When the RBI raised interest rates 13 times since March 2010, it hurt businesses and profits. The stock market was quick to react and 2011 turned out to be the worst year for Indian equities. Nikhil Vora, Managing Director of IDFC Securities told NDTV Profit that markets may start to show less volatility going forward and it is a year of savage interest rate cuts ahead.

"Companies are better placed than ever before as RBI could cut rates to stimulate growth," he added.

Below is the complete interview. Also watch the accompanying video.

Why would you take a leap of faith on markets?
 

This is what we have been thinking since last four-five months. A lot of these moving pieces we look at right now were pretty much the same or worse. You tend to get fatigued out of markets over a period of time and our sense was that you will start to see initial signs of changes in a lot of these attributes. Right now. I'm seeing a lot of those variables playing out positively. Let's look at the government inaction bit. There has been exaggerated concern on government inaction, that the government has done nothing.

In the last 20 years, any government on an average has passed 50 bills a year, while this government has passed 40 bills. So it’s in no way better or worse than any government you have seen in the historic past. It’s just that our expectations from the government have become so strong and so high in the context of private sector doing nothing for the last one year. The government has done perfectly what it does every year. We all have been perturbed with slowdown because of corporate governance issues, corruption and so on.  

I think this is the first time ever in history that you are seeing bureaucrats, corporates, and politicians - all being treated alike and at some stage, you look at how the global markets behave. They also give you a uniformed return if the inherent corporate governance is very strong.

Historically, India has been volatile because we lived through such concerns in the historic past. Incrementally, it would mean that India will actually start showing less volatility, which is not bad for any market that moves into a developed stage. If I look at inflows or interest rates and so on, we have an 400 bps increase in interest cost in the last one and half year. Corporate India has never been in a better health that you are looking at today in the context of the interest rate hike that you look at.


The leverages are amongst the lowest level, the liquidity to balance sheets is amongst the highest ever. So, if I leave apart one pool of space, significantly infrastructure-led, then there is actually not too much of pain for debt in the country in the hindsight, may be corporate India was smart, it did not really over borrow as they saw the interest rates going up. There has been not too much supply created. But it is working quite perfectly for the most companies. So effectively, they are not leveraged and they will possibly be in a better position to create supply side if interest rates starts coming off. 

Our big bet is that this will be a year of sustained and savage interest rate cuts and I see no reason to change that stance. Markets moved down in the last year because you saw interest rates going up, earning growth slowing down and markets got de-rated. In the current year, you will see interest rates going down; markets get re-rated before the earnings start to get visible. So it is not just hope, I think there is fair bit of action on the ground and it’s got not too much to do with the political inaction getting over with. I think there are relative moves made by the government.

Do you see ingredients of a strong bullish phase for India?
 

Well, it is not to suggest that we have been ignorant about the pain that is there in the system. Investors should look at what is the base of the market today. There is a fair bit of cloud in the environment around you. But I would think if I can establish a base for the market. Sensex level of 16000 has become a base for us, which was the base which we had talked about four months back. I just feel lot more comfortable as we talk about 16 plus now so i think the base of the market is important to establish, are we in a fresh bull run, bull market?

I think views and opinions will keep changing and it will keep getting consolidated as we move forward. I don’t want to make a larger statement on that but I think 16000 base seems to be established; valuations for this base are extremely compelling for a sedate growth as well. 

I'm looking at 10 per cent earnings growth for FY12 and possibly not a very different growth in FY13. The base is important for the investors to start and it will get established. 

Secondly, when you establish a base irrespective of whether you have a bull market ahead of you or a market which is sluggish, I think you get lot of businesses in stocks, which make sense and that are what the investor should really get focused on. I think we tend to drive away from the larger objective of the investor which is to make money out of stocks. No investor is investing in the entire market. 

So it is important if we get as subset of the market, which is relevant and investors can hope to see growth and value and that's what we are looking at. We have started to see visibility there. I don’t know whether we are in for a sustained bull run but I know that the bearish run is not going to be extremely large, i think it is getting capped at around 10 per cent downside to the market and it is not a bad downside to live with. 

We have a period of 2-3 months where we can build a position, the stock ideas we are looking at. So we hope that the market sustains and stabilises then you will make a fair bit of capital.

 Do you think another 15 per cent is possible over the next 2-3 months?
 

Not really and that's the focus of the work we are doing. The uncertainties that we are looking at today are not really going away. We are not being blind to them.We know that the budget is coming up. It is important that we just fix up a base for the market. The base is stronger. I don’t know the upsides right now. If the things remain sedate and if they are okay, then the market will take a leg up even during the budget.

Just put odds to the market...
 

The odd should be in significantly in favour of markets being stable. Last six months was the worst environment in which we lived. Markets are showing the resilience to stay put at a base of 16,000 and that is extremely comforting. I see no reason to change that stance. The fact is that the corporate India becomes much more resilient during tough times and we ignore that factor when we look at the world around us.

Your picks in the large cap space?
 

We are seeing steady appreciation in the currency. Inflation has started to come off and the rate cut should come in a month or so. There is fair bit of ground action, which has started to happen. You need to build up beta in the portfolio. I am still very positive about the consumption businesses so irrespective of how they performed in the last couple of years, I still think there is fair bit of merit to stay invested into those paces, I don’t see any slowdown happening there. In the non-consumption pack, you need to build up beta which is interest sensitive so infra in financial is what would bet on. In financial, I would look at private sectors like ICICI bank, Yes bank and SBI which is a wholesale funded bank.

In the infrastructure space, I would look at L&T, JP associates, Adani Ports. ITC and Bharti will bring up the balance as far as the top tier names are concerned. There won't be too much differentiation from broad street expectations but these top names will give you 15-20 per cent growth in the next 12 months. The portfolio should give you 20 per cent in the top tier ones. 

One needs to be realistic in the environment we are leaving with. You don’t want to build excessive risk in the top tier names; your risk by default is built in the mid-tier names. If you get 15 per cent return in the top tier, it is pretty decent, lucrative for the institutional investors.

 What about the midcaps?
 

I have always been positive on this space. There are extremely high businesses, which are also beta stocks. There might be shades of grey in some of these stocks but we are willing to live with some of them. Midcap picks include Den Networks; it is an excellent business model. Educomp, Ipca Labs, Sobha Developers can be looked at once rate reversal happens. 

Havells India and KEC can be considered. The risk reward in these spaces can be disproportionate. These stocks may go up by 70 to 100 per cent from the base level. There is enough merit to chase these stocks.