The interesting thing in September will be that the moratorium will actually be lifted. What do you think one has to watch out for? How do you think their credit cost will move? A lot of banks, at least private ones, have done huge fundraising. What does all of that mean?
We are assuming that moratorium is not going to be a problem and when it lifts up, the question will be why do banks at the current valuation, which is far from the peak, want to dilute? So clearly, the fact that even a company like HDFC has raised a significant amount of money, leave alone the weaker banks, tells you that everybody is preparing to make sure that they have some cushion for taking on some of the credit cost and perhaps to start showing some growth whenever that happens.
But for now, there is no doubt in my mind that the moratorium lifting will reveal a lot of loopholes. Whether the RBI will be able to cover it up or whether there will be another round of evergreening, which is very likely this time with the connivance of RBI. Therefore, the numbers will not necessarily show through immediately is a matter of conjecture and we have to wait and see. But I would be very surprised if somebody tells me that you have a situation where millions of people are without jobs, salaries have been cut and there are no signs of new jobs coming through in the market and yet we have no higher credit costs.
What do you make of Divi’s entering Nifty now? Once again. Do you think a cycle will start where the pharma index will start to inch up and the sector will start getting more weightage in the Nifty pack?
Yes, there will be some addition to the Nifty. But you have to remember that unlike many of the other sectors where there is possibility of a sharp change in terms of demand, pharma is not a) something that shut down and b) the change in demand has to be at best incremental.
So you have already had the first quarter in terms of the domestic demand not doing very well. The case of pharma was largely made on the fact that a) its performance is reasonable and b) it was grossly under owned. So going forward, the under-ownership is now gone and the valuations are no longer cheap. There aren’t going to be that many surprises coming from pharma largely because it is at best a gradual growth kind of a business. While it was under-owned and there was a cheap valuation there, there are upsides that we have seen in the last few months that have come through.
However, going forward, the key issue that you need to watch out for is how inflation behaves. The fact that the government has put so much of import duty will actually drive up prices of many of the goods in India simply because you do not have to compete on imports anymore. Consequently, there will be inflation here which means asset heavy sectors are the ones that you need to be looking for and that would probably explain something like why we have seen a surge in the power sector, for example.
Going forward, I would expect that those sectors at some stage may be heavy engineering, defence, fertilisers, power and so on where the valuations are also such that they are way below replacement cost. These are some of the sectors that will probably be more interesting rather than just the secular growth ones.