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India way beyond scams & disruptions; economy still growing: IIFL's Nirmal Jain

| February 20 2018 18 : 49 IST | CNBC TV18

Jain believes that it will not have a long term overhang. He doesn't think this is s systemic fraud that will have a cascading impact.

Even as the market continues to take a hit, largely a sentimental one due to the scam surrounding Punjab National Bank that came to light last week, IIFL's Nirmal Jain asks investors to cut through the noise.

"India is way beyond scams and near term disruptions...some foreign investors may miss on how the economy is growing amid all this noise. In fact, India stands to be a great investment destination for the next 20 years," Jain, Chairman, IIFL told CNBC-TV18 in an interview.

Speaking on the PNB scam, Jain said he believes that it will not have a long term overhang. "I don’t think this is a systemic fraud, which will have a cascading impact. But, this reinforces the urgent need for reform in PSU banks," he told the TV channel.

Jain is upbeat on home improvement and real estate. "Affordable housing is seeing a pick up in demand and reforms are serious and far-reaching in this case," he said, adding that smaller towns still have a lot of value of less than USD 50 per square feet.

On NBFCs, Jain said he believes they can pass on increased cost of funds to customers. On information technology companies, he said valuations are attractive in some firms, adding that the introduction of some innovation by companies too acts as a positive cue.

Below is the verbatim transcript of the interview.

Anuj: Good time to do the conference I guess, what is the mood right now you think among global investors because we have seeing a big decline for our markets and this has been driven by local trigger?

A: I think it is very interesting because in this environment where newspaper headlines are all about scams and frauds, some foreign investor or anybody who is coming into India may miss the main story which is how the economy is growing. Therefore, the theme of our conference is actually the main story that is happening in India which is the Rise of Millennials. That is what makes our country very different from all other large economies, not only what is happening today but for next 10 to 20 years as an investment destination. So, the theme of our conference is the Rise of Millennials which I think is a real story happening in India.

It is a much bigger story than the scams and frauds that you hear about. I mean they will disappear in a day or two. For a USD 2.5 trillion economy these are exaggerated they are not something that will make or mar of the country. But if you look at millennials they are just about 25 percent of our population and they account for 60 percent of workforce. They are very different in terms of their behaviour, their habits, the way they take decisions, in terms of their educational background. This has implications for everything, for the economy, for business, for politics and the way country will march forward in next 10 to 20 years.

This time, in fact the list is growing bigger so we have about 140 companies with combined market cap of more than USD 1 trillion that are attending the conference. Also, in terms of the participation of fund managers it is a new record. We have a 675 local fund managers that have confirmed and about 100 odd foreign institutional investors and together they manage more than USD 5-6 trillion of global assets. So, conference is getting a very good response in terms of corporate participations, in terms of investor participation.

So, regardless of what we see in terms of last few days or post Budget I think India is still very attractive. There is a lot of interest. People are looking forward to, meeting Indian companies as well as listening to lot of many speakers who are talking on very different themes. We are covering data analytics, artificial intelligence what are more relevant when the business will be driven by millennials.

Surabhi: You referred to what has been happening in the last couple of days. What is the sense I mean is this something that the market will now digest? It has already been about a week and kind of move forward or is this going to be a bit of a longer term overhang what evr we have seen with respect to Punjab National Bank (PNB)?

A: I don't think it should be longer term overhang, because it primarily reflects one public sector bank and I don't think it is a systemic fraud or something which has any cascading impact. At least at this point in time we don't see anything like that. Basically, this reinforces urgent need to reform PSU banks and if government wants to consider privatisation in whichever form they should do that. In fact they allowed the Fairfax which is a foreign investor, also investor in our company to own 51 percent of Catholic Syrian Bank this maybe a good move that stressed banks or banks where you may have certain issues with quality of their assets.

But then they have assets which are not valued. They are intangible in terms of their franchise, their base of customers, their current account-saving account (CASA) deposit raising ability, branches and those are intangible assets which typically an investor would be willing to pay for. So it may be a good idea to match these things and try and expedite the process of reforms of public sector banks. If government really wants to take a bold move then they should try privatisation as soon as possible.

Anuj: Home improvement and real estate, how are you playing that particular theme because that theme has done well? I see a lot of companies which are part of your conference in this list.

A: We also came out with a very detailed report on this and I think affordable housing as a theme, this government has done quite a few reforms which are serious and far reaching. We are seeing that there is already a pickup in demand for affordable housing. Even real estate sector people get confused, because if you look at real estate sector from five kilometre radius from your studio or my office then it looks like overpriced and kind of a bubble or very expensive.

But when we look at India, there are so many smaller towns where you can still buy a house at less than USD 50 per square feet that is where the real growth is coming. There are number of tax incentives or reforms in land acquisitions and also the incentive schemes or the subsidy scheme which has been very innovative and has been very successful. Pradhan Mantri Awas Yojana where up to Rs 12 lakhs you can get around 15-20 percent of loan amount as a subsidy to the first time home owner of a lower middle class or a relative lower economic section that is something which will drive growth. I think whatever we are seeing now is just the beginning.

My sense is that next 5 to 10 years we will see explosive growth in this sector which is affordable home or a low income housing. There is a segment where many state governments are doing, they are making very large investments. They are coming out of major reforms. I think that is seeing lot of activity and as a company we have branches over more than 1,000 cities. We are trying to leverage our branch network and expand our home loan base in those smaller tier II, tier III and tier IV cities and towns.

Surabhi: The other area of keen interest in the market obviously is NBFCs. I am looking at the benchmark yield now 7.67 percent and that has caused some concern. There is a conversation about whether NBFCs can keep enjoying the kind of margins they did over the last one year. What is your own sense there and if you could share with us your own NBFC business, what is the kind of growth rate that you are looking at in FY19? I mean that is going to be separate listed entity soon enough?

A: Relatively NBFCs are fairly safe from the interest rate movement because most of their, sorts of segment that we lend to they are not so sensitive to 25 or 50 basis points in rise and therefore the cost increase can mostly be passed on. There can be some impact on the portfolio, but I don't think it will be significant given the robust growth that we are seeing in this sector. NBFCs have been beneficiary of very strong credit growth in the economy on one hand and on the other hand as we are seeing most of the PSU banks really aren’t expanding their credit as aggressively as the demand is.

Of course, we are seeing the credit growth has got into double digit which is a good news for the economy, but having said that the demands for SME's as well as the various niche segments of the economy, the demand for credit is very strong and private sector banks and NBFCs are getting are larger share of it because PSU banks are constraint for new capital. I think that scenario may continue for some time and most NBFCs if they have a good volume growth they can take the small increase in cost of fund in their stride and move on.

Anuj: The other interesting discussion is going to be on IT, demystifying digital, because IT has done well and over the last six months I remember lot of people said that Indian IT story is over. But last six months have been phenomenal. It is not reflecting in the numbers yet though. Your thoughts on whether Indian companies are now ready to latch on to this digital opportunity and whether the rally that we have seen in IT stocks can continue?

A: IT sector basically was an underperformer for a long time when other high beta sectors were doing very well. So, last few years we have seen that banking, financial even pharmaceutical for some time many other sectors did well and IT sector growth has slowed down. So, IT sector has also, sort went through a transformative process where the nature of their project that they do, the types of clients everything underwent very significant change. But, now I think valuations have become attractive on one hand, some of the IT companies that have been innovative in terms of their skill set as well as the clients that they look for they will also see a reasonably good growth.

So, IT sector won’t see explosive growth like 100 percent every year what we saw in late 90's or early 2000’s but a very well managed companies if they grow at 15 percent or 15 to 20 percent I think there is a very good growth for long term investors. This sector has value, but I think you can't look at entire sector, you can’t paint it with one brush or you can't look at one homogenous sector. There are some companies that will do well, so investors will have to do whatever stock picking and be selective.

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