‘Short-term news is not as positive as the long-term news’

India’s economy is going through structural change and this will, in the longer term, reflect positively in corporate earnings, says SHILPA KUMAR, managing director and chief executive officer at ICICI Securities. In an interview to Samie Modak, she also

MD & CEO, ICICI Securities We have seen a sharp rally this year. What has driven it? Structural changes enacted by the government and the increase in domestic liquidity. Both demonetisation and the goods and services tax (GST) will have far-reaching implications. Both will support the formal economy and benefit companies in the organised sector. The second factor, domestic liquidity, is a corollary to the first. We are seeing mutual funds and insurance companies getting good flows.

Is it a concern that the market rise is being led by valuation expansion?

Our proprietary valuation model suggests investors are putting much more valence on long-term factors than on current earnings. The two drivers will have to play out in the longer term but in the immediate term, earnings will be under pressure. The short-term news is not as positive as the long-term news. In fact, the reverse. Everything good in the long term is affecting earnings in the short term. Take demonetisation, a long-term good but short-term impacted. We just about got out of that and then there was GST. Again, very good for the long term but will impact earnings in the short term. Add structural problems like high corporate leverage and bad loans that banks are taking time to resolve.

How soon do you expect earnings to play catch-up?

Our house is constructive on earnings growth. Over the next two years, we see double-digit earnings growth. Earning pick-up cannot be precisely timed, especially for sectors like banking. How quickly banks are able to resolve the bad loan issue will determine the BFSI (banking, financial services and insurance) impetus to growth.

The trends in terms of retail (small investor) flows?

Are you seeing a high amount of interest? As interest rates are dipping, more and more households and retail customers are actually considering equity and MFs as an investment option. Equity is still under-owned in an Indian household. There is greater interest to move to financial savings. It is encouraging that investors are also realising that one can’t time the market. You have to stay invested for long-term wealth creation. We saw that during demonetisation — retail investors stayed invested and kept steadily investing. This gives us much more comfort than anything else.

Will that patience be tested if markets go into a big correction mode?

One can’t expect investors to not respond through extreme cycle changes. What gives us comfort is that investors are not pulling out money at every market correction. This is supported by data that investors now, rather than timing the market, are investing regularly. They can of course keep changing their allocation between equity and debt as the fundamentals change.

ICICI Securities has a strong investment banking franchise. How does the deals pipeline look?

Going forward, we have a very healthy pipeline. The buoyancy in the market is supporting fund raising activity. This is helping the corporate sector to deleverage. It is also allowing promoters to get equity into their business. A lot of mid-sized firms, which had raised private money, are also having the discipline of giving exits to PEs (private equity entities) through the public market. Given the valuations, investors are also welcoming the issue of new equity. A lot of insurance companies have filed for IPOs. This is resulting in the creation of a whole new vertical in the listed space. Beside, there are high-quality names wanting to enter the market. So, the market is in a sweet spot— there is a reason for companies to issue equity and there is demand from investors for this fresh supply.

“IT IS DIFFICULT TO PRECISELY SAY WHEN THE LEVERAGE PROBLEM WILL GET OVER BUT ONE CAN CERTAINLY SAY IT HAS BOTTOMED OUT”