"The current rally seen by the market is on back of improving macros like good inflation data, current account deficit (CAD) being under control and falling commodity prices," he said in an interview to CNBC-TV18.
On sectors, he is overweight on private sector banks and cautious on public sector lenders. "Banks have given us good returns in last 12 months, especially the private sector banks and I see no reason to change my optimism about private sector banks," he added.
IT stocks saw sympathetic selling post Infoys results but there was nothing to indicate a dent in the performances of companies like HCL Technologies, Tata Consultancy Services (TCS). So, he would bet on HCL Tech and then TCS but would be cautious for now on midcap IT stocks, he added.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: What is the sense you are getting about the month of May, is it likely to spring the surprise in terms of the extension for the market rally or do you think we are beginning to temper our performance here?
A: May has been probably a weak month for markets though I remember certain occasions when we had elections; the market had zoomed up in May. We have come a long way from the 5,500 levels and we are at 6000 and what is riding this market right now is improving macros.
We are having some very good inflation data, the current account deficit (CAD) seems to be on the control, with falling commodity and gold prices. People are talking about a CAD of between 4-4.5 percent for the coming year. Therefore, although the macros have improved but it is important that corporates should also follow-through.
We haven't had manufacturing companies really declaring so far and what little trickle we have had like Jaiprakash Associates and others has not been very edifying. So unless we get corporate India following through with some reasonable earnings, the market mood would be tempered. 6000 is quite a high figure and we need some strong data on the ground in terms of performance of firms to take us to the next level.
Q: The crack has been most apparent in the banks for various reasons and now we are hitting the patch where earnings as well will probably not be very inspiring. How do you approach the entire banking space especially the PSU bunch?
A: I don't totally agree with you that the earnings have not been on course. If you see the private sector banks whether it is Axis Bank, HDFC Bank or some of the smaller ones like IndusInd Bank or Yes Bank, the earnings have been pretty stellar. Their non-performing assets (NPAs) are under control, their net interest margins (NIMs) are fairly strong. However, the problem for the banks is interest rates.
Operators and punters had built huge positions in banks anticipating much stronger credit policy after the last inflation number but that didn’t come through. So we are seeing some sort of a sell-off but I won't bid goodbye to banks as yet.
Banks have given us good returns in last 12 months especially the private sector banks and I see no reason to change my optimism about private sector banks.
Public sector banks is another space, there the problem is their NPAs and their lack of strong growth to compensate for that. With the exception of State Bank of India, one is not sure how the rest of the public sector banks are doing. So we may still continue to see in 2013-14 this differentiated approach to banks. We have been a bit overweight on private sector banks and being very cautious on the PSUs.
Q: The one pocket that has started to rise from the ashes is the entire IT space. We are seeing names like TCS, HCL Tech see some long additions and some genuine buying as well. Would you advice any of those stocks to be bought at current levels and if yes which ones would you pick?
A: What happened in IT was there was a general pre-result euphoria. Right through March it was a big outperformer of the market by a long yard. Then Infosys just caved in and the sector caved in with that. Then some sort of sympathetic selling happened across the board in IT stocks whether it was TCS or HCL Tech.
HCL Tech went all the way up to Rs 820-825 and then crashed down to Rs 685. The same thing happened to TCS but in a small measure. However these companies have come out with very strong results and there is nothing to indicate any dent in their performance.
Among all these I really like HCL Tech as a business model because they are not so much concentrated in the BFSA, telecom verticals and in the continent of North America as the rest of the India IT are. They are into different verticals like manufacturing, aviation, human resource (HR) and also their geographical concentration is far better. However, they still have some catch up to do in terms of valuations compared to the other big ones.
So, if one were to push extra dollars into IT and assuming that the rupee will be slowly depreciate and IT will be steady in its earnings without all the problems in India's infrastructure etc, I would bet on HCL Tech, and then buy TCS.
I would right now be cautious on the midcaps because the jury is still out on sustainability of their margins for the next few quarters.
Q: Is there any chatter in Delhi about policy impetus coming through either within the parliamentary session or post that or do you think the government is currently embroiled in too many controversies to be thinking about more policy push?
A: The government is on the back foot and you can sense that when you talk to people that they have been totally caught off-guard by the CBI revelations on the coal scam and the charges on keith and kin of the railway minister. This is pretty shocking. They were hoping to get through some of their populist measures like the Food Security Bill in this parliament.
The way this government operates it is very strange. Whenever this government has really done something it is when they are in the pits; we saw that happen in the multi brand retail and we saw that when Trinamool Congress (TMC) was really after them on the petro products, they hiked diesel prices like anything, as well the gas prices. So to hit their way out of trouble, the UPA government may do something which is headline grabbing in the economic field.
However, it all depends on Karnataka elections. If Congress comes through in Karnataka and replaces the BJP, you will find UPA getting a bit more aggressive on the economic front. If they don’t get through in Karnataka then they may again turn populist and that would be quite sad for the market.
Q: Would you buy anything from the ADAG bunch now or do you think it is just a function of the current momentum rally that has got these stocks moving?
A: ADAG pack has really taken off. To some extent it is news driven like Reliance Communications has abandoned its policy of going cheap and hiking its basic rates of voice, etc substantially. So people are sitting up and wondering. They do have the network.
There is also this perception in the market that Mukesh Ambani is throwing his monetary weight behind the ADAG pack. So there is some substance to this huge buying that is coming across. In terms of good balance sheet, something to work on, Reliance Infrastructure still continues to be a safer bet. I am not so comfortable about RComm and Reliance Capital.
In terms of pure quality of the business, I would go for Reliance Infrastructure but I would like warn investors that they are into some sort of a slippery ground because this group has been a bit controversial. Some of its growth plans are questionable; some of its actions are questionable. So you have to be cautious. However if you want to turn into a fan of this group probably Reliance Infrastructure would be the best bet.
Q: You track Glenmark Pharma closely, it comes out with its numbers today. What is your recommendation there?
A: Glenmark is a buy on all declines. It is one of the best pharma stocks in the country. If you look at their business model it is so complete, whether it is new drug discoveries, whether its domestic delivery in the formulations market, whether it is penetrations of the US market they haven't put a foot wrong.
They are also quite conservative unlike Wockhardt which is a bit adventurous in its way of doing things. Glenmark is a much stronger stock.
What happened in the market was that suddenly people started buying the Indian growth story again and that led to a certain lack of interest in the pharmaceutical companies. Glenmark came down all the way to about Rs 470-475. However, prior to results it moved up above Rs 510 again. If the results are good, I can see this stock touching Rs 600 in the next three-four months.
Q: What would you do with a stock like HUL now?
A: HUL is a hold because as we had talked about on the day the announcement came, the price will settle somewhere between Rs 600 and the market perception of what the intrinsic value of the stock is.
Given this smart pickup in volumes and the margins and the profits in the last quarter, one could probably give this stock an intrinsic valuation of something between Rs 540-550. If Rs 600 is the offer price and you get about 50 percent of your tendering successful, the present price of about Rs 570-575 builds in that price to a perfection.
So, unless I get new news in terms of better margins or anything, there is no icing left on this cake anymore. HUL continues to be a hold at best at the current levels.