India: Opening Up The Cash Till, Seeking Growth

The GOI inspite of its fiscal weakness is keen to push up economic activity. Going into 2009, we should see more CRR, Repo Cuts which should effectively bring down interest rates by atleast 3-4 per cent across the board. At lower rates the chances of increased NPAs would be lesser than at rates closer to 20 per cent per annum. Most smaller private banks now fetch PEs in low single digits and can turn out to be the outperformers for 20009. These include City Union Bank, Karur Vysya, Ing Vysya and DCB.

Three weeks ago the RBI initiated monetary cuts that have effectively rolled back three years of tightening. The most positive move has been the surprise SLR cut-the first in nearly a decade accompanied by overt rupee support and liquidity re-injection measures through the buyback announcements.

Consequently lending and borrowing rates are moving down and are likely to reduce further by 300-400 bp in the coming months with likely re-acceleration in credit growth. Hopefully, asset quality problems will reduce as banks, particularly those from public sector, help re-liquefy the system.

More credit flows should alleviate working capital related concerns and stabilise the economy quickly. However, income and wealth pressured borrowers are unlikely to borrow heavily for long duration assets/projects just because of low interest rates. Thus sectors like Real Estate may not benefit much, nor would the Automobile producers but Retail and Consumer Durables can.

Inspite of year-end selling by FIIs and war mongering by the media all over, markets should stabilise and rebound near-term as India goes ahead of most peers on policy easing. At current levels, market valuations do not factor in even an economic stabilization which is a good medium-term support for the market. We should see a progressively better Q1 CY09, as investors shrug off weak financial results and look beyond towards 3rd and 4th quarter earnings for CY09. The second quarter will however be a wash-out because of the ensuing General Elections.

What should not be ignored is that valuations are at historical lows in absolute terms, and if as expected, the World comes to terms with its current problems this will be an opportunity similar to the Year 2002 for investors to take a longer view and rake-in gains in a possibly multi-year bull market that would ensue. While investors will see short term negative swings they should not ignore the following:

Valuation parameters have reached close to their historical lows achieved in last 10 years.

The consensus forward P/E has slipped into the single digit territory, a level below which it has not spent much time ever in the past.

Trailing price-to-book levels have collapsed to within 10 per cent of the lowest levels seen since at least 1995. Interest rate relative measures, like implied risk premia or earnings yield gap too, have re-touched their worst levels in ten years.

Relative valuations are not as historical because of the severe market falls elsewhere but the market has come to a point where long-term, value investors that are not interested in timing the bottom should begin to invest heavily.

While valuation lows could again be re-tested in 1H09 amid extremely high level of political uncertainties. At least in late 2000 to mid-2003, the market spent over two years at the bottom of the range, but downsides remain limited because of the valuation correction though a sharp and sustainable upside would need growth momentum to return.

Growth is a high probability event over the next 18 months as Governments world over realise that Growth and Only Growth will provide succor to Civilian population and Investors all over.