Q&A: Ratnesh Kumar, Standard Chartered Securities (India)

'Market unlikely to come out of range before year-end'
Ashish Rukhaiyar & Mehul Shah
Mumbai, 4 August 2011

Given the inflationary pressures and growth cooling off, there are some earning downgrades still left in the system, says Ratnesh Kumar,managing director and chief executive officer of Standard Chartered Securities (India). In an interview with Ashish Rukhaiyar and Mehul Shah, he says investors are waiting for the downgrades to happen so that the bad news is out of the way and long-term focus can return. Edited excerpts:

Not many companies are keen to come out with their IPOs. Why?
The beauty of equities is that the market determines everything. The issuances never drive the market down, it is the other way round. The pool of global investors looking at India is now deep enough and very large issuances can be done, provided the pricing is right and there is conviction in the minds of the investors. The reality is that India is one of the worst performing markets in the world in the current year. Also, rates have been going up, inflation is high and there has been bad press regarding scandals.

When do you expect the market to come out of the woods?
There are some global factors that are pretty big and unpredictable. It is not just about India and Indian inflation or growth. The best strategy is to first believe we will be a high growth economy and then look at specific opportunities. The year 2011 is unlikely to see the market move out of a range before the fag end. By November or December, it is possible to look at how exactly we have shaped up in terms of our own performance. We will be in the 5-10 per cent range of where we are.

Are foreign investors still wary of investing in Indian shares?
Generally, people are underweight. They want to see the roll-over happening in inflation, rates and some bottoming of the growth forecasts. There is a feeling among analysts that earnings projections are still too high. For this year, the consensus market earnings growth is 18 per cent. Given the inflationary pressures and growth cool off, there are some earning downgrades still left in the system. Investors, I think, are waiting for these things to happen, so that the bad news is out of the way and long-term focus can return.

Investors appear to be bullish on the consumption story and defensive stocks. Why?
When you have a lot of fundamental and performance headwinds, attention shifts to the so-called defensive sectors such as consumer and pharmaceutical. There is nothing called a place to hide. If one is negative on the market, the only place to hide is cash in the bank. Historically, whenever there is a correction, it is not that defensive sectors do not go down. Recently, we downgraded Nestle, which is an absolute fantastic consumer story, but the valuations are rich now due to the relative performance of the stock.

Which sectors and stocks do you like at present?
We still like consumer and pharma sectors as a whole, since we believe they will deliver growth and valuations are still attractive. Our focus has been HUL and Titan in that sector. Another sector we have liked for some time is telecom, which many have found odd. We think some of the irrational competition in telecom has subsided. Bharti and Idea are the two stocks that we have liked. Chances are that gradually, without touching headline tariffs, realisations will stabilise or even start inching up. I think the street could be positively surprised by the telecom sector. These are the kind of stories that we are urging investors to focus on. Select auto stocks like Bajaj and Maruti also look attractive. Within the IT space, we like HCL Technologies. We are also positive on niche sectors like ports.