Nifty may slip 7-8%, PSU banks to get hit: Infina Finance

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS US recovery needs GDP growth of 5%: Jim Walker Markets likely to see sharp pullback FIIs net buy Rs 2484 cr in F&O market Banking sector still robust and attractive: JPMorgan ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

Though the word on the street is that markets will see a sharp pullback on the back of better than expected US GDP growth, some experts still seem to be bearish.

R Venkat Subramanian, CIO, Infina Finance is negative on the markets. In an interview to CNBC-TV18, Subramanian said that the markets may take a breather now.

According to him, the markets may not a see a correction of 15-20%. However he is concerned that the Nifty may slip 7-8%.

Continuing his bearish outlook, Subramanian noted that public sector undertaking (PSU) banks are looking vulnerable to correction.

Here is the verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Do you think the market has entered some kind of an intermediate corrective phase or do you think it is just a little bit of noise and the uptrend is still intact?

A: It is possible that we entered into a little bit of pullback kind of phase which has happened every 3-4 months, even in this somewhat uptrending but rangebound kind of market that we have been having. To that extent the Friday fall should sort of raise some questions.

The other thing is that for the first time, in a few months, we are seeing a little bit of outflows or slowdown in emerging market fund flows, in addition to the enormous money that is getting pulled out equity funds globally. The inflow in the emerging market which was strong has sort of weakened a bit. The rally in the banking stocks and midcaps which have been sharp in the last two-three weeks so that may also cause a bit of a pause and a pullback. We may get into a slight pullback but I do not think anything serious is about to happen.

Q: How much do you reckon in that potential pullback?

A: No much. From an index point of view because the heavy weights in many of the index sectors, has still not gone up as much as the some other stocks have gone up. There cannot be a broad based selloff with stocks like Reliance , Bharti , DLF , BHEL , with all of them still stuck in a sluggish or declining kind of phase.

When you are talking about a pullback, it has to be in stocks which have run up sharply in the last few days, few weeks like banking and to some extent auto. The overall index damage I do not think will be much. If you get a 4-5% pullback, that is about how much the market will go down at the index level, but midcaps perhaps look a little bit venerable now after this last two-three months of strong rally.

Q: Where on the banks would you get more cautious? Between the largecaps and the midcaps or this is more of a private versus public call?

A: It is more private versus public. I think the public sector undertaking (PSU) banks have had a sharp run. The expectation now is that the deposit re-pricing versus asset re-pricing is going to be in favour of the PSU banks and in spite of a little bit of uptick in non-performing loans (NPLs), the consensus seems to be that it is peaking out.

Whereas that is not really, the numbers are not showing that it is peaking out. But anecdotally it is tempting to believe that the NPL cycle would have peaked out, but the stocks have run up quite a bit. They are now trading at valuations which we have not seen anytime before, in terms of price to book multiples. To that extent they are venerable for a bit of a pullback.

Banks tend to outperform when there is strong foreign institutional investor (FII) flows. If we see some slow down in FII flow like when there was a bit of a less and robust flow into the emerging market fund in the last few weeks, banks particularly look venerable. PSU Banks which had a big run could be leading this pullback if at all.

Q: For the midcap clusters which have gone up and outperformed sharply, is it conceivable to expect even a 15-20% kind of a pullback in those names?

A: That is a little too sharp kind of correction. The results have all been quite good. There is enormous confidence at the corporate level. If you meet companies and listen to conference calls, you would actually get complacent about the prospects about these companies.

I do not think anybody is going to give up on the names where there is strong performance and promise for more. It would be more of an overbought kind of situation than any fresh fears about lack of performance. A 15-20% kind of correction looks unlikely to me. I would put more at the index level about 7-8% kind of correction and individual stocks maybe 10-12%, but nothing in the nature of a selloff.

Q: The dark horse of last week was the oil marketing companies- BPCL was up 12% in a falling market. How would you approach that space?

A: There is one more measure that is expected from the government. There is a little bit of speculation on whether diesel will be freed or not and when it will be done. Given that government wants to sell ONGC in the market, there is expectation that this will be completed before they come to the market with ONGC.

 

That speculation is driving those stocks. But even otherwise it is a slightly defensive kind of investment theme. Should the market go into a corrective phase, which is why there is a bit of rush into the oil marketing companies. There is not a big upside there but slightly longer term basis since the policy hurdles have been cleared, that may become a regular investment theme, going forward, in different phases in the market. It has come back into reckoning as an investment candidate and being defensive in nature has led to the possible run up in those stocks.

 

Q: A lot of these midcap themes have played out already. It started with banks, then it was pharmaceuticals even textile have moved to an extent-what would you watch next. What would you bet on in the midcap space?

A: Midcap tends to be a little bit more widespread. It is not that strongly a sectoral theme, but the media has reasons to sort of feel bullish about this space. There is a good chance that some of these cable companies may do well. For engineering companies the valuations are quite low, so there can be a little bit of uptick in those things. By and large, the entire midcap space has had a sharp run. You would not like to buy anything before you get a decent pullback, but when you get a pullback, things will remain the same. Midcap engineering, media, to some extent pharma, they would be the themes within the midcap space.

 

Q: Do you think there is a lot to play for in smallcap pharma?

A: While it is true that there is some expectation building up that there will be some sort of buyout or an event driven kind of approach to pharma, to some extent it is actually valid. There is a sense of urgency amongst many multinational companies to set up base in India, to get a foothold in the Indian market and many Indian companies are actually providing a good opportunity for some of these players, who are looking at 15-20 year kind of timeframe.

 

While between one transaction and another transaction you may feel a little bit of lull, the theme is not invalid. If you can get your stocks right, then you may still be able to benefit from a potential acquisition kind of situation. I would not be too negative on that but you may have to be a little patient and maybe a little lucky with your stock selection.