'Monsoon, lack of govt action & FII outflow worrying mkt'

According to Amit Dalal, executive director at Tata Investment Corporation, the top worries for the market right now are weak monsoon, lack of government action on policy and foreign outflow.

Heading in August, worries are that we may have to weather through weak monsoons this year, adding pressure to the economy’s already sluggish growth. Poor rainfall will hurt agricultural growth, which further raises inflation and the ability of the Reserve Bank to act on interest rates. This is one of the biggest worries for the market, says Dalal. However, he believes lack of action from the government on reforms, and weak cues from Europe can also trigger a crash in the market. “In terms of index movement can come down to 4,800 or even 4,500 if there is sufficient FII selling taking place,” he said. Below is an edited transcript of his interview with Udayan Mukherjee and Sonia Shenoy. Q: What do you make of this recent divergence performance between public sector undertaking (PSU) banks and private sector banks in the light of the numbers that have come out today? A: If you take the last two years, the private sector banks have been outperforming the public sector banks substantially. The main reason for that has been that they have been very cautious in the way they are going ahead with their book expansion and in the way they are lending to various industries. Even though there are certain risks attached to the private sector banks’ books, for instance there is a concern about the infrastructure book Axis Bank is carrying, but it’s a lot better than the public sector banks. The public sector banks’ value correction has been enormous in the last six months, or at least in the last three months, and is now reaching levels wherein they will bottom at a certain price. They will perhaps not have to erode more value even though the bad news may still come in terms of the gross NPA expansion. The upside that one can see in public sector banks is that the government has started act upon the two major sectors which have cause the greatest disruption in gross NPAs, and that’s airlines and electricity boards. The electricity boards will come first, and hopefully that will happen in the next quarter as soon as the finance ministry gets it act together with what it wants to do going forward. And if FDI in airlines is announced, for which we have been waiting for last six months, I think the biggest relief will come to banks in that regard. Q: So if you are hopeful about PSUs, is that a space that you would buy into at this level and would you buy into the frontline PSU banks or the midcaps? A: I would wait some more time because the price erosion is still on. But if they are going to reach 0.5-0.6 book going forward, if we do see restructuring taking place and if the economy starts moving on a positive front by FY13-14, then I think definitely you have to start looking at PSU banks at some point of time. _PAGEBREAK_ Q: What tops your list of worries about the market now? Is it poor earnings, global risks or is it the monsoon and lack of policy, which have emerged as the key negatives over the last 10 days? A: You are right, headwinds today is what is really capping the upside in the market. Of course, fundamentally monsoons are the biggest problem that we have both in terms of rural demand, in terms of inflation and therefore the ability of the RBI to act in interest rates. That is the forefront worry that I have. But in terms of the technicals of the market, what would push the market up or down substantially is definitely Europe. If there is more risk taking ability over there, we have more FII flows in India. If they become negative on risk and they suddenly move to a defensive position, then we have FII outflows from here. So that correlation cannot be taken away as one of the biggest risk for investing today in our market. But going forward, everybody is just craving for government policy to come around in some form or the other. So that is something the government will definitely do which makes them look a lot better than what we have seen till now. Q: Is it just a matter of time before we head to that 4,800 mark or do you think it will be restricted to these levels of about 5,000 or 5,100? A: In terms of index movement can come down to 4,800 or even 4,500 if there is sufficient FII selling taking place. But in terms of earnings, I must say that I am quite surprised. We just did some number crunching this morning, I haven’t seen the last picture yet, but 100 companies which we screened gave an earnings growth of about 20% or more. Those 100 companies had a marketcap as on today of Rs 17 lakh crore, which is about 25% of the listed space. Many of these companies have seen visible marketcap expansion, for instance the Bajaj Group. They have completely outpaced the rest of the market in terms of marketcap growth and earnings growth. Therefore we do not see these shares falling nor we do not see FMCG shares falling. We see pharma shares remaining where they are even though the index will remain range bound or on the weak side. So there is definitely a polarization of both marketcap and earnings within the stock market. Q: What are you expecting to hear on Tuesday from the RBI? A: I don’t think the market is discounting anything neither do I have any hopes of relief coming from the RBI. I think his hands are still tied with regard to the situation. Don’t forget that Brent has gone back to USD 105 per barrel and monsoon is creating more of a disappointment, and therefore the food inflation will perhaps not see any respite if things remain the way they are. Given that background, I don’t think you should hear anything positive from there. Q: How would you approach BHEL and L&T? A: I think L&T perhaps has the best case for investment right now. They have shown the most favourable order book growth. They are not only a capital goods and construction company, they have huge order book from Middle East and that too in road infrastructure. So it’s a big mix which they work with. I think BHEL has a typical problem right now with the power sector the way it is. But the only upside in BHEL, and perhaps the only positive in BHEL, is that last year was the lowest order book increase that took place both for BHEL and also for power sector in terms of new capacity. So if the government’s next five year plan has to be put into place and power expansion has to take place and hopefully some solutions are found in terms of distribution then the order book expansion for BHEL should kickoff in FY13. But that is where the story ends in terms of capital goods.