Q&A: Abhay Laijawala, Deutsche Equities India

'There is still a lot of investor goodwill for India'
Ashish Rukhaiyar & Mehul Shah
Mumbai, 15 November 2011

India’s economy is slowing but that will not lead foreign investors to capitulate, unless there is an event of significant risk, says Abhay Laijawala, head of research, Deutsche Equities India. In an interview with Ashish Rukhaiyar and Mehul Shah, he said India was still attractive for fundamental investors with a long-term horizon and that foreign flows would remain steady. Edited excerpts:

You talked about a slowdown in gross domestic product (GDP) trend growth to seven per cent in your latest report. How strong is the probability and what is the view among the investor community?
The general belief (among investors) is it’s still too early to say that. However, the risks of a slowing GDP growth trend are rising. Our report is a what-if analysis. Our economists are still maintaining an eight per cent GDP growth rate. But, clearly, with some headwinds on policy inaction, compulsions of a popular democracy and a slowing global economy, many investors are convinced GDP growth will slow down for a year. There is still a lot of investor goodwill for India and its structural drivers are very much intact. We believe the government recognises the need for reforms. What we are not certain is the timing, and timing is everything.

But does the timing of the report indicate there is a higher probability of going down to seven per cent, rather than staying above that?
That is anyone’s guess whether GDP will go down to seven per cent on a trend basis. But, as I said earlier, the risks of this happening are rising. I do think at least for the next couple of quarters, there is a possibility GDP growth might slip. I guess we have to wait and watch. However, we are increasingly being asked as to what would be the impact of a seven per cent GDP growth trajectory on earnings, market multiples and different sectors.

What impact will a slowing GDP have on the market?
If GDP slows only for 2012-13, then we think the markets have discounted it. That is because we have seen a 260-basis points compression in valuation multiples for the Sensex. If one believes the slowdown will be on a trend basis, there is potential for a further de-rating of the markets.

Your last report predicted a Sensex target of 21,000 for this year-end. It looks highly unlikely...
It’s difficult to answer this question with a high degree of certainty, given volatile global markets, rising risk aversion and a challenging macro economic situation in India. However, with most funds underweight on India, any return of risk appetite could lead to a short-term rally in the markets in the run-up to the next year.

The investor community has been talking a lot about policy inertia.
India is not the only country seeing policy inertia, which has become a phenomenon in all democracies. But we believe there are certain policies the government is working on. For example, we are already hearing the ‘no go’ criterion in coal mining has been dropped and the ministry of environment and forests is taking up projects on a case-by-case basis. So, it’s a question of timing. We believe the government’s inclination to move ahead on long pending reforms remains high, but compulsions of a popular democracy, coalition politics and a busy state election may delay its ability to move ahead.

How do you see the European crisis impacting the Indian market?
As far as Europe is concerned, it is anyone’s guess. We remain confident the governments in Europe will be responsible and try and prevent a systemic collapse akin to the Lehman moment. But it is difficult to say what would be the contours of a European package because it is a dynamic process. Markets will remain volatile until a more concrete solution comes out. We all thought the announcement that came some days before would assuage sentiments until Greece said it would be holding a referendum. Such situations will continue and, therefore, we will see markets being swayed between bouts of risk aversion and risk appetite.