Ambit Cap's top bets as market awaits RBI policy

Saurabh Mukherjea, Head of Equities, Ambit Capital is following an approach of looking for high quality and cash generative companies. As an investment strategy, he is betting on Exide , Eicher , Kotak Mahindra Bank , Bank of Baroda , Torrent Power and Voltas .

Also Read: See 10-15% upside for India in dollar terms: Morgan Stanley

He is expecting the RBI to cut rates by 25 basis points this time. However, there is a growing chance of 50 bps especially if brent crude stays south of USD 100 between now and the policy announcement date, he quickly adds.

In an interview to CNBC-TV18, he said, "Banks will be the biggest beneficiaries. There is a growing sense in the banking system that if in FY13 repo rates don’t come down by 100 bps then especially the SME community will find it very difficult to continue servicing loans. So, amongst the banking stocks the relief rally will be quite renounced if the RBI does cut by 50 bps and further more if it does signal that there is more room for cutting going into the summer."

Here is an edited transcript of his comments. Also watch the accompanying video.

Q: Super stacked with events, what's your sense of how the market comes out of June? Big make or break kind of move or do you think we'll probably just remain range bound given how much frenetic talk and activity there is?

A: I think we will move one way or the other. There is at least 4 big dates coming up with the Greek elections. The RBI June policy, the Federal Open Market Committee (FOMC) meeting and finally the European Union (EU) meeting at the end of the month and with the Spanish banks crisis building up to a crescendo, I think the situation will give one way or the other.

Either we will see LTRO (Long-term refinancing operations) or European bank recapitalization in full swing or the financial crisis in Europe will push global markets sharply down. The situation has to go one way or the other.

Q: And you are leaning towards which side?

A: I am leaning towards LTRO, towards the EU taking emergence action to save the Spanish financial system particularly. I also think they will have a pretty clear contingency plan ready in case the Greeks vote on June 16 for leaving the euro or vote against austerity on June 16. My sense is we are again at those junctures where the policy makers will have to step in with emergence liquidity pumping.

Q: The month is also split between local and global events. How much importance would you accord to what the Reserve Bank has to say and what do you think the equity market may do if they move on 25 or as much as 50 in terms of rate relief?

A: I think 25 is the base case scenario. That’s the minimum expectation the market has from the RBI on June 18. My sense is there is a growing chance of 50 especially, if brent crude stays south of USD 100 between now and the policy announcement date. Banks will be the biggest beneficiaries.

There is a growing sense in the banking system that if in FY13 repo rates don't come down by 100 bps then especially the SME community will find it very difficult to continue servicing loans. Amongst the banking stocks, the relief rally will be quite renounced if the RBI does cut by 50 bps and further more if it does signal that there is more room for cutting going into the summer.

Also read: Mirae Asset expects RBI to cut CRR & repo cut on June 18

Q: What should the portfolio approach be at this juncture because a lot of your peers have echoed the view that valuations are compelling enough to be reducing cash levels and putting money back into the market? If one would go by that view, what should you be putting your money into now?

A: The approach that we have advocated for more than a year now is to buy high quality companies, cash generative companies. What's happening is, as risk appetite diminishes, as investor's faith and growth story - whether it is the India growth story or the global growth story diminishes, investors want delivery today. They want results today, cash today and certainty of earnings.

We have been long advocating a strategy of buying high quality names what we call good and clean stocks across the piece. This could be names such as Exide or an Eicher in auto. It could be bank such as a Kotak Bank or a Bank of Baroda in the banking sector. In power, infrastructure, real estate clearly the names are fewer but you still have names such as Torrent Power or a Voltas you could bet on.

Cash generative names, strong balance sheets, decent governance, companies which are delivering results today rather than having investors to wait for four or five years provides certainty premium on high quality stocks. I think this will go up and up as we go further and further into FY13 because I don't think the global environment will get any less scary than it is today.

Q: How have you read this big cool off in commodities, especially with crude? Is it something that's going to help us later down the line? Is it looking like a durable correction this time around?

A: I think risk off is the operative word around the world over the last 2-3 weeks. It has hit Indian equities but it has also helped us by cooling commodity prices. Will it help us down the road? Tough one to answer.

The historical correlation between oil and the Indian market is 90%. That would suggest that if LTRO does come in or QE does come in, it will help our market but, it will also punch up oil prices again. Unfortunately, it's very difficult to envisage the scenario but the Indian market will run up quickly without oil following our market close behind.