• Sanju Verma, Group CEO of Violet Arch has more than 14 years of rich experience. As the key engineer of the takeover of Alchemy Share & Stock Brokers, Sanju was instrumental in setting up the Securities business for Violet Arch and ensuring a seamless transition between the businesses.
• Sanju has worked in leadership positions at prestigious organisations like HDFC Securities , MF Global (erstwhile Refco-Sify Securities) and J. P. Morgan (erstwhile Jardine Fleming ). As the Executive Director and Head of Institutional Business at HDFC Securities, Sanju grew the existing business then, to new heights and set up a derivatives business from scratch. During her tenure at HDFC Securities, they were awarded several accolades including "Most improved securities house" by Asiamoney.
• Early in her career, Sanju's skill set in recognizing the huge business opportunities from FIIs within the Indian broking context, was honed during her six year long stint at J. P. Morgan, (erstwhile Jardine Fleming), where she served as Associate Director.
• Sanju's knowledge and comprehensive understanding of various parameters that shape the stock markets is regularly featured in various media forums, including CNBC TV 18 , NDTV Profit, Bloomberg UTV, DNA Money and the like, where she shares her incisive, independent, bold, and contrarian take on the markets.
• Rated in Asiamoney, where she has been voted amongst India's handful best by both Hedge Funds and Mega Funds in the institutional equity sales and equity strategy domains , Sanju displays a natural flair for sales and fundamental analysis , alongside her winning ability to lead teams that deliver, given her strong research orientation.
• Sanju holds a Master of Business Administration with a specialization in Finance from the Xavier Institute of Management, Bhubaneswar and a Bachelor's of Arts (Hons.) degree in Economics.

 

Transcript of CNBC Interview

Apr 04, 2013, 11.27 PM IST

Indian equities overvalued; focus on rupee: Sanju Verma

Sanju Verma

In an interview to CNBC-TV18 Sanju Verma, managing director of Violet Arch Capital said Indian equities look overvalued.

"Keeping the S&P 500 rally as a benchmark, and assuming the Sensex at sub-19000, Indian equities are giving an earning yield of just 7 percent. Considering the risk free rate (yield rate on Government Securities) is 8 percent, the equity risk premium for Nifty companies is a negative 0.86. This is a proof of equity as an asset class being grossly overvalued," explains Verma.

However, she is bullish on the market and hopes that macro issue like current account deficit (CAD) may come down to 3.5-4 percent from the existing 6.7 percent. "With gold prices coming down leading to a decrease in gold import expenses, CAD is likely to come down in the coming six months," she added.

Investors should consider investing in the currency market instead of equities. Despite the negative newsflow, the rupee has held steady. Once forward premiums and hedging costs come down the rupee will appreciate and give a boost to the next phase of equities rally, she elaboarted.

Below is the edited transcript of Verma's interview to CNBC-TV18.

Q: Do you think we are headed for a big waterfall slide in the market and if yes what could the extent of the correction be?

A: We need to take a hard call and look at fundamentals on the ground before we decide to be bullish or otherwise. The screen is screaming red at this point in time. It is a sea of red. I may be called a brave heart to give a bullish call.

The macro scenario is certainly not looking rosy. The only reason S&P 500 has moved up at today’s levels is because the S&P is trading at something like 16 times giving an earnings yield of 6.25. Given that the risk free rate in the US is just about one percent or even lower, it basically means that the equity risk premium for the S&P 500 set of companies is just about 5.25.

This indirectly means that equities in the US are grossly under-valued because the higher the equity risk premium, the more under-valued the equities class for that given geography. If I use the S&P 500 rally as a benchmark and extrapolate the workings into the Indian context today at sub-19000, the market on one year forward, assuming that the EPS for FY14 will be in the region Rs 1300 or Rs 1325, the PE works out to something like 13.5-14 times which gives an earnings yield of just about 7 percent.

If I were to compare the 7 percent earnings yield with our risk free rate which is the government securities (G-Sec) rate which is close to 8 percent, then the equity risk premium for the Nifty set of companies is actually a negative 0.86. This means that equities as a class in India are grossly overvalued.

It needs to first get into the positive territory with respect to equity risk premium even before calling for a buy on Indian equities as an asset class. That’s the absolute bearish view which takes into account all the negatives; be it with respect to the current account deficit (CAD), poor earnings trajectory and a macro which seems to be flip-flopping between the good and the bad.

However, I am of the firm belief that USD 25 billion that we made through FII inflows last year had nothing to do with macro. It had even lesser to do with earnings. What it had to do with was just liquidity and liquidity alone fueled the 20 percent plus rise in dollar terms that we saw in the broader indices. So, the question that we should be asking is will liquidity continue to flow in or will there be a stop there for good.

We have pulled in on the equities front more than USD 8 billion in this calendar year. Will it continue? I think rather than getting carried away by the stock market, one should look at the currency market. I have always maintained that currency markets are nimble footed and a precursor of things to come in the stock markets. I am surprised that despite a 6.7 percent CAD number for the December quarter, the rupee has by and large been steadfast. Even in the non-deliverable forward market, rupee is trading at just about 55.25/USD or 55.35/USD at the worst. I think that is a positive.

Over the last one year, on a year-on-year (Y-o-Y) basis, rupee has depreciated all the way from 50/USD to 54/USD which is a depreciation of 7 percent. Over the last two years, rupee has perhaps depreciated by more than 20 percent but the point is that despite huge amount of negative news on the forex front, the rupee has held steady which means that there is something that you and me don’t know.
What the strong rupee is telling going forward is that forward premiums are likely to come down. Going forward, hedging costs which have inched up all the way to 7 percent are likely to come down. Once that happens and the rupee appreciates, that itself will give boost to the next phase of equities rally as and when it happens. Why I believe that forward premium on the rupee will come down and hedging costs will come down is purely because I believe that forward premium is at the end of the day a function of domestic liquidity. Last year, the liquidity deficit was to the tune of Rs 84,000 crore on an average on a single day throughout the last fiscal. This year, the liquidity deficit will be in the region of about Rs 70-75000 crore which is a far more benign number.

While the CAD number at 6.7 percent scared away people in February, the trade deficit was just USD 20 billion whereas in January that number was USD 15 billion. So, let’s not look at the past numbers, let’s look at what the CAD will be in March because there is so much of debate around that. I think that number will be lower than 5 percent.

If gold prices come down to USD 1500, then we can easily save USD 15-20 billion on gold imports alone. Saving USD 15-20 billion on gold imports alone will bring down the CAD to more benign levels of 3.5-4 percent. So, it might seem impossible now but its not impossible six months down the line.

Q: Having looked at the screen, there are some mouth watering levels at which stocks can be bought at. Would you advice nibbling into the market at this point and if yes are there any particular stocks that you are looking at?

A: We have just recently released a buy report on IndusInd Bank . We are calling for price target of Rs 497 which is our base case price target translating into more than 20 percent upside from current levels. The banking sector has been under a bit of a cloud for largely wrong reasons. That said, the story in IndusInd is pretty much well known. It has been well flagged by a host of brokers but what is important that it is a misconception that IndusInd is primarily into the CV financing business.

What one needs to understand now is that the whole business mix has changed dramatically while peers are focusing on fleet financing which is highly vulnerable to how the CV market overall does. What IndusInd has done is very smart. They are actually now focusing on small road transports operators (STROs). While the margins and growth in this business are lower, this is a less riskier business and that is what we are particularly assured by.

Infact, in a bull case price target for IndusInd, we are calling for a price target of Rs 613 where we are assuming that the net interest margins (NIM) will not be 3.8 percent but perhaps inch up all the way to 4.1 percent. The incremental slippages will not be 0.8 percent but may fall all the way down to 0.5 percent and credit growth will not be 25 percent but maybe 29 percent.

There is a reason to believe that our bull case assumptions will actually be met. This is one story that I am particularly bullish on. However the big disclaimer and caveat here is the fact that the banking space is also vulnerable to government diktat.

While the government may have done wonders for Adani Power's stock price yesterday, the company has very little to show by fundamentals having posted Rs 500 crore loss in December. Nobody is bothered to find that out. The government is telling Adani to engage in compensatory tariffs so that their net worth is not eroded over the next two years and it gets to sell power at a slightly higher tariff than the Rs 2.5 odd that one would have otherwise sold in places like Gujarat and Haryana. So, who will bear the additional tariff hike? Certainly not the consumer, given that we have a general election maybe this year, maybe not this year but next year for sure.

Are the state electricity boards (SEBs) in Gujarat and Haryana going to bear their additional costs? If yes, then what about the lending consortium that has lend to these SEBs. Canara Bank has an exposure of Rs 22,000 crore to the Rajasthan SEB and Oriental Bank of Commerce (OBC) has an exposure of Rs 9000 crore alone to just the Haryana SEB. So, each time the government tries to give a sop to one part of the market, there is somebody else who is bearing the rough end of the stick.

These kind of ad hoc measures are something that are very scary. Yesterday's decision on compensatory tariffs by the Central Electricity Regulatory Commission (CERC) could have far reaching implications. Its implications will not just be on power sector, which could albeit be positive, but it could also have negative implications for the banking sector. These are the kind of ad hoc measures that I am concerned about.

 

Mar 14, 2013

Sanju Verma picks SAIL; underweight on Bharti, Suzlon

The government's divestment agenda has gathered momentum and Sanju Verma MD & CEO of Violet Arch Capital Advisors prefers SAIL among the upcoming issues. She considers its valuations attractive and expects SAIL to give a healthy return

Sanju Verma, Group CEO

 

The government's divestment agenda has gathered momentum and Sanju Verma MD & CEO of Violet Arch Capital Advisors prefers SAIL among the upcoming issues. She considers its valuations attractive and expects SAIL to give a healthy return. She is also hopeful that the company will achieve an earnings per share (EPS) of Rs 11 from the stock.

Besides, Verma advises investors to avoid Suzlon . In the midcap infra space, she favours Sadbhav Engineering and feels it is best to switch to asset owners from contractors.

As far as the auto segment is concerned, Verma mentioned that the sales figure in February were well below street expectations. According to her, HMSI is gaining market share at the expense of listed peers. Besides, Mahindra and Mahindra’s standalone business will be driven by its SUV and diesel portfolio, she added. Due to capex concerns, she no longer prefers Tata Motors.

She remains underweight on Bharti Airtel due to high debt and low Africa earnings.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Your thoughts on the next few government offerings which are coming up, Nalco, Steel Authority of India (SAIL) and Neyveli Lignite, would you pick up any of them?

A: The performance of some of the offer for sale (OFS) issues in the last two and half months has been pretty much lackluster. Look at NMDC for instance, the OFS was done well below Rs 150, in the region of about Rs 146-Rs 147 per share. This was after the stock had already fallen 15 percent prior to the OFS. The stock has been hovering in and around the Rs 144-Rs 145 levels.

The point I am trying to make is despite a steep fall prior to the OFS, the stock still haven't recovered. So there have been very few takers and ditto goes for Rashtriya Chemicals and Fertilizers (RCF). I think the OFS performances have left a lot to be desired. That said, between the three names Nalco, SAIL and Neyveli Lignite, if I had to pick one, I would actually go with SAIL.

True, the performance for SAIL has not been very flattering either. About a year back every analyst on the street was talking of SAIL doing something like Rs 10-Rs 11 for FY13. For the first three quarters they have done earnings per share (EPS) of just about Rs 5. I will be happy if they end FY13 with an EPS of Rs 7. So, that speaks very little about the credibility of the earnings momentum for the company.

That said, FY14 will be pretty superior for SAIL on conservative estimates. My analyst tells me they are well on their way to doing an EPS of Rs 11, if not more. So, at Rs 11 on FY14 estimates, at a price of Rs 70 or Rs 72 is where it has been hovering at for the better part of last few weeks. The stock is available to you on price to earnings at less than 7 times. Given that it has a decent amount of cash on its balance sheet, ex-cash the stock is available at less than 6 times or 5 times. So, valuation wise there is huge amount of cushion and comfort.

What has been a problem with SAIL and where I would like to see greater clarity before I decide to take the plunge and then go the whole hog is some clarity on the EBITDA per tonne. Remember, this was a company till about 18 months back which was doing an EBITDA per tonne of something like USD130- USD135 and for the last two quarters, for the September quarter and then again for the December quarter, the EBITDA per tonne has come crashing down to somewhere in the region of just about USD 70 to USD 75. If they can go back to the USD 120-130 then I think you have a good story in the making which again is the function of the capex, where government policy intervention on the supportive side comes into the picture.

Government policy intervention unfortunately has not been supportive, it has been quite contrary. Don’t forget that they have a current capacity of about 12 million tonne. They were slated to do something like 25 million tonne by the end of FY15. Now, I am told they will do 25 million tonne perhaps by the end of FY17 or even FY18. The expansion calendar was the big story for SAIL. The expansion calendar itself has been pushed back by two and half years. That is what has done the price in. But, if there is clarity on that front I think there is reason to believe that SAIL can outperform.

Given that international coking coal prices have still been pretty much on the softer side and don’t forget coking coal prices was something like USD 325 a tonne two years back, USD 200 a tonne plus a year back, currently they are in the region of USD 180. So they will continue to benefit from lower commodity prices and even if there is a 5 percent uptick in finished product prices, they sell at about Rs 38,000 a tonne. If there is a 5 percent uptick given the huge elasticity of earnings to a small change in end products prices, SAIL stands to benefit.

My analyst tells me that if there is a 5 percent change in key product prices, it actually increases SAIL’s EBITDA and net profit between 25 percent and 40 percent. That is the kind of elasticity impact it will gain from. I would like to believe that given a choice, I would some time stick my neck out for SAIL. The other two, I would let them go by.

Q: The stock that has been seeing a lot of attention and news flow is Suzlon Energy. Any thoughts on that and whether you would buy it?

A: No. Suzlon is something I would clearly stay away from at this point in time. Within midcaps there is so much to pick and choose from, I don’t think there is any particular reason at this point in time to go ahead and buy Suzlon. If I have to stick my neck out and buy something within the capital good space, within the midcap arena, I would rather go and buy Sadbhav Engineering where there has been positive news flow last week. They have got land and environmental clearances for some of their projects.

We had also taken out a report last June where we were targeting something like Rs 179 for the stock. It is a different story that the stock thereafter has been hovering in the region of Rs 111 to Rs 115. But, what if it were to go back to Rs 150 or Rs 160 in a year from now? It would be trading at less than 8 times one year forward.

I have always maintained that within the capital good space, which includes infra players, power players, it is time now to shift from players who are into the contracting business to asset owners and there I think players like Sadbhav Engineering tend to score. While it is true that the government has awarded a fraction of the 9500 kilometers odd that it was to award by way of road projects and it would have benefited something like Sadbhav Engineering.

I am inclined to believe that in the first half of the coming fiscal, if not 3,000 kilometers which is what the finance minister said in the Budget, even if we do half of that which is 1500 kilometers, then asset owners like Sadbhav Engineering certainly stand to benefit. This is one of the few midcap players which actually have an return on equity (ROE) and Return on invested capital (ROIC) of something like 18 to 20 percent which is very comforting.

They have a road portfolio of something like 700 to 750 kilometers and the CAGR growth that we are talking about in terms of toll receipts for the next two to three years should easily be 50 to 60 percent on conservative estimates. But, within the midcap space at this point in time, that is one story that I am tracking closely and that is one stock that I am particularly bullish on.

Q: The one stock which has been intensely debated over the last few days in the market is Titan. It used to be a traditional favourite and suddenly it is down 20-25 percent and there all sorts of questions on the gold part of its business model. Would you buy it here after the correction?

A: I would refrain to comment because we are doing something there. So I will let it pass.

Q: Let me ask you about autos, the sector that you track. There has been a lot of pessimism on that given the recent numbers that have come in. If you still had to stick your neck out and buy one auto stock in the midst of this gloom what would it be?

A: That is a very tough one. The 26 percent fall in sales in February was well below the most pessimistic expectations. Not only a Maruti which saw a volume decline of 9 percent in February, domestically though the export side of their business did slightly well and hence, the overall sales growth came in at 2.8 percent. I would clearly stay away from two wheelers because the growth in two wheelers, say in Bajaj Auto for instance in FY14, I will be surprised if they do a top-line or a volume growth in excess of 7-8 percent which is well below the five year industry trend of 12 to 13 percent.

If I had to buy a two wheeler stock it would have been Honda Motorcycle and Scooter India (HMSI) which has bucked the trend and grown by 33 percent in February when all the three, Hero MotoCorp, Bajaj Auto and TVS have actually de-grown by 1 to 4 percent. But, unfortunately that is not listed. So, let us not speak about that and get into that territory which means the choice boils down to four wheelers.

Within four wheelers at this point in time, if I have to pick and choose one, it would have to be Mahindra and Mahindra. The consolidated numbers for M&M have not been particularly good, with the top-line and earnings momentum coming in between 10 to 11 percent for the December quarter. That is likely to be the case.

Don’t forget that the fourth quarter maybe particularly soft because the losses with respective to acquisition of Navistar or hiking the stake in Navistar will be booked. SsangYong is not going to make money for Mahindra till about end of FY15. Maybe they will cash break even and put their head above water only come FY16. Their two-wheeler business is not going great guns either. Therefore, the consolidated picture for M&M does not look pretty.

The standalone business is looking pretty good. Don’t forget that M&M has been running only one leg. The tractor business despite having EBITDA margins of 15 percent or thereabouts, has done little. Every quarter, for the last three quarters or four quarters, they have not been able to sell more than 60,000 to 62,000 tractors. If they were able to up this number to 70,000 to 75,000 tractors a quarter, they are home with respect to keeping their head above the water on the tractor side of the business.

Clearly, M&M is a story which has rested on this stupendous growth in the automotive segment. The automotive segment has been growing at 15 percent plus for them and whether it will continue or not, I am not sure. Maybe the growth will be 15 to 20 percent, maybe it will be 8 to 12 percent, but I am pretty confident that they will end up doing an EPS of something like Rs 56 to Rs 57 in FY14. It means they will end up showing an earnings growth of 9 to 10 percent which is good in the overall context of the earnings de-growth for the larger pack.

Even in February M&M was perhaps the only Indian company which showed a double digit growth in sale driven by its SUV and diesel portfolio. A 3 percent hike in excise is not great news but, the SUV hike will impact the premium side of the market, not the mass end of the market. Don’t forget that in the mass end of the market, M&M Bolero still has a 30 percent market share and is rock steady.

In a way, M&M stands to benefit if the excise hike is limited to the premium end of the market and not to the mass end of the market. Not withstanding the fact that you will have competition from Ford’s Ecosport and Maruti’s Alpha and GM’s Enjoy, it will be SUV offerings over the next 12 to 18 months.

At Rs 56 EPS for FY14, the stock is not necessary cheap at about 15 to 16 times one year forward. But one has to buy M&M looking at FY15. If they end up doing Rs 68 to Rs 69 EPS, which is what I am targeting for FY15, that translates into 23 percent odd upside over FY14 and the stock would be available on FY15 at just about 13 times. Then it does make sense to look at this story.

At this point in time, it is only M&M and Maruti and nothing from the two wheeler space. Not even Tata Motors which used to be a favourite because their capex of 2.75 billion pounds rather than 2 billion pounds, which they were talking about till three months back has come as a surprise. I don’t think you are going to see 14 percent margins on JLR in a hurry.

Margins will continue to trend downwards and the domestic side of the business is under tremendous pressure, not to mention the fact that both their Sanand and Pune plants are operating at just 40 to 50 percent of their actual capacities. The story there is not looking pretty. So maybe go short on Tata Motors and incrementally put 60 to 70 percent of your money in M&M and have a little bit of Maruti as well.

Q: You track telecom as well and that is going through a period of flux right now, how would you approach those stocks, is it time to buy Bharti Airtel or not quite yet?

A: Unfortunately, in telecom there is hardly any choice. If you recall, we had a conversation on telecoms and particularly on Bharti Airtel about 8-9 months back.

As a pure telecom story, Bharti Airtel has a lot going for it but that is all going to pan out for them only over the next 18-20 months. They are planning to sell their direct-to-home (DTH) business. They are valuing that at USD 1 billion. So, if they sell 25 percent stake, they are likely to rope in something like Rs 1,400-1,500 crore. But, what will Rs 1,400-1,500 crore do for a company which has a debt of something like USD 14 billion. The cash and cash equivalents currently for Bharti Airtel is just about a billion dollar.

A lot has been written about the fact that they did this USD 1 billion offering recently at an interest rate, at a coupon of just about more than 5 percent. But, that is a lot of hogwash because do not forget that 19 percent of Bharti Airtel’s debt is unsecured. 90 percent of their debt is floating rate and again 68-70 percent of their debt is dollar denominated.

Taking a call on Bharti Airtel currently means taking a huge call on which way the dollar-rupee movement will pan itself out. Secondly, their African operations have been very abysmal with respect to performance. I do not think the African operations will do USD 2 billion by way of EBITDA, which is what they were targeting for FY13. Even if they do that in FY14, it will be a positive. But, I have my doubts because the ARPUs in Africa are barely USD 6 odd.

While making the acquisition Bharti Airtel thought that they will grow this market from 15 percent to something like 20-25 percent. Unfortunately, this market has started growing at just about 8-10 percent and not 15 percent odd which will be trend level. So it has been growing at below trend. That is again discomforting.

Most importantly, I think there is no clarity at all from the government’s end with respect to intra-circle roaming. There was a news yesterday that Bharti Airtel will have to give back some of its circles in which it was offering 3G services. Secondly, there is no clarity on the cost of refarming. Do not forget, Bharti’s spectrum license comes up for renewal in FY14.

The big telecom story putting it contextually in the next couple of years will be Reliance. The government has taken a huge step forward by allowing a voice to be offered on broadband airwaves, which I think will do a whole lot of good to somebody like Reliance. The government has categorically said that they will not allow auction in the 700 and 2,300 megahertz (MHz) spectrum. It means Reliance has a two-three year lead before anyone else comes in and gives them competition in the 4G airwaves.

Reliance has got a backdoor entry, if that is what you want to call it, in terms of offering voice services because now they can use their pan-India broadband wireless access (BWA) license to offer voice and data after what the telecom commission said last week, for an additional Rs 1,658 crore.

So net-net, by taking the first step towards making internet telephone history in India, Reliance has taken a huge leap of faith forward. This will be the one big telecom story to watch out for. Of course, it is going to be a long haul. It will play itself out over the next four-five years but, I think the firm beginnings have already been made with respect to that.

Bharti Airtel is perhaps the only stock as a pure telecom play currently. But, I would buy it because of lack of choices and not because I am particularly positive about this space as such.

More About Sanju Verma

Sanju Verma“The stock markets are filled with individuals who know the price of everything but the value of nothing”-
— Philip Fisher

Since currency markets are very nimble-footed and a precursor to stock market behaviour, it is evident that rupee weakness leads to a vicious cycle of higher imported inflation, higher current account deficit, higher government borrowing, lower credit growth and higher fiscal deficit in the wake of falling tax revenues. This in turn leads to higher inflation, rising interest rates, lower corporate profits, lower earnings yield and rising bond yields, all of which finally manifest themselves in falling markets. Precisely what we have witnessed in the last one year.

But herein lies the catch. I believe the rupee will stabilise at 53 to a dollar, over the next 9-12 months, driven by a lower current account deficit, in turn driven by falling gold imports. Gold normally moves in a 10-year cycle and the gold rally that started in 2002, after hitting a peak last September of $1,922 an ounce, is now nearing its end with gold prices at just about $1,600 an ounce.

What can further aid potential rupee appreciation and fuel a stock market rally is the Reserve Bank of India’s (RBI) willingness to float a bond issue on the lines of the Resurgent India Bonds or the India Millennium Deposits, which should easily rope in $15-20 billion. In fact, even after including hedging and transaction costs, assuming RBI borrows at 200 basis points (bps) above Libor, it would still be able to rope in dollars at a price lower than the going rate of 8.44 per cent on a 10-year government bond.

Industrial growth in 2008-09 came in at a mere 2.8 per cent, following the Lehman crisis. However, it quickly rebounded to 5.3 per cent in FY10 and 8.3 per cent in the following year. We expect industrial growth to rebound to roughly five per cent in FY13, helped partly by the low base effect and largely by stimulus packages that the government should ‘pump prime’ the economy with.

With elections in Gujarat and Karnataka in the next one year and general elections in 2014, it would be suicidal for the incumbent government not to “unleash higher growth”. Why would the ruling coalition want to commit suicide when it has a good chance of winning, helped by a deeply fractured opposition?

Also, while in the long term a liquidity surge is anaemic for economies globally, in the interim it boosts asset inflation, stock markets included. Poor M1 growth of between two to three per cent in China and Europe suggests monetary easing and more long-term financing operations coming our way. A 50 bps reduction in reserve requirements in China for instance, unleashes 400 billion yuan ($63 billion) into the Chinese banking system, which through the ‘money multiplier spillover effect’ should push up risky assets like emerging market equities, Indian equities in particular.

Limited liquidity normally chases safe havens. Excess liquidity brings back animal spirits and chases growth and even at a nominal gross domestic product (GDP) growth of 14 per cent, India is far ahead of the western world, which is struggling with a nominal GDP growth of barely three per cent. Also, nominal GDP growth of 14 per cent means the government can grow its spending 14 per cent year-on-year and still have a constant debt/GDP.

Sanju VermaYes, risk appetite is back, and how. Let me explain. Bonds of Greece, the worst economy in Europe, returned 80% to investors last year, while those of Germany, the strongest, gave 4%. Even Spain, reeling under humongous debt, did better, returning 6-8%. Clearly , risk-prone investors couldn’t care less about the state of economies. One more example: Half of the $24.5 billion that foreign investors poured into India in 2012 had little to do with reforms — $12 billion had already come in by August, when reforms were still on the backburner. The point is, like a moth to the flame, risky markets always draw excess global liquidity, so India will continue to benefit this year, too. And excess liquidity it will be, for a while. Here’s why:

With British prime minister David Cameron eyeing another term, the quantitative easing programme in the UK, capped currently at €375 billion, will most likely get a leg-up. If LTROs (or Long-Term Refinance Operations) saved Europe the blushes last year, OMTs, or outright monetary transactions by the European Central Bank (ECB) will further encourage risk takers in 2013. With general elections in Germany in September this year and France expected to be in recession, the buzz-phrase is a no-brainer: “austerity be damned”. German Chancellor Angela Merkel and the troika (the International Monetary Fund, European Union and ECB) will go chin-up but keep the liquidity taps wide open. The US Federal Reserve will continue to buy $85 billion of government treasuries and mortgage-backed securities month after month. It’s unlikely to stop till unemployment retracts to the long-term trend of 6% from 7.8% now.

All of which would be vindication of the huge global liquidity surge, culminating in asset inflation — Indian equities included.
Japanese Prime Minister Shinzo Abe has already launched a 10 trillion yen ($117 billion) liquidity offensive, and don’t be surprised if his newly minted Chinese counterpart Xi Jinping follows suit and further reduces reserve requirements in 2013 from the current 20%, to breathe life into the Chinese economy, struggling with a sub-8% growth.

Every 50 basis point cut in Chinese reserve requirements infuses 400 billion yuan ($64 billion) into the Chinese monetary system, which, through a benign money multiplier effect, finds home in everything that’s risky, right from the Korean won and Filipino peso to Indian equities — all of which, in turn, had a brilliant run in 2012.

Believe me, the best’s yet to come.
I have always maintained stock markets are a lead, not a lag indicator. They mirror what and how the economy will do a few months down the road. True, talk of emerging green shoots on the macro front is debatable with exports de-growing 1.9% last month and IIP number for November de-growing 0.1%, not to mention the current account deficit of 5.4% for the September quarter — indicative of deteriorating external trade and continuing rupee volatility.

That’s despite the RBI selling dollars worth $921 million in November 2012 alone.
The capital goods segment has de-grown 11% for the April-November period and domestic auto sales were up a mere 4.57% in April-December. But amidst the sluggishness, what provides succour is wholesale inflation at 7.18% for December and, more importantly, core inflation (ex-food & energy) at 4.2%.

They signal falling sovereign bond yields, which I believe should settle at benign levels of 7% or even lower in the next few months. That will set the stage for the next phase of a meaningful bull run.

Published Date: Jan 21, 2013

Priyanka Golikeri & Megha Mandavial Bangalore/Mumbai October 1996. Export-Import Bank gets a new chairperson – Tarjani Vakil. It is the first time a woman has got to head any financial institution in the country, nearly 50 years after Independence.

Cut to November 2012.
There are a dozen women at the helm of banks and financial institutions, and at least as many (at levels such as country head, executive director, president, etc) who are waiting to ascend.

That easily makes it the sector with the most number of women bosses, compared with say manufacturing, energy, consumer goods and information technology, where the top decks are full of men.

Whatever happened to the famed glass ceiling, that invisible roof which stopped women from going upthe organisational hierarchy beyond a point? “As long as you can walk the talk with respect to deliverables, the ‘glass ceiling’ is more in the mind. More than glass ceiling, it’s about acceptability,” says Sanju Verma, MD and CEO of financial services firm Violet Arch Capital Advisors.

Indeed, the acceptability of women workers has improved vastly since Vakil, and not just at the top. A year ago, the Institute of Banking Personnel Selection, the agency running entrance exams noted that about 40% of applicants for bank jobs, both clerical and officer grade, are women.

Just a few years ago, that figure stood at 15-20%.

Predictably, the female:male ratio has also improved — 40:60 at the clerical level and 25:75 for officers. DNA talked to many of the chieftains, on what has worked for them and what hasn’t. Most, like Verma, said there was no glass ceiling as such, though the road to the top is competitive, highly cut-throat.

Women have always been in strong numbers in the banking sector, says Shubhalakshmi Panse, CMD, Allahabad Bank.

This may have something to do with the fact that traditionally, women have been adept at handling household finances and managing budgets. “You will always find women holding the reins and controlling finances,” says Verma.

Then, customary roles like accounting, sales and finance, which need a blend of soft skills and an eye for detail, are qualities that come naturally to women, says Roopa Kudva, MD and CEO, Crisil.

Moreover, banking, especially retail banking, has long been a natural career choice for a whole host of women in India, says Manjari Kumar, an officer with Canara Bank.

For every woman CEO or MD, there are thousands of others at the manager, officer or clerk level who have chosen the sector for the social security reasons it has on offer, believes Kumar, a mother of two school-going kids from Bangalore.

“A conducive environment, job security (in public sector and cooperative banks), effective work hours are benefits a bank job brings, vis a vis other jobs in say sales or marketing,” says Kumar.

Kudva predicts that over the next decade, there is a strong likelihood of a scenario where senior women leaders would increasingly lead teams having a high percentage of women members.

But getting to the top at a bank, or even at the branch or team level comes with its own set of problems and prejudices for women. Both Verma and Kudva admit stereotypes exist sharply for ladies. “People question whether the lady is indeed intelligent and hardworking enough to merit the position. No such doubts are raised for men who scale the ladder,” says Verma.

Kudva believes that while the path to the top does not come easy for any candidate, in the initial phase of their careers, women have to prove themselves harder. “As a woman it is probably a tougher task to establish yourself within the first decade or so of your career, than what it takes to emerge as a leader,” says Kudva.

Once a woman rises to the top, it gets backed by a sound track record. “Then, in my view, the fact that you are a woman becomes irrelevant.”

By the time a woman reaches the managerial level, she also faces pressures in the form of family commitments. “Even in the 1970s when I had joined as probationary officer, women were in great numbers in banks. But only those who had complete family support could take up promotions,” says Panse.

Kumar says, as the role in the organisation grows in size and stature, a bank job slowly starts losing its fixed-timing appeal. “You can no longer leave office when the branch closes. You have to travel intra-city on work assignments. This frequently forces most women to reconsider their career plans.”

Many a times, such circumstances necessitate women to opt out of their careers, says Kudva.

However, Panse believes that to grow in the profession, women must seek transfers to get the necessary exposure that comes from dealing with customers and borrowers from different cities and cultures. “I feel women must not just seek inter-city transfers, but also go in for inter-region or inter-zonal transfers.”

Hamsini Menon, former MD of State Bank of Mysore, says reaching the top has not been a cakewalk. “With a family, the journey is never easy. But often, the hard-work and perseverance pays off.”

Apart from family support and the efforts that the women themselves put in, organisational support in the form of favourable work hours, extended maternity leave, etc are crucial to retain women within the workforce, say experts.

“Only with full family and organisation support did I manage to reach this level,” says Panse.

The journey to the top involves acquiring specific skills, namely good communication capabilities, a consultative style, ability to run multiple agendas simultaneously and capacity to handle ambiguities and differences – all aspects that are key in a male-dominant corporate world.

While mentoring is crucial for grooming leaders of the future, the ladies admit that since men tend to network better, they not only have greater access to informal mentoring, but also acquire an edge thathelps them zoom up the organisation ladder.

“Men can network over cocktails. But there is a limit beyond which it is not possible for women to network. Women should be groomed on how best to communicate and network within their organisations,” says Panse.

Kudva says women stand to greatly benefit through active mentoring programmes. “Very often it is about getting the right inputs and support for staying on course during certain critical phases in one’s personal life.”

Sanju VermaIndia’s “silent” Prime Minister has finally shown that he has a voice, unleashing a slew of reforms in multi-brand retail, aviation and broadcasting, among other things, though it’s a pity he needed a Washington Post to stir him out of his slumber and tell India-bashers that ‘Singh is King’ after all.

It’s another thing that an additional 375 sq ft of retail space will add only one new job in the retail sector, so to add 4 million new jobs over four years, an incremental 1.5 billion sq ft needs to be added over this period.

Simply put, the target requires 6,000 malls, the size of Mumbai’s famous 0.25 million sq ft Atria Mall, to be absorbed by India’s bigger metros and cities in four years.

That seems impossible to achieve when Mumbai, Greater Noida, Bengaluru and others are already reeling from the ignominy of empty malls and falling footfalls.

Again, almost 40% of India’s retail space is primarily non-food retail. Hence, all these tall claims about the entry of Wal-Mart and its ilk improving rural connectivity by improving back-end infrastructure are easier said than done.

Also, the display of bravado in North Block over the Rs5/ litre diesel hike is hardly cause for cheer as the under-recoveries of oil marketing companies for diesel alone still stand at a whopping Rs1 lakh crore, akin to 1% of gross domestic product (GDP).

Negative export and import growth numbers for July and August, in a row, are symptomatic of India’s own “growth cliff”.

What then explains the $3 billion-plus that FIIs pumped into Indian equities last month alone, pushing local bourses up 4%, outdoing in the process, most global and Asian indices?

Well, I am not the least surprised. The BSE-30 index ended last month just shy of 19000 and slightly lower than our own forecast of 19300 for September. There is certainly a strong sense of vindication, if not hubris, as I quote from our strategy piece dated June 5: “Since August 2011, the rupee has depreciated by more than 20% and since its recent high in February 2012, it has depreciated more than 15% against the greenback, clearly suggesting a rupee rebound is inevitable as it has been massively oversold”.

The rupee firming up by 4% in September has been the biggest tailwind for the market and the best is yet to come. The reduction in withholding tax from 20% to 5% for long-term borrowings and infra bonds is, to my mind, the only material big-ticket “reform” in the last few weeks, less for its quantum of reduction and more for the sheer positive intent about the government’s agenda, going forward. We said it in June this year and we are saying it now that with or without reforms, the Sensex should touch 22000 by March 2013. We stick to our house view that the current account deficit for FY13 will come in at less than 3%, driven by a big-ticket announcement on the lines of, say, a Resurgent India Bond or India Millennium Deposits, which should easily rope in $15-20 billion.

I quote from my own June 5 piece: “Assuming the RBI borrows at 200 bps above Libor (London interbank offered rate), it would still be able to rope in dollars at a price that is lower than the going rate of 8%-plus on a 10-year government bond locally”.

The falling forward premia on the rupee-dollar trade of late, the ferocity with which exporters are hedging their receivables and importers are choosing to do exactly the opposite on their short- to medium-term payables, clearly suggests that the party for rupee bulls is far from over. India naysayers have been calling for an oil shock on the back of QE3, with oil prices slated to shoot up 30% or more in the near term, exactly on the lines of QE1 and QE2.

Such doomsday proponents would do well to know that QE3 is different; this time, the Fed will be buying back not government bonds but mortgage backed securities, which is far less asset inflationary in its impact. Also, the global economy is still limping, what with China posting its 11th straight month of contraction in manufacturing purchasing manager’s index (PMI) in September, with a reading of sub-48. While it is hardly surprising that the euro zone is almost in a recession, the fact that Singapore, despite a current account surplus of 15% of GDP, is also heading into a recession, is bewildering. The global slack will absorb the ill effects of QE3 if any.

Back home, now that the rainfall deficit is barely 5-7% and the coming rabi crop is slated to be pretty good on the back of rising reservoir levels across the country, a 2.5% agricultural growth is a foregone conclusion in FY13.

Overall, GDP growth fell to 5.5% in the fist quarter of this fiscal, led by services GDP, which fell to 6.9%, in turn led by a measly 4% growth in trade, hotels, transport and communication. Assuming a realistic rebound to 7% growth in the trade & hotels’ segment alone in the second quarter, services GDP should come in at 8%-plus, in turn driving the September quarterly GDP growth to 6.5%.

That will set the tone for the next phase of the rally.

Do note that we are sticking to our 8.5% services GDP growth number for this fiscal, which is in any case very conservative, as services GDP has averaged nothing less than 9.5% for the last 10 years. We expect manufacturing too to rebound from a measly 2.8% in the last fiscal to roughly 5% in the current one, helped partly by the base effect and largely by “pump priming” by the government, which is borne out by the 22% sequential jump in government spending in the first quarter of this fiscal.

To sum up, a 7% GDP growth is still within the realm of reality and the pockets of surprises which will drive this will come from areas like construction, finance and insurance.

The Chindia comparison is relatively passé. For all those FIIs who are still overweight on Brazil, my simple take is this: it is better to invest in India with a GDP growth of about 6.5-7% and core inflation (ex food & energy) at roughly 5% than investing in Brazil with GDP growth of less than 3% and inflation at 5%-plus. The Short Brazil and Long India trade should play itself out in the year ahead.

Any minor fall in bond yields to sub-8% levels on the back of a 65% completion already in the Indian government’s borrowing calendar will be the added icing on the cake, what with CD rates already showing the way, down to barely 9% levels from 11% plus, in barely six months!

As for all bets being off if Spain and Greece are ejected out of the European Monetary Union, all I will say is, that will be a classic case of “cutting the nose to spite the face”. And Angela Merkel can ill afford to either cut her nose or spite her face because the last thing she would want now is German GDP getting shaved off by 25%, which is what will happen, if any of Germany’s poorer cousins find themselves “out”.

Verma is MD & CEO, Violet Arch Securities Pvt Ltd

Sanju VermaAng Lee’s Life of Pi upset Steven Spielberg’s Lincoln to rake it in at the Oscars this year. Not surprising, as everyone loves the underdog; more so when the underdog’s tale has a generous mix of hope and courage. It’s precisely what finance minister P Chidambaram too loves, as he spoke of how “hope gives courage” during the course of his regressive budget speech.

Alas! There was no sign of any courage on Chidam-baram’s part as he shattered the hopes of all those, including me, for whom even a 6% GDP growth rate seems like a distant mirage. This, after tall claims that India is well on its way to becoming a $5 trillion economy, come 2020.

Let me start with the tax proposals. With direct taxes to GDP ratio having virtually doubled to 5.5% in the last decade, clearly, the immediate priority should have been to focus on improving the indirect taxes to GDP ratio.

Remember that just a mere 1% increase in this ratio from the current 4.4% to 5.4% will add at least Rs1 lakh-crore, a whopping 1% more to the GDP growth rate number.

And, having got Wal-Mart and Ikea into the country, the Budget should have done more than simply making a cursory mention of GST (goods and services tax). Without GST, all multi-state retailers, including foreigners, pay huge sums of taxes to even move goods from a central warehouse across states.

Wonder what stopped the finance minister from allowing higher FSIs (floor space indices) to allow modern retailers to set up shops in smaller towns and cities, given that rentals alone eat up almost 40%of a modern retailer’s top-line. So much for wanting to turn India into the next big retail juggernaut!

Again, the direct tax proposal of levying additional surcharges on the super-rich is retrograde to say the least. Out of a population of 1.2 billion people, less than 1%, that is only, half a million people pay taxes at the highest slab rate of 30% in India. What is even more striking to note is that this 1% accounts for almost 70% of the personal income tax collections. Now, please tell me, is it a crime to be super-rich in this country?

Worse still, is owning a luxury sedan an open invitation to be penalised? Let me remind that poor growth is not the big challenge today. The challenge is the depleting ‘wealth effect’ leading to a declining savings ratio, which, in turn, is fuelling the decline in the investment-to-GDP ratio.

Gross fixed capital formation as a percentage of GDP is down from its peak of 34.5% in 2008 to merely 30.6% currently, thanks to declining household savings and falling private fixed asset creation.

Needless to add, even the current account deficit problem is largely one driven by the yawning savings/ investment gap. Hence, it is absolutely unacceptable to see Chidambaram doing precious little to either boost domestic savings through say innovative schemes like the EET (exempt exempt tax) or boosting private capital formation through, say, brave measures like doing away with minimum alternate tax (MAT) or at least bringing it down from the current high levels of 18.5% to a more reasonable of 15%. What is the use of a tax like MAT that runs contrary to the concept of extending tax holidays like, say, section 80IA (deduction in respect of profits and gains from industrial undertakings) of the Income Tax Act?

Had the finance minister been a tad more imaginative, he could have re-introduced the inheritance tax and death duty, as well as increased the scope of wealth tax. Better still, there was clearly a case for reducing the short-term capital gains tax from 15% to 10%, if not withdrawing it altogether, as the amount collected from this tax is just a modest Rs3,000 crores annually in any case.

Again, while a reduction in securities transaction tax (STT) is welcome, what would have really helped is the abolition of STT on at least one leg (either buy or sell) of derivatives transactions.

By not removing the STT altogether, the FM has only made the cost of transacting in, say, Nifty Futures in India that much more expensive compared to the SGX in Singapore, which has incidentally, seen an upsurge in volumes in the last few years!

What a pity that the STT in India is penalising the Indian trader at home, but is indirectly aiding the wealth creation process in Singapore; a classic case of robbing Peter to pay Paul!

Also, for all his bravado, the FM stopped short of removing the dual levy of STT on Indian mutual funds, paid once when a person buys the units and then again, when the said mutual fund house invests in shares.

Again, the introduction of commodity transaction tax (CTT) on non-agri commodities seems ill-founded as there is no concept of options trading in the commodities segment. Either options should have been allowed, but since that did not happen, introducing CTT will only further shrink the narrow participant base of the commodities market.

I am equally flummoxed by all this hype about the budget being pro-women and doing its bit for gender bias against working women. Surely, Chidambaram could have brought back standard deduction benefits for salaried women, if not more.

Setting up of the Rs1,000-crore ‘Nirbhaya Fund’ is high on rhetoric and low on substance. Far more meaningful would have been the setting up of a skill development fund, especially for rural working womenfolk, who are being priced out of the rural labour market and are increasingly being forced to take shelter in low paying MGNREGA work schemes.

Speaking of subsidies, Chidambaram spoke of the UPA’s commitment to food security. Clearly, there is a need to re-learn the math as the Rs90,000-crore set aside for food subsidies defies logic, when the cost of providing rice and wheat alone, at Rs2 per kg to India’s 800 million poor under the Food Security Act, is a staggering Rs2,50,000 crore annually!

As for providing for oil subsidies at Rs65,000 crore, that again is hogwash because if the price of crude oil rises past $110 a barrel, that number will be much higher. And, there is a good chance of that happening if the Middle East sees part two of the Jasmine Revolution.

In a country struggling with even a 5% GDP growth rate, amidst the ambitious target of raising the share of manufacturing from 16% to 25% of GDP over the next decade or so, against the backdrop of twin deficits, a measly tax to GDP ratio of sub 10%, scam-ridden dealings of an Italian kind, a virulent opposition and a lame-duck Prime Minister, I am reminded of famous words by the iconic Steve Jobs, at an Apple conference in 1997: “I am as proud of the things that I did not do as of the things that I did. After all, innovation is saying no to a 1,000 things.”

In Chidambaram’s case, however, I sincerely hope he does not regret the things that he did, and, more importantly, the things that he should have done but didn’t. Till then, ahem...

(Sanju Verma is a market expert and Group CEO, Violet Arch)

• Mithil has over 10 years of experience in Capital Market specializing in derivatives, technicals and inter-market analysis.
• Prior to joining Violet Arch, Mithil worked with Centrum managing their derivatives and technical analysis business.
• Previously, he worked with MF Global and DBS Cholamandalam on the equities and sales desk managing several HNI clients.
• Mithil holds a Bachelor of Science in Electronics and is currently pursuing a Chartered Market Technician certification course from MTA USA. He has already cleared CMT level 2 and is preparing for level 3.
Bullish on dollar-rupee pair, see 56-57 ahead: Violet Arch

• Kunal has 5 years of Equity Capital Market experience in covering stocks in the Infrastructure vertical as a research analyst
• Prior to joining Violet Arch, Kunal has worked with Quantum Information Services, Stratcap Securities, MF Global and IDBI Capital.
• Kunal has been ranked No.1 & 2 by Bloomberg for his calls on Hindustan Zinc & SAIL respectively.
• He holds a PGDBA in finance from The Bombay School of Business
  
  
  

• Vaibhav has over 3 years of Equity Capital Market experience in PMS and Institutional research
• At Violet Arch, Vaibhav is focused on the infrastructure sector as a research analyst
• Prior to joining Violet Arch, Vaibhav has worked with K R Choksey (PMS) and Finquest
• He holds an MBA in finance from ICFAI Business School
  
  
  
  

• Durgesh has more than 3 years of experience in Equity Capital Market in covering stocks in the Oil & Gas sector
• Prior to joining Violet Arch, Durgesh has worked with ULJK Financial Services and Nirmal Bang Securities involving research on the companies in Oil & Gas sector
• Durgesh holds an MBA from JBIMS, Mumbai and B.E in Electronics & Telecommunication from Mumbai University
  
  
  
  
  

• Abhishek has over 5 years experience in Equity Capital Market covering stocks in the Banking & NBFC sector
• Prior to joining Violet Arch, Abhishek has worked with Way2Wealth Securities Ltd involving research on the Banking & NBFC sector
• Abhishek has been rated as the 7th best Banking analyst and has been ranked No. 1 & 5 for his calls on Allahabad Bank and Oriental Bank of Commerce by Bloomberg as of August, 2011
• He was also nominated for Outstanding Contribution Award - Non Sales for Q1FY11 in Way2Wealth
• Abhishek holds Bachelor’s degree in business management from PES College of Business Management, Bangalore and is currently perusing Msc Finance from ICFAI, Mumbai

• Mahesh has over 5 1/2 years of experience in the Institutional Segment of Equities and over 8 years of experience in the capital markets
• Previously worked with Jaypee Capital Services as Sales Trader. Mahesh’s skill in identifying opportunities and maintaining good rapport with the clients was instrumental in getting business from domestic clients for Jaypee
• Mahesh has strong relationships with domestic banks, insurance and mutual funds
  
  
  

• Amit has close to 6 years of experience in M&A advisory, Private Equity placement, business advisory and project management
• Prior to joining Violet Arch, Amit worked with Centrum Capital as part of their investment banking team and advised several Infrastructure and Financial Services clients on M&A and Private Equity transactions
• Previously, he worked with Larsen & Toubro as part of the Project Management and Business Development team in their Heavy Engineering Division
• Amit holds a Master of Business Administration in finance from XLRI School of Business and Human Resources, Jamshedpur and a Bachelor’s degree in Mechanical Engineering from MIT Manipal
  

• Anthony comes to Violet Arch with 27 years of experience in Finance & Accounts, Audit, Business and Commercial operations.
• He has worked at the Tata Group across several of their manufacturing and service companies.
• For the past several years, he has been part of Senior Leadership teams in the areas of strategy formulation and execution, business startups and turnarounds, business support and compliance management.
• Anthony is a Chartered Accountant and holds a Bachelors degree in Commerce from St Xavier’s College, Calcutta.