With the market surging to fresh record highs frequently, IL&FS feels it could continue to rise even if valuations are expensive. “It is a blue sky scenario right now with low inflation rates and interest rates, among others. The market tends to go with the momentum in such cases,” Vibhav Kapoor of IL&FS told CNBC-TV18 in an interview.
In such a situation, Kapoor said the financial services firm had increased its cash levels as stocks were becoming expensive. “It is becoming more difficult to buy with conviction, the risk reward ratio is reducing,” he told the channel.
Having said that, he does not expect a correction in the market. In fact, the base for this market has been escalated and will only move higher, Kapoor said. He also said that it will not be a surprise if the Nifty touched 10,000 in a few months. Meanwhile, given the overall valuation matrix, levels of 9600-9700 could be a resistance for the index, he told the channel.
Pharma stocks have been marginally coming back on buyers’ radar in the previous few sessions. Speaking on their prospects, he believes that the sector will continue to underperform. There may be some value in some stocks, but one cannot tend to look away from the issues such on regulatory front, domestic controls and rupee’s performance, among others. Similarly, he expects information technology (IT) sector to be a negative for another two years.
On the telecom space, he believes that the sector is expensive even from a mid-term perspective.
Going forward, if the monsoon performance is well, economy stocks, private sector banks, automobiles, two-wheelers and FMCG stocks.
Among key risks to the Street could be a change in monsoon post the onset of the season, coupled with earnings in the subsequent quarters being below expectations. There could be some global risks as well.
Below is the verbatim transcript of the interview.
Anuj: Are you still buying in this market or are you sitting on cash right now?
A: We have been increasing the cash levels a little bit but that does not mean that we expect a big correction or a big fall to happen. It is only that it is becoming more and more difficult to buy with conviction because stocks are becoming more and more expensive and the risk reward ratio is reducing; it is not that good.
However, given the fact that there is such a blue sky scenario everywhere in India in terms of low interest rates, low inflation, growth starting to improve, as well as in the global economy interest rates are still not going up, liquidity is still low, growth is coming back. So, it is really a blue sky scenario and in such situations the market sort of tends to go into momentum which is happening and therefore even though they are expensive, they can continue to go up.
Latha: What about IT and pharmaceutical? Let us start first with pharmaceutical. Do you think they have been sufficiently beaten down and now there are values there?
A: I think there is still going to be underperformance. There might be some values for the long-term but the problems have still not got solved. So, the rupee is still appreciating, their problems in terms of FDA is still there, domestic controls on increasing number of drugs are still there. So, I would think that given the fact that a lot of other sectors are doing well, they will still continue to underperform.
Sonia: What would be the markers for this index now, has the base for this market moved up higher and over the next six months what are you looking at as the top?
A: The base has of course moved higher, there is no doubt about that. To get where the market will stop in such a scenario, it is difficult because I don’t think there is much of a difference between a 19 P/E and 19.5 P/E. So, if the market is in this sort of a mood, they just tend to keep on moving up till something happens to stop them. So, that is why people sometimes turn to technicals to find out where probably the resistance can be.
However, given the overall valuation metrics, etc. I think there is one level of about 9,600-9,700 which probably could be a big resistance. However, I would not be very surprised if everything continues like this and you have a good monsoon. In a couple of months I would not be surprised if you could touch that magic number of 10,000.
Anuj: Your thoughts on Bharti Airtel, we have seen a lot of buying over the last three or four days, what could be moving the stock?
A: I would not want to comment on individual stock, but I think the market is saying that telecom this is probably the worst that is happening now because the free sort of regime from Reliance Industries is there right now which is the worst time for the other telecom players and then merger, etc. are happening and here after you could see better times maybe after another six months or so. However, having said that, even with that scenario in mind, the stocks are pretty expensive.
Latha: IT obviously the other one that is a little under the weather. Will you look for value there considering that you are saying that you are finding it difficult to find value in other stocks?
A: IT I think continues to be a negative for us. I don’t think the fundamentals are going to change for a long time to come. So, here I have been negative for at least two years or one and a half years. I think this is going to continue for a very long time to come, maybe another two years.
Sonia: What are the leaders you think that could take the market there?
A: It’s the usual suspects, the economy related stocks, the private sector banks, automobiles, two wheelers, FMCG. So all the economy related stocks and particularly if the monsoon starts up well, a lot of these stocks are going to be the leaders.
Sonia: Any monsoon related themes that you are playing, tractor stocks, agri themes, fertilisers?
A: I don’t think that is really something which -- it is a year-to-year thing, they go up for a short time and then come down. That is not really the way we would like to invest.
Anuj: Over the last one week or 10 days, we have seen a big rally in capital goods. Cement of course has seen a massive rally, what is this market betting on because earnings are still to catch up?
A: The market is really betting on revival of the economy and the capital expenditure. However, having said that, obviously it is also a rotation game, some stocks are becoming so expensive that the market is getting into other stocks which have or other sectors which have now moved up. So it is a liquidity play largely.
Latha: What about real estate?
A: Real estate is a sector which I don’t really track too much.
Latha: The market is telling you that probably all the poison is in the price, you don’t think so?
A: It could be, but as I said, I don’t track it too closely. It is a sector which I generally tend to avoid.
Latha: What about housing finance in that case? There was so much of betting on the Pradhan Mantri Awas Yojana and now rates have been falling from HDFC, from ICICI Bank, big boys are cutting and we have bid up the housing finance company stocks a goodish bit. You still stay invested there?
A: It is again a question of not only for housing finance stocks but for every sector or every stock it is a question of bidding up valuations. So, you first say 15 P/E is good, then because stocks keep on going up so it should be 16, it should be 17, it should be 18, price to book should be one and a half then it should be 2. That is the phase the market is in right now.
So you have to take a call at some point and say okay enough is enough for me and now I don’t want to participate even if it goes up another 5 percent because the risks are too high.
Sonia: What could be the big risk to this market over the next say three to six months?
A: One risk obviously could be the monsoons. If the monsoons don’t do well, you could have that because ultimately even if the economy revives, it has to come through into the earnings growth.
So, others could be in July if you find -- let us say in July you find the monsoons are not good, and you find the first quarter results have been pretty average or below expectations, and the earnings growth is not coming through, then you could suddenly have a sudden turnaround and then of course you could have some global risks which the usual like the interest rates in the US going up at a faster rate and the dollar going up. However, right now it is a pretty blue sky. It does not look like but that is the time things tend to go wrong. So you have to be careful.
Latha: There are some people who have pointed out that midcaps are particularly more vulnerable. What would be the red flags that investors should watch out for, valuations only?
A: Valuations is one and of course revival of the economy because the midcap stocks are much more dependent upon what is happening in the domestic economy and if you see that, that is not really turning around as per expectations and that could be a big red flag.
Latha: You spoke about taking out money but where will you keep it?
A: That is a problem, that is in fact one of the reasons why the market is behaving the way it is because interest rates are low as I said initially, bank deposits don’t give you much of a return, real estate nothing is happening at least in Mumbai what I see around, prices have been stagnant for a long time. So that is really a problem and that is obviously one reason why the markets are going up.However, then at some point of time you have to look at the risk reward and say okay even if the market let us say hypothetically are going to 10,000 and they are say at 9,700 now, then there is only a 3 percent upside and the risk is much higher. So, I would rather say okay I don’t want the last 3 percent, maybe put it in a liquid fund and get 6 percent.