Valuations attractive if India de-rates to Dec levels

Samir Patel of Hermes Fund Managers says that the Indian market needs to de-rate to December levels so that

valuations become attractive. Since valuations don’t fully reflect the underlying risks of the country, Patel says

a de-rating will make them feel more comfortable.

Since both the global and domestic outlook is not favourable, Patel says the market will muddle through 2012. “I

think there are more downgrades to come, which may just put a cap on the market in the near term,” he explained.

His advice to investors is to adopt a bottom-up approach when investing in India. “There are lots of very well run

businesses which we find attractive outside the usual 30 companies which we think is the real India,” he said. He

further adds that it is best to look across different sectors because good opportunities are not focused on specific

sectors.

Below is an edited transcript of his interview with Udayan Mukherjee. Also watch the accompanying video.

Patel: I think our biggest fear right now is two fold; one is valuation for a market which we don’t think fully

reflects the risks as we see. Secondly, our concerns have really been that the current account deficit in India has

been growing too fast and has been historically being masked by what we call volatile capital inflows. That concerns

us because we would rather see FDI coming in and domestic direct investment as well, but given the concerns about

policy paralysis that’s kind of delayed a lot of that.

So historically from our point of view, I think the volatile capital inflows have masked these underlining problems

and today we think they are kind of building in away. This ultimately will be reflected by the rupee weakness which

is what we are seeing today as well.

Q: Do you think the rupee’s weakness will continue?

A: We think it will. How much more I don’t know, it’s always difficult to say, but it’s had quite a strong move

against the dollar in the last six months. We think that will continue because as I said that, current account

deficit concerns in a risk off environment would definitely not favour rupee appreciation. So I think that’s where

we stand to get quite concern there a little bit.

Q: Do you think this market needs to de-rate then, just to go back to those December kind of valuations which would

give you that added comfort?

A: It has to. Ultimately we don’t think it’s a broken story. We just don’t think it’s the story that India used

to be where the growth was given. You couple that with the fact that we have got inflation concerns and the interest

rate cycle. The RBI has told you 50 bps, and I think consensus is telling you this is the shortest rate cut cycle in

history.