SENSEX NIFTY
Sep 17, 2012, 01.45 PM IST | Source: CNBC-TV18

Be cautious! Valuation no longer cheap says Sanjeev Prasad

Indian market is basking in the moment of glory, already touching 2012 high as it opened to trade on Monday. Riding high on the pending reforms, investors are seen betting on the market. However there are still some experts who are approaching the market with a bit of salt.

Indian market is basking in the moment of glory, already touching 2012 high as it opened to trade on Monday. Riding high on the pending reforms, investors are seen betting on the market. However there are still some experts who are approaching the market with a bit of salt.

Not so much impressed by the government’s move, Sanjeev Prasad of Kotak Institutional Equities feels that modest diesel price hike will not alter fiscal situation much and neither stake sale in PSUs will meet deficit target as it is not a reform.

In an interview to CNBC-TV18 he said, "Selling in 5-10% stake in companies periodically just to meet some budget targets do not classify as reforms."

Advising caution, Prasad says that valuations are no longer cheap. According to him, most stocks are fairly valued but good quality look expensive. At the same time, he argues that liquidity argument is not sustainable driver of market. Prasad also adds that many positives are already priced in the market now.

Below is the edited transcript of the interview

Q: Would you still be cautious on the market or do you think what you have seen over the last 72 hours is enough to change one’s fundamental view on equities?

A: Not at all. I think the media should cut out the hyperbole around the reforms announcement and focus on real reforms. What has been announced is not going to aggress the structural or macroeconomic challenges of the country. Look at the state of reforms; two of them I would hardly classify as reforms; something like raising prices after 15 months, and that too, by a small amount as far as fuel prices are concerned can hardly be termed as reforms.

If there is a deregulation, I would be much happier. If you look at the total subsidy numbers for 2013, we are looking at Rs 1.6 trillion of under recoveries on oil. That is higher by 10% compared to last year’s level. I doubt the government is in a position to raise prices beyond whatever we have seen so far. Over the next 6-9 months, it could be extremely difficult in the current political environment. Coming to the second bit, which is on divestment announcements, selling 5-10% stake in companies periodically just to meet some budget targets do not classify reforms.

If they do privatization whether it is outright sale to private companies or through bringing down government share below 49% then that’s classified as reforms, not selling 5-10% stake in government owned companies.

Increase in FDI is positive but it’s a modest one. If you want to revise the investment sentiment then you have to bring in whole host of reforms whether it is deregulation or deregulation of all the factor markets, land reforms, labour reforms, electoral reforms. There are so many reforms which have been pending for a fairly long time. So let’s not get carried away. This is a good beginning but we will have to wait and see whether the government in position to implement more serious reforms. Given the political climate, this is probably the best the government could have done under the circumstances.

Q: So would you still sell into any rally on sentiment in the market right now?

A: I think stocks have become fairly expensive; the broad Indian market is now trading at somewhere about 15 times plus 2013 basis and almost 14 times on 2014 basis. Many of the high quality names are really expensive now. Most of the consumer names are trading at 25 times 2014 basis; domestic ones like Hindustan Unilever, etc would be above 32-33 times 2014 basis. So it is really expensive unless you want to own them in 2015, which is two years away from a discounting perspective.

If you look at the good quality private banks, HDFC is in the range of around 4 times 2014 book and HDFC Bank 3.5 times, so again, both are very expensive. Valulations of pharma companies are okay, but it is not extremely cheap. Other sectors have a whole host of problems. There are stocks which are definitely not cheap in the context of all the regulatory issues, which need to be resolved or the policy risks.

The operating sentiment and the environment in many of the sectors are still bad. Given the fact that valuations have become fairly expensive for good quality names or fairly valued in most of the other stocks in the market, I would be a seller in the market now.

Q: How high is the probability that the incremental global liquidity gets moved into sectors like infrastructure, power etc; that have been bogged down because of government apathy. Do you think money could flow into them or would you still be cautious?

A: This liquidity argument is somewhat self deluding. Keep in mind the fact that you have seen something like USD 42 billion of money coming into India between January 2010 and now. The market has gone up about 5% since then. In dollar terms, it has gone down 10%. I do not think liquidity alone will make the market float up. If that was the case then all the central banks in the world should just be printing currency and everything will be taken care of.

Ultimately, what matters are fundamentals and earnings. As far as those are concerned, I think we have a long way to go in terms of addressing the fundamental structural issues in India. In terms of valuations, many stocks are now between fairly valued to richly valued. I would be fairly cautious on the market now.

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