Mkts may outperform after clarity on Adani issue: IIFL Securities chairman

Bad loans were increasing due to continued deleveraging by the Indian corporate sector

After being the best performer among major stock markets globally in the year 2022, India was the worst-performing major market in January. In an interview with Samie Modak, R Venkataraman, chairman of IIFL Securities, says the recent underperformance is partly due to bullish expectations. Edited excerpts:

Indian markets have turned underperformers after last year’s outperformance. Do you see this new trend continuing?

Part of the underperformance can be attributed to not having priced in a slowdown early enough. As a result, we are seeing the markets negatively react to some corporate results. The share price fall in Adani group companies has also pulled down the market. There could be a reversal once there is more clarity on the Adani issue, especially with regard to excessive debt. We are not as worried as the market seems to be on default or contagion risk. There are a number of growth levers in the economy and these should help growth to resume. With inflation coming down worldwide to low or at least acceptable levels, it should help those with low income having greater propensity to consume. Furthermore, the steady progress on capex will keep the momentum strong and enable an over 6 per cent growth for the next two years.

How do you see the health of the banking and non-banking financial company (NBFC) industry? Will bad loans continue to edge lower?

Bad loans were increasing due to continued deleveraging by the corporate sector. Aggregate non-finance debt has come down from 41 per cent to 31 per cent of GDP over the last nine years. There is a lot better protective regulation forcing timely disclosure and early tackling of bad loans. Also, as we are suggesting, the growth resumption has resilience and momentum. So, we are sanguine on both banks and NBFCs.

There are concerns around the thinning of domestic liquidity. Inflows into mutual funds (MFs) are slowing, the Budget tax move could impact insurance flows. Is that a risk for the market?

Insurance products at the upper end are not likely to be as attractive as they were before the Budget as the income from big-ticket policies will now be taxable. The MF industry could see a positive impact because of this. But if inflation stays at current levels, then deposit rates will rise and some money could get diverted from MF inflows towards bank deposits. But at present, these are tangential risks. India’s growth momentum and recent underperformance should take care of a large part of this worry.

What are the other key risks at this juncture?

Among the less-talked-about risks is the inability of the Centre and state governments to bolster the power sector. Two key reforms are needed — the new Electricity Act and the redressal of state electricity boards’ balance sheets, not to mention fair consumer pricing of power.

Do you expect foreign capital to return to India? How soon and why?

Globally, inflation is softening. In fact, our calculation suggests that US inflation has already dropped to zero. We expect the US Fed to cut rates aggressively starting from the second half of this calendar year. This would enable monetary conditions to improve. Then, India can attract more than its fair share of inflows.

What will be the key drivers for earnings growth, going forward?

Corporate profits have jumped from 1 per cent to 5 per cent of GDP between FY20 and FY22 with no increase in GDP. Hence, the full benefit of operating leverage will come over the next three-four years. Reform momentum is strong – with more aggressive implementation of the India digital stack. Also, bank and company balance sheets are less leveraged. Manufacturing investment climate is seeing an improvement, thanks to the production-linked incentive (PLI) scheme and a global shift away from China.

Which sectors and themes will benefit from the capex push and other Budget measures? 

We feel capital goods, construction, banks (both private and state owned), cement and life insurance stocks (following the latest correction) will have a good chance of outperforming.