With markets at bottom, valuations are appealing’

With the global liquidity crisis casting a long shadow, the Indian stock markets have become range bound at the 15,000-16,000 level. However, GDP growth for 2007-08 is expected to remain intact at 7.5-8 per cent, and corporate profits for Sensex companies (for the year) are expected to register 21-23 per cent growth. Given such strong fundamentals, if you believe in the long-term India growth story, continue with your SIPs in mutual funds, and if investing directly, choose companies with strong fundamentals and attractive business potential, urges Aseem Dhru, chief executive officer, HDFC Securities, in this interview to our correspondent.

Tell us about us about the current state of the market. How do you see things unfolding from here under the influence of global factors?
The world is now a large global village. The positives of this in terms of opportunities and efficiency cannot be disputed. The flip side is that all financial markets in the world are now coupled together. If there is any factor affecting one market, the tremors are felt by all the others. The total equity of all the US firms put together is to the tune of $400-450 billion. The subprime crisis is threatening to wipe off the entire equity of the US financial market. Global banks have become wary of lending to each other for lack of trust. So global markets are today facing a liquidity crisis and a crisis of confidence. Things have come to such a pass that large organisations have stopped getting capital from sovereign wealth funds. Real estate prices have moved down into uncertain territory in the US.
As for the Indian stock markets, foreign institutional investors (FIIs) are not coming into the market right now as they are fearful. It is not that they are pulling out of India, but they are not investing. And that has led to a fall in the market. Their fear is now overruling the market. So we have moved from an over-exuberant market to a cautious one. It seems as though all of a sudden there are no positives left in the market, which is not true.

Why has the market become range bound between 15,000 and 6,000?
When the subprime crisis broke out in July 2007 the Indian market was trading at around 16,000. At that time this figure looked very good as the market had risen from 14,000 in March. After that the market went up rather irrationally from 16,000 to 21,000. And now it is back to that same 16,000 level. This is a very attractive level—a level that reflects its fundamentals. I don't see a huge downfall from this level as the market is very compelling at this level.

So you think that the market is fairly valued at this level and there is very little chance, as you said, of it falling further from here?
While it's very tough to predict the exact fall, what I think is that in the current scenario the markets are very compelling. India has a GDP growth of 7.5 to 8 per cent, which compares very favourably with the half or one per cent GDP growth rate in developed countries. This suggests that money must return to India. It will be business as usual, but people will move away from the excesses of the past. The markets are at the bottom and valuations are attractive.

You expect GDP to grow at 7.5-8 per cent for 2008-09. Why such a moderate figure?
Yes, that growth rate looks quite certain. Every time we see India's GDP growth rate move above 8 per cent the economy overheats. Infrastructure growth in India has not kept pace and prepared the ground for GDP to grow at a level higher that this. Capital goods companies have their order books full. It is the limited ability to execute these orders that is pulling growth down. So, for now I think a GDP growth rate between 7.5-8 per cent is realistic.

In such a scenario, at what rate do you expect corporate profits to grow?
I see corporate profit for the Sensex companies growing between 21-23 per cent for the year 2007-08, and EPS growth at between 13-15 per cent. I think profit growth is not going to change dramatically in this quarter. Apart from some sectors, where I see a slight dip in performance, I think corporate growth should be what it was in quarter three. There is no major threat to corporate results. We have seen some heady growth in the past because of which the base has grown. So companies will find it difficult to sustain the growth rate of the recent past. There is no major problem in quarter four, and fundamentally there is nothing wrong with the economy. It is only that in the current market perceptions are weak. Whatever results come out, they are unlikely to upset the markets. What the market needs now is restoration of confidence.

Which sector do you think will be under pressure?
Real estate prices needs to correct. There is still some pain left in the real estate sector. Unless real estate prices go down to more realistic levels, the economy can't grow at a healthy pace. At these prices companies can't rent or buy properties and yet conduct business profitably. So real estate prices need to correct.

What major challenges do you see for Indian manufacturers in the near future?
The biggest challenge is that money has become expensive. In the current market tapping equity has become difficult, so companies will have to rely more on debt. That will put pressure on interest rates, which could move up. Manufacturing companies will also have to deal with higher input prices. In addition, a slight slowdown in consumer demand will also impact companies. So the manufacturing sector, which has seen a lot of growth during the past couple of years, will be under some pressure.

What should investors do in such a scenario?
For retail investors the mutual fund SIP (systematic investment plan) is the best way to invest. In the current market scenario investors should look to increase their investment in these asset classes rather than get out of them. I think that the India story is intact. Fundamentally and structurally there is nothing wrong. Investors who are looking to invest directly in equities should look for companies that are fundamentally sound and have strong business potential.