Broking firm Religare Capital Markets is looking to book profits in shares of FMCG companies and private banks as they have run up quite a bit in the recent rally.
"Market's movement since the first week of April has been incommensurate with other emerging markets. At 6100 levels we will be booking profits in some sectors, which have done meaningfully well," said Tirthankar Patnaik, EVP, institutional sales said in an interview to CNBC-TV18.
On the economic front, he said that surge seen in gold imports in April came as surprise as the street was expecting a muted number. Gold and silver imports in the month were up by 138 percent to USD 7.5 billion last month compared to a year earlier, pushing up trade deficit for April to USD 17.8 billion.
According to Patnaik, the market is not too worried about the political situation in the country, but it will be closely watching global macro data.
Meanwhile, given the weakness in Indian currency, one can the expect market to see some more profit booking unless the rupee improves, he added. Religare sees the rupee in 53-55/USD range now.
"Dollar has strengthened against all major currencies, specifically the Yen, which has led to weak rupee. For a long only investor to put incremental money into India at this point, the return from equities would have to compensate the depreciation of the local currency as well. So that acts as a roadblock for the markets performance,"he explained.
According to Patnaik, the Maruti stock may get support from a falling yen, but is unlikely to see a meaningful growth in volumes.
Below is the edited transcript of Patnaik's interview to CNBC-TV18.
Q: Would you say it is time to take profits in the Indian market after the recent rally given some of the recent macro data points that have cropped up?
A: Market’s movement since the first week of April has been incommensurate with other emerging markets. It is not just India that has done well. We will be booking profits especially in some sectors which have gone meaningfully well. Consumers will be one sector that we will be taking profits out of. Private banks will be another sector we will taking profits out of.
Q: There is some nervousness around both what came through on the macro figures yesterday as also the flux on the political situation. How much do you think that is weighing on the sentiment or performance and would that be cause for the market to move lower you think?
A: On the macro, gold imports were clearly a surprise. A lot of analysts had pointed to a fairly muted gold import number. Numbers were expected to be not more than about USD 4 billion at max. They came in at much higher than that USD 7-7.5 billion.
Numbers were up about 130 percent odd. That was clearly a big negative which actually marred the trade deficit numbers. If one takesout gold imports, growth was just about flat, about 0.7 percent or so compared to exports growth of 1.5 percent.
Gold was the key negative there. On politics, I do not think the market needs to be concerned there. We are not of the opinion that the Congress would take risk of having a new Prime Minister at this point. We do not think the lead opposition is in a position to challenge the government at this point. So, we will attach low risk, low weightage to a political event happening here rather than a global macro.
Q: Do you see the rupee as a problem for the stock market now with the recent trade data? Do you think the case for the rupee to now hover around 55 has gotten stronger and that may restrict capital inflows?
A: Yes. The rupee has always moved in tandem with the markets over the last 20 odd years. Whenever the rupee moves in any one quarter, the index actually follows. What has been happening in this particular rally is that rupee has strangely remained fairly weak and that is fairly counterintuitive.
What has happened is that trade data being weak one side, the dollar has essentially strengthened against all major currencies, specifically the yen and that has contributed to the rupee weakness. What we are saying is that for a long only investor to put incremental money into India at this point, the return from equities would have to compensate the depreciation of the local currency as well. So, that typically acts as a roadblock to market performing when rupee does not really track in-line. Unless the rupee fairly improves from now, we will expect one more reason to see profit booking at this point. We maintain 53-55/USD for now on the currency, but if the yen really moves to 110 levels and we see that actually happening over the next couple of months, then we will have to revise our numbers. At this point, 53-55/USD temporary overshoots will no longer be enough. We will probably have to revise it to about 56/USD odd levels.
Q: Which specific names would you say profit booking is desirable right now in the two spaces that you spoke about?
A: In consumers, the rally has been frankly led by Hindustan Unilever (HUL) and ITC. Both are places where we will take some profits. Axis Bank has been one private bank which has done very, very well. IndusInd Bank has also been one private bank where we will be taking profits at this point. For Maruti, numbers have been fairly okay thanks to the yen depreciation.
We do not expect very good volume growth for the company going forward in FY14 probably about only 5 percent, but the yen weakening will actually continue to provide support for that particular stock. So, we will be cautious there. We will not be putting additional positions. That is how it is. Basically we will be booking profits at this point in Axis Bank and IndusInd Bank.
Q: One of the sectors you thought that surprised positively on profits is IT. Which one specifically did you come away as most positive on?
A: Wipro did well. HCL Tech also did well. Tata Consultancy Services (TCS) was also alright. Infosys remained the big negative. We have been pointing out in our results’ tracker that these companies did well on their margins while they disappointed on their volume growth number. Overall, I was not particularly enthused by what IT did in this particular quarter. It was not a big surprise from a qualitative perspective. Numbers, of course were better.
Q: At this point, what has been the standout performance from the PSU banking lot?
A: Most of the PSU banks have had one common thread running. All of them have had fairly decent slippages, however, provisioning numbers do not give us cause for comfort right now. Provisioning numbers have been fairly high across the chain and that makes us cautious about the next two quarters. Management commentary there has also been fairly muted and cautious. So, on the PSU bank space, we have been pushing some. We like Oriental Bank of Commerce (OBC), Union Bank and Dena Bank. These are standout performers. For the rest, we will stay out of PSU banks at this point.
Q: For now do you think 6100 is a top for the Nifty and if you are calling for a pullback how much of a drop do you expect to see in the market?
A: Locally, we do not see many changes happening now. Politically, we do not consider the risk to be significant. On the macro side, weak growth remains the major concern. Inflation is somehow in the bag. Today, we are not expecting big numbers there. What is also in support is that Wholesale Price Index (WPI) and Consumer Price Index (CPI) are sort of going in tandem. So, the story is global than local.
Q: Any midcap IT stocks you have under coverage?
A: Yes, we do, but we have been pushing large cap over midcap at this point. Some stocks that we like in the midcap space are MindTree, KPIT Cummins, but our analyst has been very vocal about large cap over midcap at this point. We do not expect the rupee to basically provide further gains to midcaps at this point. Therefore, margins are likely to remain under pressure and valuations are not something to scream about at this point. So, we particularly prefer large caps at this point in the IT space.
Q: Any thoughts on DLF, the one that is going to do an Institutional Placement Programme (IPP) today? How are you guys approaching that one?
A: At this point we are not pushing DLF. From a top-down perspective, times are ripe for a profit booking at this point at 6100 levels. We would expect the market to probably go down to about 5800 odd levels before the profit booking is due. So, DLF is not one stock that we will be really pushing at this point. If one really wants to play rate sensitives Larsen and Toubro (L&T) is one stock. We will also play private banks, but not rate sensitives like DLF or PSU banks as a pack.