PN Vijay, Portfolio Manager said Reserve Bank of India's (RBI’s) monetary policy and upcoming earnings season could set the market trend in the next three-four months.
Commenting on the policy he said, "There would be a rate cut of 25 bps and some collateral action is possible on the cash reserve ratio (CRR) front."
Earnings of India Inc have bottomed out for sure and corporate India has learnt to live with costs."I am not looking for negative surprises especially in cyclicals or financials, I would be looking for some positive surprises in sectors like IT," he added
Below is his verbatim transcript of his interview on CNBC-TV18
Q: There is a lot coming too from the government’s stable again starting off with National Aluminium Company Ltd (Nalco), any thoughts on that issue and what kind of reception it may receive?
A: Nalco would find the going a bit tough given the environment for metal and there does not seem to be any great revival in demand for metal. Of course the Chinese economy is showing the first greenshoots of a recovery. However, on the whole, both ferrous and base metals are having a tough ride. Given that context unless the pricing is extremely aggressive and it being a very export oriented alumina unit, I don’t find Nalco finding it very easy.
However, it is a company with a good track record in the stock market and it is a smaller issue compared to National Thermal Power Corporations (NTPC’s) of the world. So, it would probably get subscribed but I do not think it is a blue-chip kind of an issue at all.
Q: The next two local triggers are the monetary policy next week and then we get into earning season starting April, what do you think these triggers can do for the stock market?
A: These triggers can set the trend for the next three-four months surely. In the short-term looking at the credit policy, my own sense is that there would be a rate cut of 25 bps and some collateral action is possible on the cash reserve ratio (CRR) front.
The Reserve Bank of India (RBI) generally goes by wholesale price index (WPI) and that too the core inflation number. If you see a correlation between the rate action and the inflation indices, it has been largely driven by that core inflation number, which is showing distinct sign of softening. So, the RBI maybe tempted. Additionally, if there is a realization in all quarters that the government stretched the limit of political sagacity in the last Budget, going beyond this would have been inviting for political trouble and with large states coming up for elections this summer, the government would not do that.
So, if RBI needed any proof of seriousness of government action, and some hope that inflation would be in 7 and sub 7 percent on the WPI side going forward, whether because of base effects or due to real prices softening, RBI would lend a helping hand. This is my objective analysis.
My hope of course is that the RBI would also think that the early shoots of recovery in the index of industrial production (IIP) and in the trade data that we got would be enough to give some sort of a real sign that if the economy is given a bit of a push on the interest rates, we may go back at least to 6-6.5 percent growth cycle in FY14.
On the earnings front, I think it is a much easier call. Company earnings have bottomed out for sure. I think corporate India has learnt to live with costs. Gradually, the two forces which are weakening demand and weakening material prices have evened out. It is possible that what we are seeing especially in the manufacturing IIP, we may get fairly decent earnings in the quarter ending i.e. March 31. I am not looking for negative surprises especially in cyclicals or financials, I would be looking for some positive surprises in sectors like IT.
Q: Do you see this outperformance of frontline IT continuing - that’s been the standout sector, these last couple of weeks. We have seen a bit of profit taking in Infosys but as we get closer to the earnings and guidance, do you see that sector moving up again?
A: Yes, I think the outperformance is to be related to two other segments, the tier II IT companies in the broad market. I think in both counts, we might get fairly small but comprehensible outperformance. The reason is two-fold. Today, when the retail investor or the HNI investor limps back to the market as he probably would in the second half of this year, he would prefer to buy Infosys or Tata Consultancy Services (TCS) I believe than a midcap IT stock. That is the psychology.
The second is that most of the IT companies in India are United States driven and United States is one geography where if you say European Union (EU), emerging markets and the US where every macro indicator is showing capital asset formation in terms of business confidence and inventories, etc. So it is possible that they would be able to sustain the growth.
Traditionally, if you look at the price earnings premium that people have paid for an Infosys over the Sensex in last 20 years, I think that have got eroded. It is probably at lower level but there is still a scope for outperformance and I would believe that one could use this small correction which we are seeing the market to re-enter Infosys or blue chip in the IT sector.
Q: How would you approach some of these consumption stories, not FMCG but things like Titan Industries, Jubilant Foodworks?
A: There is a generic statement one can make that they will trend higher because people are worried about volatility. Most of these companies normally have a predictable growth pattern since they are related brands and retail investors’ consumption needs, etc. Generally, they are low beta type of stocks and in an era of volatility, they find favour and get better valuations.
However, here again what I find is that the valuations have gone through the roof in many of these cases for example TTK Prestige or Jubilant Foodworks. They are trading at multiples which have absolutely no correlations to the earnings growth. So, when the domestic big money moves in they are very valuation conscious. If they can get an ITC at price-earnings of say 60 percent to Jubilant or TTK Prestige, they will rather play pitch for devil like ITC. So, I think the valuation is going to stand against them.
I firmly believe the next 12-24 months; value investing is going to become the fashion. Safe investing and growth investing will give place to value investing. So where people see real value and the downside seems to be limited, more smart money will move away from these 10 bagger type of stocks to those stocks. I don’t see any market outperformance from these companies. They are good companies but not going to give great returns to investors.
Q: Stocks like Power Finance Corporation (PFC) and Rural Electricfication Corporation (REC) have got punished quite a bit because of all the uncertainty on whether Punjab will play along with the discom restructuring deal. Would you buy them or do you think the uncertainty could drag them lower?
A: Punjab story is a bit overdone. These are very strange companies. They have two points going against them. One is the speed of the restructuring of the electricity boards which has a telling effect on both these companies. Second, is that they are clubbed generally with the midcap sector which means that when midcap bashing goes on as it has been going on, they also as fairly prominent midcaps get hit.
The second is of course a generic phenomenon and one just has to see when the value investing comes back. If people become stock specific, I think PFC and REC are good candidates. Their non-perfuming asset (NPA) levels are not that significant and they have escrowing of most of their receivable from state governments and so on. They are not bad companies and would be worth a good buy.
The Punjab State Electricity Board, the outstanding are all escrowed and it is just a little bit of politicking that is going on which is normal. I don’t see any great headwinds to these companies.
However, here again I feel that the sentiment has to change for these companies for example REC hit Rs 260 plus and then came all the way down. There has to be sentiment sort of a move towards midcap buying and then these two again will pick up. They are good companies, they have nothing fundamentally wrong in their balance sheets but they are suffering from little bit of bad news and the general aversion to midcaps.