MIP trigger will help steel and banking sectors: Gautam Sinha Roy, Motilal Oswal AMC

In a chat with ET Now, Gautam Sinha Roy, VP-Fund Manager, Motilal Oswal AMC Ltd, says there is no scope for a massive rally in crude. Edited excerpts
ET Now: What exactly is going to be the next cue for the equity markets are we going to ride on the macros, the big budget, corporate earnings or global?

Gautam Sinha Roy: It will be a mix of all these factors and there is lot of to watch out for. Budget would be the most immediate trigger. Reaction of global flows would also be important from a liquidity perspective, so would be earnings as in next quarter earnings we are seeing a low base on a YoY basis. That will also be a very important move up for markets going forward into the next few months.

ET Now: What according to you is aiding the move in the PSU stocks today? Do you think the MIP is now sort of easing the banking pain when it comes to the steel sector exposure?

Gautam Sinha Roy: That is mostly it, besides the fact that the stocks have been so beaten down and there was a scope for the rally to take place. The fact that such a trigger has come, will help one of the most stressed sectors see some cash flow recovery and will be able to service their obligations for the PSU banks. You should remember that the PSU banks have the maximum sensitivity and exposure to these kind of loans. So the improvement in debt servicing abilities of the steel companies is helping the rally in PSU banks.

ET Now: What is the outlook when it comes to the overall metal space? Has there been some positive news with the government setting the minimum import price for steel? A lot of the brokerages have hailed this as a big positive. Managements that we have been interacting with would say that this is a move that was much awaited but in terms of incremental volume growth addition, it is not going to be that much for metal players is what we understand. How are you reading into this big news?

Gautam Sinha Roy: It is a prop-up move which will help earnings cash flow to remain at a respectable level but that does not make the sector attractive per se for that. The global metal commodity cycle should play out positively which we do not see happening plus the demand supply equation in India should play favourably which is also not happening right now. So overall, I do not think we are becoming positive because of these changes on the metal sector per se. These are much needed breaks in the sector which was under massive stress.

ET Now: Do you think it is going to be a lacklustre budget with no big bang reforms or is it likely to be some sort of a game changer?

Gautam Sinha Roy: Given that the fiscal situation has slightly improved there is some room for the government to show some intent in terms of helping the demand recovery on the consumer side. On the investment cycle side, of course, there will continue to be a lot of focus and on select areas like railways and alternate energy but what I will particularly watch out for is whether the government makes some move to give some stimulus to revive consumer demand because that can clearly be done with this budget given that indirect tax buoyancy has been good for the last one year. We also have seen the fiscal improving somewhat but again the government is sticking to its long-term targets of very strong fiscal consolidation. We are seeing a lot of stress in the PSU banks and some of the sectors which are investment- oriented or commodity-oriented. Like we have seen with the MIPs, we would need to see what more the government thinks about doing in these sectors. So clearly it will be a very important budget given the state of the economy.

ET Now: What do you think is going to be the fallout then of the minimum import price because definitely that is going to at least impact auto makers though I am sure they are going to pass on the cost to consumers. But then, again that is going to tamper a wee bit with the demand?

Gautam Sinha Roy: Well yes, but thankfully on the demand side we have seen some robustness and as I said if there is some move from the government in terms of fiscal stimulus which could revive demand. Then we also have the Pay Commission report which is to be implemented. That also should be supportive for auto demand. So it is a mix and match. We of course are not expecting too much of raw material tailwinds to be there for auto companies. That is pretty much played out till now but yes going forward, we could see some improvement in the demand scenario.

ET Now: Can you guess perhaps on where crude oil prices are headed and what exactly the implications of that would be on emerging markets particularly India?

Gautam Sinha Roy: It is very difficult to guess about the general trend in crude prices but given the way that demand growth has panned out has been in the western world and even in China, we do not think that there is a scope for a massive rally in crude. It should remain subdued. Whether the subdued price will be $30 or $50 or $40 is anybody’s guess. But we are in a very comfortable position in terms of where crude prices will be. Now typically, the movement of emerging markets and the commodity especially crude, tends to be in tandem with the short term demand. That is obviously a risk for us but there is also a huge positive from the fundamental side because India is a net energy importer dependent on crude imports. As long as the prices of crude are down, we get the benefits of that through our current account deficit including the fiscal deficit, because of subsidy related burdens on the government. We are obviously in a much better shape especially with respect to the rest of the emerging markets, with respect to the rest of the BRICS pack. From an asset allocation angle, global asset allocation call is definitely positive for India. Of course the benefits of that play out in the long term. We really have to be patient if crude sustains at lower levels over period of time, it will benefit the economy. So that is something to look forward to I would say from a investing perspective as well as from a broader economic perspective for India.