Moneycontrol
May 10, 2013 03:06 PM IST | Source: CNBC-TV18

Rally almost over, stay clear of PSU banks: Dalton's Bhat

UR Bhat of Dalton Capital advises not to expect much rise in the market from current levels. He feels the rally aided by foreign funds is more or less over and the market could take a turn.

Don’t expect the market to see a dramatic rise from current levels, cautions UR Bhat, MD, Dalton Capital Advisors. This rally aided by foreign funds is more or less over and the market could take a turn, he said in an interview with CNBC-TV18.

Also Read: Rally driven by FII flows; see some policy action: CIMB

FIIs have pumped in about USD 12 billion since January, which led to just 3 percent upmove in the Nifty. So, we need more money to push the index at significantly high levels. Also, there not much improvement in fundamental factors like earnings, macros and interest rates, Bhat said.

Unless there no major political crisis in India, the Nifty would continue to get reasonable support at its 200 day moving average level of 5700. Given the dependence of the Indian equities more on foreign money, the upside looks just about 50 points from hereon, he added.

On sectors, oil marketing companies are likely to get a fillip if diesel price is hiked again. But given the current political set up, one may not see much tweaking to the price.

Bhat is more bullish on private sector banks over public sector lenders. “The valuation of private sector banks is much higher than public sector banks (PSBs). They have been able to manage the stress in their balance sheet well. Given the concerns on asset quality there is more pain left there (in state-owned banks).” He suggests investors to stay away from state-owned banks for some more time.

Below is the verbatim transcript of UR Bhat's interview on CNBC-TV18

Q: Fantastic run so far aided by huge dollops of liquidity. Do you see more upside to this market, fresh highs or do you think the run is coming towards a close?

A: The run had its course, largely because of the fact that even something like USD 12 billion of money that has come since January from FIIs has just resulted in a 3 percent move in the Nifty. Therefore, more and more money is required to run the market up which suggests that the market is reaching a level where it could take a turn.

On the fundamental side, there is nothing much to commend the market to go higher than here, whether it is on the macro side, earnings growth side, on the interest rate side or even the muddled politics that we live in. Therefore, the market has run its course. There might be a slight movement upwards, but not dramatic movements from here.

Q: There is so much chatter in the market about the possibility of another diesel price hike, the quantum of which could be higher than the routine 50 paisa that we have been seeing. What is your expectation and if it comes through what could be the impact on the market?

A: No case for that monthly hike to have stopped, but if there is a revival, it is certainly good. It shows that business as usual is continuing. So we have a very good fillip to at least the oil marketing companies (OMCs) if that comes about. There are some arrears for almost two months now and if that is made up and if there is a move towards free pricing that will be wonderful.
 
Given the state of the polity and decision making at the political level, I don't know whether the political set up would allow such dramatic changes towards free price movement.

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Q: What do you expect from the market in terms of a range? What do you think the upside potential is and by extension has the downside for our market got lifted any?

A: As long as there is no further major political crisis in India, 5700 which is a 200 day moving average, that should be a reasonable support. Plus upside could be based on huge FII inflows which do not look like they are happening in a hurry. So, the upside could be just about 50-100 points from here, not more than that.

Q: The disappointment seems to be flowing through on some of these consumer and high end consumer stories, things like Jubilant Foodworks, some of the paint companies, FMCG as well. How would you approach that entire pack and would you say there is a case now to be made for a bit of a valuation de-rating on this space?

A: They were the only ones where investors were hiding for the longest part for the last one year. So the whole view was that the consumer demand is the only one that is doing very well despite the economy not doing as well. Even that thesis has come home to roost as were because you see consumer demand also slackening a bit and that is what is showing up in the results that we are seeing for the last week or so.

Despite the big run that these companies have had, given the state of the market, investors would still continue to hold on to some of these stocks. However, the slowdown is affecting consumer sentiment and therefore, there is no better place to hide than the FMCG stocks. There is certainly some caution that is called for here. The correction may not be very steep only because of the fact that these are the only places where investors can hide given the state of the economy, given the state of the sentiment and given the state of politics in this country.

Q: How do you approach banks now?

A: In banks there are two separate sectors – private and public sector banks. The private sector banks have given a very good account so that is showing up in their valuations which are higher than the public sector banks.

Public sector banks seem to be having the worst of the stressed asset accretion. We have a situation where the PSU banks are near the new normal for net non-performing assets (NPAs) is for the order of about 2 percent from less than 1 percent which was the case just about one and half year ago.

The accretion of stressed assets especially on the restructuring side is quite dramatic. So we have not seen the worst of the situation as far as the PSU banks are concerned. There is further pain to be borne there and that is one space where people will continue to shun for some time and see whether things can improve there. However, private sector banks seem to be doing very well. They have been able to manage the stresses in the balance sheet quite well and will continue to find favour of the investors.

Q: The two things that market has never had a perfect correlation with is, one, being in synch with what people see as its fair valuations and second, what the impact of liquidity inflows could be. At this point, what is the upside risk to the market in case of these kind of flows and this much easy liquidity remains globally?

A: Over the last one year, given the state of the economy and the state of corporate earnings, it was only fund flows that are running the market. From January 2012 whatever 27-28 percent run has been almost completely attributed to FII flows. It is based on the fact that monetary easing continues in a robust fashion whether it is the US, Europe or Japan.

As long as that continues, there is always a scope for money to come in. However, in January 2012, India was underweight and therefore, deserved better allocation from the international funds. Today, it is not the case and the market also has run up quite a lot.

The valuation argument is somewhat weak as far as India is concerned. However, with signs of improvement in the US economy especially on the employment front with most international markets being at life highs, it looks as if people would be swayed towards investing in these markets. But it is not as if India will not see inflows.

India will see inflows, but over the last four months, in the first two months we saw some robust inflows of about USD 4-4.5 billion but after that it started moving away. So, we have to live with the situation where the inflows we saw in 2012 might not be there but still there will be inflows of about USD 0.5-1 billion per month which is not bad but may not be enough for the market to scale new highs.

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Q: We are almost at the tail end of earning season. Do you think a case should be made for a significant portfolio switch and in that case what would your top two-three exposures be post earning season?

A: Most investors believe that the turnaround in the economy that people are talking about is not for real. This is because finally what we have to realize is that post February when the market corrected and we had the government representatives going all over the world and saying that we are going to change things and revive the economy, we are going to do whatever it takes to ensure that sentiment is better.

Finally, people have to deliver on this and given the state of polity as we have seen over the last few days, it doesn’t look like as if reviving the economy is going to be upper most in the governments mind. One needs to be slightly cautious and therefore, the old prescription of the FMCG, pharma, private banks type of stocks where one could hide, these are the sectors where people would continue to hide and wait for any cues from the international markets as to whether big inflows could come.

However, if the big inflows are not coming because even USD 12 billion of new money that has come since January has moved the market only by a good 3 percent. Therefore, it looks as if more and more money is required and domestic investors seem to be convinced that equity markets are not the place where investment should be made. So we need to be circumspect and so defensives are the way to go about.

No change as far as allocation is concerned, continue to hope that government will deliver on reviving sentiment, on reviving the economy, on ensuring that the stalled projects are given a fillip. Assuming that all these things happen, there is a case for a shift from the defensives to the rate sensitive’s in the like but early times yet. I don't think the switch is warranted as of now.

Q: How have you mapped the improvement in economic data so far and how do you think this could spur the next leg of the rally in the equity markets if at all?

A: Some small improvements in all these factors whether it is industrial production, inflation, there are some small improvements because of the base effect. However, these things have to translate into better sentiment for the market, better impetus for entrepreneurs to take a view that it is worth investing.

Going back, committing more investments and being confident that they can raise risk capital from the markets. There is quite a gap between that small incremental movement in the industrial production and for entrepreneurs to take that big step forward in terms of investing on new projects. Therefore, there is still a huge gap between these two. Just these small incremental improvements may not be enough for the market to look up dramatically.

Q: If you had to rate an order of preference, the next big trigger for this market among global, local or earnings, what would it be?

A: It is global, continued inflow that is the most important driver for the market. Plus, no further crisis on the political front. The government should at least have some resolve to continue to play out the rest of the innings well.

Third most important is the improvement in the economic numbers that come whether it is current account deficit, inflation, IIP. These things need to happen. So, the most important continues to be FII inflows which can give direction to the market.

Q: What do you think of the disconnect between what the currency has done through the course of this month versus the way equity market has shot up? With these kind of FII inflows, the rupee should have been in a whole other place than where it is at right now.

A: FII flows confer only one portion of the argument as far as the rupee-dollar parity is concerned. But on the export front, we are not seeing the revival that was required for the rupee to do very well.

On the import side, the oil prices came down a bit, but they got stuck between USD 103-104 per barrel range. So all that we talked about, CAD coming down as a result of oil price coming down and the gold prices coming down. Not all that valid for the simple reason that the gold demand is quite elastic to the prices. Therefore, it is not as if there is a huge correction on CAD so that is a realisation that has ensured that the rupee is not firming up despite some reasonable movement on the FII flow front.

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