FIIs have divested less from India: Tata AIG

Tata AIG Life Insurance Company may break-even in the just-ended fiscal after being in operation for 10 years, said Mr Saravana Kumar, Chief Investment Officer, Tata AIG Life Insurance Company.

The company's assets under management amount to Rs 12,839 crore as on March 31, 2011. Out of this Rs 6,807 crore is in equities and the remaining Rs 6,032 crore is in debt. Out of the debt portion, Rs 2,888 crore is in Government of India securities, Rs 1,769 crore in infrastructure and corporate bonds and Rs 1,375 crore in money market instruments.

In an interview with Business Line Mr Kumar speaks about his broad investment strategy for the current fiscal, which he says will be a tough one.

Will there be foreign institutional investor interest in India despite high inflation and fiscal deficit?

FIIs look for opportunities. Our data say that within the first three months of this calendar year, among the various emerging markets, FIIs have invested good money in India. And whatever they have divested, they divested less money from India.

In March alone, FIIs have invested $1.5 billion in India. In Taiwan they divested $1.2 billion, and Indonesia saw net divestment of $0.3 billion.

Among emerging countries, India received $1.5 billion, Thailand $0.5 billion and (South) Korea $0.4 billion. In the January-to-March period, FIIs divested among all the emerging markets. For instance, in Korea it was $2.4 billion, but in India it was lower at $120 million.

India still attracts a good portion from FIIs. Among the emerging countries, India has good growth potential. Structurally, we are going to grow at around 8.5 per cent. Also, there is more transparency, a better legal system and huge population. Disposable incomes are moving up. More youngsters are coming into employed category and are spending money.

From an equity investment point of view, which segments will do well and which segments are likely to face pressure?

In the last one year in the equity market, consumer-related segments have done really well. But at the same time there could be pressure on interest rate sensitive sectors.

We are positive on the pharma sector because it depends not only on domestic demand. Today, most of the Indian pharma export a good percentage to developed and developing economies.

In India also there is huge demand for pharmaceutical products.

We are positive on FMCG sector. But the rising raw material and advertising expenditure is putting pressure.

For most FMCGs, top line is growing but EBDITA is under pressure. But broadly it will do well because is it a consumption-led segment.

Which segments are likely to see a negative impact?

In the last one year alone RBI has increased the reference rate (reverse repo) by 300 basis points. Whenever interest rate moves up, interest rate sensitive sectors — mainly the BFSI, banking, to some extent auto, construction, capital goods — will see negative impact.

The banking sector will see an impact on margins on two aspects. For once, banks have not yet passed on the entire increase in reverse repo rates to the end-consumer. They have absorbed some of the shock. Now they have to pass on the rate increases.

We will see another 75 basis point increase in rates by October.

The increase in savings bank deposits rates to 4 per cent from 3.5 per cent will also put pressure on NIMs of banks. So, banks' earnings may see pressure.

Whenever interest rates move up, non-performing assets move up. Besides, public sector banks also have to provide for pension liability. All this will impact the banking sector's earnings.

Construction sector and capital goods are also highly sensitive to interest rate movement. Whenever high interest rate scenario prevails, the developer — of road and infrastructure — has to borrow at higher cost. Even a 1 per cent increase in interest rates will affect the borrowing cost and break-even point for making profit. So normally there is negative co-relation.

But given the National Highways Authority of India's projections for construction of roads, there will be huge demand for cement, steel, labour and construction equipment. So we are expecting the construction and capital goods spaces to do better, with some lag effect.

In the auto segment; while there is huge demand for small commercial vehicles, demand for heavy commercial vehicles or medium commercial vehicles is linked to the interest rate movement. When interest rates move, there could be negative impact on demand. Plus, passing on the diesel price hike will also make a negative impact.

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