Mar 20, 2017 01:47 PM IST | Source: CNBC-TV18

Strong momentum, liquidity may take Nifty higher: Udayan Mukherjee

Feels that FIIs waited for key events to pan out for the market and their current investment of USD 2 billion in a week was a serious commitment. But, for an investor, the situation looks a little murky as the market has seen no earnings growth for the past few years.

Even as Indian equities have witnessed a strong share rally, local stocks are not the only ones partying.

In an interview with CNBC-TV18, veteran financial commentator Udayan Mukherjee says other stock markets such as Hong Kong and Russia have performed better.

But he added that Nifty could move higher from this point as momentum and liquidity is strong.

"FIIs are late to the party as they were waiting for events such as elections and Fed actions to pan out," he said. "Furthermore, the USD 2 billion investment by FIIs in a week was a sign of serious commitment."

For an investor, the situation is a little murky with no earnings growth for the market in the last three years. "It is important to look at trailing earnings growth as well," he said. "It would take a lot of courage to buy stocks from investment prospective."

On the newly-announced merger between Idea Cellular and Vodafone, he said that the Idea stock may move close to the near term arbitrage between current market price and the deal price. "Going forward, you will have to take a business call based on earnings prospects," he said but added that the sector will witness a "slugfest" thanks to Reliance Jio's tariff war.

"Expect more bloodletting between players. That usually does not create shareholder value," he said.

Below is the verbatim transcript of an interview.

Anuj: The market had a big week last week after the political result, which surprised a lot of people, but do you think this is the market which has run ahead of itself or the liquidity will continue to support the market from hereon as well?

A: I think global market context is very important. Last week, we had a big election result, yet India was not the best performing market last week. Many markets like Hong Kong, Russia did much better than India. So, this is not to be mistaken as an India-specific rally and therefore we cannot on the basis of local valuations or local triggers and news events make a judgement call on whether the market has exhausted its momentum for the time being.

Clearly, all of us can see that foreign institutional investors (FIIs) are joining the party quite late this time around. They were waiting out, perhaps to see how the events will turn out for the Indian market which is the election result and maybe even the Fed meeting. All the events have played out in favour of the market and now they have put a lot of money to work after having waited at the side-lines.

So USD 2 billion in one week is a serious commitment and if that money flow continues, the momentum might well continue. If you sit down and look at valuations and risk reward earnings etc, the reasons to buy a lot of stocks might not be very strong right now. But you never question near-term momentum in liquidity and that has been in place for the market for the last few weeks.

Latha: What is the advice for Indian investors? Is it that you look at the wall of liquidity and take your cues, keep buying the dips or is it that at some point you will worry about valuations because there are some disturbing signs, loan growth for instance, last number released by the Reserve Bank of India (RBI), 4 percent loan growth even quarter-on-quarter (Q-o-Q) if one was expecting demonetisation related rebound, that is 2.3 percent again among the lowest in probably five years, so should one worry at some point?

A: That point is already here. I do not think we need to wait for that point because the macro indicators that you are speaking about don’t indicate that we have great earnings momentum going behind the market at this point in time. We will see what the April numbers are like but chances are that we will not see something which will send the market into raptures in April and May.

The point about valuations always has to be tied in with earnings growth and while we keep talking about 17 times forward or 17.5 times forward at expensive or cheap, I think in a market where there has been no earnings growth or virtually no earnings growth for the last three years, it is important to look at trailing earnings growth as well because what is the future P/E multiple? It is an estimate of analysts, which has been consistently wrong for the last three years.

Every year, we say one-year forward, the market is trading at 16 times but when the four quarters roll by and you look back, on hindsight the market was trading at more than 20 P/E multiples but the earnings growth just failed to materialise.

So, for a market which has disappointed for three years, it is important not just to work on the basis of another future forecast, which has been wrong for three years but to look at the trailing earnings, the trailing P/E multiple as well which is 21 times.

It is not my case that the earnings growth will be zero over the next four quarters but thrice beaten, you should exhibit some shyness about earnings forecast. So, I think relative to what kind of earnings trajectory we are seeing right now and what the data points are, it would take a lot of courage to go up and buy a lot of stocks from an investment perspective right now.

Trading momentum is another thing and I do not think there is any trader on the street right now who will have the guts to go and short this market. The market trend is up, momentum is strong, and liquidity is ample. These are not the ingredients where you take a short call on the market, so the Nifty can certainly move higher from here.

However, if you are a longer-term investor as you frame the question, would you worry about investing at these kind of price levels and I think the answer to that is a little murky.

Sonia: Tomorrow is a big day for a lot of retail investors. They have been waiting for the D-Mart initial public offering (IPO) and that is going to list. How does one approach it after the euphoria post listing?

A: All of us know it is a very good franchise. The question is where does it list and where does it stabilise. I do not think people had any serious allotment. So, everybody would be queuing up to buy post listing.

Sonia: The point that Dipan Mehta was making about if you have made money in Idea so far, it is perhaps a great opportunity to exit the stock, would that be your view as well?

A: It is difficult to call right now because let us see the contours of the deal. The first couple of days, the stock might move in line to close any kind of near-term arbitrage that might exist between the current market price and the price at which the deal has been struck. That is a little hazy right now, but we will come to the bottom of that in the next hour or so and the stock might well react to that.

Eventually, you will have to take a business call. It is not about the price at which the call option exists with Aditya Birla Group or anything like that, they are not material drivers of where the stock should move in the medium-term.

The medium-term will be guided by business and earnings prospects and those remain quite murky. I disagree with what your previous speaker was saying that the number of players going down means a lot of pricing discipline in the telecom market. The pricing problem in the telecom market was not an effect of smaller players cutting prices. It was because the largest entrant was cutting prices and that has nothing to do with the smaller players lowering prices on the margin.

So, I think this creates an entity with a very large balance sheet and probably gives them more muscle to compete with Reliance on fairly level terms in terms of the pricing war that they have inflicted on the market.

In the near-term, it could mean the opposite that you would have more aggressive pricing in the market because of the balance sheet strength of the two largest players. So, I am not sure how this cookie will crumble but I think it is a very puerile kind of assumption to make that because two players have joined hands from tomorrow you will have great pricing stability and discipline in the telecom market quite the contrary in my book.

Sonia: I wanted you to comment on the point that Nilesh Shah of Kotak AMC was making about how the merger may at this point in time not have the ability to compete with the pricing pressure especially that Reliance Jio has thrown up. In such a scenario, do you see the telecom sector as a whole underperforming the market going ahead?

A: Let us see how this pans out. My suggestion is that the new entrant to this space is not going to be very complacent and happy and relaxed about one entity owning 42 percent. I don’t think Reliance entered game to be number three or number four in this


The fact that you still have a leader with 42 percent market share will irk Reliance quite a bit and you may even have a second unleashing of very aggressive pricing on the voice or data front to slice away some of that market share. It will become a big
slugfest from hereon albeit between three players but it will be a slugfest and there will be blood on the floor. So I take Nilesh Shah’s point about market share because that is exactly what the game is about and I don’t think Reliance will let Vodafone and

Idea breathe very easily with 42 percent market share.

Expect more bloodletting in this space and bloodletting between players usually does not create great shareholder value at least in the near-term. Eventually, we will see how it happens but just in the near-term, be a bit cautious.
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