Nilesh Shah sees mkt cheer CRR cut, banks stocks outperform

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Reacting to the latest RBI policy review that doled out a 50 bps CRR cut for the street while keeping repo rate unchanged, Nilesh Shah of Axis Direct says that it sure is good news. "It was an unexpected move, but it is definitely positive news," he says.

The Nifty has already hit the psychological bump at 5100 mark. Will it move higher? Shah says yes. He sees further upside for the market post the policy.

The CRR cut is expected to infuse Rs 32,000 crore liquidity into the system. Shah says that this will push growth higher. "Banking stocks will be outperformers going forward," he says.

On his notion of an ideal portfolio under the improving environment aided by the positive signals today from the RBI, he says, "One can create a portfolio of stocks across banking, small and midcaps, pharma and resources. I think that will be outperformer for the next year."

Below is the edited transcript of his interview.

Q: There is no taking away from the fact that secondary liquidity is going to be considerable. We always get fooled by this Rs 32,000 crore. It is not Rs 32,000 crore that comes into the system; over five six-months, it is over Rs 1.5 lakh crore that will come into the system. What do you think is going to be the impact on the stock market first and then the bond market?

Shah: I think from a stock market point of view, the unexpected cut in CRR is positive news. Clearly, RBI is keeping the weight between growth and inflation now little bit tilted in favor of growth. This infusion of liquidity, and as you correctly mentioned it's not just Rs 32,000 crore, but with money multiplier over a period of time, it could be far more, and that will help in pushing growth up. That will be positive from a stock market point of view.

From a bond market point of view, there was less expectation of a CRR cut, but still, the CRR cut will be treated as positive, and if the OMO continues along with the CRR cut, it will reduce the inversion in the yield curve where the short-term yields are today trading at higher levels than the long-term yields.

So both, from a bond market as well as from equity market, this credit policy is continuing the positive momentum, drop in yields, as well as heightened equity indices.

Q: Although there is only a 5 bps impact on bank margins, the CRR lends a boost dragging it to maybe 15-20 bps. But still the impact on bank cost of credit usually falls by a good 20 basis points at least. So do margins improve also because there could be a bond rally?

Shah: I think the half percent cut in CRR is not going to materially impact banks' NIM margin, but from a stock market point of view, what people will be looking forward to is the trend or the direction.

Clearly, liquidity was getting tighter increasing the cost of borrowing, and probably also increasing the potential of NPA if interest rates and liquidity remain very tight. Now, with the direction of CRR cut coming in, liquidity will ease off, bond yields will be easing off and both together will be positive for the banking sector as a whole.

Today, the valuation of banking stock after the battering which they have received the whole of last year is probably at a historical lower level. So from a valuation perspective, steps taken by RBI proves far more positive in terms of direction and trend rather than just one CRR cut increasing the NIM margin of the bank.

In my opinion, banking stocks will be an out performer going forward, but it's because of the trend rather than just one action taken by RBI.

Q: This CRR cut plus the expectation of the trajectory can take the index how much you think in the next one quarter? Are you seeing a substantial upgrade of index highs across brokerages, what is your own level for the Nifty?

Shah: It's very difficult to predict the market in the short-term and I don't think that analysts will be in a hurry to upgrade the earnings, probably in the results which we have received till now for the December quarter. The numbers have come a bit ahead of investors' expectations, but the crucial sectors where results were expected to be slightly worse may start falling over the next week. So analysts will be waiting for the whole set of results to come out and then also see how the budget impacts the various combinations of financial earning before going for upgrading the earnings.
So we are unlikely to see earnings upgrade cycle beginning very shortly; probably it is more in the next financial year than in the recent time, but with this soft monetary cycle, we will continue to see a base being formed for the market. Now there is opportunity of higher upside rather than more downside.

Q: So the base moves up you think?

Shah: Yes.

Q: Would you buy now because the index has already substantially risen and if you are buying, what will you buy? Is it banks or other interest rate sensitive? Heavyweights or midcaps?

Shah: We are definitely looking at buying index now after a 2000 point rally from the bottom. Clearly, in the short term, there could be some amount of correction purely because markets have risen so much. But not withstanding that, definitely, valuations are still in your favour.

We are now in a monetary easing cycle which will be beneficial for growth in the macro environment which prevailed for the whole of last year where rates were rising, liquidity was tight, inflation was sticky, growth was slowing down. All those things are probably going to change slowly but steadily. Growth will start improving, liquidity will start increasing, interest rates will be declining and hopefully, inflation will also follow down.

So in that developing macro environment, yes, this is time to buy equity. You don't have to buy just the banking sector, but you will have opportunity to buy, of course, small and midcap sectors which are trading at a huge discount to their large-cap peers. You will have opportunities in pharma and resources sectors.

So, one can create a portfolio of stocks across banking, small and midcaps, pharma and resources and I think that will be outperformer for the next year.

Q: You see Reserve Bank begin cutting rate cycle at least in CRR if not in repo. Would you think that that is enough to enthuse foreign investors to come in?

Shah: I think foreign investors are finding India, if not 20%, 15% cheaper now and it is still attractive. On a relative basis, we are in a far better shape than many other people. Just to point one thing, a country like Greece will be repaying over next one month, 8% of the GDP by way of maturity of government bonds. Our annual borrowing programme is far less than that. So on that happy note, I am sure FIIs will continue to look positively towards India.

Q: Even if the budget deficit didn't show any impressive number?

Shah: Definitely not. We cannot take them for granted. Deficit number will have to again point at a direction towards going down. The entire cut need not happen in one year, but the direction definitely has to be established that will be moving towards enhancing FII confidence. If we take them from granted, then certainly, a 2011 kind of a year can happen.