Naveen Chandramohan, founder and fund manager, ITUS Capital, said the change in India’s rating outlook to stable (from negative) by Moody’s Investors Service is a good sign for the country’s stability as borrowing costs naturally go lower. In an interview on email, Chandramohan, who has had a 15-year career in the financial services sector across fund management, fund raising and fundamental research, added, “One should not be very surprised by the Moody’s outlook improvement.”
On the Reserve Bank of India (RBI) monetary policy, which is scheduled to be announced on Friday, he said, “I do not believe working on the exit policy today needs to be on the highest order of focus for the RBI. I would rather they have a longer-than-normal dovish policy rather than working on an exit.” Edited excerpts:
Q: Moody’s has changed India’s rating outlook to stable from negative. Does it mean that risks for the financial sector are lower now along with visibility of sustained growth and a gradual fiscal consolidation?
We recently conducted an internal analysis within our team between the sequence of Moody’s downgrades and upgrades in the country and the correlation with Nifty levels. It was not surprising to see a 95 percent correlation between Moody’s upgrades and the Nifty being at a new high. If one looks at the cause for this, it becomes clear that when the markets make new highs, the expectation for growth increases with spending on the ground increasing.
Today’s environment is no different, and one should not be very surprised by the Moody’s outlook improvement. Another aspect to note is that an outlook change is never an isolated event, meaning, I would put my hand up and say more upgrades are on the cards. Clearly it’s a good sign for the country’s stability as the borrowing costs naturally go lower as flows get robust.
The final aspect I would conclude is that a ratings agency is always backward-looking and growth is a forward expectation. I would never speak about risks from the lens of a ratings agency. I would only think of it as a tool, similar to the grades in college. That’s never an indicator of how successful you are going to be in life.
Q: US Treasury Secretary Janet Yellen warned that a US debt default could trigger another recession, as an October 18 deadline approaches. What is your view?
When we react to headlines, it’s always important to provide context to this. Janet Yellen as a secretary is a dove and she has tended to look at monetary policy more from the lens of low interest rates rather than inflation. The question is, will the US default or relax the debt ceiling?
Today, the Fed (the US Federal Reserve) has taken the stance towards spending through borrowing which has had an unprecedented increase in their balance sheet. Today, this can sustain as long as growth in the real economy picks, up which is currently happening. I do not believe that there would be a US debt default that one needs to worry about.
Q: Several public sector companies including those in oil, power and coal saw a big run up in stock prices. What are reasons for this rally? Is the under-ownership one of reasons?
There have been a sequence of events that have led to this (in the markets, there’s never one reason). With regard to PSUs—there were seven years of underperformance due to poor capital allocation, which resulted in low levels of ownership. This had a circuitous impact on the performance.
The Covid-induced shutdowns last year resulted in supply side shocks, which has resulted in the price of commodities going up across the board (metals, energy, oil, soft commodities). This, coupled with increasing talk of privatisation, has given the companies in this sector significant returns in the last 1.5 years.
It’s been a great trade for anyone who bought it in this period. Today, everyone wants to get involved as the new investor does not want to get left out. This is where risks increase alongside too.
Q: Is the RBI coming closer to an exit policy? Will the policy provide adequate cues on the likely glided path of normalisation?
I do not think so. We are at the early stages of recovery which can be followed by years of robust growth. I do not believe working on the exit policy today needs to be on the highest order of focus for the RBI. I would rather they have a longer-than-normal dovish policy rather than working on an exit.
The RBI needs to focus on credit flow into the private sector and investments increasing on the ground. I rather see RBI following this path today.
Q: What are your broad expectations for September 2021 quarter earnings? Will these quarterly earnings help analysts revise upwards their FY22 and FY23 forecasts?
I believe you would notice two trends in this quarter and next. Companies are going to show robust growth with earnings growing between 16 and 18 percent as we are still coming off a low base. However, some of the more forward-looking managements will speak about the margin pressure increasing due to the supply chain disruptions across industries (logistics, packaging, raw material cost increase).
There are going to be specific companies that will have the ability to pass these price increases over time to their end customer (be it B2B or B2C). These companies will see a significant earnings upgrade over the next two years. Do I expect this across the board? No.
Q: What are the key factors one should consider before picking a stock or create a portfolio of stocks?
I believe the key factors from our vantage point has never changed, be it in the middle of a bear market or in the middle of a bull market, where we in today. At ITUS, a portfolio is constructed to protect the downside and to compound capital over time. The only way we believe this is possible over long periods consistently is to invest in businesses that have the ability to grow cash flows and reinvest this capital within the business. This boils down to two aspects: capital structure alignment along with the quality of the management and understanding of the business around how they can grow cash flows. As long as these two align, I believe the quality of the portfolio would be robust.
Post this, returns become a consequence. We are in control of the process, not of the outcome. If the process is watertight, the outcome becomes a post facto which will eventually come through.
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