Nifty may see 6200 if budget prudent; PSBs a worry: Dalton

UR Bhat, MD, Dalton Capital Advisors, says that the market is eyeing the upcoming budget for action. If the budget is prudent then the Nifty will touch 6200 levels. PSU banks have performed lower than expectations, where there has been a rise in NPAs and slippages compared to private sector banks. He is of the view that next few quarter will be difficult for public sector banks.

Also read: FII inflow into Indian stocks crosses $7 bn in 2013 so far

Below is the edited transcript of his interview to CNBC-TV18.

Q: It has been a strange few weeks. Global markets have held up, at least the US. Flows have been strong - USD 7 billion YTD, but the markets just lost so much steam. What is your view?

A: I think the market is looking up to the budget. There were good indications from the finance minister where he mentioned that it will not be a populist budget.  

The finance minister will strive towards fiscal consolidation. People want to believe this, but the numbers do not add up, so I think there is some consternation on that. The statistics which came from the government was also not encouraging and progress is also limited to curb the twin deficits. The inflation is also not providing much relief. The run up in 2012 was mainly due to multiple re- rating and not earnings. I think next action is expected from the upcoming budget. 

The policy statement from the RBI, where they continue to harp on curbing inflation in preference to growth was bit disappointing. These factors are giving some sort of consternation to markets. The market has gone up quite a lot, so some relief is required for the market, so that it can do well if a good budget is in the offing.

Q: How do you view the market from now up until the budget, how much more downside from 5,900 level you reckon?

A: Sadly, though from February till date, around USD 3.5 billion came in but the market has dipped by 2 percent. A lot of USD 3.5 billion that came in has been absorbed by government divestment. Major money is not coming into secondary market.    

However, in any case even if there is some amount of domestic selling and domestic disenchantment, 5,800 is a good support. I do not think it will break 5,800 on the downside. But on the upside if it is an extremely good budget, then it could probably touch 6,200.

Q: Is banking still a preferred sector post earning season?

A: The private sector banks have their Non-Performing Asset (NPA) and slippages very well but the case is vice versa for public sector banks. Lot of restructuring took place for PSU banks which might actually slip into NPAs over the next few quarters especially after power sector reforms not taking off as expected. So, there are chances of more slippages and rise in NPAs. I think the next couple of quarters would be extremely difficult for public sector banks. We find a huge disparity in valuation and that would continue for some more time.

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Q: The midcap space has been a problem. Do you see much more pressure for the broader market?

A: Many corporate governance issues have surfaced in last few months in the madcap space so investors are a bit disenchanted and it is visible in the performance. Hope from the upcoming Budget is high as far as the broader market is concerned. If the Budget is prudent and liked by the market then it will be a game changer.

Even if it is a mildly populistic Budget then the market could correct big. Public policy momentum is actually driving huge amount of foreign inflows. Major chunk of money in 2012 flowed after August-September, when the public policy momentum started. There should be a combination of both public policy and FII flows. The FII flows have been good and there is some relative stability is seen in Europe or US.

In Europe, thing look a bit stable from money markets prospective. The debasement of the currency by keeping the printing presses busy is continuing, all over the world, not just in Europe and US but, even in Japan. The hard landing in China is behind us now. We need to watch out closely US debt ceiling negotiations. If it sails smooth, then FII flows should continue because the emerging market ETFs have been attracting huge amounts of money and that is driving the Indian market. the market should continue to do reasonably well if they get some amount of assistance from public policy momentum. 

Q: How much more do you expect in terms of support from flows? We got USD 24 billion last year, but in the first 40 days of the year we have got USD 7 billion, that is 30 percent of what we got in the entire last year. Do you expect this pace to continue?

A: I don't think this pace will continue but it is contingent on a successful negotiation of the debt ceiling issue in the US. Unless, that happens there could be a risk-off trade or if there is some brinkmanship or if there is some sort of complication on account of that. We need to watch that very closely. I am sure that it will sail but it will not be a smooth sail, there would be some conditions and that may cause some volatility in the markets in the run up to that negotiation.

I think volatility will be high than what we saw in the recent past. As election in Germany is slated in the last quarter of this year so build up to that will start. All these factors will ensure that there will be continued volatility but the flow of money into the Indian market into the Indian market will not be ebb away very soon as long as there is a healthy correction as it is happening now and there is further public policy momentum as we see through the budget and thereafter.
        
Q: The correction in the index has been quite orderly and even healthy but in the midcaps, it has been a bit starker. Do you expect that to continue, the broader market underperformance?

A: It is quite possible because the amount of corporate governance issues that are coming out of woods as far as midcap and smallcap companies are concerned, are very regular. Though these companies have had FII or institutional backing for quite sometime but the surprises have been so stark that people are shying away from new investments in these stocks. Till there are corporate governance issues, it is futile to hope that money would come into those stocks. I don’t think these stock will be a favored as long as corporate governance issues are present.

Q: Would you expect to see this pessure continuing on infrastructure as a pocket? Jaiprakash Associates, Reliance Infra, Bharat Heavy Electricals Limited (BHEL) have had pretty disastrous weeks.

A: I think in the run up to the budget and after the budget if the government has to do something credible in the forthcoming 2014 elections then they will have to put the infrastructure in order. There are certainly some baby steps in power sector reforms, coal allocations, pooling and other issues.

The government must ensure that projects which are stuck up for some clearance should be fast tracked. If that happens, then the outlook for infrastructure industries and infrastructure sector would look much better. I think budget could be the game changer as far as outlook for infrastructure is concerned, and I think it is clearly worth watching this space.

Q: How you are approaching IT now after what you have seen through the sectoral performances both for front-liners and now midcaps like Hexaware Technologies?

A: With very few exceptions, I think IT has been a disappointment. The only silver lining was when one of those front-runners managed the expectations to such a low level that even a mild positive was looked at very positively by the market, but other than that there is really nothing much to write home about. I think there are even some curbs on new recruitments in some of the larger IT companies.

Therefore, I think the outlook does not seem to be good. With the sort of economic environment globally it does not look like as if they can really press ahead with huge growth as far as their earnings from the US or Europe is concerned. I think the outlook is generally weak and it is really tailing on the valuations and the stock price performance of these stocks. I think it would continue. IT would not have that pride of place that it enjoyed for the last several years going forward.

Q: What is your view on oil and gas and whether you have started buying those stocks after what you have heard from the government?

A: Certainly there is some forward movement are government’s move to hike diesel price by 50 paise every months. Compared to past now the market is more interested in this sector. Still, a lot needs to be done in terms of new exploration and pricing of gas. There is still uncertainty as to how subsidy will be shared, but positively now companies will be able to increase their prices very slowly, but over probably in the next one year or so I think things might come back to some sort of a mildly deregulated regime which the market is looking forward to. If they go ahead with this then this sector would be worth watching going forward.