RBI may not hike rates on Friday following weak IIP data: Piyush Garg, ICICI Securities

In an interview with ET Now, Piyush Garg, Chief Investment Officer, ICICI Securities, gives his views on the IIP numbers and the markets. Excerpts:


ET Now: If I could bring it to you 3.3%, how would you react to that number? Much below even the 4.5% that was being suggested few minutes by government source?

Piyush Garg: Correct. Obviously on the face of it, it is extremely bad, but one has to look at the composition of these numbers also as to how much is affected by capital goods and all. Because capital goods have been a chunk which tend to swing the numbers. I have not seen the internals of the numbers. So one has to wait for that. But on the face of it, yes it is negative. But a silver lining to all this thing is also that it is very much possible that the RBI may not hike the rates on Friday. Because the global scenario is also becoming extremely uncertain and also, there is a clear case for RBI not to hike also going forward and which can be positive also for the market. So one has to see from that angle also.

ET Now: We have seen massive volatility with the capital goods numbers and to the extent that we have seen it go significantly into the green and this time significantly into the red, how much credibility would you attach to these numbers and in that context the overall 3.3% number that we have now?

Piyush Garg: I think another way to possibly see these numbers is you take a kind of a three month moving average for the components of the IIP, let’s say, capital goods. If you take a three-month moving average some of these spikes will get corrected itself and if you take a three-month average over last six or seven months, there is a clear evidence that these numbers are declining. No doubt about that, but some of the decline is also because of base effect.

I think you pointed out that last year same month, July month, the IIP number was 10% and hence there was a positive base effect which makes the current number looks a bit okay also to the extent that it needed to fall because of the base. And if you take a three month moving average, then things look as if the things are declining. No doubt about that, but that is reasonably expected across all market participants also, because you have a rising interest rate scenario in our country and we have seen last 15-18 months how much interest rates have risen on the REPO front about 400 bps or so. So this makes sense also and it is good also that this makes a case for RBI to almost end its hawkish stance sooner than later or some time at least in near future. It is falling in place and you can look it that way.

ET Now: Given that this number has come in extremely disappointing at 3.3%, what would you really attribute it to -- would it be solely the base effect, would it be the export factors or internal numbers?

Piyush Garg: It will always be a combination of factors, but that is what I say that do not take the monthly numbers. If you take a three month average, still it will be pretty fair somewhere around 6%-6.5% IIP numbers. So it is pretty okay I think, it is a combination of all the factors which you should take into account, when you see these numbers. And not the only the monthly number you should give too much importance. Because there is a huge volatility in the capital goods numbers and which is like if you are expecting plus 20% and the number comes minus 15%-20%, then effectively you are more than 100% wrong. So you cannot project these numbers on a monthly basis, that is very clear.

ET Now: But in light of that how would you play the capital goods sector as an investor, do you believe that capital goods as a sector have been hammered down badly enough for investors to be looking at stocks in that space and many of them are today attractively priced?

Piyush Garg: I am of a firm belief at this juncture of the equity markets that it might be a slightly futile exercise to try to see which sector will do really well, which sector will not do really well in future. Because there is huge uncertainty as far as the future is concerned, which is not short term, which to my mind is medium to longer term. And that is emanating primarily from Europe, not from the US neither from within India.

So if there is a crisis in Europe, which to my mind you need not have a doctorate degree in economics to understand what is happening in Europe. It is a clear case that there is going to be a break up of Euro, a default of some of the European peripheral nations at least to start with and then the contagion spreading to some of the bigger nations like Spain and Italy, which is too big to be bailed out.

Germany, France, they are trying desperate measures to see that things are settled, but to my mind Euro will possibly break down or it can be three months, six months, one year away I do not know and which will trigger kind of a mini banking crisis in Europe. That can again basically extend or exaggerate the risk of trade which tends to take place and in that scenario none of the sectors will be spared.

If there is a very orderly decline in equity markets and things get price in very orderly let say in India also, if the markets decline very gradually now first towards let say 4700-4800 then from there towards 4300 in a matter of three-six moths, if there is a orderly decline, then you still will have pharma, FMCG sectors possibly doing well. Otherwise if there is a disorderly decline and there is a sudden shock, nothing will be spared and everything will fall together. And that is why I feel that capital goods also based upon monthly numbers might not be a very meaningful exercise.

Last month also we saw the capital good numbers came pretty strong, but it is not that the capital good sector rallied 15 days after that number also came out. And you had almost capital good sector giving you kind of a market return. So it is not going to make any sense trying to see sector wise right now. The broader issues the market is facing at this juncture are the global development, especially in Europe, and how they pan out. And that will determine whether we are headed 10% to 15% lower from these levels or we could be very close to bottom.

ET Now: Just wanted to get you in on the rate sensitive sectors. Do you think that the kind of downfall that we are seeing in the markets overall has been factored in and how would you approach the rate sensitives, particularly the auto sector?

Piyush Garg: Auto sector has a fair chance of doing a little better going forward, just on a relative basis. This I am assuming that there is no dramatic fall in the market. Because when you have dramatic falls in the market like 10% in two days or three days, then nothing gets spared. But it is an orderly decline kind of a market then there is a possibility, because I personally believe that there is a big possibility of commodities correcting very sharply. If you see what the markets are telling you, US 10 year is trading below the 2008 level which is 191 or something it is trading, the US 10-year yield. The German bonds are trading around 175, which is also lower than what they were trading in 2008. These two things are to my mind telling that possibly you have a recession ahead in these two economies or which are the broad two economies of the developed world -- US and Germany, Germany in the Euro area.

So, if that kind of a thing gets manifested into the commodities market, which is definitely not getting as of now because of possibly expectations of QE3 or something, then there is a reasonable chance that commodities correct very sharply because commodities many a times do correct or rise with a lag. In 2008 also we saw you had the equity markets fall about 50% or so from the peak from January onwards to about June-July. And oil had barely corrected by $20-$30, but from July to September 2008 you had oil correcting by almost $100, so from 148 it went to some $40. So that correction was extremely sharp so that is very much possible.

Gold obviously I personally believe that gold is not a commodity anymore, it is trading more as a currency than a commodity because of the chaos in the developed world. So it might trade still differently. But at least the commodities which get into as commodities which are used in the industry they may correct very sharply, so autos may do well. But banking could suffer very much because you will have all these concerns on NPA which may get extended what market is right now pricing in also. Because NPAs are a function of declining economy and rising interest rates which both seem to be a case as of now in India and which will be true whether it is your consumers or whether it is your SMEs, everywhere the concerns on NPA will increase. Banking will have a larger beta in case the market falls and autos might have a slightly lesser beta. That is the two sectors how I would put it as far as the market is concerned.

ET Now: Just a word on the kind of downward trajectory that we can expect for the market should be brace ourselves for a further downside now?

Piyush Garg: I will put it this way that there is a valuation support in the market. The market tends to trade around 13-14 forward PE and that has been a typical if you take a kind of a 7-10 year scenario leaving apart what happened in 2008 and 2009. The market tends to take support somewhere around 13-14 forward PE and that is where the market is roughly trading 5%-10% here or there is always difficult to predict. But yes the problem I think in the market is that short term always there is a very complex issue in terms of how markets were going to move, but medium to longer term also to my mind this time is a big big question as to what is going to happen because there are events lined up and especially events which have kind of a catastrophic effect on the markets, especially if they emanate from Europe. So in that case you can still have market going towards 10 PE I would put which could be somewhere closer to 4000 Nifty, so you cannot rule that out. But yes at every level market dips it is a good buying opportunity and if you are able to buy between this 13, 14 to 10 PE, there is a reasonable chance you might make 100% return in next two-three years.