Karvy bets on pvt banks, FMCG, pharma; calls for reforms

Varun Goel of Karvy Private Wealth feels the market strength witnessed in the last couple of weeks has been essentially triggered by global cues. With the European central bank expected to take further action and the encouraging macro economic data from the US has provided the much needed support to the market, added Goel.

However, the Indian rally will be hard to sustain in the absence of policy actions in the short term, cautioned Goel adding, "The global sentiment has been extremely positive but for the rally to sustain, we urgently require action as far as the fiscal side of the economy is concerned."

Looking at the robust performance of the private sector banks, Goel remains positive about this space. But, he is slightly apprehensive about the public sector banks and feels the asset quality could be a problem in the coming quarters. Hence, Goel maintains a cautious approach about the PSU banking space.

Here is the edited transcript of the interview on CNBC-TV18.

Q: What are you making of the market and the strength we are seeing, in fact we are outperforming lot of our Asian peers, what do you think has led to this outperformance?

A: In the last couple of weeks the market strength has been essentially led by global cues. We have seen some extremely supportive statements as far as monetary policy is concerned in Europe. The markets of course continue to expect further action from the ECB in the times to come. Of course the macro economic data in US has also been very supportive.

I think the Indian rally will find it very hard to sustain, if there are no policy actions taken in the short-term. We had very positive statements from the Finance Minister yesterday. I think there are a lot of expectations the retrograde steps which were carried out in this years budget would be reversed.

The markets are definitely looking for some signs on GAAR. I think markets are also closely looking at the retrospective taxation amendments which were carried out. I think Diesel price hike looks extremely unlikely in the short to medium-term. However, if the FM is able to present some kind of credible road map towards fiscal consolidation, that will give RBI the necessary equation to go out and carry out the necessary rate cuts in the next six months of this fiscal.

Overall, the global sentiment has been extremely positive but for the rally to sustain, we urgently require action as far as the fiscal side of the economy is concerned.

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Q: We have comments coming in with regards to possibly the non-performing assets (NPA) situation from the RBI Deputy Governor where we do see that the pressure seen on farm loans due to the drought situation. What did you make of the entire NPA situation or the asset quality which has come out from the banks this time around and how worried would you be in FY13- do you think that it's possibly going to get worse?

A: As far as the banking sector results are concerned, there has been a clear split. I think the private sector banks have been doing much well as far as maintaining their asset quality is concerned. We have seen robust set of earnings from Tier I private sector names and we continue to be positive on them.

As far as the public sector is concerned, I think the last 2-3 years have seen an increased amount of interference from the government side. There are a lot of concerns about asset quality, be it in terms of farm loans, exposure to State Electricity Boards or aviation sector exposure. We are not sure whether we have seen the peak of the NPA cycle in the PSU banks.

Our sense is that the next 2-3 quarters will see more and more pressure in terms of asset quality. Next year's budget could be populist and if we see a farm loan waiver of the kind we saw in 2009, things could get even more difficult for most of these PSU banks.

I would be very cautious as far as PSU banking space is concerned. I think there are much better names from investment point of view in the private sector names.

Q: How are you choosing to play the market in general, any sector specific strategies or with bottom up any stock selection?

A: I think till the time capital goods sector is revived, till the time investment cycle is revived, we will continue to like the consumption space. I think there are still some upsides left in mid-tier FMCG names. We also continue to be extremely positive on pharma space.

Pharma space has continued to benefit from the significant depreciation in the rupee plus there is a very strong growth in domestic formulation market also. That is one space which continues to look good. Other than that, the market is basically a stock pickers market. We continue to like bottom up stock ideas in automobile and consumption space along with a few names in the IT space.

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Q: Anything you liked in terms of earnings from the broader markets, we have Escorts which is reacting to a very healthy set of numbers but, we have sugar which is down and out today. Something like Balrampur Chini which comes out with numbers today and it's down around 1.8%, any sort of ideas you are promoting from the midcap space?

A: As far as the sugar space is concerned, we are very sure from an ideological point view about avoiding sectors which have very high government intervention. Be it sugar, public sector oil and gas companies, both upstream and downstream side or PSU banks. We are going to completely stay away from these sectors.

As far as bottom up stock picking is concerned, we continue to like thematic plays in the consumption space. So be it restaurant stories, be it a health chain, contract research and manufacturing companies in the pharma space, I think all those companies look extremely attractive even at the current valuations.