Vibhav Kapoor of IL&FS says the fall in prices of gold and crude has changed investor outlook on India. Kapoor says it is likely that the Nifty can hit 6100 near term. He even sees the index climbing to 6300 if the global environment is supportive. On the downside, Kapoor sees support for the Nifty in the 5350-5500 range.
Kapoor sees politics as the biggest risk for the market, given the developments over the last month since the time DMK withdrew its support to the UPA coalition. He expects the RBI to cut interest rates by 25 basis points at its policy review meeting on Friday.
On fourth quarter corporate earnings, Kapoor said he expects significant improvement in operating margins. He is not bullish on Unilever’s open offer for Hindustan Unilever and is advising investors to sell the stock at current levels.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: What is your call in the near term, do you think the market will stall around these levels below 6000 or in this up move you see a lot of headroom?
A: Over the next three-four months I am quite reasonably bullish compared to what I was earlier. It is largely due to the fact that oil, commodity and gold prices have all really crashed in the last few weeks. That has substantially changed the position as far as India is concerned.
Both on the macro economic front where the current account deficit (CAD), fiscal deficit and even inflation would be helped by the fall in oil and commodity prices. Also at the corporate level where you will see a significant improvement in margins going forward. So, over the next two-three months the market should remain pretty strong.
Q: So you think there is a good chance that that 5500-5600 area for the Nifty will remain a base?
A: I would think so yes at least for the next few months.
Q: What is the upside, you think we will get to 6100-6200 or are you more aggressive with your upside targets?
A: In the immediate term about 6100 probably. Then depending on how the global situation pans out it could go up to 6300 over the next three-four months.
Q: What is the key risk to this market in your eyes now?
A: Politics, that is the big risk and these projections I am making are all subject to politics. As we go forward we know the politics is becoming murkier and murkier. Therefore as the elections come nearer one is going to see much more of this happening.
That is why I am saying I am bullish right now only for the next three-four months. After that the elections will start to cast a bigger shadow on the markets. Therefore one would be much more cautious after that time frame.
Q: How do you approach Hindustan Unilever (HUL) now after the recent development?
A: One should be just selling it out because you have got a fantastic price. It was a complete surprise. Targets for most of the analyst consensus fair price is Rs 475-460.
Q: Bharti Airtel results seem a bit lackluster. Would you own anything there in telecom?
A: I haven't clearly analysed them. They just came in this morning, but I think Bharti has of course a lot of issues on debt, on Africa. So, in addition to the Indian problems, which may be are sorting out themselves a little bit now as was evident by the Idea Cellular results.
There are some further issues here in respect of the high leverage and the foreign exchange and the Africa business which needs to be analysed much more deeply.
Q: Do you still approach the market from a trading perspective now? They would ride the rallies but as you get closer to elections later in the year you will start taking profits?
A: I am not saying that this is a secular bull market, by no means. However, definitely over the next few months one has an upside because of all the factors that I mentioned.
Closer to the elections obviously the uncertainty would be much more. Probably the market is going to be very cautious in terms of the valuations it gives. Therefore, if the market does reach that 6100-6300 levels, the valuations anyway will be pretty full. I would think that would be the time to book profits.
Q: What could do best in such an outperforming scenario that you are painting for the next few weeks?
A: I would say the cyclicals, banks, financial services, auto, may be some of the manufacturing companies. If one looks at the few results that have come in so far and they may not be a representative sample of what is happening. However, while top line has not done well which was very much expected, margins have already started to improve. In most companies margins have given a surprise on the upside.
This is largely happening because of the fall in raw material prices. If one analysed raw material to sales has gone down by 1-1.5 percent in many of these companies. These are results of the January-March quarter. Obviously companies would be hiving some old inventories.
After that we have seen a much sharper fall in commodity prices that would also get benefits of the full quarter. So, going forward into the first and second quarter of next year I think one will get significant improvement in margins. Obviously because of the macro situation improving in terms of CAD, etc. the RBI should have more room to cut rates. Later on in the year probably that could have little bit positive impact on the top line as well.
Q: Do you see more gains in the rupee now down to 53.70 after the HUL development. Do you see it strengthening more?
A: The range should be around 53.50 to 55. However, definitely after these developments of commodities, oil coming down, HUL and the overall improvement, the range probably has come down a little bit. Earlier it was 54-56, might have come down to 53-55 now.
Q: Tomorrow are you expecting 25 bps or 50 bps?
A: I am expecting 25 bps. The simple reason is taht the CPI is still very high at around 11 percent so the RBI is going to not jump the ship and say okay we will do 50 bps right now.
Although there might be a case in the sense that inflation should obviously come down given this very sharp fall in commodities going forward, but I think the RBI would probably continue with a cautious stance. I would expect 25-50 bps cut in the CRR.
Q: Autos are doing quite poorly today. Would you buy anything in this space at all?
A: Yes at declines they should be bought because their margins are going to improve going forward. While right now of course the demand situation is pretty bad, but over the next two quarters some improvement should start happening once interest rates start coming down.
Q: Aside of politics do you see any global risk in the next few weeks?
A: The global economy is slowing down and this fall in commodity prices is a reflection of that. There is a huge amount of liquidity and global equity markets have been performing well largely on the back of this liquidity. Yet we have seen commodity prices coming down so much, which obviously means that the global markets are expecting the global economy to weaken further.
So, that is definitely something to be cautious about. If the US starts to go back into a recession and Europe goes down further and China also starts slowing down of course that would be a risk you will have to watch out for. However, I don't think that risk can play out in the next two-three months time.