In the last part of this three part interview; Aseem Dhru, managing director and chief executive officer, HDFC Securities speak to Sanjay Kumar Singh on attractive sectors and the future
And which types of banks do you favour — public sector or private?
There are well-run banks in both the public and the private sector which offer attractive opportunities for investment.
What makes the infrastructure sector attractive?
For the Indian economy to grow and sustain at the rate of 8-9 per cent, infrastructure-related bottlenecks will have to be removed. The Prime Minister has also gone on record saying that we need investments worth $1 trillion in infrastructure. Public private partnership model is likely to play a key role in future.
Look at the state of Gujarat. Around 40 ports are coming up along its coastline. A lot of work is happening on the gas grids being laid out across the country so that gas can take over from coal which is more expensive.
In the roads sector, the target was to do 20 km a day. We may not have achieved that target, but we have certainly moved up from an anaemic 4-5 km to around 10-11 km a day.
In power, if we get our act right by 2017, we're talking of doubling production. So whether it's basic roads, ports, airports, corporate capital expenditure, developing new cities, or developing rural infrastructure (through programmes like Pradhan Mantri Grameen Sadak Yojana) or the development of retail and entertainment space, a lot is happening on the ground. For the economy to grow to the next level, infrastructure has to expand and improve. You can't have a situation where infrastructure does not grow and we keep reporting 8-9 per cent growth. With our current infrastructure constraints, India burns out after achieving 9 per cent growth rate. And then you have inflation because supply is unable to keep pace.
Could you elaborate on why you are positive about the agriculture sector?
A large part of the inflation today is systematic transfer of wealth from urban India to rural India. Four to five years ago, the minimum support price of wheat used to be around Rs650 per quintal. Today it is at Rs1,100 per quintal. So the value that the farmer realises on his produce has gone up. Social spending schemes such as NREGA have pumped in almost Rs1 lakh crore into rural areas over the two terms of the UPA government.
Besides, farmers' productivity levels have also improved. Today most tracts of land are irrigated. Even in states like Bihar a lot of check dams and small bridges are being constructed. Today farmers are also focusing on better-quality seeds. Today a number of companies offer disease-resistant seeds. The sheer commercials of the farming sector have changed.
The government is also paying a lot of attention to the delivery of credit to farmers through kisan loans and credit cards. Banks have also been coaxed into lending to this sector as part of their priority-sector initiatives.
Mobile phones have brought about a big revolution in farming. The level of advice to farmers has improved to a new level because of this device. Let me cite an example. If you are growing pomegranates, you need a particular level of humidity for spraying pesticides. Earlier the farmer would take his own decisions. Today there are small companies that send him an SMS telling him that the humidity is right today for spraying pesticides.
Cold storage chains are coming up which help to protect what is produced. The higher support prices have infused a fair amount of wealth into rural India. If you look at the latest quarter results of FMCG companies such as HUL and ITC, for the first time after many years they have seen decent volume growth. Otherwise what we mostly saw was price-led growth. A large part of this volume growth has come from rural India.
Though we have had a great bull run since March 2009, retail investors appear to have missed out on it. Why did they miss out on it in the first place?
Whenever there has been a rally in the markets, it has been like a dream run that has crash landed. The first bull run ended with the Harshad Mehta scam; the second with the Ketan Parekh scam; the third with the dotcom bust; and finally, the rally of 2007 ended in 2008 with the sub-prime problem and the global financial crisis.
So investors have burnt their fingers in several attempts at generating wealth from the stock markets. The memories of their losses are still quite fresh. So it is understandable if retail investors feel nervous about investing in the markets. In 2008 the markets fell sharply and in 2009 the rebound was equally sharp. Both these events caught even experts by surprise. Many frontline mutual funds have also lagged behind the Sensex on returns during this period.
Besides, we are now dealing with global uncertainties. Sitting here in India, we have no idea about what will hit us next: a sovereign default in Europe, or war in the Korean Peninsula, or whether the QE2 initiative will succeed or fail. These are factors over which we have no control.
Nowadays global investors are moving pools of hot money between markets. You could see exits that are caused purely by opportunistic factors. For instance, earlier the trade was short China and long India. Then suddenly two months ago the trade changed: the Indian market had reached a high level, so global investors started buying China. The daily bouts of volatility are unnerving for the retail investor. He tends to feel confident when he sees a long-term growth in the market in one direction. So some of the fears are well founded.
Give us a couple of fundamental reasons why retail investors should invest more in the stock markets over the next 10 years.
India is in a classical situation where real interest rates are negative. While the wholesale price index is at around 9 per cent, consumer inflation for the basket of goods we actually consume would be around 15-16 per cent. Today deposit rates are not more than 7-7.5 per cent. So leaving money in fixed-income instruments would be detrimental for investors.
If you look at the GDP growth that is likely to happen over the next decade, there is a strong case for systematically investing in equities regardless of the direction of the markets in the short run.
In the past, investors have done badly because they relied on tips and random advice. As long as investors rely on quality advice, or stick to the systematic investment plans (SIPs) of good mutual funds, they will see wealth getting created.
Psychologically fear is your greatest enemy. SIPs are a great idea especially when markets fall. So investors should not get nervous and stop their SIPs in a falling market. If investors keep investing in a disciplined manner month after month for years, there is no doubt that they will do well. Today we have a strange situation where FIIs are bullish about the Indian markets while domestic investors are still sceptical.
We believe that Indian markets are in a structural bull run. We see no reason for panic. In our view, every dip is an opportunity to buy more.
To read the first part of this interview click here
To read the second part of this interviewclick here
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