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Most foreign funds not massively overweight on India: Ayon Mukhopadhyay, IIFL Securities

Reforms in the NBFC sector can increase the GDP by 1 to 2%, says Mukhopadhyay.

, ET Bureau|
Dec 09, 2019, 08.46 PM IST
Index price to earnings multiple of India to MSCI Emerging market is almost at an all-time high; while India’s ROE (return on equity) relative to other emerging markets is at an all-time low
Over the past few months, foreign inflows in India have gone up meaningfully. In the year to date India has seen foreign inflows of near $13 billion in the year till date, highest in the last many years. Thanks to these flows (and local flows), markets too have bounced back. But how far will this continue? Will this sentiment sustain? Ayon Mukhopadhyay, Director, Institutional Equities, IIFL Securities, throws some light on these aspects. He spoke with The Economic Times.

How are foreign investors viewing Indian markets?
There are two thought processes. One is: a large part of the world is growth-starved. Look at bond yields. Half of them are negative. In this situation, if you have a market which is growing at 5% GDP, it is fine. Investors want to invest. Moreover, they are seeing drop in GDP to be a mere cyclical slowdown. Even in the cyclical slowdown, they are looking at only quality companies. They don’t want to invest in the whole market. So, India is a market with a basket of excellent companies. Hence, good companies that are on the growth trajectory have not corrected at all. Second: The relative valuations are at multi-year highs.

Could you expand about the valuation aspect of Indian markets?
India's valuation is expensive. So, India historically has always been more expensive market than other emerging markets, but now the gap is at a historical high. The premium has expanded to almost 60% than other emerging markets. The index P/E of India to MSCI Emerging market is at almost an all-time high. This is in a situation when India’s ROE (return on equity) relative to other emerging markets is at an all-time low. So, while investors which are in for the very long term are fine, but others who look at data and numbers in a closed way, believe there is a big disconnect. They also feel the growth has not come in the past four years. There has been hardly any earnings' growth. So, the Nifty has nearly doubled but earnings growth is not there. Hence, there are no funds that are massively overweight on India. Investors have turned bullish on Brazil. Interest rates have come down in Brazil. Earlier China and India were the only two markets that investors were looking. But now a lot of investors find Brazil more attractive than other markets in the emerging markets space.

Could you give some examples of long-term investors investing in India?
I think the real outlier this year have been the insurance and Asset Management Companies (AMC) sectors. These are very under penetrated market in India. See the stock prices of any insurance company, whether its life or products. Look at SBI Life or HDFC Life. Other outliers are the AMC companies such as HDFC AMC. So, wherever you have under-penetration, solid businesses and the structural stories, foreign investors are buying. These companies are getting consumer kind of multiples.

Any other sectors that foreigners are bullish on?
Some of the sectors where disinvestments are happening, there will be big pickups there. Domestic pharmaceuticals companies can become big. So, any pharma companies that have strong presence in India should do well. But investors are still not that bullish on cyclicals like cement or infrastructure.

According to you, what do foreigners expect from the government? How are they viewing the recent tax cuts?
Tax cuts is one-time impact and that can lead to capex revival. But companies are hesitant to invest in capex as they are unsure over demand. But the NBFC crisis resolution is the key to the revival of growth. For instance, over 50% of auto loans are linked to NBFCs. The NBFC sector was the huge incremental credit to the system and the liquidity in the system is impacted due to this crisis. Reforms in the sector can increase the GDP meaningfully. There are some pockets in the sector which are bad, but that’s not true for the entire sector. Government will have to ensure that banks release the liquidity to the NBFCs.

Any other concerns that have led to FIIs going under?
In India over the last one year or so, an issue which has come back to the fore is the governance issue. People are now scrutinizing governance because of defaults in NBFC sector and few other companies.
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