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Last Updated : Dec 05, 2015 05:31 PM IST | Source: CNBC-TV18

How will markets react if Fed hikes rate? Two scenarios

In an interview to CNBC-TV18, Vinay Khattar, Associate Director, Head of Research at Edelweiss Financial Services & Anu Jain, Director-Equities at IIFL Private Wealth Management shared their readings and outlook on the market, specific stocks and sectors.


In an interview to CNBC-TV18, Vinay Khattar, Associate Director, Head of Research at Edelweiss Financial Services and Anu Jain, Director-Equities at IIFL Private Wealth Management, shared their readings and outlook on the market, specific stocks and sectors.


Below is the verbatim transcript of Anu Jain & Vinay Khattar's interview with Sonia Shenoy & Anuj Singhal on CNBC-TV18.


Sonia: The market has been under pressure for a while now; in fact we have been struggling to get even to that 8,000 level on the Nifty. Do you expect more downside in the near term?

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Khattar: Let us look at what happened globally in emerging market space in the last 10-12 months. On an average emerging markets globally see an inflow of USD 22 billion per month which in last 10 months has come down to less than USD 6 billion. So that is a huge amount of money flow which was happening for a decade or so which has now dried up for the last 8-10 month period.

Second, this effect is visible in the equity and currency and bond market whether it is Brazil, Russia, Indonesia, Philippines, most of these markets have suffered significantly both on the currency front as well as on the equity front.


Indian markets on the other hand have been quite insulated so to speak, we have made low of about 7,500-7,600 but the market has not cracked any further. A big reason for that is a very significantly stable macro situation in India both on the current as well as on the fiscal side plus oil being so low and inflation under control. It is a goldilocks situation that India has gone through because of which our market have not suffered as much as what most of the emerging economies have suffered.


However, going forward my sense is that the Fed rate hike appears to be one of the biggest events, which is around the corner. It appears to be a given that most likely the Fed will hike rates on December 15 or thereabout and if that were to happen, it will be a major event which could have an impact on the market as what we saw two years ago when there was a news that Fed is likely to raise rates.

Two factors will determine whether the shock will be short-lived or it will last longer. One, a big chunk of traders or bond traders in the market today haven't seen rates being hiked because the rates have been on the downward trajectory for so long that a serious rate hike scenario has not been witnessed by a significant chunk of bond traders in the US investment world.

Second, what will be the trajectory of the rate hike of Fed? If the Fed decides to hike rate aggressively -- again that depends on what kind of data comes in -- but if that were to happen, then you would see the market remaining subdued but otherwise once a shock pass-through then our sense is it again becomes a good bottom up stock pickers market.


Anuj: A word on the problem point for the market which is banks. Are you surprised that at every level we are seeing selling in private sector banks. On Friday also we saw big selloff in names like HDFC Bank, ICICI Bank, Kotak Mahindra Bank even HDFC, the financial stock?


Khattar: There has been some degree of risk which is build-up in the banking stocks and part of the reason could also be because of the strengthening of the bond yields which has shot up dramatically in the last few weeks. Overall the nonperforming assets (NPAs) scenario remains what it was; there is no clear pickup or reduction in NPA scenario though the build-up on NPAs has stopped now. So the nonperforming asset build-up which was happening in the worsening of the numbers which was happening has clearly stopped.

My sense is that bank NPAs will begin to improve once the economic traction improves. There are two factors which everybody is focusing on. One is recapitalisation of banks by the government and banks issuing fresh equity to dilute more and raise capital.

Second, the pickup in the economy; even if you were to look at the numbers with which banks are going to be recapitalise by the government which is closer to about Rs 70,000-80,000 crore and another Rs 1.2-1.3 lakh crore of fresh equity being raised by banks over the next 12-24 months - that capital is large but far more effect will come in when host of nonperforming assets will become performing as the economic traction picks up. However, that is a scenario which will be hugely positive for banks.

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Sonia: It has been all about individual midcap stocks and you have identified a couple of interesting stocks for us. The auto space has been in focus all week and the stock you have picked out from there is Jamna Auto Industries which makes the tapered leaf and parabolic springs for commercial vehicles (CVs), which is a space that is doing quite well. What kind of trigger do you see for this stock?


Khattar: The big call is in the CV space itself. The medium and heavy commercial vehicles (M&HCV) space has undergone through tremendous amount of stress. If you look at what happened in the last three-four years, the economic cycle was in the downturn then host of mining issues and mining is a very big consumer of trucks and all that is now beginning to reverse.


If you look at the last two-three quarters' numbers; CV cycle has picked up very aggressively specially in the M&HCV segment where higher tonnage vehicles are sold off and that is one reason why you found suddenly Ashok Leyland doing significantly better than Tata Motors.


Jamna Auto provides tapered leaf and parabolic springs to the M&HCV and the CV segment and because the cycle was in a bad turn, Jamna Auto also went through a significant degree of stress but the kind of stress the CV cycle saw, Jamna Auto was able to shrink its cost, manage its business better and the number degradation was not as serious but at the same time they were able to bring down their cost structure in a manner that cause the breakeven point to move lower. Their earlier breakeven point was 7,500 metric tonne of production per month which came down by almost 1/3rd to about 5,000 tonne per month. However, with this kind of a breakeven point being reduced and the cost structure coming down, as the cycle picks up you will see significant number upgradation for Jamna Auto plus they are moving into new products like air axle and parabolic springs and all are contributing almost 10 percent of the sale. So our sense is at Rs 1,000 crore of marketcap and such a big opportunity. It is relevant to remember that it has almost got 64 percent market share in India and now with the goods and services tax (GST) coming in, the after sales market which is almost four times in size of the original equipment manufacturers (OEMs) market is likely to open to him in which he is going to be focusing. So at Rs 1,000 crore of marketcap, it could be very interesting bet with a two-three years view.


Sonia: For the shorter term if we do we do see this market downtrend continue then what are the two or three stocks that you would trade either on the short or on the long side next week?


Jain: If we were to look at stocks which have given a breakdown, there are quite a few because Bank Nifty has given a negative bias, so already all the public sector undertaking (PSU) banks have given up substantially in the two-three trading sessions. You are seeing another at least 3-4 percent cut more on the PSU banks even to get to support levels. However, apart from that TVS Motor Company has broken down, so it closed at Rs 284. So that with a stop loss to about Rs 300 on a rally up to Rs 290 any day that you get. I think that will go down to about Rs 270. Yes, the Chennai floods have contributed to the sentiment out there but apart from that the chart is showing weakness even Zee Entertainment, which was trading substantially over Rs 400, is closed below that, so I would say Zee with a stop loss of Rs 407, look at level of about Rs 380 there also. So the short plays will be there.


On the positive side there are couple of stocks which are looking interesting where if there is a dip, you can use them to get into a chart pattern which is strong. So the whole oil marketing companies (OMC) segment whether it is Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), Hindustan Petroleum Corporation (HPCL) out of which IOC chart patterns are the smartest. I would look at that, any dip; it closed at Rs 430 to around those Rs 427-426 levels with a stop loss of about Rs 422. It is looking good for about Rs 455, so that is a swing play, that is not a two-three day play apart from that even something like the Century Plyboards which is a midcap stock, it is trading over 200 day moving average. So this Rs 194 levels are good to get into the counter.


Anuj: Two other stocks that you like Indian Terrain and Siyaram, if you could tell our viewers what is the story here and what are your price targets?


Khattar: We had recently done some work on the apparel industry in India and we had some very interesting insights. Apparel consumption in India which includes the trousers, shirts, ladies wear and the footwear, totally per capita consumption in India is one of the lowest in the world at just about less than USD 40 per person. Equivalent number for China is 7 times higher and almost 10 times higher for developed economies like Germany and United States. So, our per capita income is at about USD 1700 and it is beginning to improve significantly, Indian economy is likely to touch USD 5 trillion in next 10 years. So, it is a fantastic story in which the per capita consumption and per capita incomes begin to improve and people then tend to spend more and more on luxury items and branded apparels.


So, branded apparel then becomes a very interesting segment as far as investment is concerned. The second big trend that we are seeing is that fast fashion companies, companies which can bring the fashion from the ramps in Milan and in New York to quickly to the stores do very well. So, the likes of Zara and H&M, these companies have done very well over last 10 years. Zara incidentally has more market cap than TCS in India.


Some of the Indian companies are trying to emulate that. In last 10 years we have seen almost 150 brands being launched on the apparel side in India. India's total apparel brand market has almost 200 brands. So, the biggies like Van Heusen, Louis Philippe, Peter England, these brands have now got sales of anywhere between Rs 700-1000 crore, which is a very respectable number for individual brand sales to happen.


Modern retail is playing a very big part in this kind of a growth where you are finding that change which has got associated with modern retail, which have entered into malls have done very well. So, Mudra has done sales of just short of Rs 4000 crore with these brands while Zodiac has sales of less than Rs 300 crore. So, chains which have got associated with internet economy and with modern retail have done exceedingly well. Now within this basket there are two or three names which come to mind which look very interesting and Indian Terrain is one of them. It is relatively a smallish company out of Chennai. Parent was a BIFR case, this company was broken off and in last 5-6 years they have done very well for themselves. Rs 100 crore brand has now become a Rs 300 crore brand. They are into men's semiformal clothing and they have been growing very aggressively almost 20-25 percent kind of a growth is happening. Most of the manufacturing is outsourced and the company is very good with designing and fashion. So, net-net the demand for this kind of a stock is going to remain very high. The total market cap of this company is less than Rs 500 crore. So, Rs 300 crore brand available to us at Rs 500 crore with most of the manufacturing being outsourced and very strong in terms of RoC and improving numbers almost 12 percent EBITDA which could improve by about 200-300 bps over the next 2-3 years, it is an interesting story and interesting bit that one could look at?


Sonia: Zara in India is a joint venture between Trent and Inditex, right? So, wouldn’t you want to bet on a stock like Trent as well because of Zara's performance?


Khattar: You could but one must not forget that when you bet on Trent, Zara is not the only brand that you get. Trent is a much larger play. So, there is no vanilla play on Zara in India and that becomes a challenge and it is just not limited to Zara and Trent, you would have recently seen the listing of Cafe Coffee Day, for otherwise a very good company on the consumption side the Cafe Coffee Day business but once it got co-joined with coffee exports and other companies in which the promoters had investments like Mindtree and so on it became a kind of a discounted story. So that is a challenge which even Zara will face viz-a-viz Trent.


Anuj: Two trader favourite names this week Reliance Communication and GMR. how would you approach them?


Jain: Both have sold off because of the way markets have been. I think there is some more scope for both to fall down.


GMR has fallen 14 percent, I think there is scope to go down to Rs 14.50 odd. So, would stay off that. Reliance Communication is a sell on news kind of a stock. So, I would probably wait for that, that is also, at about Rs 80-81 can go down to about at least Rs 77. So, would probably look at those levels before covering up shorts if somebody is short.


Sonia: What about some of the aviation stocks, would you want to trade any of them Jet Airways was up 10 percent in the week gone by and Interglobe, although there is not much of a history there it is still up 40 percent from its listing price, anything in that space?


Jain: Jet Airways the chart is positive. So, if one were to look, there is support around that Rs 537-538 levels. I would say if somebody wants to get a positive bias if the market stay a little negative and you get those levels, that would be great levels to get into. I would say keep a stop loss closer to Rs 520 and if you look at the charts the target is looking more like Rs 610-620 as a level. Obviously IndiGo has a shorter history of it but I think if you get that stock closer to Rs 975-980 because the history is smaller, I would say those would be good levels enter that stock but as of now I think Jet Airways looks like a positive bias to play on dips if any.


Anuj: You have one more pick for us, Dalmia Bharat, what is the story here?


Khattar: We were generally looking at the cement space and cement space is one of the sectors which will perform if the infrastructure demand picks up. It has been on and off for a long time, lot of people have bet on cement and lost repeatedly because the demand did not materialise. What has happened in last 5 years is that India has added almost 120 million tonnes of incremental cement capacity. The same number in the preceding five years was short of just about 75 million tonne odd. Against this 120 million tonne of demand being added up we know what happened in UPA II and then again the economic cycle is going through such a tough phase that the demand is still yet to materialise. That makes cement space a pretty interesting bit because you are picking up the stocks at relative valuations where the numbers are still not showing any positive traction. So, Dalmia Bharat interestingly has become the third largest cement company in India after ACC-Ambuja combined and Ultratech. It has got almost 24 million tonnes of capacity which is either operational or likely to become operational in next 12-18 months. It is a shade bigger than Shree Cements, that makes it quite an interesting one because its numbers still do not reflect the kind of capacity it has built-up and the capex that it has undertaken. So, EBITDA just to give you a sense is still at about Rs 850 a tonne, this could jump up by almost 40-45 percent over next 12-24 months, this could go upward of Rs 1100-1150 per tonne as per our calculations.



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First Published on Dec 5, 2015 01:29 pm
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