Sensex 1-year target at 16000: BNP Paribas

Here is a verbatim transcript of the exclusive interview with Manishi Raychaudhuri on CNBC-TV18. Also watch the accompanying video.

Q: Give us a quick call on the market before we talk about stocks like Sterlite.

A: Firstly, if you look at the earnings growth going forward, we think over the next couple of years it should be in a range of maybe 13-15% compound annual growth rate (CAGR). So for fiscal 2010 we are seeing somewhere around 10-11% going up to about 16-17% for fiscal 2011. If you compare that to valuations, currently the market is possibly trading at about 15 times one year forward and this compares to a 15 year average of about 15.2. So we are somewhere in that ballpark average kind of range. So it is possibly neither overvalued nor undervalued at this point but at the same time, if you look at some of the frontline stocks, the well-researched, largecap stocks in each of the sectors then many of these are possibly trading at somewhere close to 20 times one year forward or even higher.

I think the stocks that investors would like to buy are not very cheap at this point in time and that is why we are seeing these pulls and pressures and that is why the market is trading in a narrow range. So I think this situation may continue for a while. We have a target of 16,500 on a one-year timeframe on the Sensex and we are not really changing that. But I think as far as portfolio allocations are concerned, maybe it is time to move away slightly from the high-beta sectors add some defensive colour through maybe telecoms and utilities in a fund manager’s portfolio.

Q: How do you read Sterlite’s large American depositary share (ADS) offering yesterday and how the market reacted to it with the stock slipping 6%?

A: I think it all depends on what the cash is used for. Prima facie, it leads to some dilution to the tune of around 8-10% but if they manage to make the acquisitions that they have been talking about or if they manage to do the capacity expansions then it would no longer be EPS dilutive; infact it could turn out to be marginally EPS accretive. So from that perspective, I think yesterday’s reaction was a bit of a knee-jerk thing. In the short-term it may correct a little more but at the same time, I think over the long-term, Sterlite remains an attractive proposition, the balance sheet is strong. So if you look at the entire metal space, possibly Sterlite, Jindal Steel and Power (JSPL) and maybe Steel Authority of India Ltd (SAIL) are the ones that have strong balance sheet.

Q: Have you had reason to rework your portfolio though and increase allocation to defensives perhaps things like fast moving consumer goods (FMCG), ITC, Lever?

A: We did that just prior to the budget we did rejig our model portfolio and while we maintain our core overweight positions in the consumer discretionaries, banks and the infrastructure plays particularly engineering and construction, we have also added some defensive colour to the portfolio though not through the sectors that you mentioned. So we haven’t added consumer staples or pharmaceuticals but we did add utilities and telecommunications.

In case of telecommunications, we think that the big concern that we had earlier in the year about average revenue per user (ARPUs) coming down, increasing competition and therefore margins coming down that was kind of overplayed and I think those concerns are gradually getting addressed.

For utilities, we don’t have the frontline power utilities in the portfolio but we are essentially playing that sector through the gas utilities like GAIL and Gujarat State Petronet (GSPL). So the entire portfolio construction approach is one of stock picking. It is the case of the stock rates adding up to the sector rates. But in general I think that at this point of time, investors would be better off adding some defensive colour to the portfolio in addition to the frontline sectors that everyone is bullish on.

Q: How would you position yourself in autos now?

A: We have an overweight on autos. I think autos would benefit both over the longer-term and the near-term for a couple of reasons. Firstly, you do have income levels going up and better demographic pattern, better income levels, higher savings rate that is clearly one of the longer-term positives in favour of autos and when you combine that with very low penetration levels even compared to the Asian neighbours that surely makes a good recipe for that sector. When you look at the near-term, I think there has been some boost to income levels – disposable income – from the budget.