Capital goods will perform on capex push: Axis Cap

Notwithstanding the current flogging, Nandan Chakraborty of Axis Capital says market will see a bull run after elections.

Speaking to CNBC-TV18, Chakraborty estimated FY14 Sensex EPS at 1450. He remains bullish on midcap consumer durables and said performance of capital goods stocks will depend on capex initiatives. Also read: Best to stay with pharma, IT, consumer stocks now: Religare Below is the verbatim transcript of his interview on CNBC-TV18 Q: It has been a tumultuous kind of week, tactically how would you approach the market now? A: We are only looking at the real bull market post elections because that is when hope of a real huge earnings growth starting because the capex bits have to be in place. This year there will be some amount of misallocation of funds, in the sense money will have to go into consumption because it is a pre-election year. For example, things that need to be done, like the KG-D6 gas, it needs to be viable, you cannot have it at USD 4 mmbtu. At the same time, you cannot increase it because of various reasons. So, things like that have to be fixed. I am looking at a real bull run immediately after elections or that could even be discounted before the elections knowing that new government twill come into place. This year it is difficult to forecast a bull market but I cannot forecast a bear market either. So, I would look at it as flat and more of stock picking rather than a market call this year. Q: Markets have turned volatile globally again - In the case of some volatility in the next few weeks, how do you see India doing in a relative sense? Do you see India’s downside being protected by the recent improvement in some of the macro parameters? A: Absolutely. As a matter of fact India is a little bit enigmatic in a sense. What happens is whatever affects the fundamentals of India, affect India technicals differently. For example, whenever risk on money comes into India, commodities rise and therefore our fundamentals worsen but to an extent we still do much better because the price to earnings (P/E) effect offsets the earnings per share (EPS) effect. This year our forecast for INR is roughly to be about more than 55  plus for FY14, to depreciate to that extent, which then lifts your EPS because you have a lot of commodities in the basket, oil and gas, metals and to an extent IT, Pharmaceuticals and so on. With that our forecast for Sensex EPS is Rs 1,400-1,450 odd for FY14 and Rs 1,700 odd for FY15, which is amongst the highest in the street. A lot of it is because we have taken a rupee depreciation call. Then, what happens is that EPS lifts but your P/E corrects to a certain extent because of the hurdle rate of investing into India. Therefore, you need to find stocks, which for a foreigner has to also beat the rupee depreciation and still do well which is possible. Q: In terms of the stock picking theme that you are talking about, how do you approach midcap this year because they have not done well, the market has been narrow, midcaps have been lagging - can you still think of a case for midcaps this year? A: Absolutely.  Although I cannot name stocks, we have in our basket midcaps for example in the consumer durable space, there are a number of them which we are bullish on and the minute the cycle turns there will be a massive operating leverage coming into consumer durables.  There are also good companies on the capex side. There are many manufacturing companies which have got massively hit in multiple ways because of massive power shortage and power costs in South India for example, the weak growth domestically and the weak exports. So there a lot of these companies which have been multiply hit which can then shoot up. Q: It has been a disappointing week in terms of earnings from the capital goods pack, when can you expect any performance from that entire sector to come through and contribution for the market by extension? A: Fundamentally, capital goods will start performing once the new government comes in, on a secular basis; For example things like railways, oil and gas etc the amount of money they will spend over 4-5 years is humungous, which will be more than what we have spent in the previous periods on things like roads and power generation and so on. This year the government will open its spigots now although it remains to be seen how much they can. However, private capex may take some time this year. So it depends on how much the government opens its spigots and therefore how much feeds into the private sector this year. Q: Talking about these gold related stocks because that is the asset class that cracked first, any thoughts on that space because ownership and interest is quite high on some of these gold related names? A: I am not allowed to talk stock specific so I would not like to comment on that. However, what I like is what the RBI has done which is basically changed the rules although it does not affect the larger players like Titan Industries and so on, which anyway can import gold directly but at least some of the other jewelers. While the larger jewellers like Tara Jewels, Titan Industries and so on can import gold on their own. But the smaller ones will have to pay and not take it on consignment; I think some of the gold speculation per se will be dampened. Q: The rate sensitives last week were rallying the most leading the market on expectations of rate cuts, of the rate sensitives which would you be most comfortable with? A: I think autos. Between autos, banking and realty, I would look at autos and specific banks. I would not say the entire banking spectrum but I would look at the specific banks for example, the public sector undertaking (PSU) banks, which are very undervalued and you have to check out for those undervalued banks that asset side has been improving and not worsening. And I would look at select private sector banks.