MUMBAI | THURSDAY, 29 AUGUST 2019 InvestorWWW.SMARTINVESTOR.IN FOR INFORMED DECISION MAKING <

SACHIN P MAMPATTAMumbai, 28 August

The Sensex has risen 67.3per cent since March2014. The Dollex —

which measures Sensexreturns in dollar terms — hasrisen just 39.8 per cent.

The fall in the rupee, from59.89 in March 2014 to its cur-rent levels of 71.77, has takenaway much of the gains thatforeign investors would haveotherwise made. In fact, dollarreturns over the longer termare even more abysmal.

The Dollex is currently trad-ing at 1.8 per cent lower thanits pre-2008 crisis high. Therupee was then trading atunder forty against the dollar.

Experts feel strong struc-tural reforms may well berequired to help bring in FPIs,even as global risk aversion isa major headwind.

FPIs typically makeallowances for 5-6 per centyearly depreciation in the cur-rency, according to U R Bhat,director at Dalton CapitalAdvisors (India). They requirerupee returns upwards of 10

per cent for India to look attrac-tive, relative to other invest-ment options.

Emerging markets seelimited interest overall dur-ing periods of risk-off trades.The current environmentdoesn’t bode well for risk-tak-ing in light of geo-politicalfactors, such as trade warsand issues surrounding Iran.However, substantial reformsmay help India’s relativeappeal, says Bhat.

“People are looking forstructural changes that cantake the market dramaticallyhigher,” he said.

Some factors are in India’sfavour. Crude oil prices, forexample, have been benign,noted Amnish Aggarwal, head(research) at PrabhudasLilladher. India relies onimports for most of its crudeoil requirement. Any fall incrude prices reduces pressureon the rupee.

Brent crude prices havebeen hovering around the $60-per-barrel mark, on the back ofweak global economic outlook.Any fall in the currency would,however, be negative for for-eign investors. “It reduces theirreturn further,” Bhat said.

The Sensex has dropped 5.2per cent since the Budget onJuly 5. The Dollex is down 9.5per cent. A depreciation in therupee, even as foreign investorsexit, has resulted in the sharply

lower dollar returns.Introduction of the sur-

charge on FPIs took the effec-tive tax rate to 42.7 per cent, atits highest. This was laterreversed last week in anannouncement by the FinanceMinister, among a series ofsteps to revive the economy.

Jefferies, in its August 25strategy note, stated that itwas encouraging to see theCentre engage on issues relat-ed to the slowdown. However,it remained cautious on the market.

“…fiscal constraints pre-clude any meaningful stimulus,prompting us to stay cautiousamid soft earnings and extend-ed valuations,” said the reportauthored by equity analystsSomshankar Sinha, PiyushNahar, and Pratik Chaudhuri.

Jefferies had cut its earn-ings forecasts for FY20 by 7per cent, following weaknumbers in the June quarter.It had also cut earnings fore-casts for the next financialyear by around 4 per cent.

FPIs have been net sellersby close to $3 billion, since thebudget in July.

Low dollar returns add to FPI woes

The Smart

Asset quality, growth woes keep Street cautious on RBL BankStock has fallen50% since July 12,further downsidenot ruled out

HAMSINI KARTHIK

The RBL Bank stock fell over 12 per centto end Wednesday’s trade as a top loseramong frontline stocks in the BSE, alsoits third fall in over a month. At ~313.65apiece, the stock is marginally over itslisting day closing price of about ~300.

A combination of factors —incre-mental worries on the asset qualityfront from new names, sale of employ-ee stock options (ESOPs), and YESBank’s rating downgrade — sparked afear of contagion in the system toweigh on the stock.

The bank, however, has clarifiedthat ESOP selling was a routine activity.“No management committee member,including key managerial personnel,have sold any shares on July 30, 2019,and thereafter,” the bank clarified.

Doubts over the bank’s asset qualityresurfaced following its Q1 resultsannouncement. The bank acceptedthat gross non-performing assets (NPA)

ratio could be 2.0–2.5 per cent in FY20(well above its historical levels), whichinvestors have not taken kindly to.

What has soured sentiment is freshasset quality trouble, which, analystssay, could cause the bank to miss outon its asset quality guidance. Analystshave pegged the same at ~300-500crore, though the quantum hasn’t beenconfirmed by the bank.

With asset quality issues at the cen-tre of attention, growth guidance hasbeen reduced to 20-25 per cent, fromthe earlier 30-35 per cent.

Much of the lowering (of guidance)is on account of the decision to go slowon wholesale or corporate loan book —the run rate of which may reduce from28 per cent in Q1 to 10 per cent for tillthe end of FY20.

The bank, though, maintains itsoptimism on retail loans. “The bank’sincremental focus will be on re-orient-ing its portfolio towards retail, andmanaging asset quality instead of

growth, given the recent stress in itswholesale portfolio,” say analysts atEmkay Global Financial Services.

With the bank facing challenges ontwo critical parameters — asset qualityand growth — for the first time sincelisting in 2016, it needs to be seen howmuch capital the bank can raise in thenext 12-18 months, and at what pace.

“In a situation of uncertainty in thesystem, we are in no hurry to raise cap-ital, and at 12.4 per cent capital, we arecomfortably placed for the next 3-4quarters,” explains Rajeev Ahuja, exec-utive director of RBL Bank. The bankhas received an approval to raise over~3,000 crore of capital.

With RBL Bank facing near-termpressure and the stock melting over 50per cent since July 12 — when troublefirst started hitting the bank — analystsdon’t rule out further downside risk.

While the Street hasn’t turned allnegative yet, being cautious on thecounter may be a prudent approach.

Britannia Industries turns crispy for investors againRising demand,intact structuralgrowth, fairvaluation augurwell for the stock

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BritanniaIndustries

SHREEPAD S AUTE

The Britannia Industries stockhas gained close to 7 per centin the last two sessions, sharplyoutperforming the NiftyFMCG index that inched up0.4 per cent during the sameperiod.

After going through a sharpcorrection in the last threemonths, investor sentimentseems to be reviving, on theback of certain factors support-ing the stock.

The recent trigger came inthe form of reports that hintedat improving demand forcookies, at a time the biscuitindustry is facing slowergrowth. This augurs well forcompanies such as Britannia,which has 25-30 per cent rev-enue share from this segment,on an estimated basis.

“The slowdown is mainlyin rural areas, which is affect-ing the offtake of lower-endbiscuits. However, premiumproducts such as cookies arereceiving good response. Thisshould help Britannia,” saysNitin Gupta, analyst at SBICAPSecurities.

In fact, the 65per cent revenueshare of premiumproducts forBritannia indi-cates volume andmargin support,with good cus-tomer demandlikely in the festive season.

Apart from the festive sea-son, good progress in mon-soon and increase in spendingby the central government,too, are expected to get theconsumption demand on

track in the second half ofFY20, say analysts.

In addition, the aim tobecome a complete food com-pany — supported by a strongpipeline of new premiumproducts — has kept the struc-tural growth story intact for

Britannia, whichsaw a sharp cor-rection in its stock(12 per centdecline in lastthree months,against 4.5 percent fall in theNifty FMCG),making valua-

tions relatively attractive.Britannia currently trades

at 43 times its FY21 estimatedearnings. This is not only 22per cent lower than its peaklevel of 55 times in August lastyear, but also a 9 per cent dis-

count to larger peer HUL.The latter had also faced

some earnings downgradeslike Britannia, albeit lower, onthe back of a slowdown in theconsumption sector.

However, issues related togroup exposure in terms ofinter-corporate deposits andinput cost inflation (wheat,sugar and milk) have made thesituation a bit more difficultfor Britannia.

Though higher input costsmay lead to some gross marginpressure in the near term,inventory management, costsavings, rising dependence onin-house manufacturing, andselect price hikes will providemargin support.

Overall, the risk-rewardequation for long-terminvestors in Britannia looksfavourable at present.

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Sensex

RBL Bank

THE COMPASS

“How to add value: 2008: Break up Philip Morris into PhilipMorris International and Altria 2019: Merge Philip Morris International with Altria''SAMIR ARORA, Co-founder and fund manager, Helios Capital

Nestlé in, Indiabulls Housing out of NiftySAMIE MODAKMumbai, 28 August

Nestlé India will be includedin the Nifty a month fromnow. The multinational com-pany is set to replace trou-bled NBFC IndiabullsHousing Finance in thebroader index.

Analysts believe thechange, effective fromSeptember 27, will triggerbuying worth over ~900 crorein Nestlé India by exchange-traded funds (ETFs).

Indiabulls Housing couldsee ETF selling of above ~300 crore, further weighingon its stock price that hasalready fallen nearly 50 percent this year.

Further, the other 49 Niftycomponents could see somereduction in their weight toaccommodate Nestlé India,whose free-float market cap-italisation is nearly thrice thatof Indiabulls Housing.

In other words, Nestlé

India will have a much higherweight than IndiabullsHousing.

So far, Nestlé India wasn’tpart of the Nifty even as itstotal market cap exceeds overhalf of Nifty components, giv-en it is not listed on the NSE.

The bourse recentlytweaked its index inclusioncriteria to allow firms not list-ed on its platform to be partof Nifty indices.

Nestlé India is exclusivelyon the BSE. However, it is

traded on the NSE under the‘permitted to trade’ segment.The change in criteria madeNestlé India eligible to be partof Nifty indices.

It joins FMCG peers HUL,ITC and Britannia in theNifty, in which the sector’sweight could surpass the 9-per-cent- mark.

Shares of Nestlé Indiahave rallied 5 per cent in thepast one week, after theexchange revised the indexinclusion criteria.

Dollex shows more pain for foreign funds amid depreciating currency

How are you keeping your calm in thesevolatile times?The volatility that we are seeing isn’texceptional. We have seen even worse before.Nothing can beat what happened post the2008 global financial crisis. Hopefully, it wasa once-in-a-lifetime event. This time around,the extent of damage is similar to the selloffin 2010 to 2013. However, some parts of ithave been different. For instance,outperforming the benchmark in the last 18months has been proved to be much morechallenging than in 2013.

Why is it so? Does it have to do with howpolarised the markets have been? Partly that. This time, the extent ofpolarisation has been a lot more than we haveseen in the past. If you look at the BSE 500, it isextreme. Then you telescope into Nifty 50index and again it is extreme. Even if you lookat specific sectors, you will see extremeoutcomes. This level of divergence is differentto what we have seen in the past.

How much worse can it get from here?If you look at the economy, the fourth quarterof last fiscal was very weak. Our sense is thefirst two quarters for the ongoing fiscal will alsobe weak. The reality is 6-6.5 per cent GDPgrowth for the full year. So, clearly there is acyclical slowdown. It is feeling much worsethis time around because of two things. One isthat this is the third setback in two and a halfyears. In 2016, you had demonetisation, 2017you had GST (goods and services tax)implementation and September 2018 onwardsyou have had problems in the credit market.The flow of credit has beenconstrained. So, the cumulativeimpact of these three knocks andconstrained credit, in particular, haveaccentuated things.

Do you expect valuations reverting or slippingbelow the mean? There has been a correction in valuations andit is in fair-value territory though above thelong-term average. The massive premiumover long-term averages, as it was in 2017 orearly this year, has significantly eroded. Wehaven’t got as cheap as early-2016 or mid-2013. Whether we will hit a trough invaluations is unknown.

What is your reading of the global situation? You can’t divorce yourself to what ishappening around the world. We aredependent on global capital markets as ourdesire to invest is higher than our domesticsavings pool. So, we will always run a currentaccount deficit and take in external savings.We are not as affected by global trade as someother economies. But for India to sustaingrowth at our aspirational levels — which isabove 8 per cent— we need the global economyto be supportive.

How are equity flows shaping up? The flows have held up under the SIP(systematic investment plan) route. Outsidethat, it is a mixed picture as we are seeingirregular flows. It is only the SIP flows of about~8,000 crore a month, which are giving us thevisibility.

Are you beginning to see any hiccups on theSIP front given the latest downfall? Not yet. There is data indicating that levels ofcancellation have increased but the aggregatenumber is still rising. I won’t be surprised if wewent through a period of cancellations if themarket stays challenging. On our part, we havebeen educating investors that you have tocontinue with the SIPs if you want it to work inyour favour.

How does an investor approach the market? My standard answer to all investors is the bestproduct to invest is a widely-diversified fund.

In the Indian context, it is the multi-cap fund category. You get a flavour ofeverything as the portfolio is trulydiversified. Sectors and themes go inand out of fashion but if you want to

stay invested through an SIP over a long periodof time, multi- cap fund is the ideal way to go. Ifyou are investing in a sectoral fund, you shouldbe conversant with when you should begetting in and when you should be getting out.With a multicap fund you can take that out ofthe equation.

What are your sectoral preferences at thisjuncture? From a valuation point of view, if you look atsectors that have gone through de-rating,pharma is one sector that stands out. There hasbeen significant de-rating and the valuationsgive us comfort. Automobile, which has beenan extremely hot sector till the middle of 2018,has seen a dramatic selloff. Incrementally, thatis another area we are inclined to look at foropportunities as we have seen some degree ofvaluation corrections. Real estate and NBFCsectors have witnessed elements of supplyshock and we think a few companies in theseareas will emerge much stronger as weak onesare getting culled.

‘Beating benchmark indiceshas been a challenging task’

Sensex snaps 3-day winning run as recession fears loomThe Sensex snapped its three-session rising streak to close 189points lower on Wednesday,led by losses in metals, energy,banking and auto counters, asglobal markets wobbled amidrecession fears.

Profit-booking followingthe recent rally and adepreciating rupee alsoweighed on bourses, accordingto traders.

Additionally, India Ratingslowered the country's growthforecast to a 6-year low of 6.7per cent for the current fiscalyear, from its earlier estimate of7.3 per cent on account ofslowdown in consumption andmoderation in industrialgrowth, among other factors.

After a choppy session, theSensex settled 189 points, or0.5 per cent, lower at 37,451.

Similarly, the Nifty fell 59.25

points, or 0.53 per cent, to11,046.

Global equities were heldback by fears of an impendingrecession following the latestinversion of yield curves of USTreasury bonds — seen as apredictor of economiccontraction.

YES Bank was the biggestloser among the Sensex pack,plunging 7.47 per cent afterMoody's Investors Servicedowngraded the privatelender’s long-term foreign-currency issuer rating, termingthe bank’s outlook as negative.

Vedanta, Tata Steel, TataMotors, ONGC, M&M, Maruti,NTPC and HUL, too, fell up to4.06 per cent.

HCL Tech, Infosys, TechMahindra, HDFC, TCS andAsian Paints rose up to 2.61 per cent. PTI

The spike in volatility isn’t really concerning but generating alpha has become more challenging than inthe past, says VETRI SUBRAMANIAM, head of equity at UTI AMC. In an interview with Samie Modak,Subramaniam shares his views on economic slowdown, valuations and the best investment category. Edited excerpts:

QUICK TAKE: NEW PRODUCTS TO HELP ENDURANCEThe stock of Endurance Technologies is up 20% since itsJune quarter results. New business wins in the domestic two-wheeler space and European businessgrowth helped the firm post robust results. Change in itsstance regarding foray into tyres, increase in content pervehicle, and fair valuations may cap the downside

Source: Exchange, Business Standardcalculations

A BUMPY RIDE

PREPARING THE GROUNDnNestlé to replace troubled NBFC

Indiabulls Housing

nMay trigger buying of more than~900 crore in Nestlé India by ETFs

nNestlé India not a part of Niftyeven as m-cap exceeds overhalf of Nifty components

nWill join FMCG peers HUL, ITC andBritannia; sector weight couldsurpass 9%-mark