RBI to cut rates by 25 bps on Mar 19: Prabhudas Lilladher

Sandip Sabharwal of Prabhudas Lilladher believes the Index of Industrial Production (IIP) data for the month of January shows growth is bottoming out and going forward the WPI and CPI will also start moderating. He expects the Reserve Bank of India to cut rates by 25 basis points on March 19. Inflation too will moderate going forward, he says.

Commenting on the Indian market, he says the market is looking to move much higher going forward and we will see growth greater than 6 percent next year. Also read: Upbeat Jan IIP, dismal CPI: Where does this leave RBI?
 
Below is the verbatim script of his transcript on CNBC-TV18 Q: What’s the market going with for the 19th of March policy? A: The Index of Industrial Production (IIP) figures clearly show that growth is bottoming out. The core industry figure which had come out earlier also clearly indicated that the growth should have been higher than what the consensus were estimating and it has come out that way. Obviously, the consumer price index (CPI) remains inflated but there clearly will always be a lag of around six months between CPI and wholesale price index (WPI). To that extent, WPI has started moderating over the last few months, and I think we will see CPI also start moderating going forward. On March, 19, RBI will cut by 25 basis points because high CPI rules out 50 basis points cut. So, we will see a 25 basis point cut coming through. Going forward, if you look at the way food prices have been moderating in the near-term, combined with the fact that global commodity prices are subdued, and last year in March, April we saw the impact of increasing excise duties on the WPI index, when the WPI index moved up substantially that is unlikely to happen this time. I think we will see inflation moderating going forward which could let the RBI to move more towards supporting growth. Q: What is the sense you are getting about the markets itself for the quarter? Is all the news now belted out and the market is now going to have a problem climbing 6000 or are you getting a sense going by global flows that we will make that climb like the US markets and make it to the all time high? A: It was my view that first we would see markets like the US and Germany move to all time highs and that is happening. US has already done that and my guess is we will see German market also do that going forward. A lot of emerging markets are already at all time highs like Indonesia, Philippines, Turkey, South Africa. All these markets are 50-100 percent above their 2007 highs. Some of the other major markets like India lag behind but now the path is clear and so going forward the market is looking to move much higher. Moreover, with a combination of acceleration in growth combined with lower inflation, improvement in trade deficit, combined with slightly lower inflation and interest rates, as well as some sort of revival in investment activity, we will see a tick mark sort of recovery in the economy. It might not be a V-shaped recovery but the recovery will be much better than what people expect. Last year, we saw growth drop from 6.5 percent to 5 percent. People are sceptical of the growth going back to even 6 percent this year but my guess is that we will see growth greater than 6 percent next year. Q: How would you position yourself with this kind of a recovery in the equity markets in terms of stocks and sectors? A: Clearly, there are two sides to the market. One is the midcap and smallcap side that have got totally battered and I see valuation in that segment, near 2002 kind of valuations in lot of companies and lot of stocks. That is one side where people who can take risk and can invest. On the other side, even the more established companies the valuations are supportive. In our portfolios, on the largecap side, we are going with stocks like ICICI Bank, Larsen and Toubro and Mahindra and Mahindra. We have selected these because we are playing for a recovery in the economy going forward and we believe they are well positioned for that. On the larger midcap side, our top three holdings are companies like Mahindra & Mahindra Financial Services, United Phosphorous and Apollo Tyres. We believe each one of them is positioned to do well as the economy recovers, and also due to various factors which are playing in their favour. Q: Would you touch the cyclicals at all? What is your take on capital goods and on related core sectors? A: In capital goods, we will see a recovery coming through next year. Although that recovery will not take the growth back to double digits but we will see growth in single digits come back. It will start from low single digits and move to higher single digits by the end of next year. Mining is more issue of regulation, clearances and ban on mining across the board, so it is difficult to take a call on that. On the coal side, I think we will see strong growth next year. However, on iron ore side, it is totally unknown on what is going to happen and how much of clearances will come through. Lot of other metals companies are bogged down due to various clearance issues. so I think that is a bigger issue out there. _PAGEBREAK_ Q: Do you see a lot of steam left in IT stocks after the frontliners have rallied about 25 percent so, far this week or is the juice done? A: I do believe that large part of the outperformance is over for these stocks. However, I think the companies might still continue to do well, given the strong growth revival figures coming out of the US. For example Pacific Investment Management Company (PIMCO) increased its forecast for US growth from 1.5 percent to 3 percent in just three months. So, if that’s actually going to play out, it’s a very strong recovery and that will have fallout on the revenue growth of these companies. On the other hand, the big fall in the rupee which people were projecting, that is unlikely to come through given that we will see a revival in growth in India, reduction in subsidies, as well as moderation in trade deficit. So I think the stocks will still do well but they might not outperform going forward. Q: Any interesting midcaps that you are watching that might partake of this rally that you are expecting? A: I have already talked about two-three midcaps, but what investors now need to look at is companies which might benefit due to some sort of revival coming through. Those could be some strong companies from the construction space and capital goods space, which belong to the midcap segment. That is where we could see some companies actually deliver very strong returns over the next one year. Q: Who would be the leaders of the Nifty rally other than automobiles? A: Banking should do well. We are very positive on ICICI Bank; it is one of our top holdings. PSU banks have their own pulls on increasing non-performing assets, but with improving macros and their valuations being supportive, we could see some sort of revival coming through there. IT will continue to do reasonably well. Consumer goods stocks should continue to do reasonably well. I would say the interest rate sensitives are where one should play right now.