'Indian Market To Narrow Until Capex Cycle Begins, Returns To Stay In Check': Kenneth Andrade

Indian markets are likely to become narrow before any signs of full-blown revival comes. Re-starting of private capital expenditure cycle will ensure the beginning of another momentum, according to Old Bridge Capital Founder and Chief Investment Officer Kenneth Andrade said. "Indian markets are at place where it is most likely to continue to perform positively," he said.

"One thing is that India Inc is not re-investing in the capex cycle, which is becoming a genuine problem now. Market participants witnessed a single-digit growth for the last two years. This year does not look significantly different," he said.  

There is no risk on capital from here, but expectation of return should be checked. The returns are likely to consolidate around this time. Broader economic parameters or broader growth rates are going to be single-digit, the expectation of an company to be growing significantly higher than that is unlikely to come true, he said.

When private capex cycle begins, it is usually followed by cash or free cash flow. Now, this process adds debt to balance sheets which weighs on valuations, Andrade said in an interview to NDTV Profit. When capex happens, there will be growth with initial valuation erosion. 

India is currently running its capex cycle. The country did well in last seven years, which benefited a lot of investors. Most of Indian companies are trading higher in terms of valuation compared to productive manufacturing. The arbitrage of return is excess in India compared to other countries, he said.

The fixed-income markets are very tight now, which means it will be tough to accumulate capital from these markets. Also, there is no clarity over more rate cuts by the Reserve Bank of India as of now, he said.

Secondly, if markets are trading at 22 times earnings, it's about four and half times cash flow earnings yield, which is where the bond markets are at now. This indicates equity and bond markets are at a parity, Andrade explained, he said.

Old Bridge Capital is picking companies who are focusing on building international franchises. These companies will eventually move away from India, exploit opportunities somewhere else. Companies will get both the domestic and international growth who are trying to make international franchise, he said. The strategy is to observe domestic franchises who are generating enough cashflow and using it to create something, he said.