Apr 19, 2012, 02.01 PM | Source: CNBC-TV18
The market is stuck at pre-rate cut levels although the street is talking about a finance ministry directive wherein public sector banks have been asked to cut rates without delay.
Vibhav Kapoor (more)
Director, IL&FS | Capital Expertise: Equity - Fundamental
Below is an edited transcript of Vibhav Kapoor's interview on CNBC-TV18. Also watch the accompanying video.
Q: The rate cut has come and gone but the market still stuck at 5,300. How much longer do you see it grinding in a range?
A: That’s difficult to say but gradually the market will move up. As we said earlier, you could reach a level of about 5,450. I think of course the rate cut has come but there are lot of issues; the banks have to pass it on, deposit rate is slow, and further rate cuts are in doubt. We think you will get another 25-50 bps over the next 9-12 months and then we have all those issues about government policy which now have been talked about so much so I don’t want to go into them in detail. On the positive side, as we expected, oil prices are coming down a bit; they have come down from USD 125 per bbl to Rs 117-118 per bbl. we expect them to go down at least by USD 4-5/bbl, maybe up to USD 112/bbl or so. The global stability is on and off. So there are a lot of uncertainties which are still there, there are still a lot of negatives which are there, sentiment is still a bit negative and that is why probably the market is not reacting to the rate cut as positively as one might have thought. So I think there is a moderately positive outlook to the market going forward, a lot will depend on how the rest of the earning season pans out and what sort of guidance companies give for the next year. So I would say the range is shifting up slightly and we expect something like 5,400-5,200 happen maybe over the next one month.
Q: Does the market remain cushioned on the downside as well or do you fear that through the course of this month, market maybe moving into a lower range?
A: No, I think with the rate cut and the possibility that banks will pass this on either through a base rate cut or in select segments. One thing that has happened is that 5,000-5,100 level that we have been talking about has become more secure than what it was earlier. To that extent it’s a positive and therefore 5,000-5,100 now is a level which is not going to get broken unless something dramatic happens globally or if oil prices shoot up. I don’t think the range is going down. I think the range is going up a bit but it is going to be pretty moderate.
Q: What is your sense of how liquidity is poised at this point because the impression we are getting is that money still seems to be preferring passive investment vehicles like ETFs etc which could work in our favour rather than against. What is the liquidity call right now?
A: Globally the liquidity is still pretty good and interest rates are going to remain low globally for quite some time. Some of that definitely could come into India. As far as domestic liquidity is concerned, it is still a little tight but it has improved very significantly from what it was in March. I think lot of it also depends upon sentiment because liquidity in relation to where it is invested is very important. A lot of it is going into passive funds. But if you look domestically, almost no money has come into the equity markets in the last six months. In fact, there has been a constant negative outflow both from mutual funds as well as insurance companies. So that is one real negative which is still there which needs to get addressed over the next few months if the markets have to go up seriously.
Q: Once we are done with earnings season in April, what are the triggers in May-June for the market, do we now get tide increasingly again to global markets and see if there is a risk on trade there or do you expect any other triggers closer home which can shape the contours of the market?
A: After the earnings season is over, which I think will get over by 15th May (these are the annual results so they come a bit slowly), the market will get back partly to the global situation. Europe is on and off good and on and off bad so that’s a very critical thing. Oil price is something which the market is going to watch critically and as Parliament session comes to an end, the market would be expecting an increase in petroleum prices. So it would look out for that. Also what happens to GAAR finally would also be very important for the market and then it would be looking at what are the policy actions the government takes. So it would come back to its normal event watch and those would become important.
Q: How do you expect to come out of this earnings season and the rate cut that we have seen. Do you expect it to have any major positive impact on earnings over the next two-three quarters?
A: I think the earnings season will be according to expectations. We are expecting about 12-14% increase in earnings for this year, of course we started off badly with Infosys, but the last two HCL Tech and HDFC Bank have been pretty good. So it won’t surprise in a major way either negatively or positively. More important will be to see what sort of guidance companies come out, that is going to be the key going forward. As far as the rate cut is concerned, some banks are already cutting rates as per the news today. So it’s going to get passed on to some extent. It will certainly have some beneficial impact on the profitability of companies. But a lot is going to depend upon how future rate cuts pan out because we need at least another 50 bps cut to start having some significant impact on the profitability of companies. Thing to watch out is going to be the deposit growth rate because unless it goes up, it's going to be difficult for banks to reduce their costs and pass on any rate cut which the RBI might do.
Q: Is there a dark horse sector you can identify for this earnings season? Something that you think will surprise positively in terms of its earnings performance because right now on most sectors the case seems to be of further earnings pressure rather than performance?
A: As far as this earnings season is concerned, we don’t think you are going to get any real positive surprise. Probably, cement is one sector, which could do a little better than what the market is expecting; expectations are pretty positive there. Going forward, I think that’s really going to be the issue. Fiscal year 2013 is what the market is really going to start focusing on now and if these interest rate cuts get pass through and you have another 50 basis point cut then definitely you could get some positive impact on earnings next year. Also, the fact that commodity prices are coming off a little bit, not too much. If you look at oil, copper, and aluminum (you will find) all of them have come off reasonably, although part of that benefit has gone away for Indian companies because of the depreciation in the rupee. That would be something else to watch out for. We do expect commodity prices globally to remain benign during the year, at least for the next few months. If that happens then that combined with even a small saving in interest rates could ensure that at least companies don’t lose on margin anymore than what they did in FY12. So margin should remain stable in FY13 and then if you have a 15-16% topline growth, not even 20-22%, which we had last year, then earnings could go up by anywhere between 14-15% next year and that would then set the pace for a moderately appreciating stock market.
Q: You were talking about bank deposits earlier, do you see it picking up because it seems like a tough environment for them because every month we are seeing these new tax free bonds coming up, the tax treatment for many of the competing fixed income asset classes is much better. In this environment if banks reduce deposit rates, do you see deposits picking up enabling them to have a cost structure which can lower lending rates in-turn to industry?
A: It’s going to be very difficult; there is no doubt about that and the liquidity is tight overall, for that inflation also has to come down because at least one major reason for slow growth in bank deposit rate has been high inflation. Therefore less savings by the household sector. So you are right it’s a very difficult environment of course. Liquidity could increase if you get a lot of money from abroad either by way of NRI deposits or by way of borrowings or FII flows or FDI flows. Yes, it is going to be pretty difficult and that’s why there is a lot of doubt in the market whether you can have further interest rate cuts. Even if you do have from the RBI, whether they can be passed on by the banking sector. Of course there is one other alternative which is that banks pass on the lending rate cuts but don’t lower their deposit rates which would mean pressure in the profitability of the banks which will lower their net interest margins.
Q: How much or how little do you think the market should expect now from policy movement because through the course of this year it’s actually been to the market's disadvantage rather than benefit?
A: That’s the key question of course and it’s very tough to say. One positive which we saw yesterday is the statement saying that there is some movement happening on the GST for e.g. and since that came from the chairman of the Empowered Finance Committee on GST, that seems like a good step forward. So that’s something which the market will watch out for over the next two-three months if the meetings in May are successful and you have more definite roadmap for the GST that could be something quite positive.
Q: How do you prepare yourself for the next couple of months? Do you work on the premise its going to be a rangebound market and become extremely stock specific or do you think something is going to break in either direction because of global events if nothing else?
A: I think we keep a moderately positive stance; we keep low cash levels and if and all when the market comes down on certain bad days, go out and buy stocks. Let portfolio shift gradually towards rate sensitive but also have a stock specific approach to some extent, keep a moderate or a reasonable exposure to defensive sectors like FMCG which will still continue to do well. Maybe pharmaceuticals little bit but definitely have positive frame of mind. I think you should - if nothing goes dramatically wrong you should get at least about 12% return over the next 12 months and if things start to improve then this return could go up. So basically what I am saying is that the risk reward ratio is pretty good at this point of time, on the downside you probably have maybe 4-5% risk and on the upside you could have at least 10-12% and maybe higher if things improve later on.
Q: Back to asset allocation point, last year lot of people bought gold and it did well for a while but that performance is slipped in the last many weeks. Would you still continue to own gold this year?
A: I think gold is something which probably is not going to perform all that well this year as compared to last year. That’s based on the premise that Europe will not go down the drain. If that happens then gold will go up very sharply. But moderately positive global environment with the US doing reasonably well, China doing reasonably well and Europe not going down too badly would not be too good for gold. So we wouldn’t be very positive on gold.