The fickle nature of the market makes it impossible to call near-term movements, says Sandeep Bhatia of Kotak Institutional Equities. He says the money, which has come through so far, has been motivated by the fact that valuations came down well.
But more importantly, Bhatia believes the rupee worries are behind us. "There is a floor to the currency, which is attracting flows. We have seen outflows from exchange traded funds (ETFs), so mostly it is active money, which has come in the last couple of days, taking selected bets. The kind of transactions that get reported like today clearly means that there is appetite for Indian equities from long-only fund managers and that is the kind of money, which we are seeing right now," he told CNBC-TV18 in an interview.
Going forward, Bhatia believes commodity prices and political developments will be key triggers for the market. However, he does not see the Nifty crossing 6300 anytime soon and expects earnings growth to remain muted.
"The overall earnings growth trajectory of 10-11 percent is nothing exciting, but it still is better than what is happening in the rest of the world," he adds.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: Do you think the Reserve Bank of India (RBI) will not deliver a big surprise today on the way up?
A: Our bet is that we will see a 25 bps cut. Infact we continue to push that. In the next quarter we will see two more cuts of 25 bps each. So, including today’s cut we will have a 75 bps cut from here on.
The RBI is still in a very cautions mode. What they use is very limited flexibility that they have. I think some of the micro numbers would give some comfort. I think the inflation trajectory will still be weak.
The rupee worries are right now behind us for the moment. So, unless things change on the macro front our call of 75 bps cut from here to the end of next quarter would probably come through. I think we will see RBI moving but in steps of 25 bps points.
Q: Do you think there will be a CRR cut as well because some of these repo rate cuts come and go, they excite the market for a day but they find no transmission from the banking system. In that sense they are economically immaterial much that the signaling happens?
A: Not right now, not in this policy installment. We think we will have to wait for that to happen so not right now is what we would think.
Q: What are you hearing from the sales desk over the last few days? In the last 11 days the Nifty is up 9-10 percent. What kind of money has walked in over the last fortnight?
A: Last time I said that things will actually improve, it looked impossible that things can change but this market is very fickle. It is impossible to believe that things will continue to fall or it is impossible to then draw straight line up always. So, right now the money which has come through has been motivated by the fact that valuations came down well.
If one looks at the overall earnings growth trajectory of 10-11 percent, it is nothing exciting by any standard at least by Indian standards. However, it still looks better than what is happening in the rest of the world.
To cut the long story short there is a floor to the currency which is attracting some of the money which is coming through. We have seen outflows from Exchange Traded Funds (ETFs). So, mostly it is active money which has come in the last couple of days taking selected bets. The kind of transactions that get reported like today we saw Bharti Airtel, it clearly means that there is appetite for Indian equities from long only fund managers. That is the kind of money which we are seeing right now.
Q: At this level do you see that force of money being there above 6000 Nifty or has the valuation argument become weaker after the recent rally?
A: Yes the valuation argument has become weaker in the recent rally. So to that extent the things that needed to play out have already played out. We got a bonanza when Unilever announced open offer for Hindustan Unilever (HUL) at Rs 600. So, that really raised expectations for other MNC stocks and also put a floor on the rupee.
Barring that bonanza which happened, I think if we have these one off bonanza announcements then clearly the market can rally. However, yes right now there is cap in terms of valuations on the market. We need to see some more passage of time therefore market from these levels, it is very difficult to see the market go over 6300 Nifty right now.
Q: What are you telling your clients to do on HUL now with the stock price stalling around Rs 570-580?
A: Fundamentally that is where the stock price should settle with the open offer at Rs 600 given a probability of getting only a fraction of the shares accepted. We would think that the stock will remain at these levels. To get another leg up on the stock we have to demonstrate significant improvement in consumer environment.
The only thing that HUL open offer has done is make every global MNC especially in the consumer segment re-look at what it is doing in India and what is its business operations in India should be valued at. This is clearly a case where returns on the cash balances for global corporations are very low now.
As far as Unilever is concerned they think it is a fantastic move to take a strategic stake right now. I don't think anyone can disagree with that. The Indian consumer story has remained strong. Even in the worst phase in the last couple of years of the Indian economy.
All said and done as far as Indian shareholders are concerned for the stock price to perform from here onwards, we need a better consumer environment and that will take some time.
Q: So what is your call on the market now for the next few months? Do you think it is still a range bound market with the Nifty between 5500 and 6100 pinging to and fro or do you think recent macro improvements warrant that the Nifty settles at a higher band?
A: All said and done we have to remember that the micro improvement is mostly a windfall. There is some action coming through from the government, but the real delta which came through is because of windfall cut in prices and the expectation that prices remain subdued for commodities such as oil and gold. So, that is one factor.
The other factor that comes through during the year is that the political heat and temperature will certainly rise. Therefore this will induce volatility in the Indian markets.
These are the two underlying fundamental events that will impact Indian markets. Once the flip side earnings growth will remain muted, 10-12 percent at best therefore this remains a stock pickers market. Whether it becomes range bound or we see the ranges break on big positive or big negative news impossible to tell. I would think we have seen good businesses get rewarded in this market. We have seen private banks continue to do well, some of the auto names do well and that is the kind of theme that will play out. Specific stocks where operations are continuing despite difficult external business environment are the stocks to bet on.
So, one such name would be Bharti, the transaction which has just been announced today demonstrates the confidence the management has in terms of execution of its plans. It gives them enough flexibility to now build what they have created in Africa. The Indian business is showing the benefits of consolidation which is happening as operators now focus on raising market share and improved profitability.
So, all this means that stick to businesses which can deliver, which have operating capabilities in their management structure and that is the only thing that will play out. The market will remain volatile and will get definitely impacted by events on both sides. Right now we saw a positive impact of commodity prices coming off that is why the market rallied. So, let us hope that this kind of trend continues but it is impossible to tell.
Q: What are you telling your clients to do on IT because that looks like the best game in town for the first quarter of the year and then suddenly everybody started selling those frontline stocks?
A: The IT conundrum is essentially about whether this is sector wise issue or slow numbers that we are seeing will go away or there is something else happening politically in terms of immigration in the US which will force businesses to cut margins, to raise costs or whether there are specific individual companies which are doing very badly and the others are delivering.
It is difficult to separate each strand so my own thought on this is remain cautious on IT, volume growth environment remains weak. There are outperformers such as Tata Consultancy Services (TCS) so that is a good bet in the sector. As far as what happens in the US, what kind of immigration changes happen, whether that has a major impact on earnings or the business model of Indian IT companies, difficult to tell right now. However, there would definitely be some downside in terms of earnings if these changes go through. So, I would recommend a caution on the sector as a whole and stick to some winning ideas that are the way to play it. But overall remain neutral to underweight on the sector.
Q: Would you still be bullish on the private banks after the recent rally and the kind of ground that they have traversed in the last fortnight?
A: There is scope for valuations to come off in private banks. We have seen a very good rally, some of them have been very good performers. I think right now I would advice caution from here on for most private sector banks in terms of valuations, but till the end of the year I wouldn’t expect more than 10 percent up tick from here. So, right now some degree of caution.
Unfortunately those are the only businesses which seem to demonstrate competence in terms of managing their balance sheet and controlling NPAs. So, the market prefers to stick with them even if valuations look stretched. I don't expect people to exit the space but given that the recent strong price performance valuation from here on is mostly capped.
Q: What are your big bets in this stock specific game that you are talking about aside of names like Bharti Airtel which you are positive on, can you think of one-two themes which you think will play out regardless of where the market is?
A: It then comes back to making call on whether the consumption theme or whether the interest rate theme or whether there will be any rebound in the infrastructure real estate space. The easy call is to say no we don't think there is a big rebound happening in infrastructure, real estate or broader big commodity players so we take that entire set out.
IT remains underweight given what is happening in US and what kind of changes the new immigration laws and cost they will impose on Indian businesses. Therefore, it just boils down to some very few select names both in banking and in the consumption play. Maruti Suzuki and Tata Motors are two businesses which from here onwards can still deliver good returns.
Maruti has the big yen tailwind coming through. We have already upgraded our earnings from around Rs 85 for next year to Rs 101 for March 2014. So, that is a big earnings upgrade that we made. We could see possibly some more upside if yen continues to remain weak.
As far as Tata Motors is concerned we like what they are putting out in the Land Rover portfolio. Jaguar itself will see a big turnaround in terms of new model in the next two years. We will see a BMW three series fighting Sedan come through from Jaguar in the next two years. So that itself will scale up the business in terms of volume which remains very small especially compared to Land Rover in the portfolio. That is one business which will see new products drive volumes and that is something which we like.