Moneycontrol
Oct 04, 2016 01:40 PM IST | Source: CNBC-TV18

RBI Policy: Effective interest rates may fall going ahead, says Axis Cap

Irrespective of RBI's decision on interest rates on Tuesday, effective interest rates will fall over the next few months, Nandan Chakraborty, Managing Director, Institutional Equity Research, Axis Capital said. There could be a slight de-rating but index will have an upside of 15 percent on an average, he added.

Axis Capital expects domestic indices to be flat till end of December. Meanwhile, the market may be volatile on account of domestic and global cues such as US Federal Reserve's action on interest rates, second-quarter earnings, OPEC decison and the action of RBI's Monetary Policy Committee, said Nandan Chakraborty, Managing Director, Institutional Equity Research at Axis Capital.

He said other factors such as assembly polls, especially in Uttar Pradesh, too may have an impact.

Irrespective of RBI's decision on interest rates on Tuesday, effective interest rates will fall over the next few months, Chakraborty said. There could be a slight de-rating but index will have an upside of 15 percent on an average, he said.

Chakraborty said consumer durables and building materials stocks will be among the ones investors could look at. He added IT and telecom stocks' outlook has been been bad and valuations have not been exciting and advised investors to avoid such stocks.

Below is the verbatim transcript of Nandan Chakraborty’s interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18.

Anuj: Looking at your report you are expecting 15 percent index upside and 20 percent Sensex earnings per share (EPS) growth in FY18. If we are looking at 20 percent Sensex EPS growth and in a declining interest rate scenario don't you think the index upside could be in that case more than 15 percent?

A: There will be a little bit of Price-to-Earnings Ratio (P/E) derating. That is the implication. Because what we see over the next 3-4 months essentially is that I would expect the index to be quite flat from now till end of December by when the Fed rate hike and so on would have happened but in the meantime it could be extremely volatile. One, because of the huge presidential election rhetoric, which obviously affects the dollar and therefore the inflows and other things.

Number two is the Q2 results.

Number three is the interest rates that you have spoken of irrespective of what happens today in terms of the Reserve Bank of India (RBI) the effective interest rates are going to fall a lot over the next few months and the Organization of the Petroleum Exporting Countries (OPEC) discussions.

If you look a bit further, there is a slight negative in the sense of what the government will do, what the various states will do in the run up to the UP elections and other state elections but mainly the UP elections. So, that is a slight negative. So, there will be slight de-rating but 15 percent is okay on the average.

Latha: You spoke about effective interest rates will fall irrespective of what the RBI does. How will you deploy that in stock picking? For instance today ahead of the policy will you buy anything, after watching the policy will you buy anything?

A: We interviewed a lot of seasoned journalists for our position of who can write well and so on and who will also be able to give tomorrow what will happen to the dollar interest rates. Unfortunately I have not found anybody. So, till then I will have to go by as per my one year calls and my six month calls, till then I am sorry, it is very difficult to know what will happen immediately as a trading call.

However, the time has come to look at defensives more as what is in the price, what is not in the price rather than business outlook. There are different stages in the market. So, at sometimes you look at business outlook, obviously you are not going to buy something which is absolutely bad outlook as of now, for example telecom.

Latha: My question was what will you buy among the interest rate sensitives?

A: Consumer durables, building materials. The reason I went into that is you cannot have one factor and say I will buy only because of that factor. That is not the way the market works. So, you will have a range of factors only a trader can say because of this one factor, I will buy this one sector or this stock. That doesn't work in an investment thesis.

Anuj: I was just looking at your strategy report. You are backing sectors which have done well. Autos, banks, cements and these three have been the leaders of this market while you are underweight on engineering, IT services. What is driving that call?

A: First of all, as I mentioned that one thing has to be prices and the other has to be outlook. So, valuation and outlook is the normal balance that any analyst works on. In the overall thing obviously one has to look more at prices given a certain point of outlook.

Now within that, at this point in time the ones where outlook is bad and the valuation is not exciting is basically telecom and realty. So, I would avoid that totally. In terms of IT, the outlook is bad and the valuations are neither too expensive, nor too cheap. So, between the three, I would be less amenable to selling IT than the other two.

But the one that I would short would be fast-moving consumer goods (FMCG). Because typically what happens is when there is a short-term problem and the valuations are high is when you short a particular sector and despite this good news about benefits flowing down to rural India and pay commissions and so on and so forth. From the management commentaries that we see the volumes are going to weaken.

So, I would rather stick to the consumer durables sector because the household balance sheets specially in rural India are quite bad. So, I would stick to building materials, consumer durables, autos and stuff like that where that increased money could come in specially because capital expenditure (capex) has not taken off and it is not supposed to take off over the next few months.

Latha: I notice that you are overweight on a bunch of or at least a few public sector banks. You see them having overcome the hump of default loans?

A: No, there are two things there. One is the mixed quarter is going to be phenomenal for some of the public sector undertaking (PSU) banks because of treasury gains. On the private side because it is trading you can't figure out how much the gain there will be. That is one part.

On the other part which is being the NPAs being lower, now, by FY17 obviously the things in the watch list will go down etc. How many hidden things are there you still don't know but we are beyond the hump of it. So, this is a combination of a short term and medium term call.

Latha: How are you placed on the Non-Banking Financial Companies (NBFCs), the ones that have been the absolute vanguards of the rally?

A: I am waiting for little more firing on the Life Insurance Corporation of India (LIC) or something, valuations.

Anuj: I know you won't talk stocks but among your overweight stance you have Ashok Leyland, what is your view on the commercial vehicle (CV) cycle because that has clearly not picked up and that is one area where we have seen some disappointment as well off late?

A: What has happened is in the CV cycle, the base has been so strong in the initial part of growth that obviously on a relative basis you will see the growth sort of weakening off because there has been a lot of buying. Therefore, this is still a great story for the next two years but in the very short-term obviously, the growth will slacken.

Latha: Finally would you believe that the midcap index rally which has been so much better than the largecaps is set to continue?

A: In general, you have to be very selective about stocks in midcap. So, there is no particular reason to think that midcaps will do far better than largecaps when you don't have a great gross domestic product (GDP) surprise, you don't have a great differential between the two but there are fantastic midcap stocks in sectors, which are not covered by the largecaps.

Like sugar is a good area, building materials is a great area, consumer durables is the third great area. These are all midcap areas where it is not adequately covered by the largecaps. So, selectively midcaps will do well and one thing you forgot from my report is also the domestic gas segment. The domestic gas segment the demand will increase, which will affect some of these stocks.

Latha: Since you spoke of one domestic theme -- gas, what about Goods and Services Tax (GST)? Is there any reason why you would buy any stock because of this eventual development?

A: No. The ones like logistics, auto, batteries, the ones that we all know of, GST not immediately, nothing really.
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