BL INTERVIEW. In current market fall, worrying part is regulatory oversight, ‘misguided’ ratings: Motilal Oswal AMC chief

As the panic-stricken investors look to read the market swings amid a sliding rupee, higher crude prices and governance issues in the corporate groups, head of the top-notch investor group, Motilal Oswal Asset Management Company (MOAMC) Raamdeo Agrawal speaks to BusinessLine on how the current correction in the market provides a rare decadal opportunity to invest in private banks and NBFCs. Edited Excerpts:

From the market point of view, it is not. Because this correction was overdue. There has been a sustained domestic flow for the last four years and markets were refusing to go down. So, very different kind of companies went up and quite unreasonably in some cases. The domestic flow has not stopped but reduced significantly—slowed down, so the stocks that were supported by this flow saw correction. With correction they have found their natural levels at the current underlying value. In my view, this is a very healthy correction.

This is a different problem than what we had seen in Lehman Brothers' incident in the US. They had given loans to the wrong customers, while in India, the problem is not from the customer side, the problem is with the management of the balance-sheet of the lenders themselves. The worrying part is the regulatory oversight, be it the RBI or SEBI. Also, the role of the rating agencies is of concern. The shock came due to the higher rating — ‘AAA’ — given to companies earlier and then reduced to junk. The mistake is not ‘Junk’ rating but the mistake is ‘AAA’. The market has relied upon the entire regulatory system and rating system. This came as a shock and it has jolted the market. Although, it is recovering from there now.

Markets may not fall further. But it is not good either if it stays here. Where will the buying come from? Because the domestic flow is gone and the foreign investors are still selling. And the news flow is not so good too. Keeping all these factors in mind, the market may remain subdued till the oil prices stabilise at one point.

We have already seen pessimism. But in reality, things are not as bad as they appear, particularly if IL&FS is taken care of. In this fast growing NBFC culture, we need more discipline. If that is taken care of, there is unprecedented opportunity for the investors. The entire growth burden is currently on private sector banks and NBFCs. It will take a while to repair the PSU banks, which form the majority of the Indian economy. Hence, we seen an unprecedented decadal opportunity. The growth momentum has shifted to the one-third of the economy, which is the private sector (banks). There is good private sector and bad private sector. We have companies with PE of 5 and 50, too. The good will become very good and bad will not be even touched. For the bad ones, the growth appetite will reduce as their lenders will be reluctant to pump in more money. If growth gets hampered, the stock will sink. Such banks and NBFCs will have to clean up their books and the market will force them to do.

Oil is clouding all guesses. But the promising sectors appear to be auto, private banks, NBFCs, consumer companies, white goods companies. However, current valuations are high and factors influencing these sectors are oil, inflation and RBI interest rates. At these high valuations, I can’t risk a guess, hence I would be cautious till the oil price stabilises.

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