Core Strengths Of Indian Economy Aid Value Creation

Navneet Munot, CIO, SBI Funds Management, in an interview with Saikat Mitra, said that the growth numbers for India are very likely to improve henceforth while expressing his views on value creation by India Inc.

Navneet Munot
CIO, SBI Funds Management

There are more than five thousand companies listed on the Indian bourses, while only a handful of them have created value, why do you think this is the case?

There is a culture that during every bull market or particularly when the phase is on, a lot of companies get listed. We saw various companies catering to sectors like marble, granite, aqua culture, IT, textile exports and so on and so forth got listed in the 1980s, 1990s and 2000. But not all of them had the competitive advantage to generate value but within that there have been seven companies in India who have generated a lot of wealth in the last 20-30 years. So this has got something to do with the evolving economy and the market structure. Most of the companies that were set up to take advantage of the lighter ‘Permit Raj’ in the 1960s, 1970s and 1980s faced trouble then. The economy and business cycles have become quite shorter in the post-liberalisation era and the companies and management who are not nimble enough to get through, have not been able to generate value. 

What is your take on the role of FIIs in terms of creation of value in the context of the Indian markets? 

I don’t know how to put it in that context but over the years FIIs have become a very significant part of the markets. Today, almost 19 per cent of the market cap has been owned by FIIs. They have been one of the significant investors and some of them have been quite vocal in issues of corporate governance. They have an almost 19 per cent stake in India Inc. which is only second to the promoters’ holdings. I think that where there are high FII holdings, corporate governance standards are relatively better there. I haven’t conducted a study, but this is what I feel.

Out of dividend and capital appreciation, which one would you put more emphasis on and why?

In India, where the economy has been growing fast, there are big opportunities and in almost every sector, the management typically ploughs back profit and as long as they can generate returns higher than the cost of capital, it makes sense to reinvest in the business rather than paying dividends. Of course, dividends have a role to play and you need to balance the two. My belief is that in the last ten odd years, dividends would have contributed around 20 per cent of the total market earnings while the remaining 80 per cent would have come from capital appreciation. So I think in a country like India, capital appreciation would play a bigger role. Having said that, ultimately dividends reflect the real cash flows and they are quite important too.

In the bull market phases we have seen that there is a flood of IPOs. Do you feel these IPOs have created value for investors and how has the scenario changed in the pre and post CCI era?

There are several companies which have issued stocks at market related prices and they still exist and have generated a lot of wealth for investors. I mean the IPOs that have come up in the last ten years have been able to generate wealth for investors. So I really can't bifurcate between the pre CCI and post CCI, with respect to the returns from their IPOs.

What change do you see in the approach of the markets in the pre and post liberalisation period? 

The markets have changed significantly from the liberalisation of 1991 when we made ourselves open to global economy for the domestic business, I mean it was like either perform or perish that was the mantra for domestic corporate. The ones who were liberal, where the management had a vision and the execution ability to compete with global giants survived. Several of them have been able to generate tremendous amount of value. Incidentally, liberalisation also coincided with significant reforms in the capital markets. The whole set up of SEBI plus the online trading and the clock-49 in terms of all corporate governance reforms and dematerialisation, the improvement in the entire settlement cycle, the working of the stock exchanges, the institutionalisation of the markets and many such things came up with liberalisation. This dual course of liberalisation and certain reforms in the market structure played a significant role in the equity market.

Do you feel that the introduction of new products like derivatives have helped in creating wealth for investors? 

It should not be looked at from the aspect of creating wealth but the fact that derivatives are too strong where both institutional and retail investors have been benefited from their presence. The introduction of derivatives has increased the depth of the markets in terms of liquidity. But just like any other instrument, it can work in both ways. So if you are using derivatives for speculating and using the leverage, the leverage is a double-edged sword. There would be investors who would have paid for it, while it would have been a good instrument or a good tool to do hedging and portfolio balancing. So you can't generalise about derivatives helping in wealth creation. It is not necessarily about wealth creation but due to their liquidity, they have increased the breadth and depth of the markets.

Going forward, five years down the line, if you want to bet on three sectors which will do well in the forthcoming years, which would they be? Can you throw some light on this?

I am quite optimistic on the Indian economy. If you look at our core strength in terms of consumption opportunity in investments and exports, I would say all the three - domestic consumption, investments in infrastructure, and opportunities in outsourcing - look quite interesting.

What is your take on India’s micro front, do you think the projected GDP of 6.1 to 6.7 per cent is achievable?

I think growth is on a much lower base of FY13, the growth next year and the year after that should be higher, we are clearly close to the bottom and may be growth numbers are likely to improve from here on. We are going through a technical slowdown but going forward I think we are going to see better days ahead.