‘Industrial recovery was stronger than expected’

Moneylife presents the second part in a three-part series of the interview with Vetri Subramaniam, Equity Head, Religare AMC.

ML: Why has the market so quickly discounted the impact of the monsoon?
I think the monsoon is not a significant factor. When you look at data like monsoon is 20% less, how much does it affect the GDP growth? I am not an expert in this issue but it suggests to me that there is some kind of downside pressure on the economy coming through from agriculture. But I think the reason why the market has looked beyond is actually something else and that is essentially the fact that the industrial recovery has been far stronger then what we had anticipated. I mean six months ago our baseline view was that we would grow at a 6%-6.5% and while my baseline view has still not changed, that number frankly should be revised upwards given the strength in the industrial production. The only reason that it has not been revised upwards is only because of the weakness that we can eventually see from a poor monsoon. 
ML: Domestic investors have poured more funds into the markets. Have we finally shrugged off our huge dependence on FIIs? If so, what are the long-term implications?
Well, the rally was started more by foreign money. You can argue that the paper that was floating around was actually sucked out in the first place by domestic investors during late 2008 and early 2009. I think the bigger issue is that pretty much since 2007, the total domestic institutional buying—whether it is insurance, banks, mutual funds put together—has actually been more than what the foreigners have done. I think this is an important trend and it’s a trend that will at some level eventually sustain because at the end of the day the economy is growing in nominal terms at 10%-12% and incomes are growing and when incomes are growing investible surpluses are growing. They have to go somewhere. Obviously the asset class of choice much to our chagrin has been ULIPs over the last three-four years. Maybe it will be the New Pension Scheme in the next three-four years. Eventually this money has to find a home somewhere. If you say this money won’t go into the equities because the Indian investors are very risk-averse, I would argue it would equally end up creating an asset bubble, because the money would then flow into bank fixed deposits. Then we should not be discussing rate tightness; we should be discussing 5% rate for FDs. Eventually something has to balance out the equation and I think the pure fact that you are continuing to grow at nominal terms 12-14% GDP means that incomes are growing and disposable savings are growing and equities are bound to benefit.
ML: What are your expectations regarding corporate performance and which sectors do you see outperforming?
I think the resilience has been more on the economic numbers rather than necessarily in earnings and particularly balance sheets. A lot of the pain which was not felt in the economy was recorded in the earnings and lot of the pain that was not recorded on the earnings was recorded in the balance sheet. Companies have done all sorts of accounting jugglery; they used the rules to their advantage to not take into account what they should have had on their P&L and all of that. Maybe the true extent of non-performing loans has also not been recorded in the system because the RBI gave a time-window to the banks. I don’t think the true extent of earnings damage has been captured fully in all the reported numbers. Having said that, in terms of a trend, the June quarter numbers were clearly a little bit of a surprise, but more because of cost-related issue rather than top-line. My sense is that the second quarter will be more of the same. Maybe the top-line is still going to look uneven but the bottom line will look much better, but by the time you get to the end of the year, the cost pressures are going to start catching up again. We already started having pressure on most cost items whether raw materials, salaries, fixed overheads all of them have started to inch back up again. It’s interesting that you actually saw some of the best operating margins that companies have ever recorded in the last eight years being reported in the June quarter, when we were just coming out of a recovery. I think at some level they will have to give out some of their margins back either because of the pressure of raw materials or because of competitive pressures. Margins cannot stay at these elevated levels for so long.

But hopefully it may get replaced by some element of top-line growth by the time you get into the fourth quarter and that should be possible because on a year-on-year basis obviously your volume numbers should grow as per your expectations.

Our key preference remains for domestic consumption themes like consumer staples and consumer discretionary items. Not that they are absent of valuation issues but the valuation issues are across the market. Banking and finance companies too feel that credit growth is starting to recover. We are far more cautious about sectors that are more globally interconnected like the commodity space. We have been positive about IT but now valuations have gone up. But on a two-three year perspective, the IT business model will weather this downturn because the downturn in the western economy in this time is more consumer led rather than business led. The health of corporate balance sheets in the developed world is reasonably good. The financial system had a problem but that also has been largely put behind so I don’t think spending trends will really get badly affected. 

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    Stocks resume their upward march

    Growth in Chinese industrial production strengthened the Indian market rally

    The Indian stock market continued its bull run on Wednesday on hopes of a robust recovery in the global economy after China reported strong growth in industrial production for October. The Sensex closed at 16,850, up 409 points, while the Nifty gained 122 points to close at 5,004.

    Asian markets also gained on buoyant Chinese macro data. The key benchmark indices in Hong Kong, South Korea, Taiwan and Singapore rose by between 0.82%-1.61% while Japan remained flat.  However the Shanghai Composite fell 0.11%.
    On Tuesday, 10th November, the Dow Jones Industrial Average was up 20 points at 10,247, the S&P 500 index ended flat at 1,093 while the Nasdaq Composite Index fell three points to close at 2,151.

    Meanwhile in premarket trading on Wednesday, the Dow Jones index was trading 61 points higher.

    In the Indian market, IT stocks continued to firm up after the president of industry body Nasscom said the sector will regain double-digit growth from April 2010. Tata Consultancy Services was up 3% while Infosys Technologies and Wipro were up 4% each.

    Shipping stocks rose after the Baltic Dry Index breached the 3,500 level on Tuesday. Shipping Corporation of India, Mercator Lines and Great Eastern Shipping Company were up by 9%, 14% and 6%, respectively.

    Jubilant Organosys shot up 20% on news that its wholly owned subsidiary Jubilant Biosys has signed a pact with Singapore-based Duke University for global research and drug development.

    C&C Constructions jumped 6%, after the company’s board approved raising funds through various modes.

    Rural Electrification Corporation rose 5% after the company received government’s approval for a follow-on public offer of 17.17 crore shares.

    Shree Renuka Sugars was up 2%, after the company acquired Vale Do Ivai S.A., a Brazil-based sugar and ethanol company, while Ballarpur Industries went up 2% after the company redeemed debentures worth Rs1,000 crore issued by its a step-down subsidiary, BILT Graphic Paper Products.

    Pyramid Saimira Theatre was locked at the lower circuit limit of 10% at Rs 19.65 after the Securities and Exchange Board of India barred the company from trading in the capital market for seven years.

    India’s largest small-car marker Maruti Suzuki remained flat despite data showing that total car sales in October rose 34% to 132,615 units. Sales of trucks and buses, a gauge of economic activity, rose 52% last month to 42,562 units.
    Meanwhile, trade secretary Rahul Khullar said exports fell 11.4% to $12.5 billion in October 2009 over October 2008. Between April and October 2009, exports were at $90.4 billion, down 26.5% from the year-ago period, he added.

    As per media reports, C Rangarajan, chairman of the prime minister’s economic advisory council, made a statement that the Reserve Bank of India may withdraw some monetary stimulus if inflation rises towards the end of 2009. The fiscal deficit needed to be reduced by 1%-1.5% in the next fiscal year, he said.

    Finance secretary Ashok Chawla said on Wednesday that the rising capital inflows into India were not a concern any more and the authorities were monitoring the situation. He also said India’s economy was unlikely to reach growth rates of 8%-9% until exports revived. Earlier this month, the trade minister had said exports may start growing in annual terms from the March 2010 quarter.

    Meanwhile, data showed that China’s industrial production surged 16.1% in October 2009 from a year earlier after record loan disbursals by banks so far this year. The industrial production growth exceeded market expectations. Retail sales climbed 16.2%.  The growth in urban fixed-asset investments in the first ten months of this year was 33.1%, easing from the 33.4% growth in the first nine months of 2009. The consumer price index fell 0.5% from a year earlier and the producer price index shrank 5.8%, with each dropping more than economists had estimated but still showing an increase from data in the previous month.

    Exports, a key engine for China’s economic growth and a major source of employment for its people, dropped at a higher-than-expected 13.8%, though the contraction was an improvement over the 15.2% decline in September 2009.

    New loans issued by Chinese financial institutions dropped in October 2009 to their lowest monthly level this year, suggesting mainland Chinese authorities were scaling back a key source of stimulus for the economy. However, China’s key broad measure of money supply, M2, rose 29.42% at the end of October 2009 from a year earlier, in line with expectations.
    — Swapnil Suvarna [email protected]

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    Sex pills will remain as OTC drugs

    Moneylife mentioned some time back (6 October 2009, Sex sells in drugs too) that pre-sex and post-sex drugs, Revital and i-pill tablets are growing by 25% and they have replaced the largest-selling drugs like Corex and Phensedyl. Over the past few days, there has been a major furore among religious organisations and individuals objecting to television and print media advertising for post-sex drugs for women. i-pill and Unwanted 72 have levonorgestrel, a synthetic derivative of the naturally occurring female sex hormone, progesterone. Gynaecologists have reported problems like irregular menstruation and other side-effects from these pills.

    Gynaecologists have also reported incidents of unsafe sex among teens because of these medications as teens use them easily without knowing the harmful side-effects of continuous usage of these drugs, as they are easily available as OTC drugs. A few organisations have opposed the use of these pills as OTC drugs and they want to make them prescription drugs. However, the Drug Technical Advisory Board (DTAB) has decided against making these drugs prescription-based as it felt that this necessity of prescription will defeat the purpose of these drugs which are meant to be taken within 72 hours of unsafe sex. The Cipla website mentions that i-pill is 95% effective within 24 hours of unprotected sex, 85% between 25-48 hours and 58% effective if taken between 49-72 hours.

    However the DTAB suggested that there could be an expert committee having gynaecologists, information and broadcasting ministry officials and other people who can decide about the advertising of such pills. The committee would judge on what these advertisements could contain—like possible side-effects and minimum interval to be maintained between two successive doses.
    —Dhruv Rathi [email protected]

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