An opportune time to add high conviction bets

With half of 2022 already behind us, markets have been weak given a slew of issues viz. geopolitics, inflation, interest rates and now signs of a global. India has remained one of the better-performing markets with MSCI India USD down ~14 per cent YTD (as on July 12, 2022) compared to MSCI EM down ~21 per cent and MSCI DM down ~20 per cent during the same period. On valuations, Nifty 12M forward PE is now at ~17X which is ~25 per cent off the peak of ~22.9X, and ~1 standard deviation above the long-term average.

Perhaps at this point of time global investors are largely in the risk-off zone, what are the most common questions which are keeping global investors worried?

Oil and the impact of inflation on India is something which global investors are monitoring very closely. In the last few months, as per media and govt. reports, India has imported Russian oil at a ~$10/bbl discount (at landing cost) to market rates. Further, India’s import of oil from Russia has increased from ~2 per cent to ~10-15 per cent which helps to reduce the total crude import bill for a net oil importer like India. Even at the higher end of ~15 per cent. India’s average crude import prices have reduced by just ~2 per cent. Inflation in India remains elevated (CPI ~7.7%) mainly driven by rising crude, food and commodity prices. CPI inflation gets impacted by ~35 bps when crude prices increase from $90 to $100/bbl. Oil and fuel derivatives comprise ~9 per cent of CPI. The Indian govt. has been proactive in attempting to control inflation, such as: i) Reduced excise duty by ~INR 8/liter on petrol prices, which is expected to reduce CPI by ~30bps (assuming oil prices stay ~USD 110/bbl), ii) Increased subsidy on cooking gas (~INR 200/cylinder) and iii) increased additional subsidy for fertilizers by ~USD 14bn. This does put some pressure on the fiscal, but the govt. has some buffer from robust tax collections given a strong economic reopening post covid leading to an all-time high GST collection of ~USD 195bn in FY22 (vs USD ~154bn FY19, pre-Covid). The fiscal deficit might slip from ~6.4 per cent to ~6.7 per cent without the government. having to give up on its capex plans. Given the macro environment, we think this ~30bps slippage is manageable. Over the last couple of weeks, the govt. also imposed a windfall tax/cess on upstream companies and refiners, which should further bridge the fiscal gap.

In our recent investor interactions across the UK, USA and Canada our take-away was that investors are positive on India because of the structural growth opportunity. However, the recent macro headwinds coupled with Indian markets relative outperformance has led some investors to trim their exposure of India at the margin. Our meetings often ended with them telling us that they would like to reallocate as soon as said macro worries fade. Crude at $100/bbl is a crucial level for the Indian economy as the country is the 3rd largest oil importer globally. For India, every ~$10/bbl jump in oil prices widens the current account deficit by ~$12bn, which is 0.34 per cent of GDP. Even with crude at ~$100/bbl average price for the year, CAD will touch ~2.5 per cent (generally considered a manageable threshold for India by economists).

The Indian rupee tends to have a negative correlation with commodity prices. Since the start of the Russia-Ukraine crisis till mid-April, the Bloomberg Commodity Index gained ~16 per cent, while INR was flat. The RBI has intervened in the forex market periodically to maintain the rupee’s stability – reinforcing their previously stated intent of reducing FX volatility. INR has depreciated by ~5% YTD, which is not an outlier given other EM currencies have depreciated more (Korea ~-9%, Taiwan ~-7%, Malaysia ~-6%). The RBI is sitting on forex reserves of ~USD580bn, the 4th largest in the world which provides some comfort on RBI’s ability to manage INR.

Apart from the macro headwinds, India is very well positioned among global players on account of overall debt levels, demographic and reforms: The overall debt level for India is ~140% of GDP while 6 out of AXJ countries have debt level of 200% of GDP (eg. Singapore- ~362%, Hongkong ~340%, China ~286%). On the demographic side, the average age of the working population in India is ~27 vs US at 31 vs. China at ~36- which works perfectly in favour of an emerging country like India which is slowly growing to become a global manufacturing hub. The govt. has been pro-growth and hence all the reforms like introduction of the PLI scheme (production linked incentive scheme), reduction in corporate tax levels, easing of doing business has been focused to make India a global manufacturing hub.

While the recent correction in the Indian markets have reduced India’s valuation to just 1SD above long term average, there remain stocks which are down ~30-50 per cent from peak. This also provides a brilliant opportunity to add to names which remain our high conviction bets and possess superior long term growth profile. We remain focused on our bottom-up stock picking strategy and continue to find superior companies which are aligned with our investment framework generating wealth for our investors.

(Souvik Saha is Equity Investments Team at DSP Investment Managers)

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)

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