GST passage may catapult Nifty over 9,000 in FY18: Dalton Cap

Nifty may cross the 9,000 mark by the next fiscal, if the goods and services tax (GST) bill is passed in the monsoon session of the parliament, says UR Bhat, Managing Director, Dalton Capital Advisors.On its passage, it would give a good opportunity for short-term traders to sell as market reaches its peak, says Bhat. He is positive on auto, auto anciallry, defence, private banks, non-banking financial companies (NBFC) and the pharma space.NBFCs and private banks were able to cash in on the failures and problems faced by public sector units (PSU) banks. This has given them a lot of success.The auto sector he says will be a beneficiary of the GST Bill being passed as he feels the companies may be able to save on taxes.He asks investors to avoid public sector units (PSU) banks.Below is the verbatim transcript of UR Bhat’s interview to Anuj Singhal & Ekta Batra on CNBC-TV18.Anuj: You have seen many market cycles. We are trading much above median valuations. That is of course global phenomenon. Do you think this will end badly or do you think earnings will catch up at some point and the market won\\'t correct much, what is your sense?A: The hope is that earnings will catch up. For quite some time now there are early indications of an economic turnaround.Anuj: Hope is not a data point.A: There are some data points. But finally as I have been saying the real proof is when Index of Industrial Production (IIP) starts showing some positive numbers of some magnitude. Exports start picking up. At least exports have stopped decelerating now. There are certain indications. But valuations are a bit stretched, no doubt about that. So, it will take quite some recovery for these valuations to sustain. Goods and Services Tax (GST) is a big structural positive but from 7000 in February to whatever 8700 now there has been a dramatic up move based on Goods and Services Tax. So, therefore GST might not give us a great fillip immediately at least. For traders they might find that is the peak for the moment. But for the long term investors GST represents a structural change which might impact the economy very positively in the long run.Ekta: So, is the best factored in, in the market right now or do we see 9000 eventually?A: Eventually yes, it should be there.Ekta: By when?A: May not be in a great hurry. It is possible that there might be some euphoria after GST and it might come somewhere near there. But unless economic recoveries happen and it translates into earnings growth which is not in the immediate future at least or not for at least a couple of quarters. Probably next financial year we should see 9000 for sure.Anuj: What will take the markets towards 9000, where is the leadership, because banks have run up a lot, IT of course we are seeing some problem in terms of earnings. That is the two big legs. But what else do you think can take the index towards 9000?A: As of now the best performing sectors are auto, auto ancillaries, private sector banks, these are the ones that have taken leadership and even during the economic sort of slowdown these were the sectors that were doing very well. So, these are the sectors which can probably push the market a bit higher but finally the market has to go up based on the large weighted stocks and large weighted sectors doing well which is probably some time away.Ekta: The big sector which is in focus and the big talking point has been the entire Non-Banking Financial Company (NBFC)/brokerage space. Huge expansion in terms of valuations as well. Do you see any incremental expansion in valuation, say for the likes of Bajaj Finance or even a Bharat Financial inclusion barring what has taken place I terms of news today? Is there further upside on any of these stocks? Should a retail investor go and buy a share of Bajaj Finance?A: I can't talk about specific stocks but NBFC as a sector has done well largely because of the problems of the public sector banks which are of more than two thirds of the banking sector which have not been able to finance growth in the economy. Therefore it is the private sector banks and quasi banks like NBFCs which have been doing the best of lending, they have been able to cherry pick and lend. After the sort of renewed focus on regulation of NBFCs by Reserve Bank of India (RBI) NBFCs seem to be offering much more of a surer sort of an investment destination than earlier when there were booms and busts. So, structurally NBFCs seem to be doing well. They would probably continue to do well. But even there the margins are under some pressure and valuations are a bit stretched. But this is one segment where there is general economic slowdown. These are the sectors that people will cherry pick to see that they can hide in reasonable stable sort of stocks.Anuj: You spoke about private banks, but public sector undertaking (PSU) banks have given a great bounce from the lows. Is that just a trading play or do you think there is value in buying some of the PSU bank stocks?A: It is a trading play in my view because the structural problems are still remaining unsolved. Half of the problem that is recognising the problem is done, but the solution to the problem is nowhere in sight. Basically they need huge amount of capital to be able to finance growth and that capital to the extent that the government has committed is a fraction of what is required. So, while addressing the problem the banks need quite some time for them to address the problem because even today they have probably identified the non-performing asset (NPAs) but it will take another three years for them to write them off. So, it will take quite some time, quite some effort and quite some capital to put them back on the even keel to be able to finance the growth of India. So, therefore that is why private sector banks seem to be cherry pick and finance the growth very efficiently.Ekta: A quick question on pharma space. Because now it seems as though the problems are turning away from the US Food and Drug Administration (FDA) issues because of the recent resolution etc that we have seen and it is focussing a lot more in terms of pricing pressure on the US which is not something that is going to go away any time soon. So, your sense in terms of whether you would focus on more domestic focussed pharma companies since they have less regulatory risk as well and your approach towards the big four or five?A: The big ones are the ones which really export into the US and they are very close to addressing these problems they had with US regulatory stuff. And if they can solve that problem that market is the market that offers dramatic growth for them. That is where they have made good forays even in the past and done well. So, the domestic ones also ranks in the grand scheme of things. It is the large ones which are addressing the US markets and if they can address the regulatory problem well there is money to be made there.Anuj: Any other theme that stands out. We have the logistics stocks of course doing well because of GST, couple of jewellery stocks have done well. But any other theme that you are backing at the market right now?A: Auto is going to be another beneficiary because that is a very highly taxed sector. So, that is probably is going to be a beneficiary from the GST if it happens. That is even without all these tax incentives they are doing well. So, if GST comes and they are able to save something on tax demand could be much better and they might actually give a better account of themselves.