a company in telecommunication could show the kind of a further growth upside and so on and so forth you are going to see many such kind of companies coming one after another into the market and assuming the leadership.