Market may see new highs next year: Raamdeo Agrawal

The Indian market has been consolidating for the last six-seven weeks. In an interview to CNBC-TV18, Raamdeo Agrawal, director and co founder of Motilal Oswal Financial Services says the valuations are attractive. "In 2013-14, the earnings are expected to be in Rs 1,350 range. So, in the normal course itself, it can cross over to 20,000-21,000 because the market is attractive," he adds.

Also Read: Govt clears 9.5% stake sale in NTPC, may get Rs 13,000cr According to him, PE multiples are at 15-15.5 percent. "A 10-15 percent move in the earnings, in next four quarters, should see the market going to the new highs. It is not a very high energy kind of a situation where something big is going to happen. But logically, in the next year, we should see new highs," he explains. Below is the edited script of his interview with CNBC-TV18’s Udayan Mukherjee and Mitali Mukherjee Q: You keep an eye on metal stocks like Tata Steel and Sterlite Industries. Would you buy Hindustan Copper at Rs 155? A: I do not know enough about Hindustan Copper or copper per se. But companies run by public sector undertakings, unless they are available extremely cheap, one should not hazard an entry in those stocks. Q: Would you say the same about any potential issue from NTPC? A: NTPC is a giant and almost a monopolistic power producing company. But it does not have much opportunity in the merchant power. So, its returns will be regulated to about 14-15 percent of RoE. Q: Do you see a breakout post the Parliament session? A: In 2013-14, the earnings are expected to be in Rs 1,350 range. Now, the valuations are attractive. So, in the normal course itself, it can cross over to 20,000-21,000 because the market is attractive. PE multiples are at 15-15.5 percent. A 10-15 percent move in the earnings, in next four quarters, should see the market going to the new highs. It is not a very high energy kind of a situation where something big is going to happen. But logically, in the next year, we should see new highs. Expert views: Trading tips on 10 largecap stocks Q: Do you believe that the market could still have a shot at a big move come December, which is when we usually see some activity? A: I do not know about monthly moves. It is very difficult to predict. People say that foreigners will come back from their holidays in January. So, from January to March, there will be a good allocation to Indian stocks. That is what you get to hear. Because of that, there will be a pre-emptive buying in the market. So, one has to just watch. This has been happening in the past. One has to be hopeful. _PAGEBREAK_ Q: Do you think earnings have bottomed out or is it a still a sticky kind of patch where you cannot project those numbers with a great degree of confidence? A: Whenever you look at next four to six quarter into the future, there is always some kind of uncertainty, but in aggregate things workout well. This quarter was pretty solid. There weren’t major blow-ups in any earnings. If there is a relief in the next three-four months from the interest rates and things like that, then my sense is we have seen the bottom of the earnings. Earnings are solid now. So, whether they grow by 12-15 percent or 7-8 percent, the worst for the earnings could be in the range of Rs 1,300-1,325. I am not too bearish on the earnings side at this level. Q: The only worry for some people, including for the expectation of a December performance, is the way the rupee has depreciated. How concerned are you about how much that may hamper market performance going into next year? A: It is the most important indicator that one has to watch. It is one thing that  Delhi is scared of. The moment rupee goes above 55, you start hearing a lot of noise about reforms. It is one particular variable that has huge repercussion and is the most important one. Nobody can do anything about. It has impact on the current account deficit and an impact on the fiscal situation also. Rupee is now at around 55.25. My sense is that though government can manage this number, at any level they want, but there is a gap in trade account and current account. Balance of Payment (BoP) situation is quite tight. The Reserve Bank of India (RBI) does not want to lose any of the reserves that they have. So, only a rate adjustment can balance import and export. Rupee is the most important variable right now. The world is not willing to buy too much of exports from India at this juncture. Import also looks to be very inflexible. So, I think the only adjustment will be through the currency depreciation. That is quite dangerous. Q: You track autos quite closely. Mahindra and Mahindra (M&M) has emerged as a clear favourite out there and Maruti Suzuki has done well, but the others have not. Have you rejigged your portfolio there? A: No, I have not done any changes. Mahindra looks to be very promising, especially with their new launches. They have complete capability in terms of designing, producing and even exporting. We may look to add it to the portfolio. I think the real battle is happening in the two-wheeler segment, where Honda has grown this year very strongly at the cost of market share from Bajaj Auto and Hero MotoCorp. So, for the next year, one will be keenly watching the two-wheeler space to see how much more energy is there in that space. Two-wheeler still remains a very fascinating place for investing. Q: Consensus seems to be slowly building that telecom maybe coming out again in terms of performance, particularly something like Bharti Airtel. Do you think it is time to look at that stock? A: The current outcome of the auction has been encouraging for the incumbents. It should help them reduce the cost of spectrum going forward. But they are talking about further auctioning in March. So, we do not know who all are coming in. One of the problems, apart from the spectrum pricing, is the level of intensity of competition. If by February-March, whenever the auction happens, and two-three large new entrants enter the market through the new bidding then again we are back to pavilion. In reality, I do not think anybody should try to get into Indian market by blowing few billion dollars. If that happens then competition situation does not change. Otherwise, clearly some ray of hope is building up for the Indian telecom companies. But it's early days yet. _PAGEBREAK_ Q: There has been some excitement after a long time in media as a sector. Have you thought of including anything in your portfolio? A: Everybody has been talking about media. But I see media companies not making profits, except for Zee Entertainment, nothing seems to be having some edge. When the digitisation fully plays out who will make money? My sense is that Zee seems to be a very reasonable and safe bet in media. So, Zee is one stock that looks very interesting to me. Otherwise, when I tried to look into the profit and loss balance sheets of other media companies, I could not figure out on how they would make money. Q: Do you expect to see any big valuation changes in the next year in terms of the sectors that have enjoyed premium valuations versus those that have been ignored or do you think next year it is probably a good idea to keep you portfolio as is? A: Whenever market rallies big time, some of the out of flavour sectors will definitely come into the fore. One of the sector, which is definitely favoured as and when the interest rate cycle turns, is public sector banks (PSU). They are completely out of shape. Results have been very bad. We saw the Q3 results, where provisioning coverage has to be brought down to show decent result. These are the worst set of results that I have seen in recent times. Stress in the public sector balance sheet is very high. So to save that particular situation, most likely RBI will act from here onwards. This is the worst possible situation and worst possible valuation. Can this situation change? I think that is where the scope is highest because very large banks are available at a very low valuation. Otherwise, there are very few sectors, where one can clearly that changes could happen in next 12 months. Q: Do you find anything exciting to buy in the auto ancillary space? Names like Apollo Tyres, Exide Industries or Amara Raja Batteries too have become quite active recently. A: I think Amara Raja looks to be very interesting. It is the number two player in battery. It has gained market share. The profitability is very strong. The valuations are also reasonable. So, Amara Raja stands out very clearly. Auto space, on the whole, is very interesting because all of them have high profitability and are at reasonable valuations. I do not know many component companies, except for Bosch. It is, right now, not doing too well, but in the longer-term could get about 20 percent kind of returns. When this quarter results were out and there was 20-25 percent reduction in profits, I thought the stock would crack. But that has not happened in the market place. At any point of time, the stock cracks, I think it is a very interesting stock to see. In ancillaries, there are a very few stocks, which have demonstrated ability to make money in good times as well as bad times. These five-six of the automobile companies have demonstrated that they can make serious amount of money in the years to come. Q: Commodities have not had a good year-end. Reports indicate that there has been back-to-back selling by hedge funds on many of these key commodities. How do you approach metals, oil going into next year? A: With regards to metals, I do not know how this global recovery or global demand is going to determine. The steel prices are still soft and not doing too well. The valuations are reasonable. I do not have any insight, in terms of how the prices will move, whether they will be up USD 500 or down. So, I am not taking any stand on that. Oil looks to be very interesting, particularly Cairn India, where the stock has delivered about six times earnings for the current year. That is around Rs 12,000-13,000 crore profit. It is only a two-year old producing field. So, the potential is very high. Government definitely will come around to permit the company to produce more. Given the way the contract is signed, additional production does not give much of extra earnings to the company. But even then, some extra earnings will come. My sense is that it is a free cash flowing, dollar asset. So, in a situation, where the rupee is weak; you have something which is producing dollar profits, day in and day out. So, Cairn looks to be interesting.