Q&A: Nikhil Vora, MD, IDFC Securities

'Markets will see a broad rally'

Mehul Shah & Ashish Rukhaiyar
Mumbai, 22 April 2011

IDFC Securities is of the view that factors that drive up the markets currently appear positive, even as the indices behave in a volatile manner. Nikhil Vora, managing director (institutional equities research), spoke to Mehul Shah and Ashish Rukhaiyar. Edited excerpts:

IDFC has revised upwards its Sensex target. Are we out of the woods?
This is the first time in the Indian context that we are looking at all the variables that can impact a country, be it internal or external happenings. Such as the four ‘I’s – inflows, interest rates, inflation or international reasons and, lastly in the Indian context, the inaction from the government side. These variables in entirety are so large that any one can disrupt any market flow.
So, in an extremely uncertain and vulnerable environment, we actually changed our stance and became positive during that period. We had called for a 17,000-index earlier from a 22,000-index and (now) we have reversed our call, becoming extremely positive on the 18,000-index, which was just about the end of February, and now we are playing for a 22,000-index, by the year-end.

Is there enough rationale for such a positive stance?
The rationale to become positive is the biggest change in all the five variables I talked about. I think we are possibly at 75-85 per cent of the top-end of that variable. So, in terms of uncertainties of any businesses or any environment or any factor, we are possibly at more than three-fourths of that uncertainty being close to over.

What about inflation and crude (oil)? Everyone seems worried on those counts.
In crude, very interestingly, today the underlying asset trade of financial trade in crude, which is speculative, is at a 20-times multiple to the consumption of crude, against a historic three-four times. This means there is huge speculative trade getting spun into this. Any speculative trade which remains in a narrow band for a period of time tends to unwind by itself. This unwinding takes three-four weeks before it gets into a normative demand-supply pricing. My sense is, in crude you will get into that zone. So, there is lot more to see positive, that it will get shielded or remain in a narrow zone so to speak.
So, if any, crude will actually come off by possibly 10-15 per cent. It will still be higher than what we have seen last year, (but) significantly lower than what you are at today. So, if crude is at $120 today, we are literally calling for sub-$100 crude. That, I think, will happen in the next six months odd. I don’t think the demand growth has been so disproportionate. Even if you look at the revival of the US economy and so on, it is not of such a sharp magnitude for calling crude at $120. So, I think crude inflation will drop off.

What about food inflation? The opposition has upped the ante, which could lead to huge political uncertainty.
For the last two years, if you look at food inflation, it actually has been very sharply up. My sense is that it is on its way down and the rationale is whenever food inflation tends to correct, that never happens in a linear manner. It never happens like it will correct three per cent, five per cent, 10 per cent and so on. It corrects by 25-30 per cent immediately, because the supply side starts to shore up significantly, for as food inflation grows, the propensity to produce more is higher and, thereby, it tends to retrace prices.
I think that has started to happen. In the past month, top-end food prices for a lot of the food commodities which are delinked from crude have actually fallen 25-30 per cent. A very good sign that food inflation is coming back to normative levels. So, the biggest component of inflation is starting to look at least topped out. If inflation is at 8.3 per cent now, my sense is it will settle at seven-eight per cent for the next one year. The interest rate is a function of what inflations are in various economies and so on. My sense, again, is that given the higher rate of deposit growth and the fairly calibrated RBI stance one has seen, you have also seen the peaking of interest rates. It is starting to show in the near-term rates; it actually has gone down by 50 basis points already.

What is your take on the quantum of foreign flows this year?
Look at inflows and it is extremely interesting on this part. Never, ever, in history - in the last 15-16 years at least - have emerging markets underperformed developed markets. It has happened twice but by a very low margin and when there was a global crisis. In the past six months, India has underperformed global markets by 17-18 per cent. There is no rationale for this over a period of time and so a bounce-back will happen.
On the inflows part, we saw net outflows of around $1.6 billion in the first two months of the current calendar year. In March, we have already seen inflows of around $700 million. So, inflows are starting to happen. Second, one tends to sell out-performance and buy into under-performance. That is how one should look at investments. Developed markets have given that sort of outperformance, while emerging markets are still at ‘under-performance’.