Dec '16 Nifty target @9200; rally in metals justified: Macquarie

He does not see any bull market in cement sector.

As far as the metals space is concerned, he says the rally is justified as these companies were beaten down out of shape and were trading at bankruptcy kind of valuations.Below is the verbatim transcript of Rakesh Arora’s interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18.Latha: Let me start with this consolidation in the cement space with the promoters removing the pledge on the shares of Kesoram. What kind of mergers are you expecting, realignment of units are you expecting within the BK Birla and the AB Birla Groups?A: We don’t cover Kesoram and Shanshui so won’t be stock specific. However, I would like to highlight that UltraTech Cement after the merger with units of Jaiprakash would be almost 90 million tonne which is almost one third of India’s capacity and production. So, I find it very difficult that they will be able to muster approvals from Competition Commission. So, I doubt whether this kind of proposal will go through. There might be Birla Group companies but they might remain separate entity from what it looks to me but it is difficult to guess and these stories keep coming whenever there is a bull market.Reema: We have seen cement prices go up, there is expectation and therefore the earnings this time from the cement companies in this quarter could look good. Stocks have rallied close to about 20 percent in the last few days, do you believe that the cement cycle has turned favourably or not and therefore what would you recommend on individual heavyweights?A: I think there is going to be a little bit of disappointment if that is the expectation. Though cement prices have moved up in North and Central India but they are still lower on average for Q4 as compared to Q1 and this is true for all India also because prices have moved down in East and South India. So, I am not very sure whether we will have any major uptick in profitability over Q3 meaning volumes are up 9-10 percent so that should help little bit but I don’t think margins or profits will be way beyond what we have seen in Q3. So, I think there is some disappointment coming in. Latha: They are the stocks that have run up the most, you think now the valuations are stretched, Ambuja Cement, ACC, UltraTech, all of them? A: It was stretched before that also because people have been expecting a bull run in cement sector for pretty long time. I don’t think that is coming. There are no signs of any kind of distress in the system which is required for sector to bottom out. Most of the companies are cash rich, they are expanding meaning we might see a seasonal uptick but there is no bull run. Reema: What about the metal pack because that is another space where on the back of steel price increases due to minimum import price (MIP) the expectation is that the Q4 earnings could be relatively a little better than what the street was anticipating. How would you read the rally that we have seen in metal companies? A: The metal stocks were beaten down out of shape and they were trading at bankruptcy kind of valuations and the rally is justified to an extent that now we think commodity prices might have bottomed out and there is a favourable period going on right now because there is some kind of stimulus happening in China which is reviving demand. There is a restocking cycle going on as consumers come to think that commodity prices have bottomed out, they are going back to the normal inventory levels. There is also an seasonal uptick, normally this quarter is supposed to be the best out of the whole year plus the discount trade with Fed delaying its interest rate hike and European Central Bank (ECB) going further with quantitative easing (QE), so all these are combining to create a little bit of support for the metal names right now. However, there is a huge overcapacity. So, again, as I said, in cement there is no bull market.  We might have hit a bottom and we are going to bounce along that bottom for some time. Latha: Is this positivity only related to the stocks because of the technical position of the commodity or the stock or will there be relief for the companies on their P&Ls?A: The steel companies with MIP coming in we were forecasting a USD 50 per tonne margin improvement. It will be seen fully only in Q1. Q4 there will be some improvement. So, steel companies will be on an improving path in terms of profitability. Latha:  We had the Infra Ministerial Group speaking with us yesterday. Steel Secretary Aruna Sundararajan said that they are still planning a package for distressed steel companies. It was a little vague, they are looking at foreign investment, even financial investment to bailout the sector as well looking at banks to convert their loans into partly at least into redeemable preference shares. Nothing very concrete but something is being planned. So, does all this mean that there could still be further P&L relief beyond that USD 50 margin benefit that you are expecting?A: I think the large companies like Tata Steel, Steel Authority of India (SAIL), JSW Steel would go through that path which the Steel Secretary is referring to. It is more probably for companies which are beyond hope right now like Bhushan Steel, Visa Steel and the smaller companies. So, if government is able to do something for them, it is well and good but I think shareholders well get diluted because debt is extremely high and there will be write-offs. Latha: So this is positive for probably debt holders, not shareholders you are saying?A: I would tend to think that way. Reema: What about the market per se, I remember post the Budget you had recommended a buy on the Indian markets because valuations at 14 time FY17 were lower than the 10-year average. Since those levels, we have seen a rally of more than 10 percent on the key indices. At current levels what is the call on the markets? A: We continue to remain supportive of the market and we think the second half would turn out to be better in terms of earnings growth also. Till now we have been seeing the impact of commodity prices going down and that is impacting the topline but this would be in the base numbers from next quarter onwards. So, I think revenue growth would go back to 14-15 percent levels and companies are able to hold on to the margins. So, earnings growth will start to look better. Currently it is going to be around 8-9 percent but can go up to around 14-15 percent in the second half. So, overall, I think markets are well supported and the rally should continue. We have a target of 9,200 for December 2016, it looks very far but I think we are on the right track.   Latha: I wanted to ask you about BHEL. There was a CLSA note out earlier today that ordering from Genco’s has begun and in fact it is at its highest level in the past five years; not that the past five years were anything to write home about but it is still better. Are you noticing that, is there any BHEL or any other such company that you would play on this theme? A: We have a negative view on BHEL. We don’t think BHEL will be able to come out of the hole they have digged themselves in for quite some time.  While yes they are going to be few orders from SEBs here and there but unlikely BHEL would be profit making company in the foreseeable future. So, would avoid that. Latha: What are your positive recommendations fundamentally speaking? A: We have been pushing two key themes which is infrastructure and consumer discretionary and we continue to hold on to those themes. I don’t think there is third theme which has emerged as of now. (Interview transcribed by Priyanka Deshpande)