There is scope for earnings to recover from here: Alok Agarwal, DHFL Pramerica Asset Managers

Alok Agarwal, Equity Fund Manager, DHFL Pramerica Asset Managers, is fairy optimistic about India's prospects from a returns perspective. He told ETNow that India shines amid this slowdown risk on the global side.

Edited excerpts:

ET Now: With the kind of macros we are dealing with domestically and globally, there has been a massive volatility seen in oil prices. US yield curve has been flattening, there is a global risk of an economic slowdown and of course, the tightening of liquidity is a huge crisis. How does one navigate in a market filled with so many uncertainties, so many headwinds?

Alok Agarwal: Of course, as you pointed out, we are seeing some headwinds and a lot of global factors and some of them are pretty new. Some of them are likely to stay, for example, the risk to slowdown is pretty new.


Of late, recent PMI numbers from China, Germany and the US plus Chinese auto numbers and the way the crude has been reacting all show that there is some slowdown expected. You also mentioned that the US yield curve has been flattening. Yes, the two-year, 10-year spread has come down to the lowest since 2007 or so. Expectations on global growth have come off.

Lower crude prices as well as fall in yield work in India’s favour. Hence, the lower yield is also favourable for our valuations. After the Saudis and OPEC said they are going to cut production, we have seen crude reacting positively. So we need to be watchful on these sides.

In terms of strategy, we need to just ensure we stick to companies with strong cash flows and good long term growth prospects as far as portfolio allocation is concerned. We are going to stick to it.

After the recent correction we saw, especially in 2018 in broader markets, we see the Nifty index trading at about 16.7 times one year forward, which is about 10 per cent premium to averages. On a price to book, it is about 2.5 times one-year forward, which is about 5 per cent premium to the averages.

While the valuations are slightly above averages, they are not prohibitively expensive. All we can say is India shines smartest out of this slowdown risk on the global side. We are still the highest growing country and with our external debt being manageable compared to our peers, India is quite well positioned.

ET Now: FII flows have been at the highest level since 2008 and even if you combine the equity and debt flows, those have also been at all time lows. What is the kind of trend you have witnessed? Now that you say India is relatively better positioned, do you see FII flows come back once again?

Alok Agarwal: Yes, as I mentioned, FII outflow in 2018 was about $4.6 billion, which is the highest since 2008. We are in a chronic current account deficit situation and a deficit current account has to be made good with a flow on the positive side at the capital account. With FII flows remaining negative, our balance of payment goes into a deficit zone, which impacts our rupee situation.

Given the India situation where a large portion of our current account deficit comes in the form of crude imports, fall in crude prices is likely to augur well for India and we should get disproportionate amount of flows from FIIs. So in case, there is an outflow by FIIs from emerging markets, we should have a lower share of the outflows. But in case there is an inflow into emerging markets by FIIs, we should get a higher share.

Having said that, we know apart from the global risk of a slowdown, we are in a liquidity tightening situation globally ever since the global financial crisis in 2008. In these about 10 odd years, the balance sheet of four major economies in the world had risen from $4 trillion to about $15 trillion and they are looking at reducing that balance sheet now.

Whether the overall risk assets and equities will get influenced this year, it is difficult to project, but India stands as a more disproportionately advantageous position. We do believe that in case of an outflow, there will be a slow outflow and in case of an inflow, we will get a disproportionate amount of inflow.

ET Now: Let us also talk about some themes you are betting on and healthcare seems to be one of those. What are the kind of sub-segments within the healthcare and pharma space you are bullish on and what is the rationale?

Alok Agarwal: See if you look at healthcare over the last three and a half years or so, the sector has corrected about 35 per cent in absolute terms. Major headwinds were rising regulatory hurdles and there was a price erosion in their products in the US.

Both the regulatory hurdles have started abating and the price erosion has started to wane in the US. We see that in the meantime some of these companies had introduced cost control measures, they have started producing on the speciality side and their India business has also been ramped up.

Those who could manage this well both on India side and cost control were smarter. We are more overweight on those segments. The valuation for pharma is also pretty attractive although it is about 25 per cent odd premium to the Nifty, but it is significantly below the 10-year average of about 38 per cent-odd premium.

Towards the peak, we were nearly double the valuation of the Nifty. We do feel that on a low base or lower EBITDA margins we are seeing for the sector, there is scope for earnings to recover from here, which offers a better risk reward.