Edward Pulling of JP Morgan Asset Management said that if India trades at 15 times PE, the Sensex trade at 30,000 in the next three to four years and said that he saw a Sensex EPS of Rs 2000 between March-September 2013. He added that the March 2009 Sensex EPS would be seen at Rs 850 and March 2010 at Rs 850-900. “India is not expensive at this point; most Asian markets are trading at 14 times 2010 earnings.” Pulling further said that he did not expect the Indian market to see a re-test of its previous lows.
Commenting on the Indian economy, Pulling said he was positive that India would once again see a GDP growth of 7% and 8%. He said that earnings growth would be primarily driven by the infrastructure space. However, he said that the Indian real estate sector was not attractive right now as there was more transparency required.
Speaking on the current fad of Qualified Institutional Placements (QIP), Pulling said that he did not see all of the QIPs going through.
Here is a verbatim transcript of the exclusive interview with Edward Pulling on CNBC-TV18.
Q: What do you think about India and how much can the markets can run from here?
A: When I first started investing in India, about 15-16 years ago I think the Sensex was around 3000-4000 and now we are at 14,000-15000. And I think that in 3-4 years time we will be at 30,000. So by almost any measurement that is a bull marker. This being India, there are going to be plenty of bumps along the road and that’s part of the fun and challenge of investing in Emerging Markets. But there is tremendous amount of money, profit to be made in the longer-term if you stick with it and you know what you are doing. If I think that the market can double from here in 3-4 years then that is no matter what your definition is that’s a bull market. But it's not going to be a linear 14-15000 to 30000?
Q: Are we then saying that what happened in 2008, through early part of 2009 shouldn't be classified as a bear market at all?
A: It is very painful part of my life. But I was certainly caught unawares by the severity of events last year. I think almost everybody was. Equally, I was surprised by the election outcome in India a couple of months ago. So as I said, these are the challenges of investing in a exciting developing economy like India's. What happened last year -was that there was too much exuberance going into 2008 and no one could have predicted those events. If you are a strict fundamental investor and you enter 2008 with India around 21-22 times forward earnings you would you have been paring your positions. You would have said, “I don't know why, I don't know when, but the market will trade back to its long-term average multiple of 14-15 times forward earnings.”
Q: From where we stand now, given fundamentals and earnings expectations, would you say that there is a touch of exuberance in the market now or not quite?
A: Where are we right now -14,200 on the Sensex ; in March 2009 EPS is going to come in at around Rs 850 and lets just say for sake of ease that its Rs 850-900 for March 2010, then you start to see EPS ramping up and once the earnings upgrades kick and you will see March 2011 EPS at around a Rs 1000. So those are denominators and numerators. So where are we? That puts us on 14 times March 2011 earnings, swing it back for a calendar year and you are almost at 15 times December 2010. The rest of the Asian region is probably on around 14 times 2010 earnings with a consensus earnings growth of around 30-33%.
China is on a pretty much exact same multiple as India, so is the market over extended? I don't think so on valuation terms. Has the market moved very sharply in the past 3 months? Have the high EBITDA stocks significantly outperformed? Is there a mean reversion trade unfolding right now? -Quite possibly yes. But again, I am not going to get overwrought over short-term movements. The price lies further out. 2011 to 2013, when the earnings growth in India will really ramp North.
Q: Let me just ask you about what you have assumed in that valuation matrix, which is Rs 850 this year and Rs 1000 in 2011. I remember speaking to you in February and you were saying people are talking about 850 but we probably don't get to Rs 850. We get to Rs 700-750, if we are unlucky we get to Rs 650. Has that scare receded that we are not going to see maybe a decline of 10-15% in earnings this year?
A: I think the situation has moderated. When we spoke in February, we were coming off what every single corporate has told me, what the banks had told me, the December quarter was the most difficult quarter that any of them could remember. The credit markets had frozen up, there was no liquidity, and order books were gone. But that situation has ameliorated. Now slowly but surely we are reverting back to more of a steady state environment. So if you want to put numbers on it - you are going to ease back into a 7%, then 8% of GDP growth plane. So the severity of the earnings downgrades looks like the past. So I don't think we are going to see Rs 650 as an EPS no for Sensex
Q: 30,000 Sensex in 2012-13?
A: Let’s explain. Let’s go back to the denominators. Rs 850-850 then Rs 1000 in March 2011. I think that between March 2011and either March 2013 or September 2013, earnings in India can double.
Q: Rs 1000-2000 in 2 years?
A: Yes. So over a 30-month period I think earnings can double. Why?- A lot of capital intensive long gestation projects, ports, roads, steel mills, airports, etc. all these big ticket items which are under construction right now, are still finalizing their linkages, power stations etc, these will start to come on around 2012 or through 2014-15. They will change the complexion of earnings in India. But it is important that they all start coming on towards those three years. I can't guarantee that in March 2013 the denominators double, it could be September but you will see a significant ramp up in earnings.
Let’s go with the assumption that markets discount earnings by year and that the assumption that the median multiple for this stock market is 15 time earnings. If you go my calculus what I am essentially saying is that Sensex earnings, with the equivalent there for a typical broker basket will double. So Sensex earnings double from Rs 1,000 to 2,000, 15 times 2,000.
Q: So you are saying in 2006-07 this played out, Sensex earnings grew by 35-40% per annum. You think after 3 years of earnings consolidation we could get back to that 35-40% earning growth again?
Q: Propelled by which basket of stocks? Just infrastructure? Or commodities as well?
A: It is primarily infrastructure, you can look at it. It is going to be power, ports, airports, steel mills, maybe roads and there will be a component of property as well. Those will be the biggest contributors. There are some interesting projects under construction right now that will take years to complete. Then of course you will also have quite strong growth from financial services sector.
Q: But you don't think that a lot of that rebalancing that had to happen has happened already in the last couple of months- where people who were sitting on the sidelines had to catch up. That catch up has happened, they have invested enough?
Q: There is still money to come in?
A: I believe so.
Q: Across the globe or particularly in Emerging Market equity space?
A: I think there is a strong predilection now for the Emerging Market space, because of that anomaly that I explained. We are enjoying a monetary policy set by a troubled part of the world and we are not troubled or are as troubled. So it makes all the sense in the world to shift money to this part of the world. We also can't deny the ascent of China and India right now, more so than every, they are beacons of growth. They represent good value and have pretty strong balance sheets.
Q: Do you think the supply of paper in India will soak up a large part of it or will there be enough leftover for the secondary market because there has been so much Qualified Institutional Placement (QIPs), IPOs will follow- does it worry you?
A: It is a very pertinent question. I think if you look at the backlog, it is approaching USD 10 billion now, companies have taken approvals. This USD 10 billion is going to happen? Absolutely not. You are already seeing push back on quite a few of recent deals. Does a flood of new equity represent a short-term hurdle or speed breaker to the market? Yes of course it does. But what is gratifying is that investors are discerning and there is push back on some of these deals. Not all of them are going to be done or they are not all going to be done in size that people are hoping.
Q: Most of them are from one sector: realty. Has your view changed? That's where all the new paper is coming from
A: My view is real estate has always been that it is a great long-term opportunity.
Q: Meaning do not touch it now.
A: But it’s remaining a long-term opportunity. So I would personally like to see a lot more transparency in the sector. I have large investments in Chinese property companies and they have worked wonderfully in the past 3-4 months. That was a sector that was on its knees last year and has revived wonderfully strongly this year. I would love to see the same in India.
There are a few requirements for it – one is low interest rates and two rising income. We have that in India. It is a great long-term opportunity. You and I can't deny that property is underrepresented in the stock market, in the economy, that there are millions of dwellings that need to be built in this country in the low, medium and even upper end. So would love to invest in the story, but right not it is not attractive enough.
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