Mkt won't rally over 5%; focus on quality stocks now: Kotak

The current market rally will not sustain over 5 percent, predicts Sanjeev Prasad of Kotak Institutional Equities. Indian equity market witnessed a massive rally on Thursday as US Federal Reserve chairman Ben Bernanke decided not to taper quantitative easing for now. Despite this huge upmove seen in the market, Prasad cautions that India's macros continue to be challenging.

Below is the edited transcript of Prasad's interview to CNBC-TV18. Q: The tidings are good for markets like ours especially after what came out from the Federal Open Market Committee (FOMC) policy but how would you approach today’s trade? A: Honestly, the market will probably jump 3 percent at the start itself, so I think that trade is done pretty much. After that we will have to wait and see how much of reforms actually take place because once this trade is done one has to get back to the basics once again. It is not as if all of our problems have been solved by whatever announcements made by the Federal Reserves (Fed) last night. The way I look at it is India has basically got get out of jail card but how we use that card is going to be pretty important going forward. Keep in mind the fact that this tapering is not something which is not going to happen. It is not as if in perpetuity the US Fed will continue to have a very accommodative monetary policy. So, the important thing between now and January, whenever one sees some changes as far as global liquidity is concerned, can India implement some reforms which will result in economic growth coming back on a more sustainable basis. If one looks at the valuations again, it is not very supportive. The Indian market is not inexpensive. When one looks at the broad market itself, the BSE index for example, it is trading at almost 14 times now on fiscal 2015 earnings. Once you cut it by sectors, the quality sectors are pretty expensive. Look at consumer names. Of the 17 stocks we cover, we are almost trading at 30 times now on fiscal 2015 earnings. Large cap pharma names are trading at about 20-22 times March 2015 earnings. So, the market is not looking very cheap, at the bottom-end of the market, we have a lot of sectors which are inexpensive but we need to see some improvements in the operating environment, regulatory environment. Some government actions have to take place. So, without that I won't be too excited about the rally sustaining beyond the first 3-5 percent which will probably get done today itself.

Q: The dollar now looks headed towards 60/USD and perhaps it could remain there for a bit because the rupee had gone to oversold terrain. Do you think there is a case now tactically only perhaps to selloff say IT and buy things like power, so many of those dollar debt laden balance sheets? A: I don't think so. As an investor, I don't think one should be compromising in quality at any given point of time. You can get these moves on and off but over a longer period of time, you get to probably burn your fingers more often than not in some of these bad quality names. So unless and until one sees a fundamental solution to some of the problems in the power sector, I won't be too excited about those names. If one wants to play the power sector, then he/she should look at some of the regulated entities like National Thermal Power Corporation (NTPC) and Power Grid. These are good companies with regulated returns. If one sees any move towards softer interest rates in the future, then these stocks will anyway do well. So, that is probably a better way to play the power sector rather than look at some of these companies which still have a lot of operating issues whether it is coal availability, unviable PPA’s or other issues. Hence, I won’t get too excited about what has happened. It is not as if the operating and fundamental challenges of India and specific sectors have been addressed. It is up to the government to address each of these issues. We are still losing about Rs 11-12 per litre on diesel. So, I hope the government increases diesel prices rather than using this opportunity not to implement reforms, I think that would be a pretty sad thing.

Q: How do you play this market then for the next couple of months, will you use every near term rally to sell into this market, does that continue to be the strategy? A: The strategy has always been pretty much the same- one should be in good quality names. This market is not very expensive, don't go by the top down view. Unless you see some fundamental reforms there is no point going down the quality curve. The big problem which I am facing at this point of time is neither I have too much conviction on the high quality names, given the problems on valuations, nor do I have too much conviction on the low quality names because there the problems are not really getting addressed whether it is the PSU banks, PSU energy, the industrial infrastructure names. So unless and until, one sees some movement towards addressing the specific problems in each of these sectors, it is very hard to take a call on the beaten down names. We are sticking with more of a rupee portfolio. We have had overweight positions on IT, pharma, some good quality names in auto etc for a very long period of time. And I will continue with that strategy. Maybe one could lose some money in the immediate short-term because if we will see appreciation of rupee, obviosuly IT, pharma stocks are not going to perform in the short-term. But I think that is probably a much safer strategy because who knows in two months down the line if one doesn’t see too much reforms and if all the US data comes out strong and then we will suddenly start seeing talks of US tapering come back once again. Also don't forget that we are headed into elections. When the government actually switches off the tap of reforms, we will have to wait and see. But we actually have only a 4-5 month window to really do some reforms. As far as the basic problems of India are concerned current account and fiscal challenges still remain, we have to go and address those issues.