Alroy Lobo shares his views on the outlook for the Indian markets

Link to this interview - http://investindia.kotak.com/video/video.wmv

Q - How big is the risk of inflation for the recovery story in India?
Inflation would move up in the second half of this fiscal year. In our opinion, this would depend on how monsoons play out. If monsoons do not play out well, then you get agri-inflation in. If this happens then there is a risk of inflation ending the fiscal year with about 6-8%. So, I think monsoons will really be a wild card there, but it will clearly enforce inflation in the second half of this fiscal year which would also move up because of base effects and commodity price index inflation. 

Q - Do you think the Indian economy has very strong fundamentals? Do you think it is in a good position going forward?
We are seeing significant changes in the market, right now. The first change has been the significant improvement in the external funding environment. In the last few months, in fact since March, we have seen both; Foreign Institutional Investors (FIIs) and Mutual funds actually investing in the market, which is a very nice and pleasant trend. In fact, FIIs have pumped in close to US$8bn into the Indian equity markets, since March. This is very important for India’s infrastructure story because if you don’t have equity funding, you don’t get debt funding and for the Infrastructure Programme in India to take off, this is a very important element. The second important change has been the change in the government. A very strong mandate has been given to the current government in power and therefore reform progress, in my view would be an on-going process. The third change is – If you look at the buffers that India operates with, whether it is on the monetary side or on the fiscal side, we are clearly seeing that to start kicking in into earnings more towards the end of the fiscal year.  So this year Fiscal 2010 may be relatively flat on earnings but alt of these initiatives and measures would start playing out in Fiscal 2011.so if you look at the market of Fiscal 2011, it still looks reasonably valued.

Q - How does the Indian market look in the short-term? India is the best performing among all BRIC markets with the Sensex up over 88%.
Yes, I think the market is clearly bracing up to the fact that perhaps we are coming to the bottom of the cycle of GDP growth slowing down. Second half could see an uptick and if that really happens, then earning upgrades could start following. Also, what you are seeing with the return of external funding is that the market has begun to attach some value to the embedded assets in companies. These are companies which are investing in new projects where earnings are not visible right now but clearly these projects have value. So if you take both these combined, you’ll see that the market in India is in no mood to correct very significantly because these could come as positive surprises, going forward.

Q - What stocks/ sectors would you recommend buying into at the moment?
Infrastructure is clearly ‘the sector’ to watch out for in India. This sector did go through trouble times last year post the Lehman issue because of lack of external funding. So with external funding recovering, you are seeing this sector once again getting interest. Also, if you see, the Government’s thrust in the recent budget has been directed towards building infrastructure be it Roads, Power or any other form of infrastructure, even rural infrastructure for that matter. So infrastructure has got lot of downstream benefits – you see the construction sector benefiting, capital goods sector benefiting and even asset owners benefiting. Clearly there are plays across the entire spectrum.