Polls, India-over-China mood to rule mkt now: Religare Cap

Market across economies appear to be in a mood of introspection, but India may still scale new highs purely on fund flows, says Gautam Trivedi of Religare. He argues that market can absorb additional liquidity because there exists pockets of valuations. With state elections round the corner and FIIs opting for India over China, Religare Capital is mulling revising its year-end Sensex target of 17000 higher. 

Also Read: See no signs of economy picking up: Macquarie He observes that the year-to-date rally has been very narrow, mainly concentrated around IT, Pharma and FMCG stocks. So even on valuation terms, there are many sectors in the market which are yet to move up, banking being just one of them.  He says PSU banks are still recommended with SBI being the most preferred pick for the long term. He says the market is pinning hopes on a BJP win and if the results are below expectations, equity markets won't see a steep downside. The bigger deterrents for the market are QE tapering and inflation. Below is the verbatim transcript of Gautam Trivedi's interview on CNBC-TV18 Q: Where do you take the markets now? It looks like markets across the world from Wall Street to India are in a mood of introspection. Do you think that we are going to pierce the all-time highs sometime soon - say in this calendar year or in this fiscal?
A: Yes, I think you make a valid point regarding the global markets, but more importantly on India, unfortunately India is very much a one-legged stool right now with the other two legs completely missing. The one that is obviously there is the strong Foreign Institutional Investor (FII) flows, but retail interest and domestic mutual fund and insurance companies continue to be net sellers in the market. So given that foreigners have pumped in USD 17 billion YTD the party will continue as long as the money flow is strong. Economic conditions on the ground have not significantly changed to justify these levels, but purely on fund flows there is significant upside to the market even from these levels. Q: What is your view on how to approach PSU banks? In the last week or so ever since most of the big ones came out with their numbers a lot of experts have started to recommend these heavyweight PSU banks - like SBI etc. Do you think this is a good time to be accumulating them?
A: PSU banks for the most part and historically have actually been trading buys and given where valuations are today we would highly recommend buying the PSU banks for sure. State Bank of India (SBI) remains our top pick within the banking space. Outside of SBI, which is still a stock that investors can look at from a long-term holding, the other PSU banks are more trading oriented names and given where valuations are today there is significant upside to them. So we would recommend buying even the tier 2 midcap names. Q: You said that given this liquidity the market could scale highs. It does look to you therefore that valuations will not be that much of a dampening factor. If the money is there you will have to get in somewhere, is that the argument?
A: The market has been very narrow. YTD if you look at Nifty for example, only 18 stocks are in the positive, the balance are all in the red. If you look at the CNX Midcap Index 36 stocks out of 200 are in the positive, the balance are all in the red YTD performance. So when you look at these numbers - will the market be able to absorb incrementally another couple of billion dollars or even more, the answer is yes, because a lot of these stocks really have not moved yet and we are still seeing a lot of concentration in valuation expansions, PE expansions in what has been working YTD.
The domestic consumer plays, export-oriented companies like the IT companies, healthcare. So the concentration has been largely in these three or four sectors and the market rally should be more broad-based.
_PAGEBREAK_ Q: You guys had a Sensex target of 17000 for March 2014. Do you stick to that target or looking at the events of the last couple of weeks you would want to change that?
A: The target probably has upside risk simply because you have got a couple of things going for the market. One of course is the overall fund flows which are pretty positive. I was in the UK last week, met over 15 investors and for the most part they remained extremely positive on India. One of the investors actually highlighted a pretty interesting point saying that a lot of the bad news and the risks in India are actually quite well known unlike China. So there is a clear preference for India over China at least as of now and the other important factor will be the state elections. If you have got both these having a strong momentum the market clearly has more upside than our target of 17000. It is already above 17000, but more importantly we may have to revise our numbers if these factors continue to play out. Q: You spoke about SBI and other PSU banks also now deserving a look in. Anything in the smaller space, say the Rs 3 lakh crore and under that category, under the Bank of India (BOI), Bank of Baroda (BOB) category, we have seen a lot of movement in the UCOs of the world.
A: It is not very easy really to differentiate among the PSU banks. They have very similar profiles. But our bet remains really with SBI, Union Bank, we also like BOB. So it is a mix of the large caps and the midcaps within the PSU banking space. Q: Would you also buy the private banking space or do you think valuation gap will narrow between the two?
A: The valuation gap theory of narrowing some day, people have tried that several time and unfortunately have got burnt. So with the exception of probably an SBI which does command a lot of respect in the market, I am not saying the others do not command respect but the fact is we have not seen a lot of the PSU banks being able to get into the private banking valuation range and I do not see that necessarily happening in the near future either. Q: What is the biggest threat that this market has at this point in time; something that could cause the FII flows to peter off?
A: I guess an early announcement of tapering and of course a lot will depend on the extent of tapering, so 85 going to 75 will be less of a problem versus it going to a 50 or a 55. Some such number which basically cuts down the QE to maybe half the number from where it is today. So stuff like that could be a negative. We have a lot riding on the state elections of course and that could be a potential disappointment if the market seems to be factoring in a BJP win in three of the five states for sure at this point and maybe making some improvement in Delhi and if those results do not pan out the way people are expecting that could potentially be another source of disappointment.
Of course the fiscal is precarious and while both the FM and the Reserve Bank of India (RBI) governor have done a great job of trying to reassure us on the fisc as well as the currency - that remains a threat nonetheless.
_PAGEBREAK_ Q: How seminal is December 9th for you? Yesterday when the Chhattisgarh elections were happening our associate company CNN-IBN's reporters and senior editors were telling us that it looks very touch and go. It does not look like it is a given Bharatiya Janata Party (BJP) victory. Suppose for argument's sake on December 9 what we learn is that the BJP has done worst than expected in Delhi, after all it is seen as a three-way split there and even loses Chhattisgarh, so it is basically only two victories that they romp home with. How much do you think the markets may take it badly and would you use that as a buying opportunity or would you also shed?
A: I think I would use it as a buying opportunity. The fund flows do continue to remain pretty robust. I was in the UK last week. The preference still is India over China or for that matter the other three BRICS economies and a lot of other emerging markets. If you look at the absolute numbers that we have attracted in terms of foreign inflows this year, we have taken in USD 17 billion which Year-on-Year is only down 10 percent. Hong Kong and China do not report numbers, but that USD 17 billion makes us the second highest recipient of foreign portfolio inflows after Japan which is north of USD 100 billion. So I think that momentum will continue.
What foreigners really are looking for is stability. The preference at least at this point seems to be that the BJP could come in and do something magical with the economy and a lot is riding on that, but a potential Congress win is not necessarily a bad news either. So let us get realistic about the state elections as well. Q: How much would you bet on infrastructure? Has the CCI made any difference to the situation on the ground? Would the Tata Powers and any of the power companies come back on your radar?
A: Unfortunately not yet. There is still time before we actually start getting positive back on this sector. We need to see the fuel supply actually starting to kick in. It is early days and interest from investors in general still remains pretty poor. Q: If you do believe that there is perhaps further upside in this market how do you position your portfolio at this point? What would you accumulate at this juncture?
A: Among the large caps we still like some of the banking names which have underperformed like ICICI Bank. We still like IndusInd Bank and Yes Bank, so we will continue to put money into those. Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) also look interesting from a valuation perspective. So that is what we would like in the financials space. Mahindra & Mahindra (M&M) in the auto space is a stock we like a lot and if you look at the performance of the stock especially during election years, the stock has done extremely well. We did a survey and found that in a pre-election year M&M six months prior to the election on an average rallied almost 36 percent and post the election for the next three months after that has rallied another 20 percent. So we are very bullish on this name. We like M&M.
Within the IT space we continue to recommend Tech Mahindra, Infosys and lot of these stocks because the other development which I gathered last week when I was in London was that European companies have actually turned the corner significantly and a lot of that has been due to the fact that they have gone into an aggressive cost cutting mode. Cost cutting includes increased outsourcing on their IT spend and you will start to notice big wins from Indian IT companies in Europe as well, so that is something to focus on and companies that have exposure to Europe or are building out in Europe will stand to gain. So we remain pretty strong and committed to the IT space even now. Q: Does that include second-rung ITs as well?
A: Not so much. We still continue to prefer the large caps. Q: Metals have done well lately. I suppose there is an import substitution story which was revealed in the domestic sales coming better than expected for even a Tata Steel, definitely for a JSW Steel. Any valuation gaps there that you might still buy into?
A: Metals have had a good run. From this point with the exception of Tata Steel which is not so much of an India play, the other domestic India plays are near fully valued. So I do not see more upside, even JSW Steel for example had a great run. We would hold off on incrementally putting more money in the domestic metal plays. Q: If we had double digit or worse than double digits going northwards of 10 percent on Consumer Price Index (CPI) and northwards of 7.5 percent on Wholesale Price Index (WPI) in mid-December and that resulted in the RBI having to take a strong stance on December 18, could that mid-December time be another hiccup for the market like December 9th?
A: Yes, it would absolutely. Inflation remains the single biggest concern even now for both domestic and foreign investors - the fact that the focus has shifted from WPI to CPI with the new governor. I suspect that will be a very, very important number to look out for in mid-December and it will have an impact on RBI rate policy. Q: You must have heard about the entire UP sugar mills crisis. There is a meeting that the ministers will hold at 3 pm later today and some resolution is what many of these companies are hopeful on. Would you use this as an opportunity to trade or to invest in the sugar stocks or would you completely stay away from the sector?
A: I think the interest levels in the sugar space in general have been extremely weak. UP remains an isolated case where they actually have Minimum Support Price (MSP). It is probably better to play other sugar stocks which are not necessarily linked to the state of UP, UP is a unique situation. But I think in general there is limited interest at this point from investors in agriculture/ sugar stocks.