Jul 18, 2013 11:03 PM IST | Source: CNBC-TV18

RBI policy next big trigger; FMCG won't fade yet: Citrus

Apart from corporate earnings, Reserve Bank of India‘s monetary policy and monsoon session of parliament will provide the next big trigger for the market.

Sanjay Sinha, Founder of Citrus Advisors believes that markets may revisit previous highs, but may not be able to sustain it if the government fails to execute number of initiatives it has recently announced.

Apart from corporate earnings, Reserve Bank of India's monetary policy and monsoon session of parliament will provide the next big trigger for the market.

Sinha also believes that love and affection for FMCG pack will continue despite the higher valuation as people prefer to trade in these stocks during uncertain times.

Also read: Economy to recover slowly as RBI defends rupee: Poll

"FMCG stocks which kept the index up even though the Bank Nifty was down by about 4.5-5 percent. So, having held on to these levels for that period of time I would be very doubtful that they would surrender the stock price levels so easily," Sinha said.

Below is the verbatim transcript of the interview

Q: What is your view on the kind of range that we have set out for ourselves? Now, we are sort of making an attempt to get to the higher end of that trading range but do you see us break above these levels that we are trading at?

A: That would be largely a function of the liquidity and the sentiments in the market. Even though the liquidity was not very supportive in the last couple of weeks, the sentiments in the market were quite strong largely thanks to a very strong set of results from Infosys. However, the sentiment has got punctured quite severely by the Reserve Bank of India (RBIs) action. If we have now some amount of sentiment coming back to positive realm and also a bout of liquidity coming in to the market, it is quite likely that the previous highs of the market might be revisited. However, that is not the important question before us, what is more important is that are we going to sail pass those levels and strive for greater heights or will we just touch that level for the sake of a formality and then retrace back. In my opinion if the steps which are being taken by the government do not have a very strong execution footprint behind the announcements then we may not see those levels being sustained.

Q: In terms of the next trigger that we could expect for the markets on the domestic front where do you think it is going to come from and whatever it might be do you think that it has factored in?

A: I don’t think that the market has totally factored the series of events which it has ahead of it. One of the key things that the market still needs to factor would be the earnings outlook for the next few quarters. There was a sense which had set in that there would not be anymore earnings downgrade and we had probably seen the worst behind us. However, with the cap on the liquidity by the RBI and the mood now setting in that there may not be anymore rate cuts in the near future, those earnings outlook might get revisited. What can counter that would be a very strong set of results in this quarter. We have seen in the previous quarters every time that we have a good result from one of the IT majors the other one disappoints. Today we have a significant result from the second IT major. This and some of the other results will set the tone as to what would be the set of expectations as far as the performances are concerned. The next big expectation that the market has is probably the RBIs policy itself. Since we are now going to be approaching this policy without any set of expectations suppose there are some announcements which are catching the market by surprise that could be the next big trigger. The third thing would be that we have the parliament session now scheduled from the August 3, this is likely to be a very stormy session of the parliament but if the government does manage to get some of its bills passed that also would be one of the sentiment boosters for the market. Other than that because we are now in mode of the run up to the next general election the set of expectations from the government is now very muted. So, therefore any positive impact on the execution front would also be a positive trigger for the market.

Q: Coming down to earnings what did you make of Axis Bank numbers? The stock is one of the biggest gainers on the index today perhaps a relief that there was no great pressure on asset quality but would you recommend that stock now?

A: I have held a view that between the private sector banks and the public sector banks the valuation differences have widened. Within the private sector banks you have Axis as one of the more lovable selections. It has met the expectations as far as this earnings outlook is concerned but in this quarter for the first time we have seen at least a very visible and acknowledged impact of the non performing assets on the books of banks. We saw some bit of that being played out in the case of HDFC Bank, we have seen some of it in the case of Axis Bank. In my opinion these stocks are fairly valued at the current levels and therefore if you do want to make a play on the economy and you want to get an alpha on that play you might actually do so by getting an exposure to the public sector banks despite the fact that they have not done so well. However, within the private sector banks if you have to make a pick I would say that between the three majors which is HDFC Bank, Axis Bank and ICICI Bank, Axis Bank looks a better bet amongst these three.

Q: A quick word on the entire FMCG space, that has been pretty much in focus in the past two days, do you think that valuations have just peaked out – Hindustan Unilever (HUL) at 40 times and even ITC possibly at over 35 times FY14 it might have just gotten a bit too expensive or do you see further upside?

A: On the valuation front we have been saying that for the last six months that this space looks stretched in terms of valuations. Despite that the stocks have appreciated by about 25-30 percent in the period also. What is happening to the market is that every time that the market takes a defensive stance or every time the market moves southward it is the FMCG stocks which end up outperforming. Forget about long-term trends even in the behaviour of the market over the last three to four days it was the performance of the FMCG stocks which kept the index up even though the Bank Nifty was down by about 4.5-5 percent. So, having held on to these levels for that period of time I would be very doubtful that they would surrender the stock price levels so easily. So, at best till the time as the market starts looking for other sector or other hot segments which will take the market up there will always be love and affection for the FMCG as a pack and even though the valuations are stretched they will continue to be trading at these valuations.

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