Last week, the Indian market underperformed on the back of several issues ranging from Cyprus bailout to DMK calling off its alliance with the UPA, taking the Nifty below 5700.
In an interview to CNBC-TV18, Sandip Sabharwal of Prabhudas Lilladher says he expects Nifty target of 5500 to be a bottom for the markets.
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He feels the next trigger for the market will depend on the steps taken by the government after the Parliament session as projects worth Rs 8 lakh crore are stuck due to various regulatory issues.
Talking about stocks, Sabharwal suggests holding ICICI Bank. Among autos he is bullish on Mahindra and Mahindra (M&M) and Tata Motors. "If inflation will be sharper than what Reserve Bank (RBI) believes and we see a more aggressive monetary easing rather than the forecast today, companies in the largecap space like Larsen and Toubro would also be very well placed," Sabharwal told the channel.
Below is the verbatim transcript of Sandip Sabharwal's interview on CNBC-TV18
Q: Where would you see a floor for the Nifty at this point in time and what would be the next trigger that you would be watching out for, considering the diesel price hike that came through on Friday? What about the Cyprus bailout issue which is more or less a done deal?
A: The markets, after starting off well for the month of March, got hit by several events. First was the Cobra sting operation that led to fall in banks. Then we suddenly had the Cyprus issue which was unanticipated and finally the withdrawal of support by DMK. All these issues have created negativity in the market. However, if we see the forex market, rupee continues to be stable and appreciates during this entire fall of the market. This has been different over the last two-three years where the movement of the rupee and the movement of the market is typical or highly correlated. This indicates less likelihood of any big outflows from foreign investors at least in the short run. Considering that and also the fact that there are huge short positions in the markets today reflected by the extremely low put call ratio, a level of 5500 for the Nifty looks to be the bottom for the markets.
Going forward, one of the key triggers may be, after the end of the Parliament session what are the steps that the government takes to kick start the investment projects because there are Rs 8 lakh crore of projects stuck due to various issues. Is there any concrete action being taken there? Secondly, it will be the trajectory of inflation where the RBI has projected that inflation could be stable around current levels for some time.
If we do an analysis of the way global commodities have moved, food prices have moved in India and last year’s base effect, over the next two-three months we should see a significant follow up in headline inflation that will create space for monetary easing. So, these two will be the major factors that would determine the movement of the market.
Q: Considering the fact that the Cyprus situation was handled more effectively than Greece, are you a buyer? It could be possible that after this one week break in the rise that the US market saw - that will resume. After all they are still putting USD 85 billion every month into the system, Japan is following suit and things are still fairly re-inflating even in the European economy. Would you be a buyer at this current juncture?
A: Obviously, the market is buyers market. It is not that we are in a bear market, globally, the bull market is on. Economies like India, Brazil and China (to some extent) are stuck due to various reasons, but eventually, they have to follow. One is a largecap side of the market where we have valuations that are at very high levels for consumer space and rest of the space looks pretty attractive. Secondly, even in the broader market, the kind of plummeting of values that we have seen is quite amazing.
Finally, every company has some equity value unless you believe that that company is eventually going to close down. To that extent, there is significant value available in the market place. Today it is more of a question of conviction because stocks, whatever you buy, have been going down and whatever you sell here, your strategy turns out to be right. So people believe that’s the right strategy whereas I think there is a lot of value in the markets which will play out going forward.
Q: Talking about stocks, you said consumer discretionary is a no-no. What will you go with now if you are a buyer in the Nifty?
A: One would have to look at private sector financial institutions except for HDFC which looks slightly stretched. It has not fallen much if you take the rest of the private banking space be it ICICI Bank, Axis Bank or HDFC Bank. I think all of them have seen significant correction and seem to be well placed. Out of them, we hold ICICI Bank in our portfolios. Similarly, if we look around even in the auto space, companies like M&M, Tata Motors could benefit. We are not currently holding these companies but the sharp drop in the value of the pound will benefit it in terms of its margins. So, we will see improvement in margins for this company and that could be a positive thing for them.
If inflation will be sharper than what RBI believes and we see a more aggressive monetary easing rather than the forecast today, companies in the largecap space like Larsen and Toubro would also be very well placed.
Q: A lot is spoken about the broader markets as oppose to the fall in the Nifty that we have seen in the past couple of weeks. For example, infrastructure is quite alive today, likes of GVK Power and Infra. At this point, do you think any of them is a buying opportunity from the broader markets? In general, what would your top picks be?
A: There are a lot of stocks in this space that could be a ‘buy’. It is more a question of buying for investors who are slightly patient and can hold on for the long run. The way, value of some of these stocks has plummeted is absolutely amazing. So when you talk about particular stocks, we have avoided stocks like GMR, GVK, Lanco, Hindustan Construction because they are heavily leveraged.
At some point of time, there is some equity value that will play out unless you believe that the company is going to close down. Selectively, one has to take a bet on those. I won’t take names at this stage, but there could be a lot of value for people who can hold on for a year.