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Last Updated : Sep 24, 2015 06:28 PM IST | Source: CNBC-TV18

At 7,500 Nifty, all domestic negatives priced in: Dalton

The recent Nifty lows of 7,500 look like a reasonable bottom and all domestic negatives are priced in at that price, UR Bhat of Dalton Capital says.

The recent Nifty lows of 7,500 look like a reasonable bottom and all domestic negatives are priced in at that price, UR Bhat of Dalton Capital says.

"The joker in the pack is China but I hope it will be able to handle its economy well," he told CNBC-TV18's Latha Venkatesh and Sonia Shenoy.

India is in the early stage of an economic recovery, Bhat said, adding that he was bullish on the pharmaceutical sector, which could lead up the next bull rally.

Below is the transcript of the interview on CNBC-TV18.

Latha: It is an extremely confusing or rather pessimistic global scenario as well as domestic scenario with growth not picking up. However, at 7,500 is all the bad news priced in or you think that this market is in danger of piercing that?

A: If you go by the domestic economy and the domestic corporate earnings and stuff like that 7,500 looks like being a very good support. However, the only joker in the pack is how China plays out.

I think if China is able to handle its economy reasonably well and postpone what is a huge disequilibrium in the economy, there I think things will be under control. 7,500 looks like a reasonable bottom. All said and done India is certainly in early stages of an economic recovery so therefore that should hold the market in good state at 7,500 plus.

Sonia: The sector of the year has been pharmaceutical and even today you have names like Lupin Pharmaceuticals giving you returns. Do you expect some more outperformance from the pharmaceutical space?

A: I think that is possible because if you see the pharma sector was really affected by the huge problems they had with Food and Drug Administration (FDA). That I think is slowly getting resolved; not everything is resolved yet but I think early stages of some resolution on the FDA front most of the big pharma companies in India.

Once that happens given the fact that the US economy is doing reasonably well and they are big exporters to US, big ones at least so things should look all right there. It may be an outperformer vis-avis the market for some time now.

Latha: I wanted to ask you something which used to be your old love –fixed income. We saw this Amtek Auto bonds going into default out of nowhere and today CARE has downgraded Shree Infra Realty not it still remains investment grade but GMR Infra one of its special purpose vehicles (SPV) loans have become default status. Should we be worried that even if India is like on a slow U-recovery. There is still some poise and waiting to come out. How would you advise a fixed income investor?

A: Incrementally things are not getting much better there. Even if you see the banking system the stress in the system is if anything increasing because of a rules of the game you can always classify them as marginally performing for sometime as long as the commission and date has not happened and stuff like that.

Finally it is not just the banking system that is at fault. The larger macro issues need to be sorted out. If you see most of the stress in the system is on account of infrastructure where we have problems with raw materials, where you have problems with collecting sales proceeds whether it is power, whether it is roads these are the issues.

Whether it is raw materials, resources and basically either the government or government agencies are not paying because of some issues with arbitration or you have electricity boards and their derivatives which have not really started paying yet so these are the issues. The larger issues need to be solved.

There is no point in just blaming that banks have not done well because these non-performing assets (NPAs) are, I mean nobody really lends hoping that something will become an NPA. They have done their appraisal reasonably well I am sure but the larger macro issues need to be sorted out only then things will look much better.

Sonia: Going ahead the month of October we have many triggers coming up. If have the earnings season, the Bihar elections and then there is an uncertainty about when the Fed will hike rates. What do you think is the most important trigger for the market now that could perhaps change the direction from here on?

A: The biggest is China that is internationally. However, domestically I think earnings season might not give a great fillip to the market. As long as it doesn’t disappoint, the market would find some support at these levels. Bihar elections I think the results come in November so there is still some more time.

Latha: Are we overplaying the importance of the rate cut? I mean the Reserve Bank of India (RBI) if it cuts and the chances are they will, given the kind of inflation numbers. It is not getting passed on. I can’t remember when the difference between the repo rate and the State Bank of India (SBI) base rate was as wide as this; it is 270 basis points if the rate cut comes. So should we really angst about the rate cut? Will it really change the market at all?

A: You can change sentiment for a short while, maybe 24 hours at best but not much more than that because finally there are structural problems. If you say there is a huge difference between repo rate and SBI’s base rate given the level of NPAs in the system all these NPAs had to be sorted out only through increased profits.

So, therefore structurally it is not possible for them to cut interest rates so easily when the NPAs are mounting. When you have some much money impounded even today statutory liquidity ratio (SLR) and cash reserve ratio (CRR) and stuff like that. You have this problem about old deposits having been taken at higher rates and so all these things will continue to influence the transmission of any signals from the RBI.

Latha: You were a director on Karnataka Bank, so you will have an insider view, are you still?

A: No.

Latha: In any case you can still have that insider view. Look at this amount of licences that have come payment bank licenses and deep pocketed guys have got it. Small banks perhaps will be a smaller competition. Which of the sectors in the banking space you will avoid now because this competition is so severe?

A: Public sector banks continue to have their serious problems. However, the government has to make some headway in terms of inclusive banking. I think public sector banks are the best organised to that. They have this reach and they are not as probably commercially minded as others.

Latha: Will you buy any part of the banking system or avoid any part of the banking system as an investor?

A: Private sector banks continue to do well. As long as they continue to manage to hold on to lower levels of NPAs and in fact they have got a huge advantage in terms of capital adequacy being very high.

Their ability to raise additional capital if required so they will capture a lot of the potential growth there is in economy. Public sector banks are stunted by lack of capital, huge NPAs and the requirement to sort of spread the resources thing in the virtually non bankable and inclusive banking sectors.

Sonia: We were talking about the pharma space but do you think there is more potential in the broader market pharma stocks the likes of Glenmark Pharmaceuticals, Aurobindo Pharma or should you still be sticking to the front liners like Lupin and Dr Reddy's Laboratories?

A: As a sector, as long as they are able to negotiate the FDA problems I think they should be doing reasonably well. There is also always the hope of some mergers and acquisition (M&A) activity in the pharma sector that will also keep interest levels reasonably high.

However, I think the key is in trying to sort out the FDA issues and addressing the US market where there are enough growth opportunities for quite a large number of these at least the bigger guys.

Latha: Are you buying now or you will buy at 7,500?

A: You cannot always buy at the bottom. So, therefore you have to be invested. You just sort of change your weightages to profit from this because if the market were to go to 7,500, private sector banks will continue to be good. The auto ancillary sector has been beaten out of shape so therefore there may be some value picks there.

Latha: You would be buying Bharat Forge and Motherson Sumi at current levels?

A: Not to speak specifically about them but the sector has been hammered out of shape and there is nothing to suggest -- the auto numbers keep doing reasonably alright. So, therefore there is nothing to suggest that whether the export market or the domestic market has suffered a lot. So they should be able to pick up quite a lot of the growth momentum there.

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First Published on Sep 24, 2015 09:44 am
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