Gopi Suvanam, founder of Investworks feels the market can cross its previous peak and see a new high this calendar year as investors are moving into equities away from commodities and bonds.
Talking to CNBC-TV18, Suvanam advises staying with Maruti or Tata Motors, which are already in the momentum. “There is a huge re-rating of profitability of Maruti because of high end depreciation,” he says.
In terms of banking and other rate sensitives, he feels investors should pick and choose some of the well performing private sector banks that have some solid growth on their balance sheets like Axis Bank or Yes Bank.
Here is the edited transcript of his interview with CNBC-TV18
Q: It seems like we are pretty much on the right course to make a new calendar year high. Do you think that it would be sustainable going forward?
A: It could be highly likely that we would cross the earlier high because one of the reasons that market is moving up is a global flow of allocation away from commodities and bonds into equities which we are seeing across countries, across economies.
US markets have already gone to new highs. Emerging markets are also doing well across the board. So, I think there is very high chance that we can easily cross that earlier high and we can remain at that level for some time.
Q: In terms of a sector which could possibly lead the market higher from current levels and which one would you possibly invest in at current levels?
A: I would not get into specific sectors and look at the broad markets as such, because the drivers of the current market are monetary flows and not specific corporate performance.
However if you really want to pick and choose may be I will choose stocks like Maruti or Tata Motors which are already in the momentum and there is a huge re-rating of profitability of Maruti because of high end depreciation.
So, that is one good stock that I would look at. In terms of banking and other rate sensitives, I would go with some of the private sector banks and may be avoid some public sector banks like State Bank of India (SBI) that may not be that sensitive to interest rates but pick and choose some well performing private sector banks that have some solid growth on their balance sheets like Axis Bank or Yes Bank.
Q: How would you explain the correlation in terms of the macro economics that we have seen with the movement in the markets. We just have the IIP data which came out on Friday for the entire fiscal. We have come at worst levels that we have seen in the past 20 years for IIP. It has just grown around 1 percent as opposed to around 2.5 percent-odd in the previous fiscal and now we have the markets possibly touching a fresh calendar year high in 2013. How would you correlate the two in terms of what even the gross domestic product (GDP) estimates are by the RBI at around 5.7 percent?
A: Index of Industrial Production (IIP) is not really picking up. Even if you look at PMI and other numbers they are not really very positive to warrant the kind of rally that we have seen. Part of it has already been priced in because if you see stocks like Bharat Heavy Electricals Limited (Bhel) or Larsen and Toubro (L&T) – heavy industries stocks, they are not doing very well.
Even stocks like Tata Steel and auto sector have not done well over the last couple of months. So part of the story behind the slowing of growth is already been priced in. However sectors like consumers banking to some extent over the last couple of days have done really well, primarily because of an expectation of future growth and also to some extent a huge inflow of money from the developing world.
So, if you are seeing yields of 0.5 percent or 0.75 percent in US there is no where to go. So, people are investing in even low growth stocks like HUL or ITC or even IT sector just to ensure that they generate some amount of alpha. So, that could be one of the reasons that India has seen such a big rally despite weakening of the economy as such.
Q: What have you made of earnings in general this season because there has been some amount of volatility in terms of the numbers that we have seen. Some of the PSU banking stocks have been quite good whereas some have disappointed quite considerably – even something as disparate within the auto space, something like Ashok Leyland is completely down and out while a couple of others like Maruti, though bigger, was a positive?
A: There is huge amount of disparity. May be some of it is because of as was mentioned some financial stress on the balance sheets of various organisations. So, companies are not able to cope up with lack of liquidity over the last one year especially in 2012-2013. So, that is one reason that there is huge amount of disparity.
Another disparity could be because of heavy capital investments that some of these companies have done over years expecting growth to pickup but that did not turn out to be the case. So, companies like Maruti etc who have invested several years back are benefiting from even a small spike in demand but companies like Ashok Leyland and even may be to some extent Tata Motors may not gain that much by small spikes in their sales.
So, one of the things is we should look at stocks that are not too leveraged and may be stocks that have a broad base of consumers who are with them through various business cycles. So, something like an HUL or ITC is a good bet from that angle, rather than going for stocks like banking sector or some of these new age stocks.
Q: In this run up from 5500 to 6100 a couple of sectors have been the key protagonists. One is the IT space where you have seen names like Tata Consultancy Services (TCS), HCL Tech etc power ahead - of course the ones that reported a good set of numbers. The other is the entire FMCG space like ITC etc that have powered ahead. Between these two spaces would you choose to take your profits out of either or would you put incremental money?
A: I would start taking out profits away from HCL Tech to some extent. It has rallied quite a bit from its lows of this month. To some extent I would unwind my put positions on HUL and other consumer products. I would still keep my bets on, on ITC. There is some more steam left there I guess.
From other tech companies – one of the tech companies that I think has still some more froth is Infosys. So, apart from these I would like to keep away from these stocks at the moment.
Q: The market has closed at the highest level in 2013 on Friday. In your mind, what kind of am incremental upside do you see beyond these levels?
A: If I may use the technical term the momentum would continue I guess for the next couple of weeks at least. So, we have seen about USD 1 billion of investment in the last 10 days itself whereas we have seen only USD 1 billion for the whole of the month of April in terms of FII inflows. So, we could see some more liquidity going forward.
There is positivity in terms of liquidity but I am not so sure on the economic front and even on the political front. So, I don’t think even though there could be some highs, the highs would be really significantly higher compared to what we have seen earlier. So, maximum level I would see is 6300 levels for Nifty.