Mkt won't fall much till expiry; more pain for Re: Religare

The market will not fall much atleast till the expiry, says Gautam Trivedi of Religare Capital. He sees a lot of cash buying in the last two days, but come Friday, immediately after the expiry, the market will once again see weakness.

He feels the weak rupee on the back of the ballooning current account deficit, or CAD, is pulling the market down. He thinks the rupee will continue to remain volatile, which will lead to foreign as well as domestic investors remaining cautious and not pumping in more money into the system. Also Read: Nifty to hit 4900 on poor macros; NBFCs attractive: Alchemy
On banks, Trivedi feels it will be better to wait for the second quarter results before putting fresh money into the space. With rising non-performing loans, or NPLs, there is very limited interest in PSU banks, except SBI, he says. Though there is some degree of interest in private sector banks, he adds.
On Food Security Bill, he says a lot of it has already been factored in by macroeconomists. He feels the overall consumption pattern will be impacted because of the direct benefit transfer (DBT) that will take place wherein cash will directly come into bank accounts and second the good monsoon. The two put together may lead to a rally in some FMCG names, he adds. Below is the verbatim transcript of Gautam Trivedi's interview on CNBC-TV18 Q: Let us start with the broader markets first. Do you think that the market has seen the kind of highs it had to in that small three-day recovery we saw and that this time around even before the expiry we could take 5,300 lower?
A: I don’t think the market is necessarily going to head significantly down between now and the expiry because there is a huge reverse up position out there in the market. So as a function of that you will see a lot of the frontline names move up. When I say reverse up, what happens is a lot of these guys have gone and sold cash and gone long futures but given the high cost of rolls these positions are unlikely to be completed rolled over.
So as a function of that you will see a lot of cash buying in the last two days, especially the last day and at the time of VWAP. So as a function of that, the market will remain robust but I see weakness in the market starting Friday again. So the fundamentals have not been changed, it is just the very technical reason that you are seeing some degree of firmness returning to the market. Q: You would think that immediately after the expiry, you could see the markets vulnerable?
A: Yes, absolutely. Q: What is your view on the food security bill getting cleared by the Lok Sabha and the impact that it would eventually have on the fiscal deficit and how worried the market is at this point with regards to it?
A: A lot of the food security bill in some ways has already been factored in. So the mere passage in the Lok Sabha and probably by the Rajya Sabha soon is a mere formality at this point. People already knew and that was already factored in by most macroeconomists, including ours. So that is not a big surprise.
People not only need to understand how this is going to impact the overall consumption pattern in the country given the fact that you also have the direct benefit transfer (DBT) that will take place wherein cash coming into the bank accounts directly that is one. Two is you have had a great monsoon.
So you tie the two together and you are probably looking at a potential continuing the rally in some of the fast moving consumer goods (FMCG) names. So that is the impact that I can think of but from a macro perspective, a lot of that was already factored in. Q: What is pulling the market down, you think this is entirely a rupee effect and basically what is your view in terms of where this market might find its feet. Is it sub-5,000?
A: It is hard to put a number in terms of the index because the wild card in this whole environment right now is the currency and it is the inability of the government/ Reserve Bank of India (RBI) to defend the rupee. That is number one.
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Number two is to bring in some degree of stability to the rupee, both of these factors are clearly not there yet until that doesn’t come which only can happen if the current account deficit (CAD) is reined in, which is still a medium-term to longer-term event. I still see the rupee being extremely volatile and in the absence of any stability in the rupee, people would be definitely concerned about putting fresh money to work in India and I don’t mean the rupee is not only impactful for foreign investors, but also for domestic investors. Q: You have a lot of banks that are going to be addressing at your conference, what is the sense that you are getting about the asset quality pressures and how much more there is to go in terms of weakening of asset quality, many of these banks are already down about 40-50 percent since the start of the year, do you see more wealth destruction in the banking space?
A: We do. I will probably have a much better answer to this question by this evening when I would have met the 10 banks and the non-banking financial companies (NBFC) that are coming but you do raise a pretty important point about the NPL issue. This point the market and a lot of the investors that we discuss banks with are clearly not in the mood at this point to put fresh money to work in the banking space.
If at all, there is some degree of interest in private banks, but almost zero interest in the public sector undertakings (PSUs) except maybe State Bank of India (SBI). This is in spite of the fact that a lot of these PSU banks are trading at 0.5-0.3 times price to book, but yet there is limited interest. In fact, our view is that we underweight the banking space, our view is that at this point, it is better to wait for Q2 results before putting fresh money to work in the banking space. Q: Let us talk about something positive, the IT space. I understand you are overweight on IT, would it be even in largecaps or is it only in midcaps? Largecaps would look rich in valuations?
A: It is in the largecaps and the reason being that the ability of midcaps is to gain the bigger contracts or to be even invited for the bigger contracts is obviously a problem. So the business has been gravitating towards largecaps for the last several years, it is not new news and we continue to prefer largecaps, in fact one stock which is a largecap for now is still for some reason trading at midcap valuations, Tech Mahindra, it has been our top pick since the stock was around Rs 800 and we now have one of the highest target price on the street of Rs 1,600. So we would still recommend buying into Infosys and Tech Mahindra. Q: Would you be a buyer in any of the non-banking financial companies (NBFCs) considering that they saw a big rally in MMFSL, Shriram Transport Finance Corporation has been going in the other direction, would you like them because their problems could be more intermediate in terms of wholesale money being expensive but not as worried as the banks are in terms of NPLs?
A: Yes, I do agree with you. We have four NBFCs coming and attending a conference today but you raise a valid point about the NBFCs. The NBFCs have been largely – I would not say they haven’t corrected but they haven’t had the brutal correction that PSUs or even some of the privates have had.
We like the NBFC space even now and I do agree that this is an intermittent problem of the wholesale funding. Hopefully that goes away and they find a solution around it. Our top pick within that space would be Mahindra and Mahindra Finance. We just recently met with Ramesh Iyer and the mood there is clearly that they are in a very sweet spot given the fact that we have had a great monsoon, 700 rural branches. I cannot think of a better way to play the rural India theme in this environment than buying M&M Finance. The stock has had about 15-20 percent correction, it is pretty attractive at these valuations. Q: Take us through what might be the ultimate earnings growth or earnings number of FY14, do you see further downgrades, separately your take as well on metals, they would be beneficiaries of rupee depreciation, so is there a buy in that space?
A: Let me answer the second part first. The rally in metal stocks is clearly on the back of the overall commodities rallying in the international markets, but the fact of the matter is and also the fact that the Indian metal stocks were trading at 0.5-0.6 times book and were clearly attractive from a valuation perspective. The ability of Indian metal companies to pass on the hike in international commodity prices to consumers is going to be a big challenge in this microenvironment. The only beneficiary there would be Tata Steel which like Tata Motors has bulk of its earnings from overseas versus India but outside of that a lot of these companies will be challenged to hike prices.
In terms of earnings growth, we have a 7 percent earnings growth currently for FY14 and a Sensex target of 17,000 so as a function of that, it is where we are. If the market and the economic environment turns for the worse, we may have to relook at these numbers. Q: You had mentioned earlier that you have a Sensex target of 17,000 by the end of the fiscal that is by March, would you require to scale down your Sensex target if matters get worse as we have seen in the past couple of weeks?
A: The answer is yes because I don’t think when we put these numbers out, not just us anybody for that matter expected the rupee to depreciate as fast as it has. As you just pointed out earlier that if staying at a certain level for even 10 minutes is interesting, if this continues to fall further, it puts a lot of arithmetic out of gear so yes, we will be competitive to look at our numbers if rupee continues to fall.