Mkt sentiment bullish; people want to enter: Nirmal Jain

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In an interview to CNBC-TV18, Nirmal Jain, chairman of IIFL says the market always runs on anticipation. According to him, many times people look at liquidity vis-à-vis fundamentals but if liquidity improves fundamentals can improve.

"This is because most companies can raise equity, reduce debt, recast the balance sheet and if the money market condition becomes easier then money can be raised from overseas or money can be raised locally at lower cost and that also improves fundamentals."

Below is an edited transcript. Watch the accompanying video for more.

Q: Do you think the upside for our market perhaps is a little capped at current levels and it might be a little prudent to book at least part profits? What is the sense you are getting from the market now?

A: We have our investor conference with more than 400 global investors and more than 90 companies. The general mood is that the worst is behind us and people are looking forward with a lot of optimism for the future. But at the same time, the market has run up a lot. So most of the investors will look for bottom up opportunities and therefore indices might consolidate but if there are good fundamental stories then they will always have buyers and investors.

Whether you want to book profit or not depends on your portfolio. If you are holding good long-term stock even if they correct by a few percentage points, in a market like this when momentum is behind you, it is better to hold on rather than book profit in a hurry unless you aren't very sure about the fundamentals of the company and you are looking at exit opportunities. Any time is a good time to sell that kind of stock.

Q: We understand that the response has been very good from both corporates and from investors alike. Do you think this is still a bear market rally or do you think a new bull market has begun for us?

A: I think it surprised all of us but it looks like a bull market. In times like these when things can change so rapidly it is very difficult to figure out bull market vis-à-vis bear market rally. But at this point in time, sentiment is quite bullish and people are looking for opportunities. There are many investors who are still sitting on cash and haven't invested because it all happened so suddenly. At the same time they are worried about that market is already 18,000, it's jumped so quickly.

What they are doing is they will say that shows us the bottom of ideas. Some particular individual stock which is good in fundamentals and which hasn't risen much or even at current valuations looks attractive. In our conference, we had three-four different themes, one of which was banking. We had almost 16 leading banks and non-banking finance companies (NBFCs) participating. It appeared that the worry about non-performing asset (NPAs) was rather exaggerated, because most of the companies gave an indication that it may not be as bad as many analysts or the media made it out to be and things have already started improving.

As we see, there are expectations about interest rates even before you see a rate cut is making things look better and the second was even in infrastructure space we had Minister for Road with us so he is very confident that this year they will do a target of 20 kms per day which is 7,300 kms of award and execution always happens in the lag of two years.

But another thing that we got from people from the government is that once UP elections are over then the Congress will be in a much stronger position to go through with the policy reforms because what they are thinking is in UP of course Congress is nowhere to make a party but they will be needed by any coalition partner because there will again be a hung assembly. So Congress which got just about 20-20 odd seats last election might improve to 60-70 which is not significant.

But because the collation partner will be dependent on them, at the state level then they will be able to get much better control at central level and it appears that if it improves in UP then they will have much more confidence at the central level. So it looks like that after the UP elections the government says - we are determined to carry it through the process of reforms and make sure that the economic growth is not sacrificed much, so whatever damage has been done they want to undo it.

On fiscal deficit and these subsidies front also they said that if you control leakages, then the subsidy for NREGA or the Food Security Bill is not as bad as it appears and of course it also has a positive fallout on demand what we saw in the last two years.

Q: Everything that you have said so far seems very bullish. In the second leg of this rally if it comes through, what would you be betting on? Would it be the continuation of banking and infrastructure names where you are hearing optimistic voices or betting ahead of the policy reforms?

A: Just one correction - we are not entirely bullish because people are worried about crude oil prices and the geo-political risk is something which you just can't brush aside or ignore it. Crude oil is already at all-time-high in rupee terms and if it goes up from here our fiscal deficit, current account deficit will again be under tremendous pressure so that one factor is there.

Other than that although we have heard noises but people will look forward to see some action also. The third thing which is the RBI it appears that interest rate cut will not be as aggressive as many people are expecting. They will look at inflation gradually, it may not be, although there has been 325 basis point increase and this year many people are expecting 200-250 basis point cut. My sense is that the actual cut throughout 2012 maybe just be about 100 basis points. One has to be cautious. There is a cautious optimism and one has to look at individual stocks.

On sectoral theme, infrastructure will continue. You have to look at commodities particularly steel and cement sector where valuations are attractive and the investor interest now seems to be. There is some interest in those sectors. Other than that, pharma, FMCG and those defensives which had run up in a bear market also look good. Some of the select companies look like they are now talking about demand growth which is significantly higher than what they have seen in the last two years.

Q: The sector of the moment is the entire power space. Once the news had been digested, a lot of people raised concerns about the viability of this with respect to logistics or who will subsidise this high imported coal price. What would you think will happen now? What is your view on the power stocks?

A: Power sector valuations were very attractive because the stocks were beaten down as there were a lot of delays and concerns about coal linkages. Second, there is a significant under ownership in the sector as most funds reduced their weightage because the outlook was quite grim. Thirdly, long-term we need power and most of the new power capacity has to be created. If there is a policy initiative which can address the issue because of the new power projects facing serious problem of coal linkages the ministry won't create projects or linkages.

Many of them bid for the new power project without even signing up or closing the coal linkage part of it. So if that issue can be addressed in some manner then the sector valuations are attractive and there is under ownership there will be a run up. But at this point in time, one needs to digest the news and revaluate the valuations and then take a call.

Q: The one niggling worry that the street has had about this rally is that it's not backed by any kind of fundamental growth. We are still seeing some earnings issues in key sectors. Do you think perhaps we could see a reversal on the back of that there is not too much by way of fundamental news that's backing this rally now?

A: Market always runs in anticipation. Liquidity also drives fundamentals. Many times people look at liquidity vis-à-vis fundamentals but if liquidity improves fundamentals can improve because most of the companies can raise equity, reduce debt, recast the balance sheet and if the money market condition becomes easier then money can be raised from overseas or money can be raised locally at lower cost and that also improves fundamentals.

Many people look at taking up new projects when the environment is better and there is a feel good factor. So there is a general emerging consensus that the worst is behind us. Interest rates will not rise further; inflation will not look as ugly as it was. On the policy front, whatever we see will be positive on the incremental perspective. Market is looking at that. So this kind of rally will always have corrections but there is a good probability that this rally sustains and it rallies for the year.

You may see some corrections but if you are a medium to long-term investor then you shouldn't take a jittery call and just try and book profit with an objective to get back. It may not be that easy in the stock that you hold. There is some correction which will be healthy for the market. Days like today's run, you have some negative news on geopolitical or any global front will give those corrections but one should hold the equity portfolio and build on it.