Gautam Trivedi, MD & Head of Equities-India, Religare Capital Markets is bullish on IT stocks and expects some amendments to the US immigration bill draft. Many market experts had turned cautious on the IT sector given the impact of this bill on an already ailing Indian IT sector. Until now IT companies like Infosys, TCS, Hexaware and Mindtree have reported satisfactory numbers in Q1FY14 earnings.
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From the banking space, his preference is titled towards private banks over public sector lenders, but cautions that asset quality remains a major concern for the sector. He feels that the street has been overly bearish on Axis Bank.
Q: In the results season the first few stocks have given us much better-than-expected numbers. Do you think bad news is reserved for the later half of the earnings season?
A: The start has been quite good, the private sector banks and also some of the Non-Banking Financial Companies (NBFC) have announced good numbers and tell a very different story.
The non-performing loan (NPL) problem is not over. It is definitely creeping up even for some of the private sector banks, Kotak Mahindra in particular was not a great set of numbers. But Industrial Development Bank of India (IDBI) is one PSU bank that has declared its number, where the NPL was significantly higher, people will need to see more of the PSUs announce results until we have clarity.
Today, is a big day with Bajaj Auto, Reliance Industries and a bunch of other names declaring results. We are right at the starting point of the results season and it is still early to say how this will pan out.
Q: Is there more upside to Tata Consultancy Services (TCS) despite the fact that the performance has been scintillating?
A: The overall interest in the IT pack remains pretty strong. Our economist and strategist Tirthankar Patnaik was in the US last week and came back with a lot of interesting thoughts. On IT he got the feedback that the Indian IT stocks will actually continue to do well.
The US Immigration Bill which is the big sword hanging on the entire space, not just in India, but overall IT space globally will not be passed entirely as it appears today. A lot of US investors believe that it will finally be a watered down version which will be a big positive for the Indian IT stocks.
Given the rupee depreciation and the fact that if this does come true; i.e. the US Immigration Bill will not be that big a deal, demand remains still a challenge and that does not takeaway the fact that it will remain an issue. But the under-ownership of the Indian IT space augers pretty well right now and we would put our money on the Indian IT stocks.
Q: What about the markets? Is this still a pullback in an otherwise down trending market or do you think because we have broken out of that trading range there is a case for higher upsides in the market now?
A: I do not see a case for higher upside for the market, because a lot of the international funds have very limited interest in emerging markets (EM) and of course India. The EM funds in particular remain invested in India and have no real reason to pullout as of now, the rupee being a major cause of concern for everyone.
The EM funds at least for the time being seem to be pretty resilient and still find India attractive despite all the issues that we have on the ground here, still find it more attractive than other EMs i.e. Brazil, Russia or China. So, that is a positive.
The other way to look at this market is that in absolute terms from a domestic investor perspective, whether it is institutional investor or retail given the issues with the economy, given the fact that we are going to have one of our slowest growths in decades the absolute index level unfortunately is still extremely high.
You only have a bunch of stocks that are holding up the index, but the absolute index level has kept a lot of people out of the market. Lot of the high networth individuals (HNI) still continue to stay away from the market given the fact that the index is where it is. From a foreign institutional investor (FII) perspective, over the last 5-5.5 years, the actual market in dollars is down 35 percent.
You can take that two ways, one, people say we have not really made any money in India, but for people who are looking at deploying fresh money this is a pretty attractive level. So it is attractive from an FII level, not so attractive from a domestic level.
Q: Do you think the favoured picks in a situation that you are drawing up, defensives, fast moving consumer goods (FMCG) are already priced to perfection?
A: It is a good point because a lot of FMCG stocks have been near lifetime highs or have crossed lifetime highs. The problem is the interest level which still remains within the three sectors that have outperformed the market this year i.e. FMCG, pharma and now in the last few months it has been IT. So, unfortunately when I look at the market and see what I should be buying in this situation, I cannot think of too many things outside these three sectors.
One other sector where there are still opportunities is the autos. We continue to like Tata Motors though the stock remains range bound, but at Rs 275 the stock goes to about Rs 310-315 and then comes back down. So it has been range bound, but it is in a trading range.
We like Mahindra & Mahindra (M&M) given the fact that it has had a pretty sharp correction. Given the fact that you have five upcoming state elections starting in December and then next year you will have a major general election the rural sales after sport utility vehicles (SUV) will auger well, because you get good monsoon. The stock is now at 11.5 times FY14 earnings and so, we like M&M. There are opportunities that we still like outside these three sectors, but they are far and few.
Q: Private sector banks were the ones that were doing well. Are you getting second thoughts in the private banking space?
A: No, we don't. You are seeing some of it catch up in terms of the pain in the economy starting to catch-up with the private sector banks. The question is will they be able to dodge it, which they have done successfully over the past 24-36 months where the PSU banks have taken the brunt of the NPL issue versus the privates.
Undoubtedly, privates continue to remain the preferred choice over PSUs not withstanding beautiful valuations for the PSUs, but people at this point are in absolutely no mood to venture into the PSU space despite great valuation.
There is a lot of direction overall in the banking space going forward and we will know by the end of this month as more PSUs and State Bank of India (SBI) declare results, but the preferred choice remains privates over PSUs.
Q: Weren't you impressed by the Axis Bank numbers on Thursday? At least there was no worsening of asset quality.
A: The Street has been overly negative on Axis Bank and in some ways at least so far based on the numbers the bank seems to have redeemed itself. I do not think their problem seemed to be any worse or any better than its peers. Axis Bank is a reasonably strong bank and the street has been overly bearish.
Q: For the rest of the year or for the second half of the year should the market be prepared for more muted flows from the FIIs purely because of the macro issues and the fact that it is now trickling into some of these corporate earnings, balance sheets?
A: Fund flows are very hard to call and at this point, the bigger concern is currency. It is not so much the economy. India still stands out and is a preferred choice over the Brazil, Russia, India, China and South Africa (BRICS) countries as well as the other EM economies.
Assuming the government is not able to do anything substantial between now and the next elections the market will remain largely range bound and will be very bottom-up driven market.
I also see wild swings in the market once we get into the state election and as we see results coming out whether it is the Bharatiya Janata Party (BJP) or the incumbent government that is voted back to power that will also offer opportunities to trade the market. But outside that, the market will remain largely range bound between now and the next year's general elections.
Q: What are your expectations from the oil and gas space going ahead? Today, we have Reliance Industries (RIL) numbers and Oil and Natural Gas Corporation (ONGC) has surprisingly started to perform well in the last couple of days. It maybe too soon to call, but in general how are you approaching the oil and gas names?
A: The oil and gas space is attractive and interesting and in some ways it is the need of the hour. We need both oil and gas. Logically, the stocks should be in a sector which is devoid and different from the rest of the economy.
With regards to ONGC, the concern is that if the government is going to give a USD 8.4 gas price hike to ONGC, it is likely that being the largest shareholder they will take the money out through a larger dividend. ONGC remains one of our top picks, but that has come with a feedback pushed back on ONGC.
RIL is a stock that has not done much over the last three years and a lot of interest, lot of inquiries coming into RIL. A lot will depend on a couple of things; one will be with respect to their absolute production starting in FY15 and FY16. A lot of people want to see guidance on that from the management, while the gas price hike is positive people want to see what happens with production.
The second will be the telecom launch which is also a widely awaited event and the impact that it will have on the Indian telecom sector on which we are actually quite negative. So these are the two important events that still need to be seen. Management guidance, if they do give something this evening, would be very helpful determining the future course of RIL.
Q: The markets' contours have been 5600 and 6150 or thereabouts. For the rest of 2013 is the surprise likely to come from breaking upside or breaking downside?
A: Very difficult, but my bias is towards more downside versus upside, because there is no real logical reason for the market to edge up given our weak fundamentals. So, I have a personal bias towards more downside.