Big Talk- Nilesh Shah

BIG TALK:
NILESH SHAH,
DEPUTY MANAGING DIRECTOR,
ICICI PRUDENTIAL MUTUAL FUND-->
‘We are buying on every fall’
Sandeep Singh
Monday , August 27, 2007

The US sub-prime crisis and political turmoil might push the stock market down, but it’s because of foreign money moving out, not because anything significant has changed in the economy or the way companies are doing business. So believes Nilesh Shah, Chief Investment Officer of ICICI Prudential Mutual Fund who has recently also been made Deputy Managing Director. In a conversation with our correspondent, Shah explains why he thinks India is in better shape to handle such surprises and gives his reading of the market.


How bad is the sub-prime problem and how much will it affect India?
The sub-prime issue will keep resurfacing over the next few months. Sub-prime is the result of falling housing prices, rising interest rates and higher EMIs in the US, after two soft years. So, unless the entire cycle reverses, it is unlikely the sub-prime issue will be settled quickly.One positive is that the US Federal Reserve has shown inclination to contain it by cutting some key interest rates in the next few months. That should take care of rising interest rates. What’s left is falling housing prices and accelerating EMIs. But once interest rates start falling, housing prices will start stabilising, and then accelerated payments won’t create much of a problem. Although the sub-prime problem persists, the market has more or less discounted the risk from it. Unless something dramatic and new happens, the market won’t be bothered much.

It won’t fall much from here…
At a Sensex level of 14,000, the market has substantially discounted political and global uncertainty. The monsoon has been very good, inflation is low and falling, interest rates are stabilising, industrial growth is continuing, the rupee overvaluation is correcting — there’s a lot going for India.For September 2008, a year on, we expect earnings per share (EPS) of Rs 900 for the BSE Sensex. Then, in the Sensex, there’s about 2,000 points of non-monetised businesses like Reliance Gas, which is not commercially operational, or the life insurance business of ICICI, SBI and Bajaj Auto, all of which have value. Remove 2,000 points from 14,000, and the market is trading at a PE of 13.5-14, which is a reasonable valuation to buy into.
Are you buying?
Certainly. We have been buying with every fall. It makes sense to buy when stocks are cheaper, rather than when they are expensive.

Where’s the value?
FMCG has been the most defensive, and hasn’t fallen much. Capital goods and IT too didn’t fall much, but some auto, banking and telecom stocks got butchered. In the current volatility, invest more in large- and mid-caps.

What about political uncertainty?
Won’t it hurt?Political uncertainty has greater ability to cause a short-term blip, rather than leave a long-term impact. Sentiment will be affected, as people across the world have invested in India, thinking of it as an economic powerhouse. Those perceptions may, rightfully or wrongfully, change, leading to money being pulled out. But I don’t think it will have a material, long-term impact on our economy. Today, we are in far better shape to handle this problem.
The sub-prime crisis and politics do affect Indian companies. For instance, overseas borrowing could get more expensive, even more difficult.The cost of foreign borrowing has gone up because of a widening in spread on Indian credit. However, our external commercial borrowings (ECBs) are $25 billion. If rates increase by 1 percentage point, that’s an extra interest outgo of $250 million. That’s manageable. Indian treasurers are smart: they will trade in currencies and interest rates to take care of this movement. And even if the US Fed cuts interest rates, spreads may widen, but the base rate will fall. So, net-net, the borrowing cost won’t be significantly higher for Indian companies.

How do you see the rupee moving in the next three years?
Currencies are difficult to predict on a longer tenure. There are several factors to it. If FII and FDI inflows, and remittances, keep pouring in, the rupee can only appreciate. If commercialised gas production increases in India, our dependence on oil reduces, which means outflows reduce. Again, long-term appreciation.In the short term, we see the rupee depreciating to 42 against the dollar because the credit risk has widened overseas, reducing demand for ECBs. In the long term, it might climb to Rs 40, even Rs 39 levels.

Coming to ICICI Prudential Mutual Fund, there have been some changes at the top. Will that change anything?
No. Our business is simple: we have to service our customers to the best of our abilities. We have always managed our products in a manner that gives investors the best, not just in terms of returns, but also in terms of suitability and expectations.For instance, take our new Indo Asia Equity Fund, which will invest 65 per cent in Indian stocks and 35 per cent in Asian stocks. This fund is unique and fulfils many needs. As it is, retail investors’ allocation to Indian equity is lower than what’s necessary or deserved. This fund ensures 65 per cent allocation to Indian equities and the tax advantage of an equity fund. Since the balance is in Asian equity, it gives them an exposure to business cycles different from that of India. It also gives them an exposure to industries not available in India like natural resources and semi-conductors.

Why not 100 per cent allocation to foreign equities, as most overseas funds are doing?
Retail investors have low exposure to Indian equities, and there’s no point in pushing a 100 per cent foreign fund to them. At the same time, country diversification makes sense, as business cycles in Asia are different from India, as are industries. Combining the two gives a less risky product and also a tax advantage.

Why restrict it to Asia?
Asia fits better with India. Growth in Asia is likely to be higher than the rest of the world. Globally, allocation will move to Asia because of its performance potential — $3.3 trillion reserves and two billion people.