PL bets on private sector; picks ICICI, Axis, L&T

Following some positive moves from the European Union and hopes of reform from the Indian government, global markets have been seeing a rally since Friday. The Indian market too saw an upmove, capping the biggest gains of the year. On Monday, the 50 share Nifty gained some strength and touched 5300.

According to Sandip Sabharwal, CEO, Portfolio Management Services at Prabhudas Lilladher believes that the downside risk for the Indian economy has significantly reduced. In an interview with CNBC-TV18, he said, it is not only due to the outcome of the EU summit or because of what the finance ministry has been announcing over the last week, it is also because of the way commodities have fallen and the plight of the weak rupee.

In a situation like this, Sabharwal is betting on the private sector and his top picks are ICICI Bank, Axis Bank and IDFC from the banking sector along with Larsen and Turbo in the capital goods front. He also feels that SpiceJet and Jet Airways are in a very favourable positions and one can go for it.

Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.

Q: Will you buy now – we have broken that 5200 range and some material changes in macros in the sense of a new leader at the finance ministry and perhaps some show of purpose in Europe, do all this change the fundamentals enough and crude included make you a buyer at these levels?

A: Clearly the downside risk for the Indian economy had reduced significantly even prior to what happened at the finance ministry or the EU summit because of the fall, the way the commodities had fallen. Secondly, it was also because the way rupee has gone down. Both create a scenario where the rupee falls create a terms of trade benefit for exporters and even the domestic manufacturers because it creates a import barrier.
 
The fall in the commodities creates a strong scenario for reduction in current account deficit and eventually inflation. I think the downside risk to economy has clearly reduced significantly. The pace at which it recovers depends a lot on government policy action. To that extent, we spent the last 15-20 days in consolidation mode where the markets are going to breakout on one direction or the other.

The likelihood of a upward breakout was always greater so once this breakout has happened, clearly in the short run a 300 to 500 point move at least should fructify and subsequently further market direction will depend on how the monsoon pans out. How the overall global scenario is panning out and whether the government takes some steps on the ground will also affect market direction.

Q: To play this 300-500 up move which we could see, sectorally how would you align yourself?

A: Sectorally, we have increased our overweight position on financial substantially because I believe that private sector financials will be the ones which will lead the rally. So that is one segment to play on. In our portfolios, we are holding ICICI Bank, Axis Bank and IDFC.

One the capital goods front, the market leader Larsen and Turbo is what we hold in our portfolio. That looks very well placed because the orders it has announced for the first quarter seems to be much ahead of what the actual expectations of the market for the first quarter are. These segments look positively positioned and that is where we are overweight on.

As a theme, we are positive on airlines, except Kingfisher. Both SpiceJet and Jet Airways are in extremely strong and sweet spot for the next couple of years. I think that is another segment we are playing for.

Q: What about autos? The numbers that came today were a disappointment, was that priced in or is there fresh bad news?

A: Auto sector valuations are clearly expensively positioned. This year the volume growth will be muted, given the fact that in the last couple of years, the volume growth has been pretty strong. The key thing to monitor this year will be to see how the margins move.

Last year we saw that despite strong volume growth, margins got squeezed for a number of companies. If margins improve this week because of lower gross margin pressures, I think that will be taken positively. I think valuations are cheap. There are no near term triggers for the auto sector. I think one would be equal weight on this sector at this stage and look for some positives as things move forward.

Q: For this upside which you are talking about to fructify, are you assuming anything by way of a reform, even if it is something which could be token diesel price hike. If we don't hear anything on that front, is there a risk that the markets will sell off or will markets move higher despite no reform coming through?

A: I think markets will move up irrespective of any factor because people have been extremely negative on equities. In the first quarter, global emerging market equities got in USD 25 billion. The second quarter saw USD 11-12 billion outflow and cash positions are pretty high globally. Bonds too are hugely overvalued vis-à-vis equities.

I think that movement will happen but, that is not important. What is important is that they should sustain because for any wealth to be created, long term moves have to be sustained. For that, we will need positive policy action. I think that is something that will be key monitor.

Q: What about IT? It looks like a double positive with the dollar getting more expansive and early moves of some kind of a support to banks directly stepping aside from the sovereign. That should create a positive, is that priced in?

A: I think technology stocks have really sold out despite all the macro concerns. That is mainly because of the way rupee has moved. I think one can't be negative on technology but one can't be excessively positive also.

The key will be to watch the M&A activity because some of the companies are sitting on huge cash holds and there has been news flow that some sort of M&A activity should happen in some of the larger names in the near term. If that happens, that can create a positive sentiment for some of these stocks.