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Last Updated : Feb 01, 2016 05:35 PM IST | Source: CNBC-TV18

Don't overstay your welcome in current bounceback, warns Udayan

Global shares appear to be in the midst of a relief rally, which could go on for a bit more, but traders should tread with caution on the long side, says CNBC-TV18 Consulting Editor Udayan Mukherjee.


Global shares appear to be in the midst of a relief rally, which could go on for a bit more, but traders should tread with caution on the long side, says CNBC-TV18 Consulting Editor Udayan Mukherjee.


"The Nifty for now appears to have put a bottom at 7,200 and it may be respected for the next few days or weeks but I am not sure I can say it is the final bottom," Mukherjee told CNBC-TV18 in an interview, warning that traders shouldn't "overstay their welcome" on the current bounceback. "For the rally to sustain, we need other factors to fall into place."

Likening the recent buying by foreigners into Indian equities to tactical rather than strategic, Mukherjee said the earnings picture was still mixed -- even as about the season has gone past by.

Below is the verbatim transcript of Udayan Mukherjee’s interview with Sonia Shenoy & Reema Tendulkar on CNBC-TV18.

Reema: It has been close to about a 350 point recovery on the Nifty from its lows of 7,240. Does the data give you the confidence that perhaps we have put in a near-term bottom in place?

A: I wish thing were that simple but I don’t have that kind of confidence because the market is moving very fast right now. It would be a guess at best, if one were to stick its neck out and say 7,200 or 7,250 was the bottom for the Nifty and we will not go below that in the near-term.

I think what might be possible and this is something that I discussed last time I was on the channel is that we could be in for a period of global relief. I hadn’t anticipated the Bank of Japan move then but even before that we were talking about 7,550 on the Nifty and probably a little move up to about 7,700 also as a possibility.

Now we have covered 7,550 in one day because of the Friday gap-up and we could extend it by little bit more particularly if global markets permit. However, there is nothing fundamentally out there to suggest that we had a firm bottom in place. It is possible that the bottom is respected for a while, for few more days and weeks particularly if the global markets remain on a somewhat stronger footing. However, I won’t be too sanguine that that is the final bottom which the markets put in.

In fact I would not over stay my welcome on any major rallies which play out globally because I think for a durable bottom and a durable uptrend to re-emerge we need a lot of other things to fall in to place. So, from what I see on the screen it appears to me like a trailing rally, a relief rally in global markets.

I don’t know how much more legs it has from here but it wouldn’t give the whole lot given the kinds of earnings we have seen and given the kind of global confusion that we are still facing.

Sonia: So, the trader orientation should be selling on every rally, right? However what about the investor, because we have seen some amount of buying emerge from foreign institutional investors (FIIs)? Is this the time to nibble in or is there still the time to preserve cash?

A: I don’t think the FII buying was value buying. I think the FII buying was a strategic positioning in the near-term or a tactical positioning in the near-term because of the Bank of Japan news which might have led a lot of global traders to feel that may be in the near-term the market doesn’t have or has limited downside. So, some of the shorts should get covered up.

Remember there were considerable shorts even from the FIIs in the future & options (F&O) segment in the month of January. So, may be some of those positions got covered up which is why you had a fairly large positive figure on the F&O side. There was a little bit of positional buying because of expectation of a bit more of an up-move in the near-term.

I wouldn’t say that there was a lot of value buying which happened suddenly out of the blue on Friday. I would like to see what kind of follow up we see here on over the next few days from the FII side. All of this is to do with as we discussed last time what the Central Banks are doing in a bout of desperation to keep markets afloat because everybody is stunned by the January volatility.

So, Mario Draghi is talking about infusing more capital. Bank of Japan surprised the street with the negative interest rates. The US Fed is scratching its head to see what it can do and central banks will do these things from time to time because they don’t like market volatility and one way falls in the market.

However, you will find going back and if you look at history that market downtrends are really reversed by central bank action because of some liquidity that this skewered the problem. I don’t think this is a temporary liquidity problem that we are facing in global markets and therefore anything that we see by way of relief in stock prices over the next few days I think should be seen as temporary and not a permanent solution.

Reema: You made a very valid point about for a durable bottom to be in place we need many of the other things and one of them is earnings. There was a CLSA note which suggested just over the weekend that 71 percent of the companies are under their coverage which have reported their earnings have actually disappointed. How did you read the Larsen & Toubro (L&T) earnings? It is better than the worst case scenario but nothing to cover in glory?

A: No, not by long shot but my sense is L&T as you guys were discussing just before I came on is, L&T actually fell a lot going into the earnings. Given that there could be some kind of a trading bounce, not very meaningful, may be only about Rs 50-100 but that is possible because of how much the stock had fallen in anticipation of fairly poor set of earnings. So, it might be a little bit of buy on the news after a sort of predicting the fall or preempting the poor set of earnings.

The problem that I have with L&T is that this is not about a trading call for one week or for three days and whether the stock will go from Rs 1,100 to 1,200. The problem is what will change L&T’s earnings margin and order trajectory for the next four-five quarters. I don’t see anything in their environment which is suggesting that there will be dramatic improvements to L&T’s environment over the next one year or so.

So, you will get trading bounces but I suspect that the stock will eventually come around to grinding lower because L&T despite – everybody talks about how attractive L&T has become. My problem with that assessment is that L&T has fallen a lot in absolute terms from Rs 1,800 to Rs 1,100. However, from a valuation perspective I still think L&T is not terribly inexpensive. I will tell you why. Because I think analysts are grossly exaggerating or over expecting L&T’s earnings even for FY17.

When did you see a large-cap stock falling 40 percent from its top and then a brokerage after a result marking down its earnings per share (EPS) estimate by 25 percent? That happened on Friday with L&T when couple of those brokerages said we are now cutting our estimates by 25 percent for next year. This after a 40 percent fall in the stock, so I think the street is slowly coming around to the view that L&T will continue to disappoint over the next one, one-and-a-half years because there is no discernible pickup in private capital expenditure and that will continue to haunt L&T.

I would not get excited about any bounce which will happen in L&T. L&T, I doubt will go on to report anything more than Rs 50 earnings [per share] for FY17 and this is not the consensus. I think the street is still in la-la land with Rs 65 earnings next year. I don’t think L&T does more than Rs 50 next year. On Rs 50 [and share price of] Rs 1,100 is still 22 times PE, that in my book is not cheap. I think I won’t be surprised at all if despite a trading bounce, L&T at some point gets back into triple digits once again. That is less than 1,000 bucks.

Sonia: What about the banks? The market is clearly now sifting the wheat from the chaff, making that distinction between banks that have higher amount of disclosures like Yes Bank, Kotak Mahindra Bank versus others like ICICI Bank. How do you approach that space now and what are the stocks to look at?

A: The wheat is just a handful out there. It is a lot of chaff out there so I would still approach it with trepidation. I think some banks should be singled out for a lot of punishment. However, before I go on to that I think there is some news today if I am not mistaken that the government is talking about an asset reconstruction bank again to try and bailout some of these public sector banks and address the non-performing assets (NPA) problem in the Budget session.

So, that might lead to some kind of a trading bounce in some of these fallen names because of the prospect that the government will use tax payer’s money once again in some form couching it is language like recapitalisation or asset reconstruction company etc. Essentially it will be a bailout for probably the nth time in 10 years. However, this happens periodically and I am not a big fan of these kinds of moves at all.

We were discussing over the weekend [at the CNBC-TV18 Investor Camp] in Jaipur about the faith of public sector banks. I think they all need to sit down and get their heads together and get a longer-term solution to this problem. This cannot carry on. Every five years you say again there is an NPA problem so let us throw a lot of money into their kitty and ensure that they somehow muddle along for the next five years. That is not a solution that is band aid. How long will we continue with these things and continue to bailout public sector banks. I think they will get marked down even further.

As we were talking about earlier I think State Bank of India (SBI) and I don’t want to sound alarmist here it wouldn’t surprise me if something is not done about it in terms of these kind of measures from the government. I think SBI could go down to double digits as well the way it is going with its asset book.

I am very unhappy with ICICI Bank and the way it has dealt with its problem and also with the disclosures. I think they have had enormous breach of investor trust. I don’t think ICICI Bank in the foreseeable future will get back to trading at the kind of valuations that private sector banks have got relative to public sector banks.

My call would be that ICICI Bank now in the light of its disclosures needs to trade at something close to what old public sector banks used to trade at which is near their book value. I wouldn’t pay more than one times book for ICICI Bank. I would take money out of that bank and put it into some of the other better performing banks that we discussed in the past.

I think ICICI Bank has behaved pretty much like a public sector bank despite a private sector management.

Reema: The domestic institutional investors (DII) buying in the equity markets has actually picked up in the month of January so the DIIs according to the provisional figures in the cash markets have put in closed to about Rs 12,500 crore and this is much higher than the Rs 6,000-8,000 that they had put in at least in the month of November and December. Does that give you a sense that the midcap action and activity will continue to remain strong?

A: Not just about the DII figures, I think the January- February figures will also include a fair amount of insurance money because that tends to be front loaded during the first half of the year or the first few months of the year. The figure for January probably is around Rs 5,000 crore from the domestic roughly that for that domestic mutual fund fraternity and a lot of that might have come from the insurance company.

We are still not an insignificant number and it gives me hope that domestic investors are not panicking about the fall in the market. However, there is more than that to be optimistic about midcaps though of course selectively.

Sonia: On the markets itself, now it seems like the global news is behind us. The Bank Nifty once again is in the red this morning?

A: These are trading pops, the market needs to latch on to a reason sometimes to give you a relief rally and that is exactly what you saw on Friday. I don’t think it was a very studied kind of a call that something technical has changed for the good. It is just that something good happened let us cover our shorts and the market across the board, all these markets rallied.

I wouldn’t be surprised if even European Markets and the US market later in the evening also opens on a somewhat more somber note having digested the Japanese news. So, as I said earlier I wouldn’t get carried away by Friday’s rally and not over stay my welcome thinking that this is a start of a new uptrend.

However, to get back to the point that I was mentioning about midcaps the question that you had asked earlier I think midcaps selectively have a much better chance of outperforming because not only for the technical reasons that you mentioned but just look at last week’s examples in terms of earnings just first look at the large-caps the message is quite clear that large-caps companies are struggling to post earnings growth.

You look at the marquee companies that reported last week in each sectors, leaders – ICICI Bank in banking, Bharti Airtel in telecom, HDFC in housing finance, L&T in construction, NTPC in power, Maruti Suzuki in autos these are the marquee companies all which saw downgrades post their earnings.

On the other hand you look at some of the midcaps earnings which came in. Marico, Power Grid, Birla Corp, Titan there are so many companies which gave you -- if not exceptional -- certainly robust earnings in the current economic environment. So, my takeaway is that because large-caps are such a proxy of overall economic environment at the way the macro growth is panning out I think they are struggling while the smaller companies are probably doing a better job of handling or managing their growth.

That tells me that this gross domestic product (GDP) number of 7 percent plus is not to be believed because the largecap companies, the numbers that they are reporting is just not consistent with 7-7.5 percent GDP growth.

Reema: You were talking about a few midcaps which have reported fairly good earnings. Any midcaps that you would recommend to buy based on what they have delivered?

A: I am not in the business of recommending stocks to buy but I can tell you which of the earnings I liked. I liked Power Grid it seems like I am not a big fan of public sector companies as you well know but Power Grid stands out. I was mystified by the rally in NTPC last month. I don’t know whether it was defensive buying or something but I am not a big fan of NTPC at all. However, Power Grid earnings I thought were quite solid and they seem like one of those companies that you might still want to own in such a difficult environment particularly if you believe that the power sector is about to turn around.

I was very happy surprised with Marico’s earnings. I think the whole FMCG space which is battling a massive valuation problem and therefore stocks are not performing. In the middle of that to see Marico come out with the set of numbers that they did was very encouraging. Titan’s had a very average kind of a spell for the last few quarters. This one the festive quarter, the jewellery business picks them up so I would watch Titan’s next quarter very closely to be sure that they have re-discovered their business momentum or if this was just a one-off but this quarter numbers were quite good.

The whole NBFC space has been also under a lot of pressure so it was good to see Shriram Transport Finance Company a beaten down stock come out with a fairly stock stable set of numbers. I am only mentioning some of the larger midcaps. You all know that many of the small-caps also did quite well from the results which were posted last week.

Copy edited by Nazim Khan, interview transcribed by Vrushali Sawant

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First Published on Feb 1, 2016 09:21 am
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