Apr 16, 2013, 08.49 AM | Source: CNBC-TV18
Apart from quarterly numbers of Infosys not coming through as per expectations, the company cutting their dividend was most unwanted, says Raamdeo Agrawal of Motilal Oswal Financial Services.
Raamdeo Agrawal (more)
Joint MD, Motilal Oswal | Capital Expertise: Equity - Fundamental
Talking about the current inflation scenario, he says if lower oil prices flow through to some kind of lower industrial raw materials, manufacturing products, we will see rapid moderation in inflation. He feels that then, the central bank will definitely cut interest rates in the next 12 months.
About the market mood, he says that though earnings are holding out well, the big move on the upside in the market can happen only on the back of some dramatic shift in the oil price or major political change, which is in store in the next 12-14 months. He says that as of now, we will be rangebound at 5500-6000 and the market will not go going significantly lower than 5500.
Here is the edited transcript of his interview with CNBC-TV18
Q: What did you make of the disaster that Infosys delivered this quarter? What would be your approach towards this stock now?
A: Last quarter was a different thing. This quarter, there was a severe reaction by the market. Clearly, everybody is disappointed. I do not want to say that there was anything good. I would say that I was most disappointed by their dividend policy. They cut their dividend from Rs 47-42 that was the most unwanted.
With the kind of pile of cash they have and the inflation differential which you have the yield is 5-6 percent and inflation is about 10 percent, so everyday they are destroying value of the cash they have in books.
So, excessive holding of cash is further hurting the valuation of the company. So that was one disappointing part of it, apart from whatever numbers which did not come through as per expectations.
Q: What is your take on all the macroeconomic data we have got in the past couple of days? Do you think that we are turning the corner around because Consumer Price Index (CPI) has eased and Wholesale Price Index (WPI) inflation eased below 6 percent today. Is there more room for Reserve Bank of India (RBI) aggression to come through now and do you expect it?
A: Aggression should be visible once inflation comes below 6 percent. If lower oil prices flow through to some kind of lower industrial raw materials, manufacturing products, we will see rapid moderation in inflation.
So I would think that next 12 months will be very exciting in terms of falling interest rates, whether it is going to be 50-100 bps one cannot guess, but definitely we will have a lower interest rate in next 12 months.
Q: The macro situation is easing a tad bit now. Do you think that at least that’s one headwind that’s partially out of the way, and the markets could at least if not climb higher, find a base around these 5,500 levels and not sink below it?
A: Yes, I would think so. Right now earnings are holding out well at current levels. The current year will still be 7-8 percent higher than that of last year. Next year is also expected to be somewhat muted as we stand today, but still we are talking about from 1200-1300, so that will be another 7-8 percent. So earnings are holding out well and in a way it is growing also.
So at 15 price-earning (PE) multiple around 5500 should be a good case to hold onto. However, the big move on the upside can happen on the back of maybe some dramatic shift in the oil price or something or major political change, which is in store in the next 12-14 months.
So, these things are expected, but right now we will be rangebound 5500-6000, once or twice it will keep happening, but I don’t think market is going significantly below 5500.
Q: Have you taken a look at the gold finance companies and the fact that gold prices have corrected so much, and the impact they could have on the financials of these companies?
A: We are trying to figure out what will be the impact of the decline in the gold price on all the ladies, all the jewellery-buying population. The volumes can rise and we are hearing that kind of response from jewellery companies.
But the companies which have gold inventory in their books obviously will have one-time loss in terms of whatever a few crore here and there. But business in terms of volumes will definitely be better if the gold price is coming down. It is good news for the consumers that gold is cheaper.
Q: What about Reliance Industries? In the last three months the stock performance has been quite unimpressive. It has fallen off from Rs 920 all the way to these levels right now.
But this time around, there is an expectation that at least on the Gross Refining Margin (GRM) performance it will be better than what they saw last quarter. What is your expectation from the numbers? How much of a trigger it could provide for the market?
A: One of the triggers was when diesel price was freed to the market prices, that possibly was opening up very large opportunity for them in the course of time. Now, diesel prices are actually coming to market parity very quickly because the crude prices itself is going down.
One of the large opportunities for Reliance could be coming from opening up of retailing opportunity from their pumps and they are garnering very quickly 5-10 percent of share of this large Rs 7-8 lakh crore kind of market.
So that was one big opportunity. But this telecom thing keeps coming up. They are seriously looking at launching telecom services here. Telecom services as we know is very capital intensive and it takes a lot to win the game.
For quite sometime, the return on that capital remained quite muted, so the market must be really apprehensive how exactly this is going to play out and hence the stock prices is kind of muted. But I think opportunity on the retail side is very, very large. One should have a positive outlook because of that.
Q: How would you be mapping India vis-à-vis the globe, because it seems like for reasons good or bad, we don’t seem to be tracking what the European markets are throwing up most of the time and neither does Asia. How do you map the correlation that we are tracking at this point?
A: One of the things which have happened in the last 2-3 months, is that Japan is printing about USD 75 billion of stimulus every month. Europe is also on the same scale and everybody is dumping money in the US. The US yield has fallen. The 10-year paper has fallen from 205-210 basis point (bps) to more like 170-175 bps, so clearly, there is too much of money being printed and too rapidly.
There are few places where it will show up. One is the asset class and it will show up is the equity markets worldwide.
Every game starts from the US and that’s where they are in a new high and climbing very rapidly. How fast it can become a very big game and when will we start tracking with Dow is a matter of time. However, I think we will have a great time in Indian equity markets also.
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Raamdeo Agrawal, Director & Co Founder, Motilal Os