Budget 2013: Budget key mkt trigger; buy Dabur & BoI, says Religare

Tirthankar Patnaik, EVP - institutional sales, Religare Capital Markets explains on CNBC-TV18 that the Budget Session is likely to be next trigger for markets. Patnaik adds that the market witnessed some profit-booking after the announcement of the credit policy by the RBI and domestic institutional investor outflows came on the back of redemption pressure. He advises investors to maintain a 'sell' on BHEL with a target price of Rs 200 and raises concerns about Axis Bank's asset quality.

In the consumer segment, Patnaik zeroes-in on Dabur and Emami as favourites with Cummins being the top pick in the capital-goods space and prefers Bajaj Auto in the auto segment. Patnaik also highlights stocks like Dena Bank, BoI, BoB and SBI from the PSU-banks segment. Below is an edited transcript of the interview on CNBC-TV18 Q: The market has been very tired over the last few weeks. Do you expect it to pick up with the Budget at the end of the month?
A: Yes, I think so. The market seemed to have taken a breather after the Reserve Bank of India (RBI) announced the credit policy. Though there was a lot of profit-booking, the market is beginning to build-in a lot of expectations as the Budget Session nears. The finance minister has committed to achieving the fiscal growth target of 5.3 percent and that would be the next trigger for the market, going forward. Q: What do you make of this quantum of domestic selling? Is it still a redemption issue? Are people parking cash in order to subscribe to some of the government paper? What is causing this daily outflow Rs 1,000 crore?
A: I think it is due to both. The market has reached the 20,000-level for the third time in four years and every time, it touches this height the retail investors begin to feel some discomfort. A lot of investors are beginning to see capital values being reached after four years.
So, the redemption pressure is likely to continue and overall weakness in the economy has also meant that inflows are at a premium at this point. We expect some discomfiture at this level to continue. It would probably take outperformance for another year, in my opinion till the third quarter or so if the market is up around 20-25 percent for the retail interest to actually come back. Until then you are likely to see this pressure going forward as well. Q: What do you takeaway from BHEL's results? Would you continue to maintain a bearish stance on the stock?
A: Absolutely. Our analysts have been spot-on, on the stock all these years. BHEL’s FY13 order-book is hardly Rs 25,000 crore as compared that to FY12 level of Rs 55,000 crore. Order inflows are not expected to pick up until FY15 when the ordering in the 12th Five-Year Plan will start.
To that extent, the stock is expected to languish around these levels. We have a target price of Rs 200 for the stock and we maintain a 'sell' call. Tare not expecting the investment cycle to pick up anytime soon and therefore BHEL is likely to remain under pressure for that particular reason. Q: You have a sell on Axis Bank. It has managed to successfully raise a huge pile of cash with some institutional investors. Are there any concerns?
A: Axis Bank has done fairly well. The raising of capital was a complete success. But its asset quality was what we have been concerned about right from the start. We believe that banks will continue to be dogged by the problem of asset-quality. It is basically a macro-call. We are not looking at more than a GDP of 5.5 percent for FY13 and that is likely to increase only to about 5.8 percent in FY14.
So, the macro-concerns remain. Axis Bank has thus far maintained its results, but we believe that given the chunky nature of its book there might be some problems cropping up going forward and to that extent we maintain a ‘hold’ on the stock. I think most of the upside in the stocks is likely to be priced-in and there is going to be little of it going forward. Q: Cummins India did quite well after the announcement of results. Are you constructive on that stock?
A: Absolutely. Cummins is our top pick in the capital goods segment. We have just recently rolled over our target price to about Rs 585 and expect it to reach that level in about 8-9 months. So you should see the stock touching Rs 600-levels on the stock over a 12-month period. Q: You are buying consumer stocks like Titan Industries. Are you confident that the next year will remain as robust for these stocks?
A: We like Titan because of its structural strength and we are positive on the stock. The company is supported by factors such as India's gold consumption, discretionary consumption, increasing trend of organised jewelery and specialty retail.
In the near-term, Dabur India and Emami attract our attention from the consumer sector. Dabur has been the sole stock that has shown not just improvement in volumes, but also in margins in the FMCG segment. Hindustan Unilever (HUL) disappointed on volumes and the slowdown in the economy is slowly tricklinjg into the consumption segment. Q: Crude has reached USD 117 per barrel again. Would you expect to see OMCs make those small adjustments to diesel even before the Budget so that investors are convinced that the process is well underway?
A: Your guess is as good as mine. Diesel has been deregulated now and petrol was deregulated in June of 2010. However it took about two years before OMCs were able to make changes in petrol prices frequently enough for the the market failed to register and react at any point in time.
Our base case is that there should be some changes at least in the first half of the year until the election get closer. So for the market if these companies are able to take a few Rs 0.40 hikes will be met with a positive response by the fisc and provide a leg-up to the OMC segment which is trading at below- levels over the last four-to-five years. So the market needs to see that these changes actually come through. Q: The National Thermal Power Corporation (NTPC) issue is due in a week or so followed by MMTC Ltd, Steel Authority of India (SAIL), Rashtriya Chemicals and Fertilisers Ltd in March. Which of these do you think will see a strong response and are investors enthused now about government paper?
A: If the OIL sale is anything to go by, there is appetite in the market. We maintain that equity supply is likely to be large in the next six-to-eight months but given the quantum of flows it is not likely to change or shift the direction of the secondary market. There will be enough flows if the government continues the rhetoric on reforms and if the global backdrop remains favourable. To my mind, all of these issues should have a favorable response and NTPC particularly so. Q: What are you buying in the auto sector?
A: M&M's UV sales were amazing and we are aggressive on M&M, apart from Bajaj Auto and Tata Motors, as a domestic play. We prefer global plays like Tata Motors and Bajaj because of their export-driven nature and higher margins over Maruti Suzuki where we believe that the play is essentially on realisations. It is basically a Yen bet which is supporting the stock right now. Volume-growth levels are considerably lower. We have a 6 percent YTD result for FY14 and management has pointed out there will not be growth of more than 5-6 percent on volumes.
At this level, we clearly prefer Tata Motors over Maruti and Bajaj over Hero Honda. Today, the Hero Honda results might offer some support for the stock apart from the build-up in inventory. These results would start to rationalise in a couple of weeks. We maintain our preference for Bajaj in the two-wheeler space. Q: From the PSU-bank sector, what would you buy especially given the correction that the segment has been through over the last few weeks?
A: From the PSU-bank sector we like Dena Bank, Bank of India. Bank of Baroda is to report results today and remains our top pick along with the State Bank of India.