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There is no great trigger for the market to move upwards: Pradip P Shah, IndAsia Fund Advisors

Pradip P Shah, Chairman, IndAsia Fund Advisors, says despite..

Pradip P Shah, Chairman, IndAsia Fund Advisors, says despite there being no trigger for the market to move up, there is no likelihood of a downward turn in consumer demand. It will continue to grow. He was talking to ET Now.

Edited excerpts:
Crude prices have reversed. Could there be a near-term top in crude and do you think somewhere the macros have bottomed out and the worst of the newsprint both in terms of interest rates and crude is behind us?

No one can predict how crude prices will go but it looks like supply will increase because at $76 a barrel, there is a lot of additional capacity that can come on stream quite quickly. I do not think the worst is behind us. Do not forget the US is doing extremely well as an economy and while the Fed announced last week that the pace of interest rate rises will be a little slower than what the market was anticipating, it is still going to rise.

That coupled with the US economy doing well, is attracting money into the United States. We have seen money flowing out of FII holdings in February, April and May. Overall, so far in 2018, Rs 21,000 crore has flown out. That does not augur very well. Plus, our own concerns in India will possibly lead to further reluctance to invest in India.

Let us talk about a sector where as of now it clearly looks like that there is no light at the end of the tunnel. It is the Indian banking sector and especially PSU banks. Do you think it is going to get much more darker and is the dawn still a distance away?

In the public sector banks, there has been a lot of pain and some pain will continue going forward. The chairman of State Bank has said that the worst is behind us but I am not so confident and sanguine as he is because the environment is still not fully ready for bottoming out of all those problems.

For instance, the Insolvency and Bankruptcy Code, one of the most important strategic and structural measures that this government has introduced, is still in a state of effective implementation. It is going to take time of about a year to two years to settle down and till that time, the resolution will be not as rapid and quick as one would like it to be.

Also, maximising returns from those bad debts, from those toxic loans is a must. The whole process where the creditors committee sits in judgement on a resolution, the resolution professionals is a very weak link in the whole system. Legal challenges have delayed resolutions but the creditors committee does not feel individually that they are responsible for the debt problems.

They feel that they can write off and get on with it and in the process, a lot more is written off than perhaps is warranted and that requires capital into the banks. Now, how do you get capital in the banks?

If the government just gives in money into the banks, the banks are prone to writing off more or not collecting or not being as efficient in their credit appraisals and recovery.

There has to be some pain on the banks for not performing and the US model was a better model where Citicorp was bailed out where 10% of the losses were toxic loans for which the government was standing guarantee for 90% of the amounts. 10% of the losses were to be borne by Citi Bank.

So, there was a powerful incentive for Citi Bank to maximise its recovery and therefore minimise the drawdown of capital from the government. Something like that is necessary. So, there is some incentive for the public sector banks to recover as much. Of course, going forward, the government is trying a lot to improve the management, governance processes, CEOs etc and those will come but their pain is not over, there is still going to be some more pain.

Do you believe that the upside in Nifty is capped to 10,900-11,000?

There are no triggers for upside. The economy is doing very well. There is demand, consumer consumables, consumer durables, two wheelers, four wheelers, tractors and even in capital goods, there is noticeable demand and that is because of two years of suppressed demand.

GST and demonetisation have their own concerns but we had good monsoons and that pent up demand is reflected just now. But beyond this, there is no real trigger for us to do well. We will grow from 7% to maybe 7.5% this year but it is not going to be 9% or 10% because that is not possible. Also, we do have the clouds of oil prices being high, dollar appreciating and money flowing into the United States.

Our own elections are looming. If no investor can discount that if the present government does not get the same kind of mandate that it had in the past, will it be able to continue with the structural reforms and other welfare measures as well as implementation of policies that they have already announced? Will it be as effective in doing so? That concern will keep a cap on markets. Individual stocks on the basis of outperformance beyond the expectation will surprise markets positively but overall, there is no great trigger for the market to blossom upwards.

Despite the market not being able to see a major upside from here, do you think consumer stocks will continue to outperform?

Consumer goods are doing very well. You see demand growth, volume growth in almost every company and not just multinationals. That augurs very well for the economy as a whole. It leads to jobs creation and investment. There is no likelihood of a downward turn in consumer demand. It will continue to grow.

What should one expect in terms of returns from Titan, HUL, Page Industries? Guys who are betting on expensive businesses, available at ridiculous prices are making more money rather than true blue value investors.

This is of course the case that investors prefer the comfort of proven businesses which have proven management. Take a stock like Hindustan Unilever. How well managed it is. How good its product ranges are. How alive it is to opportunities. It never misses them and so people have confidence that it will continue to do so in the future.

So even if they overpay, they feel there will be continuing growth in the company and therefore valuations are much better in other scripts, perhaps commodity and industrial scripts but not in these consumer stocks but the consumer demand continues. There is no cyclical decline in demand and so I think people are betting on these good managements and good companies to sustain profits.

The rupee is at multi-month lows. Do you think it is time to be contrarian in IT and pharma?

IT and pharma will benefit from not just the currency depreciation but because of their being able to service. For instance, Indian IT companies are adapting to the change demands which have been brought about by the great disruptive forces of digitalisation — whether it is mobility, analytics and so on.

They are offering proprietary IP led solutions along with their services to give complete total solutions to their customers. We are doing it in a very competitive cost, not only are we giving them at competitive cost.

We will continue to see demand in IT industry, especially the leading companies. They should do very well. The same applies to pharma. At the end of the day, the United States and President Trump has announced that he has to bring down these costs.

How does he bring down those costs? One of the strategies that he is talking about is getting pharmaceutical products from outside the country because there the cost structure is better and especially generics where even today generics are prescribed in larger numbers than patented drugs. The pharma sector is going to do well. There has been consolidation on the buying side in the pharma industry in United States and therefore that has affected the margins of many of our pharmaceutical exporters to United States, but as new products come off patent and biosimilars and other more complex molecules come off patent, Indian pharmaceutical companies will do very well.

Original Article


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