Rally may fizzle out; Bata, Crompton good bets: Religare

Given that the fundamentals of Indian market have still not changed, the current market rally, which is driven by fall in commodity prices, may not sustain, believes Gautam Trivedi, MD & Head of Equities-India, Religare Capital Markets.

Concerns relating to quality of India Inc’s earnings have not gone away yet. Also, there is risk that correction seen in commodities may be temporary in nature, so the market may pull back the gains it has made, he said in an interview to CNBC-TV18. Meanwhile, Trivedi is not let down by Bata’s subdued first quarter results. Infact, he suggests accumulating the stock at current levels. He expects capital goods player Crompton Greaves to post a rise of 250% in FY14 earnings. “There is enough evidence to expect the company to turnaround and we are positive on Crompton Greaves from 9-10 months perspective,” he added. From midcap PSU banks, Religare is bullish on Bank of India. Below is the verbatim transcript of his interview on the CNBC-TV18 Q: We had a good rally over the last seven days. Is there more ahead or would you start getting cautious? A: One has to be practical about what has really caused this rally. The rally has come through because of the fall in the price of commodities driven mostly by oil and gold. So, this is something which maybe temporary although I hope it sustains. But if it ends up being temporary, the market will end up pulling back on some of the gains that it has made. Therefore, it is primarily a commodity driven move. Q: What do you see for the next couple of months for this market? Is it just pinging between 5500 and 6000 or anything more by nature of a trend? A: There is no trend. The fundamentals really haven’t changed; the commodities have ended up rescuing the Indian economy and to some extent the market. But overall, there is still a lot of concern in terms of quality of earnings and we haven’t seen a great set of earnings so far this season. The IT stocks clearly have disappointed. We have seen Bata’s numbers which came out yesterday and they were moderate at best. The domestic demand and for that matter even the external demand from an IT perspective is not great. Even the fund inflows into the domestic mutual funds or the offshore India dedicated long only mutual funds are not seeing significant signs of money coming in. I was in Hong Kong last week meeting investors and they are not really seeing any significant inflows for the India dedicated funds. Having said that, a lot of the regional funds are allocating more money and that has obviously been the reason the market has seen this big inflow, calendar year to date. Howver, nothing significantly has changed with the exception of the commodity pullback which has been positive for the market. I would still think that if the commodity pullback continues, obviously it is positive but if it bounces back, for example gold is up eight percent in the past few days and if that were to continue, I think we would see the markets starting to slip back again. Q: Tactically though, how does that set the pitch for the market over the next couple of weeks? Would you say there is still the possibility of the market either moving higher or having made a higher base for itself through the process of the last series or neither are very probable outcomes you think? A: It is still going to be a very bottom up and stock specific market and stock selection. If one looks at yesterday’s concluded expiry, we saw almost 70-75 percent of index and stocks rolled over. We have the inception open interest (OI) at almost Rs one lakh crore, which it is up 15 percent from the previous expiry. So, these are definitely mildly positive signs although I wouldn’t get too, There is some interest coming back to trade the market, especially from foreigners and foreign hedge funds and foreign prop desk. That is clearly a positive sign but I don’t want to read too much into it and expect the market to have found a new bottom. I think it’s a little early for that. Q: So would you say there is still the possibility that we slide through the 5500 mark just on our own because the other positive through this month is not just what happened with commodities but the fact that a little bit of our macro started improving? A: The macro was an improvement led by commodities. Even we have cut our current account deficit numbers to now three percent for FY14 assuming that oil and gold continue to trend down or remain at the same levels. So that improvement in macro is clearly still a function of commodities. There is still concern about when the elections will be held? Will the government basically slow down the reform process a few months prior to the elections? Will they be held in September, will they be held in June next year? So, there is way too much confusion. And the other big event that will happen is the report by the S&P, which will be submitted in the next few weeks to the government on what their view on the Indian ratings is. Therefore, there are a bunch of events coming up over the next few weeks, as well as the balance set of results. Once the results season is over, everybody would be in a better position to say which way the market is going to go. _PAGEBREAK_ Q: What did you hear in your conversations with the large investors? Are they looking at this as a trading opportunity because of the fall in commodity prices or in their head, something fundamental has switched around in India? A: I think nothing fundamental has switched around in India. What we focused on was our midcap report which we released last week. It is titled the ‘Lucky13’ which has 13 stocks that we have as our top picks. The meetings were focused more on that. There are still a whole bunch of investors out there who have interest in midcaps and have been closely watching the space given the fact that a lot of these stocks have just got pummeled. We clearly focused on high Return on Equity (ROE) companies; companies where over the next 12-18 months, there is at least a minimum 25-30 percent upside and in some cases even more. That really was the focus of my trip and the feedback was reasonably positive. Q: With regards to the midcap report, Bata is one of your top picks, were you disappointed with the numbers that you saw yesterday? Would you still buy it? A: The results were not great and same store sales were roughly two-three percent, which obviously was a bit of a disappointment. We are not totally surprised with the quality of results. The midcap report really talks about is stocks. We are all aware of the current economics and fundamentals of the Indian economy. But, if there are stocks that you would buy with a 12-24 month view and which would these be, then obviously Bata figures in one of them. It is important to note that when the market does start to rise, it is hard to accumulate midcaps. The midcap market is for the most part an over-the-counter (OTC) market where it is hard to buy quantity in size on the screen and you have to source blocks. When times are tough, people do end up taking a second look at their midcap portfolio and actually selling out either due to redemption pressure or just overall concern on some of these midcap names. We think that’s the best time to start to accumulate some of the midcap names otherwise you just can’t find liquidity in these names. Bata of course is one of them. Q: The other controversial pick in that list is Crompton Greaves which has been such a big underperformer. Do you think we are close to the worse there? A: I like what you said that it is a controversial pick although I am not sure how you characterise controversial. We have had a buy on the stock for the last about 9-10 months and the call clearly hasn’t played out. The question really is will this be the final quarter of pain and does the stock really start to turn around. We have enough evidence to think that their European operations which have been the root cause of their problems have actually started to turn around. We are seeing significant improvement in their European operations. Of course the domestic story is obviously more dependent on the domestic economy. But that single event in that company i.e. the European operations could significantly change the earnings profile of this company. We have a 250 percent earnings growth this year as in FY14. It is coming off a very low base. In terms of valuations, it is extremely attractive; the stock is near a five year low. So, if you marry these two – that is the reason we continue to recommend the stock as a buy and it remains one of our top midcap picks. Q: From that same list, there is also Bank of India which has had difficult couple of quarters to put it mildly. How come you picked this midcap PSU bank? A: We wanted to pick one bank among the PSUs. We went around the table figuring out which would be the right one. Our analyst clearly likes this bank a lot and he spend a lot of time with the new CMD. Our analyst is convinced that the new CMD, Bank of India is actually going to do great job with this bank. So, it is more to do with timing and valuation where really you have confidence and that’s really what the Bank of India fits in. _PAGEBREAK_ Q: Just switching away from your ‘Lucky 13’ for a moment because I noticed that you have a sell on Idea Cellular which has seen a tremendous reaction to its numbers today. What makes you cautious about that - the dynamics of the sector or something with the stock and how it is reporting? A: The results obviously were very good and have surprised the whole street. Nobody saw the 8.5 percent quarter on quarter sequential volume growth coming. However, our problem really is with the entire sector. With Reliance Industries (RIL) looking at launching their 4G product, there will be tough times going ahead for the entire sector. If you look at the way RIL’s newsflow have started to come out, it is extremely positive. They have signed up with Reliance Communications, they have signed up now with Bharti Airtel in terms of buying bandwidth through the undersea cable. They are looking at potentially getting the ability to offer voice. So you will see increased competition and RIL has historically known to come and offer extremely low prices, attractive enough and help expand the market. They will certainly do that on the data side. So, if you were to club voice with that - that could be a very formidable threat to the existing mobile operators. Therefore, fundamentally the sector will be under pressure going forward. Q: The other big underperformer and erstwhile institutional favourite was Voltas. Do you think this streak of underperformance should be utilised to buy it? A: Voltas is amongst one of the 13 stocks that we like. Again, the valuation is at a five low and that’s been the underlying theme of some the stocks that we have picked in this report. The stock is now trading at 0.7 times forward price to book which is extremely attractive. It is time to start of accumulating the stock. The fact is for midcaps, it is really more to do when you accumulate the stock, talking from institutional perspective, not necessarily retail. From institutional investors’ perspective, it is important to be able to accumulate size and now is the good time when we actually would get a good supply and size in lot of these midcap names. Q: What was the reaction to these ideas because this market looks like it’s a very top down kind of market where ETF flows are coming in, they are buying largecap stocks, midcaps are largely ignored which is why this market has not enjoyed great breadth of late. Did you find people receptive to the idea of going out and cherry picking midcaps or they felt that time is not right for that kind of bottom up approach? A: There was a mixed bag. There were obviously sceptics who said at this point we would rather focus on the largecaps and try and see what best we can do in them. There are whole bunch of funds out there that did not invest in midcaps. Having said that there are bunch of other investors in Asia, and in general huge FII community that does look at midcaps. To be honest, the volume of business that we have seen on the back of this report obviously has been muted and will be at least until the results season is not over. A lot of these companies haven’t declared results that are in the reports. So, I think people are waiting to see how the results will pan out. Bata was only one exception which announced its numbers yesterday. There was considerable interest in the report. The question is - will that be put into action right away? I don’t think so. Frankly, these are things that you can’t necessarily time. We would continue to flag opportunities in the midcap space to our investors. This is only one of the many reports that you would see coming out from Religare. Q: The chatter in Delhi is that perhaps as early as October, we will see some action in terms of early elections. How nervous are the institutional investors that you interact with about that and what are they positioning themselves for really? A: There is not that much nervousness about the elections. A lot of people did ask whether Narendra Modi or Rahul Gandhi from their respective parties would be announcing Prime Minister Candidate. Obviously I did not have an answer to that. However, the fact is if you seek clarity on that, that would be a step in the right direction but the fact is that would  to some extent end the debate on whether Narendra Modi will be a Prime Minister Candidate or not. However, the question whether the elections are held earlier or in June is really not that much of a deal. People are still focused on what the potential outcome could be and permutation and combinations that could emerge post the results, which obviously nobody has any clarity on. Even the election polls haven’t started to try and protect that. The fact is you will see more action closer to the election time in terms of fund flows, assuming of course the fundamentals don’t improve between now and then.