Nifty rally valuation-driven; profit booking seen: Religare

Tirthankar Patnaik of Religare Capital Markets says the spectacular market rally is clearly on the back of heightened expectations of further easing by the central bank going forward. However, he says unless there is a revival in the economy, this is likely to end up just as a purely valuation-driven rally.

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"Unless things materially improve on earnings, we will see probably just a valuation-driven rally, which will look for profit booking opportunities at any point in time," he told CNBC-TV18.
He expects earnings growth for FY14 in our estimate to remain subdued around 9 percent or so.
"If you see overall, this is not an India-specific story. This is an emerging market story and the capital flows have gone to all markets," he told the channel. Below is an edited transcript of Patnaik's interview on CNBC-TV18. Q: How would you justify macro situation and the Nifty currently at two-year highs?
A: What has finally worked out is inflation is down below 5 percent, which is RBI's midterm target. Near-term and midterm target is about 3 percent and core inflation is below 3 percent. The market could not have asked for anything better. It has really worked out very well.
As you have seen with bond yields today, they are below 7.4 percent. Market is clearly expecting a much more comfortable rate easing from the central bank going forward and that has sort of propped up the markets today. Q: Do you think this is entirely liquidity-driven rally and at some point will valuations look unjustifiable? Are they already looking that way?
A: We have been highlighting that one reason for the fall in inflation has been the sharp weakness in the economy. About 4.8 percent is what we have expected from the fourth quarter gross domestic profit (GDP) numbers that are coming out on May 31. We might probably see a 4.5 percent handle. That is actually telling you that the drop in inflation is a feature of the economic weakness.
Unless we see a revival in the economy, this is likely to end up just as a purely valuation-driven rally. Earnings growth for FY14 in our estimate would be around 9 percent or so, nothing to write home about to be honest. Unless things materially improve on earnings, we will see probably just a valuation driven rally which will look for profit booking opportunities at any point in time. Q: For the moment, what are you picking up from the street? Is this looking like a fresh inflow of foreign institutional investors (FII)? Did you pick up the word exchange traded funds (ETF) anywhere? What describes this rush in the last two-three days, barring yesterday of course, when we were catching our breathes?
A: If you have seen over the last 10-12 trading sessions, it is generally just capital flows, which are flooding in all emerging markets. India of course had two-three nice data points that have come in which have actually cleared the way for market to expect central bank easing cost of funds going forward. That has been the trigger especially for India. If you see overall, this is not an India-specific story. This is an emerging market story and the capital flows have gone to all markets. Q: Are we now poised to possibly touch a new high for the Nifty? Do you think that even if we do touch it, we would be able to sustain it or possibly build on it?
A: That’s the key question. Nifty is at 6100 plus levels. We are very close to lifetime highs. This is probably third time in five years that we have reached these levels for the Sensex around 20,000 levels. The question is the composition of index is materially changed over the last five years. That is to be seen. How much upside do we expect on stocks in terms of earning going forward rather than valuations, is likely to be the trigger going forward. Q: What are your guys recommending to buy in terms of stocks at these levels?
A: At this point, we think the market is probably right for some amount of profit booking because we are not seeing clearly earnings moving up. First half of the earnings fared really well. This is essentially a repeat of what we saw on the third quarter. First half was fairly, second quarter was disappointing. Unless earnings going forward are sustainably better then we would not be buyers in the market right now. Q: Just a back of the hand calculation indicates that a lot of defensives have actually led the rally possibly in the past two years, say the likes of ITC, Hindustan Unilever (HUL), Sun Pharma, Lupin, etc. From the current position that we are in, would you recommend possibly putting in a large amount of money in terms of a composition on an equity portfolio towards defensives? Do you see incremental gains coming from current levels on stocks which have already seen such a strong run?
A: As you rightly pointed out, a lot of the rallies have been driven by defensives at this point. This is not a beta rally. To our end, in terms of profit booking, we will recommend selling out of private banks — IndusInd Bank, YES Bank — they have done very well at this point. Some amount of money could be taken off the table at this point.
Are we then recommending going into beta? Not really. Unless growth numbers really change, one would not recommend that. Q: Is retail money coming at all? What would you advice if you were asked parking in bonds is looking much better for a six month view?
A: I am not a bonds guy but at this point we do not see fresh money coming into the market. Q: Just a word on the banks then. You did touch up on private banks very briefly. If you look at it from a two year perspective, the PSU banks are actually have worsened in terms of asset quality and earnings. How would you be placed in terms of the Bank Nifty in particular and possibly taking positions within individual stocks especially the PSU banking stocks?
A: Oriental Bank of Commerce (OBC), Dena Bank and Union Bank have been about the only PSU banks that we have been pushing. A lot of the clients who we speak to are totally off PSU banks. We generally look at private banks. Either you trade them during the earnings season - that’s about the only time you get some amount of returns on them but you can’t really think of them as core portfolio holdings given the asset quality pressures are unlikely to subside in the near term. Our GDP numbers are not telling us that asset quality numbers really improve in the next one or two quarters anyway. So we are very selective in the PSU banking space.