Remain a buyer in this mkt, bullish on power sector: Dalton

UR Bhat, MD, Dalton Capital Advisors is not ready to laud the government for announcing reformist measures. Bhat calls it an effort to boost sentiment rather than making any substantive changes to the economy. Speaking to CNBC-TV18, he complained that fundamental issues in infrastructure sector still exists and investment worthiness can be attributed to this nation only when infra companies are able to roll out projects they are stuck with.

Speaking on the progress made by rupee, Bhat observed that the currency had recovered most of year-to-date losses but it will weaken again due to lack of structural growth in exports.
Bhat advised investors to go long on the market currently and believed that inflows to India will continue on strong monetary easing. "Net, net I think one needs to be a buyer with the market having gone up by 25 percent YTD on the back of some USD 15-16 billion of FII inflows," he justifies. Bhat, however, feels it will be difficult to get 6000 on the Nifty.
Also read: ICICI Direct's views on October series Here is the edited transcript of the interview on CNBC-TV18. Q: The announcement of reforms continue, no progress on the big macro economic reform of the fisc but fairly good announcements coming in terms of trying to get more money into insurance, perhaps that way step up the savings rate. I don't know if that will help as well trying to put that money into infrastructure stocks. Why don't we begin there, the toughest nut to crack, how would you look at the infrastructure stocks?
A: I think there is some effort at buoying up sentiment, if nothing else in substantive terms. Therefore, I think this space is worth closely watching. But, in substantive terms whether the infrastructure companies are able to push ahead with the projects that have got stuck is actually the final decider as far as investment worthiness is concerned.
Issues are still not sorted out whether it is in terms of raw material, whether it is in terms of land or resource availability, all these issues still need some action. But to the extent that announcements and monetary easing can help, I think all that has been done.
Therefore I think it is worth watching and one thing that most people have agreed on is that if the government is committed to take action, quite a lot of these things require legislative action which may be difficult for this government to push through. Hence, I think within a boundary, whatever is best possible they would certainly do. We should count on that being done over the next month or so. Q: Even if some macro economic issues like the fisc are not sorted out the rupee is going gung-ho for the markets, it is a rank outperformer with some 6 percent gains coming in the last few weeks itself. Do you think this could ensure that the stock markets are going to remain cheerful for sometime now? Net-net are you a buyer?
A: Net, net I think one needs to be a buyer with the market having gone up by 25 percent YTD on the back of some USD 15-16 billion of FII inflows. That I think is the case. People need to go long on the market. But, the fact is that most of the returns that market has provided is on the back of FII inflows plus some sentiment boosters that we have seen over the last couple of weeks.
In substantive terms, nothing much has happened. It is only because of the flows and marginal balance of payment positive position that we saw for the last quarter is what is keeping the rupee up. It has been quite a substantial gain. All the losses that we have made from the beginning of the year in the rupee have been regained.
Therefore, I think there is a limit up to which it can go becuase exports are still negative, we are not able to grow our exports and just because oil prices have been somewhat soft from the last quarter and gold imports have weakened a bit, we have a margin on balance payment positive for the last quarter.
But, I think that may not be the position going forward, because as the busy season comes we will probably need to import a bit more. There is certainly some growth in oil imports plus the structural problem of lack of export growth is something that will probably keep the rupee somewhat soft as we go along.
On the macro international side, whatever could be done in terms of monetary easing has been done, whether it is in Europe, whether in US. I think the difficult political and social decisions that need to be taken, whether it is in Europe or US, has not been taken. There are limits to addressing economic problems through monetary policy. I think that limit has been reached because the maximum possible monetary easing has been done.
The fact is that we have elections going on in US now and there will be elections in 2013 in Germany. Therefore, the whole effort would be to ensure that the economies do not really collapse. That is as far as action would be taken. It is not really to solve the problem. The difficult political issues are unlikely to be addressed in the short-term.
There is certainly pain in the medium-term because of the extent of amount raising that we have had. We will probably continue to have some inflows on account of monetary easing. But, we need to wake up to the fact that we are going into the results season in India and that is not probably going to be something that we can cheer about. Plus, we will have the state elections and the political temperature will rise. All these things need to be factored in before we take a very bullish view too.
_PAGEBREAK_ Q: What is that then in terms of a time table that you have in your head? Would it be end of 2012? Would it be as we approach the budget? Where would you start taking profit or at least definitely stop buying? Would that be in January as we start smelling the budget?
A: Even today we are seeing that the election bound states will probably have some softening as far as agriculture lending recovery is concerned. There will probably be some more interest subsidy and some more time given for repayment of agricultural dues. These are things that are not going to be liked by the market in a very big way.
As and when we see the end of this sentiment booster in terms of buoying up economy through what I call open-mouth-operations, which is going to be over quite soon, we will probably have a somewhat weak September quarter results. Then we will have a flurry of election related issues. Therefore, Election Commission will probably impose some restriction on new announcements pretty soon over the next one month or so.
Before that you will have all these open-mouth-operations and thereafter, I think you will probably have some more sops for most of the states going to the election. That is the time I think the market will be somewhat concerned about bullishness, plus it is also the time you will probably have elections in the US. Then people start talking about the fiscal cliff in the US and you have serious problems in Spain and Greece and these will also probably come to the fore. Therefore, I think this is the time.
Till the next one month I think things will probably be fine, but after that we really have to be very careful about potential bullishness. Q: I didn't really gather your view on the incremental upside for the market. From this 5700 level do you think we have the wherewithal to get to about 6000 or so given the concerns that you alluded to and perhaps that’s a tall ask right now?
A: That is a tough ask. 6000 is a tough ask. But another 100-150 points is possible based on new announcements that would come. But, if you really see in substantive terms whether it is insurance or something, approving schemes of insurance companies within a timeline is not exactly a great policy action because that is something that should have been done anyway.
With things like these we are really trying to confuse policy action with modest announcements which are at best administrative in nature. I think everything is seen as policy action which is hardly the case. The real test is when corporate India starts going to the drawing board and start in terms of investing in new projects, when it is possible for corporate India to have the confidence to raise money in the primary market. These things are not around the corner.
Unless these things happen, the sustainability of this bullishness will be questioned pretty soon. Q: Even up until then or for the long haul what would you be bullish on? I am sure the purchases that you are making or advising at this current juncture is not all for the next one or two months. Is there anything for the long haul?
A: For the long haul if you have faith in the Indian market, one should be bullish on the power sector, because that is where action has to come. I don’t think during the election or even before the budget it is likely that large swaths of India will be dark. Therefore, that problem needs to be fixed and I am sure it will be fixed sometime very soon.
Therefore, that is one sector I think is worth being bullish on. Plus private sector banks also are a favourite because they are the ones who have been able to manage to contain NPAs and still go quite aggressively. These two segments are probably worth looking into. Otherwise, one should play along with the market and be careful to ensure that you cut your losses if there is a sharp reversal.
_PAGEBREAK_ Q: There have been some positive stock market cues and that could mean that the disinvestment target could be bettered. At the moment, you have not even scratched the surface, you have not earned a rupee as of now on divestment, yet the markets are doing well and now we hear those SUTI stocks, Axis Bank, L&T and ITC could also be sold and then of course other divestment moves could be there. Do you think with spectrum auction, divestment and such like the government would be able to bridge the fiscal deficit somewhat? What is your working figure?
A: I think most people seem to think that the fiscal deficit plays somewhere around the 6 percent mark. Even if the divestment is very successful, Rs 30,000 crore plus the SUTI divestment and all that might come down by 10-20 bps, but not dramatically below that. 5.1 percent is a pipe dream for sure. I think one needs to work with a 5.7-6 percent range of fiscal deficit and given the fact that the most important issues are the twin deficits, interest rates, projects which are stuck, these are the things that need to be addressed for the market to be really sustainably bullish.
The market was so much starved of good news for the last several months that even these announcements which are cosmetic in nature is good enough for the market to give this sort of return and in addition you have the flood of liquidity internationally. If you really see the USD 15-16 billion that has come, probably half of it is through sources which are not readily explained in terms of the long-term India dedicated funds.
It could probably be P-Note funds which might take reverse route quite fast. You already had a 25 percent return during the first nine months of this year. Therefore, there is probably a reason for people to book profits also. I think one needs to be circumspect about that. At the same time, one cannot give up on this because for the next one month you would probably have a series of announcements which will buoy up sentiment further. Q: In that series of announcements, how hopeful are you about the National Investment Board, the fast-tracking of infrastructure projects and how would you approach some of these infrastructure names? Would you be a buyer?
A: As I said, if you have faith in India you should be buying those stocks. There is no gain saying that India needs quality infrastructure. There is a lot more money that needs to be attracted to modernize infrastructure. Therefore, the first thing that you need to do is to ensure that at least the infrastructure projects which are stuck in the middle get some momentum.
That is the faith that you need to have. But, on the National Investment Board I think that is a very good idea. That needs to be done because a single window clearance is extremely essential for such projects. Otherwise, you are running from pillar to post all the time. But, what I hear is that there is some opposition even within the government, the Environment Ministry is not very happy about it and stuff like that.
Therefore, I think one needs to sort out these issues and if it really comes to fruition, you need to believe that something is happening only when the first single window decision is given through the National Investment Board. Till then it is a good idea worth backing, but watch the space.