The markets have not had it easy in the past few days. If the early signs are anything to go by, the earnings season isn’t expected to be good either. However, this might well be a passing phase. While a few experts believe the Modi government has not done much, Aditya Narain, chief strategist, Citigroup Global Markets, India, tells Malini Bhupta that barring a few areas, the new government has delivered on expectations and quality of growth will be far superior in this growth cycle. Excerpts:





Last year the markets were rooting for Narendra Modi. Has the Modi delivered on those expectations?



Yes, I would say. All you need to do is check back on what reforms the market wanted before the elections and, you will see, almost everything has been done. Although the Land Bill is seeing some challenges and GST is not done yet, they have got a lot done. The government has also used the current macro situation to its advantage. I would argue that the big challenge of getting approvals is a thing of the past.The government has probably done more than was expected – and the big framework is set. That said, it does not necessarily mean that businesses will respond quickly and that is where the bigger challenge currently is.

We would believe that at an overall level, the ecosystem for business is becoming much more dynamic, and should over the medium term be supportive of decent quality growth. You could possibly see this as a mix of the ability to start business / investing - without it becoming inflationary, domestic money coming to equity markets - which widens the pool and moderates the concentrations in either foreign money or bank debt, and policy changes – which continue, and should start adding up.



While expectations are usually a shifting target – we would believe the government has delivered on early expectations - and while the market is currently focused on the corporate response (investments, earnings and sentiment) and is showing signs of disappointment, the broader equity market should be supportive. We have a December 2015 market target of 33,000 for the Sensex

What, according to you, has the government done to facilitate growth?

While we could start ticking off the expectation list (at the time of the elections): we believe the government has gone to areas that go beyond this list. We have actually done a report called the 'Nation Changers: Going beyond reform' where we talked about the four schemes of the government -- Jan Dhan, Swacch Bharat, Make in India and Digital India. These we believe are big ‘Socio-Eco’ reforms: and will collectively create a much more vibrant and efficient eco-system or platform for growth. This should be both more distributive, and will start adding up. While such initiatives are always hard to quantify in their linkages and outcomes – we do believe they will over a five year period, add to GDP growth, savings and help the current account deficit. So we believe this is where the government has gone a little beyond expectations, and it will eventually show up.

Is India's equity market losing its sheen, given that revival in earnings is not happening anytime soon?

There are two parts to this. Firstly, the market has rebounded and stock prices have moved up substantially over the year. The macro environment is going to be supportive for a sustained period of time and while it can’t give a ‘pop’ from here, it will act as a cushion. But secondly, what the market is watching out for is a pick-up in earnings, investment and corporate mood. This will act as an overhang over the next three to five months and will keep markets flat during this time.But once that starts changing, the market should respond. While everyone is focused on the level of growth, which could be relatively slower in coming, we believe the quality of growth (higher returns on investments, lower levels of risk and an extended growth cycle) will be significantly better and will surprise on the upside. So, if the market is losing any sheen, we believe it’s very temporary.

Where do you expect GDP at in FY16?

We expect the GDP growth at 8.1 per cent in FY16.

Earnings are expected to surprise negatively. What is your view on earnings expectation for FY16?

We expect 13% and 17% for FY16 and FY17. We are at 12% for FY15. Our numbers have got cut down by 5-6% from their peak in November. These are bottom-up numbers, and we will also take a relook once the March quarter plays out. As we look out, we believe businesses may do better than the broader trend in the economy, as the quality of growth improves. So effectively, earnings growth would do better than sales growth, as once sees a disciplined response by both corporates and consumers, atleast in the initial stages.

Citi does not have a very positive view on the technology sector. Can you explain why and whether the outsourcing story is over?

For a while now, we have been seeing that while global companies were clocking decent numbers in terms of market share growth, Indian companies were not keeping pace, or growing their share of the pie. In addition, more recently, the pie's expansion itself has slowed down. So this has hurt, and with market expectations on growth high and multiples suggesting as much, there has been a pull-back, and the market has been disappointed. We have been cautious and stay that way for now: but India’s IT companies have reinvented themselves very well in the past, and we will be keeping an eye out for any such signs.

What sectors will be the new sunrise sectors in the new growth phase?

In the previous growth cycle, there were a few sectors that were very hot at different stages (eg retail, media, real estate, infrastructure, financial services) and at different times drove the market. This time, excluding e-commerce, we think growth will be fairly well balanced and distributed across sectors. While the quality within sectors will also be better, we believe this relatively balanced growth across sectors actually adds to the quality of overall growth, and is a part of the attractiveness of India’s market being ahead. We are overweight on autos, telecom, cement and banks. There will be no pronounced lead sectors in this growth cycle.

What about sectors like power, infrastructure and steel, which have been under stress for a while?

These sectors have been under stress for a while and we believe their recoverywill be measuredand not accelerated. To kick-start these sectors, you will require the government to come up with more than just policy changes and the government will need to spend a bit. You see some of this mentioned in the Budget. But once the revival is underway, we do believe you could see and extended investment cycle - though it’s unlikely to be as sharp or aggressive as the last one.

What about the PSU banks and their challenges?

It is part of the economic challenge in the system. But since the rest of the capital markets -- equity and fixed income -- are so supportive, it takes away some of the pressure: Strong companies and projects have access to capital. In addition, the private banks are in decent shape from a capital perspective, and you could expect them to participate a little more. And finally, the government is creating vehicles like the National Investment & Infrastructure Fund (NIIF) that should also lend a helping hand. So while the challenges with government banks are a funding over-hang, it’s probably a lot less than their 70% market share would suggest. We also believe that government banks don't have to grow at 20-25%. If they grow at 10-12%, which is what their RoEs support, it would be fine. This investment cycle will not be as dependent on PSU banks for growth as in the past. The loan market is shifting.

Steel sector is suffering as raw material prices are high domestically making imports cheaper. How can Make in India work?

These things look more challenging when markets are at a low, especially commodities. Whenever end product prices are weak, fresh investments are generally low – and that is the current challenge. We believe fundamentally the ‘Make in India’ initiative will help in investments in the sector: but you will need a stronger commodity market to kick start it, in this space.

Do you think a strong currency will come in the way of India's ambition of becoming an export hub?

As long as the current account deficit is under one per cent, the currency is not too volatile and if India is competitive, it is fine. Nobody puts up capacity with the currency as the key consideration. It’s the market, manufacturing competitiveness, and ease of business that counts and that’s what investors look at, rather than shorter term moves in the currency. On those counts, India is getting to be a better and better place to be in.