Jul 23, 2013 03:43 PM IST | Source: CNBC-TV18

Mkt correction likely as Q1 nos start to disappoint: IL&FS

There is a very significant chance that the market will go into another correction as more and more results come out, says Vaibhav Kapoor.

Vibhav Kapoor of IL&FS says the market is likely to correct as he expects more disappointing news coming from Q1 earnings ahead. Although rupee depreciation has benefited the Nifty and some of the heavy weight stocks and sectors, it has not really helped the broader market or the economy as a whole, he says.

He sees Nifty trading in a range of 5,500-5,600 on lower side and 6,100-6,200 on the upper side. The best way to play the market is be selective and just trade, he advises.

He is not confident of slew of measures announced by RBI and government helping curent account deficit (CAD) situation. The governent intent is positive but more needs to be done on the CAD front, says Kapoor.

Also read: Defending currencies? More like digging a hole

Below is the verbatim transcript of his interview on CNBC-TV18

Q: Do you expect the market to continue its upward trajectory given the kind of newsflow that you are hearing or do you think 6,100 thereabouts should be the cap?

A: Two-three points need to be made here. One is that in the current rally, the market has become even more narrow or the rise in the market has become even more narrow than it was earlier and there is very clearly a shift happening from the broader market to a very few select stocks in the Nifty. Therefore, the broader market has probably gone down in the last few weeks but the Nifty has gone up because of this 5-6 stocks. Stocks like ITC, Hindustan Unilever Ltd (HUL), Infosys, Tata Consultancy Services (TCS) and maybe Reliance Industries Ltd (RIL) have contributed about 300 points to the Nifty in the last three-four weeks.

Second, is that obviously rupee depreciation is beneficial for the Nifty not for the market as a whole or for the economy because there are a large number of high weightage stocks, which benefit from the depreciation of the rupee. Therefore, some of these stocks are definitely becoming pretty expensive now. There is also flight to fast moving consumer goods (FMCG), which is further continuing to happen and making these stocks now look pretty expensive.

All in all, L&T’s result for example yesterday showed that the domestic based companies are still in a lot of trouble and we have to go through a lot of these results over the next 15-20 days. The banking sector also is under stress.

Overall the Nifty would continue in the range we have been talking about, 5,500-5,600 on the lower side and 6,100-6,200 on the upper side.

Q: Where does this leave any investment approach or approach to the market even where this deep skew exists within sectors and within the index; one pocket of it keeps moving to higher valuations while the others in the doldrums, what do you do with the market like that?

A: Very tough because you cannot keep on buying those 5-6 stocks. They are becoming expensive and if they don’t perform according to market expectations, which obviously are very high now, you could see a sudden fall happening at some point of time in them. So it is not a very safe strategy.

One cannot buy other stocks because those companies are not doing well or those sectors are not doing well. You have to be selective and you have to just trade. That is about it.

Q: How is the equity market reading the slew of measures that have been announced both from the finance ministry and recently from the Reserve Bank of India (RBI), are they reading it as positive in terms of attempting to band-aid issues like the current account deficit (CAD) etc or is it being seen as a retrograde kind of an approach?

A: The intentions are definitely positive but how much these measures will help, will have to be seen. Curbing gold imports can only succeed to a certain extent because of the very deep-rooted social sort of attraction for gold in this country. So, they are positive but I don’t know how far they can help in controlling the CAD. We will need to see.

Q: Do you see the possibility of the market entering another correction by the time this earning season is over because after yesterday it looks like there probably will be significant downgrades or some downgrades at least at the end of this earning season as well?

A: I would think so. All that has happened is that the export oriented companies have performed well because of the rupee depreciation. So, we have seen the IT sector doing well. We have seen companies like Bajaj Auto on back of exports doing well. Even RIL tends to gain a lot because of the depreciation of the rupee. The results for the rest of the domestic based companies - some of whom stand to lose because of rupee depreciation and others,  which are completely domestic economy related are still to come out. We saw first of them come out which was L&T which disappointed the market as a whole.

So there is a very significant chance that the market will go into another correction as more and more results come out.

Q: How much longer do you see this range being in place and how much longer do you see this broader market languishing because barring these ten stocks, equities are not making money for people, do you see this being in place till the next elections?

A: Equities are not making any money for people even for the foreign institutional investors (FIIs) for that matter because they have suffered a lot because the rupee has depreciated. How much can you own of those five-ten stocks? This is going to continue for sometime.

In fact, if you see in this last 20-days rally from 5,500, this is one of the few times that we have had such a sharp rally without any FII participation. If you take out the HUL issue, there has been about Rs 2,000 crore of negative flows in the last 20-25 days from FIIs and yet the market has rallied so much. So this is just showing that there is no new money coming in but there is just a massive shift happening from the broader market, from capital goods, infrastructure, a lot of other sectors banking as a main example into just either IT or these 5-10 FMCG names and that doesn’t bode too well for the market.

Also, there are other issues that still continue to remain; there is always have this stimulus issue, which can come up at any point of time. The market also seems to have suddenly forgotten that there is an Immigration Bill pending, which can again impact the IT sector. There are still a lot of issues. The general economy is still not doing well. The macros are still in a lot of problems. Therefore, this range is going to continue for quite some time.


Q: You think it is a selling opportunity?

A: Some of the stocks, which have obviously now reached either full valuation or are expensive. I cannot see for example any justification for a HUL to be at 45-50 times with a 10-12 percent growth. So, you have to book profits in those stocks when you are getting that profit. It doesn’t ever pay to be too greedy.

Q: You were talking about the L&T numbers, is it symptomatic of the fact that there is a problem in this sector that is not going away in a hurry and it is still an avoid as a sector?

A: I would say that it just shows that the overall domestic economy based companies are still not doing well; they are still facing a lot of headwinds. Even if you look at L&T, most of the topline growth has come from the international or the global part of their business rather than from India. If one were to look only at the Indian part of the business, it has probably even done worse than what the overall results are showing. So there are still a lot of headwinds as far as the domestic economy is concerned and it is going to take some time for that to improve.

Q: How do you approach the issue of investing in various asset classes now given what is happening across markets, the stock market is what it is, things have obviously turned on their head in the bond market as well and gold has been quite volatile, how do you do this breakup now?

A: One can again put a little bit of money into the fixed income market in bonds because 10-year yields are back to above 8 percent. While you may not get the sort of quick returns we got last time when we invested at these levels but you could still get moderate returns over a six-twelve months time period from there.

Equities, is only a trading market, so you trade; you look for cheap stocks, sell them and they go up and you just trade between these 5,500-5,600 and 6,100-6,200 levels.

Gold is a completely different issue because gold prices will probably keep on fluctuating depending upon market’s expectations about whether the Fed is going to reduce this stimulus or not.

Q: When you speak to a lot of people from industry, you sense a lot of despair at that and people are there not talking about this down cycle getting over in just two-three quarters, some believe it is getting worse, do you hope that things will be on the mend by 2014 after a six-year down cycle or could this painful period get protracted even longer?

A: It is difficult to say, the government is taking some right steps. There is no doubt about that but these steps will take time to filter through to the ground level and we also do need a lot more steps.

We also have elections coming up and as we draw closer to them, there will be more uncertainty as to what is going to happen. Internationally, we the Fed stimulus, which we can cause markets to go topsy-turvy from time-to-time. So there are a lot of imponderables. I would think that you would need to wait till after the elections for a real clarity of trend to emerge.

Q: Elections are generally important but do you think this time it is of a much greater magnitude in terms of importance, in terms of being a make or break for the market the way the verdict turns out?

A: It could be because this time there is more uncertainty and the economy is not in great shape as we go into the elections. It could definitely be probably even a more significant event than it normally is.

Q: How do you think foreign money is approaching India now because we keep hearing strains of how India is relatively better than other emerging markets, are people willing to give it that long line or are they just waiting for an opportune moment in which to reverse some of the long trades they have had in the market?

A: In these last 20 days, we haven’t seen any money coming in. So there is a lot of apprehensions about what is happening to the economy and the political situation going forward. Some money keeps on coming in whenever there is an allocation from the emerging markets or from the Asian markets.

Some money is either coming in or being shifted from other stocks in some of the stronger companies, which people see as being either immune to the domestic economy cycle or doing well otherwise because of the sector for example, FMCG. I do not find that there is a huge appetite for the market in general but there could be appetite for some specific sectors, for some specific stocks from time-to-time.

Q: This recent narrowing of the market would have pushed out even the small amount of high networth individuals (HNIs) that were active in the market domestically when anyway we hear a redemption pressures both from mutual funds and domestic institutional investors (DIIs), how long before any of the domestic crowd gets back to the market in a meaningful way?

A: I don’t think that is going to happen before the elections. It is the earliest you can think of is after the elections if there is a stable government and the people think that now things are going to be better. Before elections, I would very much doubt a large influx of retail or high HNI money.

Q: Who is holding this market up? There is no participation from domestic, FIIs have not been buying from the last month and a half and yet we have had a 500-600 point Nifty upmove, focused on just 8-10 stocks, can you imagine which kind of participant is holding this up?

A: The point is that money is shifting from the larger market to these 6-7 stocks and these 6-7 stocks are heavyweights in the index. If you take ITC, HUL, Infosys, TCS and RIL and maybe HDFC Bank, they would constitute almost 45-50 percent of the index. For example, if Rs 1,000 crore moves from the rest of the market into these six stocks, the rest of the market is not going to go down that much because that is distributed over a 100 companies but if it goes into six stocks having just 50 percent of the weight of the index, the index is going to go up. That is exactly what is happening.

So, there is no new money coming in, you are not having money go out in a big way but you are having a big shift into 5-6 index heavyweights, which is pushing the index up and giving an impression that the market is going up but that is not so.

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