See Nifty 6900 by Dec; like infra, auto: Macquarie's Arora

Macquarie’s Head of Research Rakesh Arora sees the Nifty hitting 6900 by this year end, though he sees the spate of shares offerings by companies to limit gains in the short term.

Many companies have been coming out with offer-for-sale issues to comply with the Sebi rule on minimum 25 percent public shareholding. Arora expects the current bullish phase to gather steam from October onwards and sustain till January-February, after which the market could temporarily peak out. In an interview to CNBC-TV18, Arora said he did not see general elections taking place before May next year. Assembly elections slated for 2013 will be among the key triggers deciding sentiment, he said. Arora is hopeful of the capital expenditure cycle picking up from the second half of this financial year. In the infrastructure space, Arora is bullish on Cummins India. In the banking space, he likes SBI and Axis Bank, and among autos, his top bets are Maruti and Tata Motors. He is negative on cement stocks and expects the earnings downgrade cycle to continue for some more time. He is cautious on the IT sector as he feels the stocks are priced to perfection and there is little room for error. In addition, he sees the sector being vulnerable to the revised visa rules in the US. He advises investors to stay with quality names in the large cap space. Below is the verbatim transcript of Rakesh Arora's interview on CNBC-TV18

Q: It has been a very strong run. Would you take some profits here or do you see this run extending significantly higher from here on? A: From a 12-month perspective our target is 6900, so we remain positive into the market for rest of the year. However, there is a USD 2 billion worth of paper which is likely to come into the market in the next two weeks because 3rd June is the last day for meeting the listed norms and a lot of companies will be trying to raise money as you say Fortis overnight.

Foreign Institutional Investor (FII) inflows have reduced a little bit from average of USD 2.6 billion a month and now they are averaging USD 1.3 billion, so there is a little bit of a decline. There will be enough paper supply in the market, so some moderation in the market can happen in the near-term but second half looks to be pretty strong and I think buying on dips will be the call. Q: What is your primary concern on the market right now? This kind of supply that is going to hit the market or is it something else like valuations or politics and policy that you think may lead to some softness? A: It has largely to do with the supply of paper in the market. The FII inflows have been diverted mostly towards Japan etc. and that has reduced the flows into India, though India has been fortunate that despite the emerging markets seeing weak inflows, India has sustained positive inflows and I think it is just that the quantum of paper getting bunched up in the next two weeks makes us little bit cautious on the market in the very near-term. _PAGEBREAK_ Q: Anecdotal though, what are you hearing from colleagues in terms of money interest in this market because that is being overwhelming in the month of May. Is that still pushing very hard? Is it the ETFs that are beginning to suck money into India? A: Most of the money which came into India was only long-onlys and that is long-term money. There is genuine interest in India following the reform attempts which the government has been doing. Mr. Chidambaram has also been doing rounds trying to give confidence to the investors. So the general feeling among investors is that GDP growth of India will go back to that range of 7-8 percent in the next 3-4 year period. Currently, markets are undervalued if you consider that kind of GDP growth will return.That is why we have long-onlys with 3-5 year view who are buying into the market and FII holding has jumped to an all-time high of 19 percent for the top 200 companies. So I think this is the sticky money which is coming into India and as confidence gathers pace about Indian economy’s growth returning, I think this momentum will be sustained.

Q: What are the chances that your targets get hit earlier in the year because of this wall of global capital and the global market performance and as we get towards the end of the year political considerations might usher in a correction which is eventually getting to your target but not in quite the same fashion as you are describing? A: Elections are unlikely to happen before May-June next year. So, the market would be peaking out by January-February next year before we start worrying about whether any coalition would have enough strength to give us a stable government. So I think that is far away at the moment. There would be little bit of hiccups because we have got three big states going for election in October-November but I think the investment cycle is likely to pick up mostly from the infrastructure side in the second half and people will start seeing action on the ground which is what has been missing till now. The interest rate cuts also should pick up post-monsoon and post-September when we have a new RBI Governor. So these things would propel market to a new high and we are thinking that probably January-February is the time when market should peak out rather than earlier. Q: If your view is that the capex cycle will pick up in the second half then other than Larsen and Toubro (L&T) what kind of names in the infrastructure space would you be willing to bet on now? A: What I was talking about is not a full-fledged pick up of capex cycle. We are saying that capex cycle on the infrastructure side will pick up. Private capex can still take a longer time and probably wait for elections. So apart from L&T the stocks that we are pushing is Cummins and largely we are saying that play these two banks. You have State Bank of India (SBI), Axis Bank that we are pushing, plus people can look at Infrastructure Development Finance Company (IDFC). So we are not really recommending going to 2-tier and 3-tier stocks in infrastructure side. We are sticking to more of quality at the moment. Q: What else would you pick from rate sensitives between the banks and the autos? A: Autos are clearly the pick on interest rates but the stocks have already run up quite a bit and we really like only the four wheelers. So Maruti and Tata Motors are the two stocks that we are pushing from autos. Rest of the valuations does not really give us comfort to push a buy call at this juncture. Q: What has your general observation been of cement? There has been a bit of news flow around it. The numbers were not very inspiring. Dispatches are mixed. A: Cement is going to under-perform this year because the expectation had gone up to a very high level and last three-four months we are seeing that there has been earnings downgrade continuing. Cement prices were very weak in March and April. There are little bit of positive announcements which have come through in May. That is what is really pushing the stocks upwards. We are heading into monsoon so things will again slowdown and there is not enough real demand to keep prices up. So I think earnings downgrade cycle will continue at least for another one or two quarters. People should use this uptick to book profit in cement names. Q: I see you have got an underweight on the front-line IT companies, all of them - TCS, Infosys, Wipro. What makes you cautious? A: We were worried about the valuation versus demand expectation and now we are even more worried after the proposed visa norms that have been made public. We think that these visa norms are not just aimed against outsourcing but these are aimed against Indian companies. So, there is kind of asymmetry in the loss. I think that can shave off 15-20 percent out of earnings if these visa norms are cleared in the same format as they are proposed. So we are pretty cautious on this IT space per se. Most of the favoured names like TCS etc. are trading at very high valuations. So room for error is extremely limited and the cheaper ones like Infosys do not give enough confidence right now to buy them. So I would say that IT as a sector is an avoid at the moment. _PAGEBREAK_ Q: How are you treating 2013 as a tactical rally which will end before elections next year or do you think it can be a multi-year trend because a lot of people have doubts about whether this is a multi-year trend. They see the next government formation being a key risk to taking any kind of call for two to three years. A: We think it is a multi-year trend because the reforms which government is pushing are very significant in nature and some of the reforms like Goods and Services Tax (GST) are left little bit unfinished because of elections probably will be completed once the new government comes in. So, all these reforms have in it to add 100-200 bps to GDP growth. So we are pretty sure that in three-four years time we will be again talking of 7-8 percent GDP growth and market currently is factoring in around 5.8-6 percent GDP growth. There is a multiple rerating which can happen as people get more clear visibility of GDP growth going back to 7 percent plus. So that is what we think will drive the two-three year rally. Obviously there will be hiccups in between and elections does remain one of the key concerns but I think that is for the next year and the first half of next year where this concern would be reflected in the market. Q: If your call is that the markets are headed for an extended up cycle then how much space would you make in your portfolio for slightly riskier trades, stocks where there is a great amount of leverage, stocks that have had balance sheet issues? Would you do that leap of faith call right now or is it too early and too dangerous? A: We are into the first phase of recovery. The economy is just bottoming out. So I do not think we are in any hurry to get into that riskier trade at the moment. The cyclical sector itself is trading at a 12-year low as compared to defensives. So there are enough large caps which are there to play this whole rally before we look into those riskier trades. So sticking with quality large cap is the call at the moment. Q: Would you start selling down Fast Moving Consumer Goods (FMCG)? A: We are underweight on FMCG. FMCG stocks have been benefiting because of fall in global commodity prices and you are seeing margin expansion, but valuations are extremely high, so these companies have to continue to deliver very sharp growth to justify these kinds of valuations. Currently a lot of investors were playing the consumption theme and that is why they have bought heavily into staples and also into discretionary. So these guys will start to come out as these sectors underperform the market and shift into defensives like utilities etc. which have been beaten down to very low levels. Q: What are you telling clients to do on these resource companies now, Coal India and National Mineral Development Corporation (NMDC)? Coal India is languishing at Rs 300 and NMDC which a lot of investors brought in the issue has gone down to Rs 120. Do you sense a lot of frustration there? A: These stocks look extremely cheap. From a fundamental perspective it is difficult to justify these price levels. Coal India does have a huge offering which is possible in future and government is not doing any favours by not giving any clarity on how it will happen and how they propose to do it. There is a fair bit of chance that given the market conditions and the amount of paper to be floated that Coal India is asked to do a buyback. So, that could be a reversal trend for Coal India. We fail to understand NMDC. Now with 5 percent plus kind of dividend yield and stock trading at 2.5-2.6 time EV/EBITDA whatever iron ore price you want to assume you can assume there is still value out here. So currently investors are more focused on consumer names etc., once that fancy gets over companies like Coal India, NMDC, National Thermal Power Corporation (NTPC) will come back into favour pretty strongly.