‘India is likely to benefit from the global slowdown’

“Those days, we had direct access to Mr Murthy,” says KC Reddy, CIO, ABN Amro MF, referring to NR Narayana Murthy. Reddy was reminiscing how he, as an investment analyst covering IT companies, wrote what was probably the first research report on Infosys.
Infosys and the Indian market both have come a long way, and so has KC Reddy. He has worked in various reputed organisations such as Credit Agricole Asset Management (Hong Kong), Thames River Capital (London) and Charlemagne Capital (London) where he was involved in managing a range of equity funds including Asia Fund, Greater China Fund and India Fund. At ABN Amro Asset Management, India, Reddy will also be the fund manager for ABN Amro Opportunities Fund and ABN Amro Future Leaders Fund. He spoke to N Sundaresha Subramanian and Vivek Kaul

It’s a homecoming for you. How are you feeling?
This is the first time I’ll be on the fund management side in India. I am looking forward to it.

Does your decision to move to India have a macroeconomic angle, given the slowdown around the globe?
Personally, moving back to India was a priority. Moreover, after the takeover by Fortis, they increased the capital allocated to the mutual fund business ten-fold to $50 million. They are bullish on India and were looking to strengthen their mutual funds business. I thought it was a good opportunity. From a personal perspective — this is not a house view — global economy is set for a phase where it will be driven by China. We made a lot of money in the emerging markets. India will be one of the few countries that will benefit from the global slowdown.

Does being a fund manager in India require a different sort of orientation than being one abroad?
Different kind of funds call for different styles. But the basic things remain the same. In my stint with managing emerging market funds, I have become familiar with brokers, analysts and different sections of the market. Therefore these are not new to me. Lot of people have become fund managers in the bull market. There is less focus on research and more on taking big, macro calls. There is a tendency to speak to market people.

There is trading in lot of companies because either brokers or CNBC said so.
There is less discipline in India. We will focus more on in-house research and less on outside. We will do financial modelling and prepare forecasts and focus more on bottom-up approach. In the last few years, everything went up and making money was not difficult. Index strategies worked well. Going ahead, though the long-term outlook is good, not everything will go up. It would be like the second half of the 90s, where it was difficult to make money. Focus will be on bottom-up strategy.

Have you reoriented the portfolio in some of your schemes?
Almost all schemes we have done some reallocation, though not completely. We have been keeping in line with the objective of the scheme, for example, we have exited positions where we had less conviction.

We have cut out overweight on index stocks, where we have less conviction. Global economy is in the process of slowing down. Any company exposed to the global slowdown is in the risk of earnings growth. We went underweight on commodities-related stories in June. So far, it has worked in our favour.

Other big companies, we are not negative on valuation, but the beta is not very high, given their earnings could fall 40-50%.

Similarly, we went overweight as early as June. Active valuations are factoring 30-50% drop in earnings already. But as the global credit crunch eases, MTM losses on the bond side could come down. Risk-reward looks very favourable.

Don’t you feel rising rates will hit banks?
Interest rates are close to peaking. Increase in inflation has flattened, if you noticed over the last few weeks. We might see an accelerated fall in global commodities, not only in oil, but also in agri-commodities. There is significant inventory build-up in edible oil, palm oil and soya. Lot of apple production is coming in and we expect a similar scene in copper also. Demand destruction is shocking. Prices will fall sooner than anticipated. And governments will be keen on cutting down rates to push growth. If our views ring true, we see bond yields closer to 8% than 9%, and then lot of MTM losses will be reverted.

Besides, banks are in a better position to pass on costs to customers than many manufacturing companies. Surprises are possible as most funds are underweight or short.

Even other rate-sensitive sectors such as real estate and auto are mildly positive from a trading perspective.

What are the other sectors that interest you?
There are some very interesting midcap ideas. We are looking at telecom, IT and healthcare space. These are less affected by the slowdown, valuation is single-digit PE and are high ROE stories. They have been unjustifiably hammered. Once market recovers, people will come back.

What is your view on commodity prices?
Commodities have room to fall further. The demand destruction is phenomenal and is not appreciated by the commodity bulls. Global oil demand is down 1.5%, within that Chinese demand is down 2.5%. The US car sales are down to their 1992 number. There are signs of falling demand in Europe, Japan and Korea.

In China, the big factor was Olympics. With the Olympics underway already, demand is slipping there too. There is degrowth in oil demand globally. Supply issues have kept it up. But, price elasticity won’t kick in until it falls below $80. Similar demand destruction is seen in varying degrees across the commodity space. Prices have to fall.

What is your message to investors?
August, September and October have the potential to be the most important months in the world economy in the next 10 years. One has to be very cautious and watch the data. Investors should go back to the old style of investing, must diversify and stick to valuations, should keep expectation low to 20% returns.

Lakshmi Mittal winging into SpiceJet?

Lakshmi Niwas Mittal, the London-based billionaire who controls ArcelorMittal, the world’s largest steel company, is believed to have evinced interest in buying ailing low-cost carrier SpiceJet.

“He (Mittal) would like to go for a full buyout,” a source familiar with the development said.

This will require Mittal buying, apart from the promoters’ stake, the $80 million (Rs 350 crore) foreign currency convertible bonds (FCCBs) that SpiceJet issued to Istithmar, the Dubai government’s investment arm, and investment bank Goldman Sachs.
The Tatas hold around 7% stake in the airline. Mittal could not be reached for comment.

Mittal’s interest is a surprise because the airline doesn’t have a strategic fit with his businesses. “It doesn’t make any sense for Mittal to look at SpiceJet,” said an industry source.

On the other hand, liquor and aviation baron Vijay Mallya remains keen on scooping the no-frills carrier to lift Kingfisher’s market share above that of arch rival Jet Airways.
Meanwhile, Wilbur Ross, the US investor often called the ‘King of Bankruptcy’, who is close to Mittal (he is on ArcelorMittal board), wants to rework the terms of his investment in SpiceJet.

Ross had in July announced an investment of Rs 345 crore in the airline. SpiceJet sources insist that deal is not in danger, but they admitted it “may not be sealed on original terms”.

A source familiar with the development said Ross’ return to the negotiating table came after the Airports Authority of India (AAI) issued an ultimatum to SpiceJet to pay up dues or be charged landing and navigational fees on a cash-and-carry basis from August 1.

“After this ultimatum, Ross set down certain conditions before he injected funds into the airline,” the source said.

The conditions include writing down of dues to creditors and delivering operational performance within a specified timeframe.

Ross is also believed to be trying to negotiate the conversion rate of the FCCBs to as low as Rs 10 a share from the Rs 25 per share discussed when talks for the deal had closed, the source said. “Though Ross is keen on bringing in capital, he may not do it on original terms,” said the source. His fund has raised concerns over some legal issues too.
Ross had completed due diligence of SpiceJet on July 31.

A senior SpiceJet official confirmed that the AAI has extended the airline’s credit period till August 31. The official, however, was mum on whether Ross was renegotiating the terms of deal.

Sources said Ross may eventually not go for conversion of bonds into equity. “That is why there is no question of triggering an open offer (after breaching the 15% stakeholding as per Sebi rules) or hitting the ceiling of 49% on foreign direct investment,” said the source.

Besides AAI, SpiceJet has to pay dues to private airport operators Delhi International Airport Ltd, Mumbai International Airport Ltd and Bengaluru International Airport Ltd too.

And these are only mounting. “It has started delaying payment of aircraft lease rentals to lessors due to paucity of working capital,” said a source.