Jul 22, 2013 03:47 PM IST | Source: CNBC-TV18

Idea cleanest India story, cautious on HUL: Kotak Equities

Sandeep Bhatia, executive director and head of sales, Kotak says the obstacles in other EMs are only the tip of the iceberg, which is not the case with Indian fundamentals, which he sees improving.

Calling Indian fundamental problems as 'self-evident', Sandeep Bhatia, executive director and head of sales, Kotak Equities says solutions for the country's issues too, are obvious. However, the same isn't the case for other emerging markets (EMs), says Bhatia in an interview to CNBC-TV18.

Also read: FIIs pull out $3 bn from Indian capital markets in July

Bhatia says the obstacles in other EMs are only the tip of the iceberg, which is not the case with Indian fundamentals, which are improving.

Meanwhile, Bhatia is bullish and betting big on Idea Cellular. He says the stock could rally to Rs 180. Additionally, Bhatia expects the rupee to trade at the current levels and is cautious on  HUL.

"It is clearly a combination of the fact that everyone is seeking safety and there are a lot of stocks which have gone out of circulation. So right now, we maintain our cautious stance on HUL, we are not pushing people to buy at these levels," adds Bhatia.

Below is the edited transcript of Bhatia's interview to CNBC-TV18.

Q: We were just discussing whether the favoured set in the market of 15-17 stocks can continue to become more and more expensive, what is the feedback you get from your clients?

A: There is clear resistance to buy the same names at higher prices all the time. This is clearly, a very shallow market with not many alternatives, which makes sense.

We just recently upgraded Idea to a 'Buy' today morning. We have always like the name. If one takes a two-year view, this is a business, which will show significant upside from current expectations of earnings, primarily on the back that the domestic Indian fundamentals are improving. More importantly there is a new driver in terms of data revenues, which is emerging. So, we like that name, it has run up.

The quarterly numbers will come on August 1 and if one takes a slightly longer-term view of around two years, one will see a huge play coming through in data. Idea is therefore the cleanest India story that you can buy and we think that the price could move up to Rs 180.

Q: What do you do with Reliance Industries Ltd (RIL), how did you guys read those numbers? The first reaction doesn’t seem to have been great?

A: We upgraded RIL before the run up, so we have captured some of the upside, which the stock showed. Right now, we see the price target in the region of Rs 980-1,000, so it needs to take a bit of a breather.

Honestly, with this kind of market, one is grappling for ideas that are making sense both in terms of earnings and a weak rupee environment. So, RIL is a beneficiary here and the valuations are not completely out of the ballpark. RIL fits all these three criterias. So, for large investors, this has been a stock where most of them have been underweight. At the current level, it is still a hold for us and it may take some time before it makes the next move but we still remain positively inclined on it.

Q: When you talk to clients, are you getting the sense that complete rout in terms of sentiment on emerging markets is behind us or is it that people are making some trading gains over here but the mood or the stance is essentially negative on emerging markets (EMs)?

A: I do not think the negative sentiment on EM will go away in a hurry. We have been warning for a long time that when the reversal of the quantitative easing (QE) starts, it will be painful for India and other emerging market countries, especially those which run large current account deficits (CAD). Clearly, that sentiment and that fundamental will not go away. India has a long way to go to sort its macro imbalances. I see continuing to be under pressure. So, I think this is just a trading reprieve, nothing else.

Q: Would you say that for the rupee as well, are precarious funding for the CAD, do you think that will open up pressures for the rupee again after this respite?

A: I think the current rupee fall has let up a lot of steam. It should hold at current levels right now. We are seeing a lot of action from the Reserve Bank of India (RBI) even if that on the cost of some short-term sacrifice on growth. We have seen RBI move. I expect the finance ministry to make further announcements. So, there is clearly a move to hold the rupee at current levels. Let’s hope that holds, because falling rupee is not good news for anybody especially the banking system.

Q: Will people need to make big adjustments on their bank portfolios in terms of exposure to this space and are equity market participants sort of coming around to the view that there could be some rate hardening action soon?

A: It is difficult to say whether there will be a rate increase, but the tight liquidity conditions will remain. It is going to be something, which will play out especially in the next six months. If we can hold the rupee level right now and the equity market holds up with some good luck, we are in a much better position.

If there is another disruption in the equity market or in the debt market, then there will be pressures coming through on the currency. So, the way I see the currency stabilize, we have issues on the macro which need urgent action from both the RBI and the finance ministry.

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RBI has always done its bit, continues to do its bit, so let’s hope finance ministry chips in. All said and done, right now one has to wait and see how growth comes through. We think growth will come under pressure in the first half of the year, let’s see if the monsoon helps pick up growth in the second half but the clear casualty will be public sector banks.

Most of the lenders are from the public sector bank space to the infrastructure and the other businesses which have seen high leverage build up over the last four-five years. So, I would remain cautious on the public sector banking space despite the pressures we have seen on private sector banks in the last two weeks or so. That is a much better managed space in the banking sector.

Q: What are you telling your clients to do on Hindustan Unilever Ltd (HUL) after the last week’s surprise move?

A: Most people are surprised by the strength of the move. I could have expected Rs 610-620 levels but the stock reaching Rs 700 level is clearly a big surprise. It is clearly a combination of the fact that everyone is seeking safety and there are a lot of stocks which have gone out of circulation. So right now, we maintain our cautious stance on HUL, we are not pushing people to buy at these levels.

Q: Indian Oil Corporation’s (IOC) issue is coming up and it could be a large issue maybe USD 700-800 million, do you see a lot of appetite from global clients on this name?

A: Yes, I think there will definitely be interest. It is difficult to comment on specific issues but I wouldn’t expect too much trouble there.

Q: How are people beginning to approach IT now, where the mother market i.e. the US is showing signs of recovery, so volume growth may pick up but that is getting balanced off with this big concern about the immigration bill, are you guys turning incrementally positive on IT or is it still a neutral kind of position?

A: We have had a positive bias towards IT. The combination of weak rupee and improving US fundamentals are helping the sector. The overhang on the immigration bill will not go away but we don’t expect the worst outcomes to come through. There will be watering down of the proposals. Eventually, it is something which will hurt both the US and India if immigration is tightened up unduly. I expect some kind of a watering down of provisions.

There is a protectionist mood back in the US, so this is something which as the economy lifts in the US, will start diluting itself, which is a good thing. So, this is a longer-term process, I would expect more than six months that this process will go on. In the near-term, valuations for IT companies are good.
We like Infosys and Tata Consultancy Services (TCS) both. Infosys has a potential to surprise with a lot of cost and inefficiency currently built in, which carries one of the highest bench. So, expectations are running high for the new management but there is also scope to surprise.

Q: About the market itself, are you apprehensive that some of the macro challenges you spoke about might trigger off another correction at any point?

A: Market remains extremely unstable. Any equilibrium that it reaches is going to be an unstable equilibrium and there can be any kind of moment in India or globally, which can definitively shake it off its balance.

It is for everyone to see that we are just holding on. The only reason why we are where we are, is the fact that some of the large six-nine stocks, most 45-46 percent of the Nifty, are doing extremely well and some of them have come to levels, which they would not have if there was choice elsewhere in the system. So, I hope we just continue to be stable and we get the one-two years that we need to set or atleast credibly start to set the house in order.

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In the interim, if we can easily be buffeted either way, that is something which we will run the risk off, we have already seen that in the currency. The only good thing is that equity market has held up better than most people have expected, I hope that continues.

Q: What do you think the catalyst might be for flows to decide on whether or not they want to stay engaged with this market, for instance, do you think there is more negative action from the RBI that will cause big selling pressure for our market or is it still essentially global depending on which way things like Fed speak etc trend?

A: It is a very curious case that most of the policy makers right now will not be holding office by next year. We will see a change of guard both at RBI and at the Fed as per current expectations. So, we will have to wait and see what the new incumbent say and do.

We also need to realize that things are looking more difficult in other emerging markets, especially China. So, the only good thing I can say about India is that all the problems of India are self-evident. Anyone who is a half intelligent commentator can point out what the issues are.

The tragedy is that while the solutions are also as self evident, they never seem to come in place. For other emerging markets, the risks are something like an iceberg. What remains below the surface is much bigger than what is seen above the surface. That is the only good virtue about our great country.

So, we know what the issues are and everyone else also knows what the issues are. Hopefully, in the next two-three years, we get an administration that starts grappling with the issues, which is why the market is where it is because atleast everyone knows what the issues are and hand to heart, these are eminently solvable.

It may take some more time than we should have put in if we had started to tackle them a couple of years ago. But that is the way we are, that is the way the Indian polity behaves. So, things are looking difficult but atleast we have started nailing some of the problems.

Q: What about Larsen and Toubro (L&T) today? Can you justify buying and holding that to your clients when they ask you what to do with that name?

A: It is a high quality management and a high quality name in the sector. So, we expect order inflow to be strong maybe in the region of USD 250-270 billion. Till last quarter, they had an order inflow of around USD 180 billion. Numbers on the order inflow would be good, margins will be down and that is the least that you will expect given the pressures the entire sector is facing. Hold on to this stock for want of better choice in the entire space so entire construction, engineering, equipment space, this is by far the best name, so hold on to that.

Q: You have tracked fast moving consumer goods (FMCG) stocks like ITC for many years, ex of HUL, how much more do you think this entire valuation expansion cycle can go for something like FMCG especially in the context where volume growth is beginning to suffer for these companies?

A: When I started my career in 1994 looking at this stock, the valuations were at these levels. The technology sector hadn’t taken off in 1994 was the market in which the technology sector has not happened. It was a market in which some names such as Hindustan Motors were in the indices. So, clearly there was a market which didn’t have much choice which is why the sector traded at the multiples that it did trade at.

After almost 20 years we are back to similar status. So, this sector will trade at these levels as long as there is lack of confidence and therefore no appetite to invest in other sectors. When will that change? I don’t think it will change this year.

Q: You spoke about Idea earlier in the show, what about something like a Reliance Communications (RCOM) which has been the biggest stunner from this space?

A: Any improvement in RCOM is good for the banking sector. So, what we have seen is probably moves on the back of anticipation that we are seeing some resolution of the problems the business is in. As far as investors are concerned, we have not been pushing that name, one would prefer to look at Idea, which is a clear domestic play with no balance sheet issues. So, that is something, which I would think investors are better off investing in.

Q: So resign to loping about in this range for the market or do you think either ends of it either the top or the bottom can be tested at some point this month?

A: Not this month, but in the next six months definitely. Any upside from here is an opportunity to sell. This market is clearly fully priced. There is no basis to wait to grind up further in a hurry. So, book your profits when you see the market inching up and you will definitely get lower levels in this market.

There is going to be some uncertainty when there is a change of guard, there will be some time before the new person takes over reins and there could be some communication issues and some wobble here and there. So, you will always get an opportunity. I hope it remains a cheering market and doesn’t sink away.

Q: What could be the trigger for the next correction, do you think it could be local macro or do you think it could be global macro once again?

A: In the near-term, it could be global issues. In the next six-twelve months it definitely is the local macro.

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