Buy now, Nifty may surge to 5800-6000 post Dec: Prime Sec

Badly bruised by weak sentiment and heavy foreign institutional investors' (FII) selling, Indian market is still licking its wound unable to attract investors. However, some experts see the second half to bring in better prospects.

N Jayakumar, President, Prime Securities feels that the Nifty could surge to 5800-6000 post December. Therefore, he suggests buying now as it is offering an attractive entry point.
In an interview to CNBC-TV18 he said, "As long as there is some basic clarity on policy formation I think we are really looking at the oil price and monsoons really to determine the market. That's why I believe that 5800 or 6000 is possible given my orientation on these two factors those levels could be reached."
Continuing the positive outlook, Jayakumar adds that sovereign and PE funds are constructive on India now while FIIs outflow also has been minimal.
As an investment strategy, he prefers YES Bank and IndusInd Bank in the banking space. He is also bullish on auto ancillary and textile stocks. Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying videos for more. Q: How are you feeling about the second half of the year? Is visibility still clouded or do you think the market can work with 4,800 as a base?
A: I would go with the thesis that 4,800 give or take 1,500 points, may well be the base that the market will work around. It has been climbing that probable wall of worry right through for almost a year and a half now, not withstanding the sharp bear market rallies as people have been terming them.
I think the market will find its feet slowly and the multiple things that are sort of some relief to the market, not the least of them being that the government is finally beginning to want to speak, if not speaking already. We could have a much better second half, much more constructive from a midcap perspective. Q: What would you characterise a 4,800 base with significant upside? Would it be another sharp bear market rally or would it be of a different nature, the kind of recovery we see in the second half?
A: I am not categorising it as a bear market rally. I just think the market gets into these extreme sort or pessimism moods in this zone and then bounces back. So the sharpness of the move indicates to me that the market is sort of making these from a chart perspective at higher bottoms if you will. If I remember right – 4,530 or thereabouts was the bottom that we made a while ago, then we made about 4,720 and this time we made a higher bottom. What we are doing is really absorbing news as we go along.
It wouldn’t surprise me if closer to December or the first quarter next year we move towards the 5,800-6,000 range also, because the reality is that across the board, there is just so much newsflow that the market is absorbing that it is impossible to believe that either one or the other will be the one deciding the move for the market.
From an India perspective, there are two things which actually hold key for the rest of the year - one is oil price and the second is monsoon. One should determine that these two are well outside the government’s control; then we will stop looking at Delhi for any direction other than hoping that there is no major goof-ups in terms of things like GAAR etc.
As long as some basic clarity on what we need in terms of policy formation comes through, we are really looking at the oil price and the monsoons to determine where the market goes. That’s why I believe that 5,800 or 6,000 given my orientation on these two factors, those levels could be reached. Q: As we move towards the end of the year, do you expect a fear that there might be more concern about global growth? Some people are talking about recession like conditions. How much of a headwind could growth actually present to the upward journey that you are talking about?
A: We have been waiting to have the sort of ‘whole world going crazy’ on India several years ago saying the next best thing after white bread was to invest in India. That was the kind of mood. We created a top for several years - in that sense when we hit 6,300 in early 2008. Today it is exactly the opposite. Ratings agencies, policymakers, economists etc are going completely crazy bemoaning the lack of direction from Delhi and in that context if you have global headwinds as well.
One of the things that is very clear is that oil had no business to be all these years in the USD 100-125 per barrel range. Therefore, I believe we may well be into a period for the next 12-18 months where the WTI may range between USD 65-80 per barrel. If you go back to interviews that we have been having, we have been extremely bearish on crude and we think even the WAF premium would disappear as far as Brent is concerned.
We think a steady state Brent in the USD 80-85 per barrel range, WTI maybe USD 70-75 per barrel range could be the order of the day for the second half, in keeping with global fundamentals. In that context, if India were to chart out from a 5% which everybody now believes is the kind of a low-ball number that we will hit, if we were to build a base, you will find that India, with all the negatives, now known to everybody, offers the kind of 5% growth clarity which is not there in many parts of the world.
Looking at it differently, a 5% with the tailwinds of oil prices or monsoons are even reasonable and we could make a pretty constructive bottom around 4,800-5,000 and move 20% higher from that towards the end of the year. Global fears if anything will only indicate even further that we need to look back which is probably the reason that you are already having virtually no selling from foreign investors other than this ETF flows that come in and go out.
To my mind, the ETF flows are very similar to the hedge fund flows of the 2005-2006-2007 era and if that is the case that is the only ‘hot money’ or sort of volatile money that comes in, but long-term investors, whether sovereign funds, PE funds etc are pretty constructive on India. With the dollar-rupee moves, the market has kind of made it impossible for people who want to sellout if you have a long-term basis. But on the other hand it also makes entry point for new funds that much better.
You are talking about a 56-57 plus dollar-rupee entry point and an effective dollar index for all practical purpose on the midcap side well below 3,000. But even otherwise the Nifty just adjusted for the dollar-rupee moves is already in the 3,500-3,700 range. From an entry point perspective, I don’t think you can ask for better and if I were to put my neck on the line, buying into the Indian market is almost a no brainer at this point in time.
_PAGEBREAK_ Q: Would you buy the big banks, the big infra or take a midcap call? How do you play the second half of the year?
A: If you were to be in the frontliners and you were to look at the interest rate sensitives and the banks for instance then we would focus on names like YES Bank and banks that are significantly removed from the NPA issues of other bigger banks. We would take slightly more constructive micro calls on the space itself through names like YES Bank or IndusInd Bank. These would be our favorites in that space. It’s a stock specific market, in what may well turn out to be a broadly up-trending market.
Clearly in an uptrend, the frontliners will need to do well otherwise the index won’t move up, but we think that we would go for specific names like the ones that we talked about. Our preference would however still be on the midcap space where we would focus very heavily on the auto ancillary space. The textile space being extremely sensitive to the weak rupee and even engineering goods to some extent, because we think the RBI’s premise of boosting exports may not happen necessarily in the short-run, but give it a quarter and the impact of this will settle in.
Already we are talking to names in the auto ancillary space and in the textile space which are talking about significantly higher export numbers for this year even as early as June of 2012 for the FY12-13 period. The export story is definitely a story that we think is here and while I might be a little brash by saying that is the next best thing after IT, in 1992 when the dollar-rupee weakened, it may well turn out to be given what’s happening with the Chinese labour situation etc.
I think any labour intensive export oriented industry may well turn out to be the spaces that could attract money. These, if you noticed are extremely under-owned, are not places where people have made money in recent times and therefore with the decimation of the auto ancillary industry for instance in Europe, it’s natural that people will look for more stable sources and more stable suppliers. The Indian markets are offering them exactly that.
So in the initial phase, there maybe some dollar-rupee adjustment etc, but net-net all these exporters will tell you there are enough margins on the table. Several years ago, the RBI went against the real estate space and what’s happened to the real estate space over a three-year period since. Then they came down heavily on the micro finance space and that’s almost got decimated since. Then it happened to the gold finance companies.
Perversely the RBI has now decided to go extremely gung-ho in terms of boosting exports and if that’s one thing that the RBI has said extremely clearly over the last two-three policy announcements is that they want to boost exports whether it’s refinance, whether it’s interest subvention, whether it’s ECBs, whether it is export refinancing whatever. In that context, if we had just gone along with what the RBI wanted in terms of getting out of the spaces that they were against over a period of time, curiously enough they might well have given us the lead into one space that would really benefit over this period which is therefore the export space.
I have been a great fan of the RBI except for its currency management policy, but if you dovetail that with their sort of almost devilish obsession for exports, I think you will realise that a weak rupee is well and truly within the framework of the policy that they have set out. The management of the rupee however and the volatility thereof leaves much to be desired but that’s a separate story for a separate day. Q: Along with any positive macro announcements, would you be worried about this micro sectoral level interference something like cement for instance that happened last week? Do you think that could continue to happen?
A: I feel what’s happening is that we haven’t realised it, but there have been small micro movements whether it’s Anna Hazare or others. They may have been irritating sidelights on a front page, but frankly they have resulted in substantially higher fear levels amongst public functionaries in terms of carrying out their duties. Nobody is above the law - is a truism in most parts of the world but are not followed.
In India it may well turn out to be a reality that it’s an animal we have sort of let loose without actually desiring to do it in that manner, but the reality is that that might well have proved to be a very interesting sidelight of the Indian market, the governance and fear levels in terms of public functioning. It may well have gone to a new level. Of course there is the other side which is where functionaries are extremely scared of taking decisions and when the government needs to do something which promotes decision making it rather paralyses these into inaction.
Having said that, it’s very good that cement companies having consolidated beyond belief over the last 10-years and are now finding that these nice well-cushioned relationships otherwise called cartels cannot exist. It’s a great wake up call for that industry. While consolidation is a big theme and therefore promotes profit making etc but profiteering through carteliszation, they are going to come down heavily on it. The RTI to my mind was really the next best thing after independence that we got where any common man can ask any questions about most things in public domain and I think things like the CCI may well turn out to be the icing on that cake. Q: Right now we are only discussing the baby steps of whether the market has got a more durable rally coming. Are you feeling more confident about next year and the fact that there could be much more significant gains for the market to be made? New highs are very far, but do you see a significant upside going into next year?
A: I think it’s important to point out that the market peaks out when the issuance of equity other than euphoria etc that people know and talk about, when euphoria is the highest and people want to invest. Apart from those reasons when issuance of equity is at its kind of peak which was the case in 2008 where literally all kinds of issuances of equity were happening, conversely the market actually makes a base when equity is actually being sucked out of the markets.
To this I would like to point out the one comment that we have been having across channels is that the biggest buyers of equity in the market today on a sustainable basis are actually promoters of companies and that’s something that we need to look at in the context of whether it’s through buybacks, whether it’s through delisting or the whole bunch of delistings in the Indian context, the Indian promoters.
Really speaking there is a net depletion of the existing equity stock from the market and when that dovetails with the pessimism, the headwinds etc that to my mind marks almost a climactic bottom at this point in time, that the market today is seeing on a daily basis promoters who are the most sustainable buyers of their equity. Most Indian promoters in the last 25-27 years that I have been working, would tell you that we have a listing because at any point in time we can issue equity and raise money for what is required in terms of business of the company.
That equation has changed and nobody is willing to contribute in terms of equity dilutions, QIPs etc. IPOs are virtually dead then you are talking about a market where rather than this equation holding true that we have a listing because we can raise money and promoters are now saying that this listing price makes no sense, you are not going to get money might as well increase our holding in times like this or delist.
You are talking about a very, very strong signal which retail investors would do well not to ignore and while retail investors have been the smartest in this market, has been out of the markets for almost now three and half, four years I think it’s probably a great time to convert some of the savings into investments, especially as I said in spaces like the once we talked about and with managements where creeping acquisitions or increasing of holding is well and truly happening.