Nifty may move to 5500-5600 if inflows continue: IL&FS

A significant turn in sentiment has fuelled equity markets worldwide. Hopes of action from policymakers in Europe and back home, and strong foreign inflows has helped the Nifty gain over 10% in the last three months.

According to Vibhav Kapoor of IL&FS, these gains could continue if foreign fund flow continues to be strong.

In an interview to CNBC-TV18, Kapoor gushing liquidity will keep sentiment high, helping the Nifty take out key resistance levels. “If this positive sentiment continues for some more time, there is a good possibility that the market might break upwards and target 5,500 and maybe even 5,600,” he said.

However, Kapoor believes Nifty at 5,600 is unsustainable because of lagging fundamentals. Macro economic cues in the country still do not bring cheer to the market. There is yet to be any significant action from the government on reforms and fiscal consolidation, and interest rates continue to remain high, hurting investment demand in the country. In such a scenario, Kapoor says profit booking will kick in once the Nifty hits 5,600.

“There definitely needs to be some change in the situation on the ground, otherwise you could probably get into a little bit of a higher range; instead of 5,000-5,400 you may get into 5,200-5,600 type of range for the next few months,” he said.

On the downside, Kapoor says that the chances of the Nifty taking out 4,900 is very low, unless something like a European blowout takes place.

Below is an edited transcript of his interview with Udayan Mukherjee.

Q: We are now at the higher end of the 5,000-5,400 range. Do you see a major breakthrough or upside from here?

A: I think there has been a significant turn in sentiment, both in India and globally, in the last few weeks. This has been partly led by a perceived improvement in the European situation and also a lot of hopes emanating from the Indian government that some reforms will happen, fiscal consolidation will happen. Of course all this has been aided by a lot of liquidity which was parked in bonds and treasuries etc, and a little bit of that might globally be moving towards equities. So the sentiment has improved, the situation in the ground still remains the same, but with this liquidity flow I think the market is right now at the higher end of the range of 5,000-5,400.

But if this positive sentiment continues for some more time, there is a good possibility that the market might break upwards of this range and target 5,500 and maybe even 5,600.

Q: Would it be a sustainable move or do you think fundamentals will not support if we do get to 5,600?

A: Around 5,600 the valuation starts to look a little stretched, there is no doubt about that. Even today, at current prices, given the fundamentals atleast in the largecaps, it is a little difficult to find good stocks. So at 5,600 definitely there will be a lot of profit booking which should come in, so it will be difficult to sustain 5,500-5,600 levels.

I think you would need this positive sentiment to continue, the liquidity to continue to flow in and definitely some change in the situation on the ground. Otherwise you could probably get into a little bit of a higher range; instead of 5,000-5,400 you may get into 5,200-5,600 type of range for the next few months.

Q: But for now 5,000 on the Nifty seems secured as a base to you?

A: Yes. We were always thinking that 4,900 is definitely something which should not get broken on the downside, and I think the way things have moved, probably that looks more secure now. So the chances of that breaking 4,900-5,000 on the downside are very low unless you have a European blowout.

Q: What has the market priced in in terms of policy expectation? Is there a scope for disappointment if the things do not materialize over the next few weeks?

A: Yes, there is definitely a scope for disappointment because some of the expectations of the market may be difficult to come through. For example, I think the biggest one would be fiscal consolidation and keeping the fiscal deficit at 5.1% as promised in the budget or lower than that might be very difficult.

We also have to remember that oil prices have been going up. Gradually from USD 100 per barrel, it is up to USD 113-115 per barrel. This will obviously add pressure to the fiscal deficit. Unless the government comes with some real sharp increase in prices of oil products and some real reforms in the oil sector, I don’t see how it will be possible to meet that fiscal deficit.

So yes, definitely there is hope for disappointment but we will have to watch it over the next maybe couple of months and see how it goes.

Q: How are you positioning yourself right now? In this move if the Nifty does go to 5400-5600, would you take profits or would you add to your positions?

A: I think we would be only taking profits between 5500-5600 levels, not at this point of time, because right now, the sentiment is obviously very strong. Maybe a little bit of profit booking is likely but definitely not in a big way. One could also churn the portfolio a little bit; shift a little bit more into cyclicals on a very selective basis and reduce positions in defensives.

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Q: If you had HUL and ITC in your portfolio, would you book some profits now?

A: Yes, I think they are pretty expensive, there is no doubt about that. When the market does move up with momentum, it is normal for these stocks to underperform a bit. So some profit booking definitely would be called for.

Q: Do you think the worst is over for Reliance? That’s emerging as a big call for a lot of people who have not owned it for the last couple of years?

A: Yes, because it’s an index heavyweight. I think a lot of people have been underweight on it. We always thought that Rs 700-720 type of levels were very close to the bottom for Reliance. Now it’s moved up to Rs 820 levels. So probably in the short-term, there may not be too much upside on it.

At least for the next 1-1.5 years, earnings growth will not be great for the company. It is a cyclical right now. Refining margins have moved up very significantly, but probably that could be temporary. So at these levels, I don’t think one should be chasing the stock. I think one should wait for corrections and maybe towards Rs 750 levels would be a good level to buy.

Q: Would you take a contra call on oil marketing companies in the expectation that post the monsoon session something will have to happen on diesel or is there too much risk associated with it?

A: Yes, I think there is too much risk. I normally try to avoid such companies, because it too much depends on what the government does and it’s very difficult to predict that.

Q: Do you subscribe to the current optimism in the market about midcap IT?

A: Some of the midcap IT companies were very cheap. For a long time, when the rupee was depreciating last year, the market did not take that into account as far as midcap IT is concerned because the confidence level overall globally was very low. So some of them are still trading at attractive valuations, and if you select a couple of stocks properly, it might payoff.

Q: Infosys is up today on the back of the news on the Palmer case; would you buy it at Rs 2400?

A: No, I think it is again approaching levels where it is not that cheap given the fact that the company has been in so many problems in terms of growth.

So at these levels while the market crosses 5400, it could push up quickly for another 50-100 points because it is breaking out of a range. But it is difficult to get stocks at good value at these levels. Probably, it would be a good idea for trading to buy a little bit and then get out at 5500-5600. Otherwise, you need to wait and not chase stocks unless you are really confident of the long-term and you are buying for the long-term.

Q: When you start the process of switching to some cyclicals, which pocket of cyclicals would you be looking at - is it the metals, autos and infrastructure?

A: I think couple of autos on a very selective basis. A couple of private banks could be a good idea. While some of the infrastructure names are trading at attractive prices and valuations, it might be a bit too early for them to move. Again from medium and long-term view, it might not be a bad idea to add little bit of infrastructure to your portfolio.

Q: But you would not venture into names like public sector banks (PSU) or even global metal plays?

A: I think PSU Banks still have a lot of problems. Obviously, these are asset quality problems. I don’t think those problems will get over so soon. So these stocks will probably under perform for some more time to come.

As far as global commodities are concerned, the slowdown in China will keep global commodity prices under pressure for quite some time to come. So I would avoid these two sectors.

Q: What about real estate?

A: I am not a fan of real estate and I have always avoided that sector. So right now, particularly given the type of situation we are in, I would completely avoid it.

Q: Do you see issues like the CAG report on coal etc having any kind of sentiment impact on the market or given expectations of reforms and global liquidity that may just remain a side issue?

A: It is too early to say but the initial reaction in the press and the initial reaction from a lot of commentators probably point to the fact that it will not be such a big issue. I maybe wrong on that because you can never predict how politics goes. But my feeling is that it’s not going to blow up in to something very major.

Q: Does that mean it may not have any major impact on power or metal companies which reacted last week?

A: There might be some specific companies, which might get impacted but on an overall basis. I don’t think the entire power sector, for example, will get impacted. Anyway, the government was talking about auctions going forward.

Of course, a lot of reforms need to be done in the power sector particularly in the coal sector and these will take time. So I don’t think just because of this report, there will be a whole lot of negative influence on these companies.

Q: Do you think for the next six months investors can work with the presumption that the market might just keep forming slightly higher ranges and move forward without a massive downside risk?

A: That is the way it looks like as of now particularly given the fact that the US economy is stabilizing. There is so much of liquidity globally and interest rates globally will remain low for a long time to come. This can change very quickly if again the European situation worsens.

So a lot of it depends on how the European situation moves. If the Greece exit again comes into the radar then one can never say; things can turn ugly. But if the European situation remains okay and things start to improve there, it would be safe to say that gradually going forward, equities should show improvement from here. I think it will not be a big upmove or a very fast upmove; it will be a gradual uphill movement.