Expect Sensex to touch 24000 by 2014-end: BNP Paribas

Anuj: What do you think was the central theme of the week? Was it pre-election hope rally, was it the fact that globally the markets looked quite ok? What led to this big breakout for the market?

A: When I was on this channel about 10 days ago I mentioned that we upgraded India, turn overweight in our Asian modern portfolio. And, the themes behind that upgrade are what are playing out right now past couple of weeks. First, we have seen fundamentals improve, not just macro economic fundamentals in terms of trade deficits or lesser concern about liquidity and moderating inflation but also in terms of the earnings environment which in India seems to be quite robust right now, particularly, when it comes to comparison with the rest of Asia.

When you look at North Asia, the big blocks China, Korea, there are severe concerns about economic slowdown and the earnings environment in these markets. That brings us to the second point, added to the fundamental improvements in India and the political hope that is building over past three-four weeks.

There is also an element of lack of choice in the entire emerging markets. North Asia, particularly China and Korea put together are about 43-44 percent of Asia and that seems to be some kind of no go region as far as institutional investors are concerned because of the concerns I pointed out. That leaves very few pockets of Asia as worth investing and one of the larger pockets out of those is India which is not only a large liquid market but also offers certain set of stocks which are not only growing but are also offering a degree of management disclosure and relatively better corporate disclosure quality.

Latha: The nature of the move in this week is a bit surprising or definitely trend changing. It is not just that fresh money has come in, look at the way the markets have moved – HCL Technologies down 5.6 percent, Dr. Reddy’s down 6 percent, Wipro down 5.3 percent, Sun Pharma which seemed down 5 percent, Lupin down 3 percent clearly the shift has come from defensives to cyclicals and likewise I could rattle out nearly 20 percent gains in the ICICI Bank and YES Bank. Is there more of that to happen – money moving away from defensives to the cyclicals like banks?

A: In the near-term there can be a movement away from the defensives and into the cyclicals. That has been happening and may continue for sometime. One of the reasons is the kind of defensives you talked about, they have not only performed quite significantly over last two or three quarters and as a consequence some of them are appearing expensive. However, FIIs have also bought them and in our today’s report we pointed out that there are certain sectors like IT services, pharmaceuticals where FII stake over last four or five quarters have gone consistently up. While they are not over owned, they have also been bought heavily.

There is a degree of under-ownership in the domestic cyclicals which reflecting in the relative trade that we are seeing now. Many of these domestic defensives or even some of the stocks that are linked globally like Tata Motors or the IT services pack are really good stocks. They are fundamentally attractive, they offered a decent management quality that investor desires and so, there maybe a short-term underperformance from these but alpha generation would still remain concentrated in this high quality names and I don’t expect a major exodus out of these names particularly from the traditional long only investors.

Anuj: Are you saying that HCL Technologies, Infosys, Dr, Reddy’s are actually presenting good buying opportunity and at the same time stocks like Hindalco maybe DLF are actually presenting an opportunity to lighten some of the positions if you are stuck from the previous higher levels?

A: I would not take stock specific names but by and large the IT space as a consequence of the underperformance that it has suffered and particularly if this continues for some more time would present another good entry opportunity to investors.

The fundamental hypothesis, the fundamental driving force in case of IT services which is new orders and particularly large orders from the BFSI space and from other industrial universes in the United States and Europe, that story is not yet punctured. So, that fundamental tailwind still remains and as a consequence we would think that some of the larger frontline names in IT would continue to have earnings estimates revised upwards.

From the cyclical names that you talked about, we are actually advising investors to add beta to their Indian allocation but through the relatively better quality exposures. Such better quality exposures do exist in private sector banks, even selectively within the public sector banking space if an investor is careful to avoid the relatively risky exposures in terms of asset quality and I would think even in some of the second tier engineering or industrial names.

Among industrials is a classic high beta exposure, we have seen L&T perform phenomenally well and no doubt that remains a key exposure in our portfolio as well. However, there are also a few second tier stocks that we have added examples being Crompton Greaves or IRB Infrastructure where there is a fundamental story in terms of new road ways orders or increasing capex in the transmission and distribution sector that has gradually building up. So, it is perhaps not the right time to add beta blindly but possibly look at better quality exposure among the domestic cyclicals.

Anuj: The other ratio is the market getting a bit ahead of itself in terms of the move that we have seen over last few days because you still have global risk and political risk. What’s your call on that?

A: The point that you made about the market getting ahead of itself, there could be some concerns towards that affect in the near-term but if you look at the overall valuations of this market which is about 2.2 times price to book, about 14 to 14.3 times one year forward PE, those are still within manageable limits.

The long-term one year average for the market is about 15.2 times on price earning (PE) and its still at a small discount to that. No doubt, its expensive compared to the Asian average but the Asian average is dragged down by the relatively unattractive markets like China and Korea. Even though it may appear that market has rallied too sharply in the near-term. As long as the fundamental drivers are in place, this rally or rather this outperformance may continue for some more time.

Latha: This is a tough one I know but what’s your best guess. There were some people who were telling us they see 7000 in 2014. What’s your sense, maybe before the elections in terms of Nifty returns?

A: We do have a Sensex target that I can tell you and you can interpolate that in terms of Nifty, that’s 24000 by the end of calendar 2014. So, we have about 10 months to go and the upside is close to about 15 percent or so from there.

Latha: Will midcaps out do?

A: In general, the midcap space is beaten down so much and the valuation discount compared to the large cap have been so high and that severe valuation is now getting reflected in the outperformance of midcaps. The midcap universe is something that we would still recommend that investors trade with caution.

Particularly, focusing on those midcaps which offers some degree of visible growth and there is some identifiable catalyst going forward. In this space, one has to be careful about the management disclosure and corporate disclosure quality. So, there are certain sectors where midcaps are easy to find. IT services, Pharmaceuticals and there are few such exposures that we do have from the industrial space as well. But, in general the motive of investors should be to find midcaps with identifiable growth catalyst and better management quality.