Is the consolidation that we are seeing in the market a temporary pause before we start moving higher? The macros look very ripe for the Indian market, the rate cut has come through, the dollar index is cooling off, and with the hope of the earnings improving going ahead in the second half, do you see the markets go higher from here on after a phase of consolidation? And when do you see this consolidative phase getting over?
Deepak Shenoy: We are fund managers, we always like the markets to be going up. So we will always have this optimistic view that in general, the markets should go up. But it is very difficult to predict the short term, so we are not really keen on saying no, no it is going to happen three months and six months and all that, but in general there is a lot of uncertainty in the near term, and that near-term uncertainty causes markets to be both volatile upside and downside. There’s not much point predicting or trying to do anything about that.
If you look at the longer-term sentiment around 2 years, 5 years, 10 years, – those are a little more understandable from the perspective of the macro. The macro says that India is relatively less leveraged, the government does not have as much debt to GDP as otherwise, our interest rates are much more controllable because inflation is low, we have corporate capex that probably has a lot of room for it to grow because corporate balance sheets are strong.
Domestic consumption in terms of retail loans has not picked up meaningfully in the last year or so and I hope that will change. But by and large, those have been the breaking down factors saying we are not growing meaningfully largely right now, but longer term we will do well. Whether this phase is a consolidation phase or before a breakout or whether it will before a breakdown I am not sure, but my feeling is if you are in this for the long term, India is a great place to invest; we have a strong economy, relatively better than perhaps a lot of other countries around the globe.
The markets may reward some other pockets basically because they have either been beaten down too much or have a temporary upsurge, but relatively speaking, we are expensive but we are also growing. So, we are paying for long-term growth. If you are in this market, you should not think of the next three or six months as your target territory. You are thinking of five years, I think you have a better chance at making a reasonable return.
We can definitely understand your optimism towards the market, that being a fund manager you are always optimistic and you want the markets to go; but the fact of the matter is that there is a rise in the geopolitical tensions and that is impacting crude which is not good for the Indian market. So, give us some sense about how you see the crude movement? Do you believe that such elevated levels are sustainable or could there be a cool off anytime soon? Is it a good time to look out for some OMCs which are any ways cheaper.
Deepak Shenoy: OMCs have always been cheap. For one, they are cheap because they do not have any meaningful pricing power. The last few years have been good for them because they have been able to buy crude at whatever price and their retail prices to you and me have been the same more or less for the last three years. We have had no real meaningful inflation or deflation in the fuel prices at the pump for three years now. The crude itself was at $140 in 2008. It is at $70 now, half that price. We are talking of an increase from some $60 odd to some $70 odd, which is not meaningful. From a perspective of whether India can handle this? It is fine. We are okay with everything. What will happen is margins will change for even the OMCs. The overall margins from the refining end will go down a little bit. They get expanded margins or contracted margins on the retail front. So, they are very volatile from that perspective and nobody values them meaningfully. The problem really is that we have great RoEs at certain times, but terrible RoEs at times when we cannot control the prices and the government wants us to take the hit rather than reducing excise duties when crude prices go up. So, I would not meaningfully try to bet long-term on any of these stocks right now, other than short-term momentum bursts. I do not meaningfully see this as a long-term kind of growth-oriented strategy.
However, crude prices at an absolute level, are not meaningfully high and most Indian inflation that is imported from the crude basket is slowly starting to change because our mix of vehicles is starting to change, our domestic petrol and diesel prices are more or less stable. Even with geopolitical tension, we have not had any meaningful change in input prices for a lot of raw materials that are based on crude as well. So, I do not see this as a huge thing. Of course, if the prices go beyond $100, $120, then we have bigger problems.
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