Dydasco believes India is not a very leveraged economy as the concentration of debt in the economy is still very high. "India's concentration of debt is as high as some countries like Russia which is a very concentrated economy and those are risks for the banking system which would impair the ability of the country to grow if they are not addressed very soon," she adds.
But she is very interested in China. She finds China similar to what India was in some sense in mid 1990's. She says the private sector in China for the last three years has suffered from very high cost of capital, which in turn has imposed a lot of discipline among smaller companies that do not receive subsidies from the government.
Below is the verbatim transcript of Frances Dydasco's interview on CNBC-TV18
Q: How many years have you covered Asia?
A: I have been covering Asia more or less since 1988 when I started in Japan.
Q: And you have also covered India for a large period of time?
A: Yes I started covering India in the mid 1990's.
Q: You had a romance for India but you are no longer hot about India are you?
A: Currently we do not have any investments in India. I think I have to say I am very impressed by the verve of Indian entrepreneurs which has always attracted me to India. Now we have a situation where there is quite a lot of uncertainty from a policy point of view, but for us more it has been about trying to find companies that we would really like to invest in and at this point we are not finding the kind of positive operating leverage we would like to see when we make an investment and given that we find it difficult to stomach some of the valuations that we see in the market.
Q: A lot of Asian companies have huge amount of leverage, money has been cheap and corporate governance has gone for a toss?
A: Yes we typically see this after we have had a long period where capital is mispriced. Companies start making decisions that are based on rather silly assumptions which are not sustainable.
Q: You said that you feel that the operating leverage in Indian companies is not good because A there is a slowdown and B the cost of capital is high?
A: Yes. I think the other concern we have in India is simply that if you look at the banking system and if you look at the debts in the banking system although you can argue that overall India is not a very leveraged economy, when you look at the concentration of the debt in the economy, it is very high. India's concentration of debt is as high as some countries like Russia which is a very concentrated economy and those are risks for the banking system which would impair the ability of the country to grow if they are not addressed very soon.
Q: But given the fact that you claim that you are a bottoms up stock picker, I am sure there are pockets of opportunities in the technology sector, in the pharma sector not leveraged to India, why have you ignored them?
A: The valuations are quite high and again we really focus on incremental returns. I really want to see a company's operating leverage going up rather than down. In other words it is operation return capital employed actually rising.
I think part of the issue that we also have with those companies is just their valuations and if you look at the cost of capital in India clearly if you look at CPI which is elevated and I think it will remain elevated. I don't think interest rates are high enough to give savers a return on their savings. And until that takes place it is going to be very difficult for liquidity to flow back into the banking system which is what needs to happen for the system to recapitalize itself and re-liquefy itself. And given that we focus on the discount rate and valuation, if the discount rate is going to still rise basically if there has to be a positive real rate over CPI then that means discount rate still has to rise. In that environment it is very difficult to argue for higher valuations.
Q: Interest rates in India are already so high, I understand that but let me put this proposition to you, 20 years you watch global markets, India made a new lifetime high whereas China is still way below its 2008 highs. So how do you as an analyst explain that? Money is chasing India, going out of China perhaps so why would you not be in India as opposed to China?
A: It is funny that you say that because we are very interested in China and China strikes me as being or what India was in some sense back in the mid 90's when everybody dismissed it and if I said software company India people would look at me askance and today if you look at the kind of capital discipline in China again people would look at askance.
However if you look at the private sector in China for the last three years they have really suffered from very high cost of capital, I mean money is very tight particularly for private sector companies and as a result and of course there has been a slowdown because of the export sector. So that has actually imposed a lot of discipline among smaller companies that do not receive subsidies from the government.
The problem has been with the state sector which really has not had the same level of discipline because the state banking system and policy essentially supported it. But what is really interesting I think about the current moves that you see in China is there has been some recognition for sometime that this has to change. But you are starting to see some sense that this time they are quite serious about it. For example, allowing interest rates to rise, the 10 year rate has been slowly rising allowing there to be temporary liquidity crunches from time to time just to give the whole system a bit of a check.
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