Indian market in 'Goldilocks' situation; like hsg fin cos: IL&FS

Technical expert Ashwani Gujral of ashwanigujral.com too believes Nifty will see a range expansion next week and break out from the 100-point range it has been this week. Nifty will break out and go towards 9000-9100.

Bank Nifty, which so far has been leading the Nifty upwards will also scale 20,000 by next month, says Gujral.

Talking stock and sector specific, Kapoor says some of the stocks in the cement space have started looking expensive but if one has two-three year time frame and believe the infra story is going to play out then one could get annualised returns of around 12-15 percent from current levels.

With regards to agri based stocks, kapoor says buy them on dips so that the risk reward ratio is better. From the non-banking financial space (NBFC) he prefers the housing finance companies and not the others.

For the PSU banking sector is still not out of the woods although the market seems to be thinking worst is over, says Kapoor and does not advice buying them.

Meanwhile, Gujral is upbeat on Cipla, Bharat Forge and Delta Corp. Below is the transcript of Vibhav Kapoor and Ashwani Gujral’s interview to Sonia Shenoy and Anuj Singhal on CNBC-TV18. Sonia: Tell us about the market opinion itself because so far market has been in a consolidation phase, but are people still deploying money or is there some caution at higher levels? Kapoor: I would not really say it is in a consolidation phase, because the market has actually been going up right throughout from February onwards when it touched low 6,800. And as you said just now, the midcaps have actually gone up even more than that. So, it is in a steady uptrend. And it is time actually for a consolidation to start somewhere out here or maybe another couple of percentage points from here because finally, we have come to a level where the valuations, while they have been expensive are now probably getting into a little bit of a dangerous territory. First quarter results have been reasonable, but we have only seen a 5-6 percent earnings growth. The market is factoring 12-15 percent for the full year, which means for the next three quarters you will see still higher growth. So, while the earnings have started to turn around, they have not yet come through fully. So, given all that, you should be approaching a real consolidation maybe in the next couple of weeks, maybe a couple of percentage points more from here. Anuj: You said valuations are now beginning to look a bit dangerous or in exuberance territory. Which pockets in particular, because IT clearly, is still not there, pharmaceuticals might not be there, we are still below median valuations. Do you think banks are getting overheated? That is a large part of the market. Kapoor: I think a lot of stocks actually and some of the midcap stocks particularly, some of them like sugar for example, just as an example which comes to mind, quite a few other stocks, quite a few other sectors. You mentioned IT. IT is one sector which we have been of the view right from the beginning that it is going to be a rank underperformer and that is what has happened. Going forward, it is going to be still more of an underperformer than it has been. IT is passing through a very difficult phase, it is going to pass through a more difficult phase. The only plus point you always had was rupee depreciation and even that is not happening and I do not think that is going to happen.So, IT is really not going to do well.

However, the rest of the sectors whether it is automobiles, whether it is fast-moving consumer goods (FMCG) for example, some of them are really pretty expensive valuations. But having said all that, I do not think that we are saying it is the top of the bull market, certainly far from it. Maybe markets are running ahead a little bit now and they will need to go through that consolidation, correction phase sooner or later. Sonia: So what do you see as the range for the markets over the next 3-6 months because the market has been making higher tops and higher bottoms. As a floor and ceiling for the market, what would your markers be? Kapoor: Right almost at the beginning of the year, we had a target of about 9,000-9,100 for March, 2017. So, we are already pretty close to that now, maybe 5 percent away. I would revise that a little bit higher to 9,100-9,300 as being the target for March, 2017. And that is primarily not s much because the earnings are better than expected, certainly not. It is more because the global liquidity is so huge. And it is not that only India is doing well. Actually if you look at some of the other markets, it would be a surprise. I do not know whether somebody has looked at Karachi. Karachi has been up 26 percent since this year and it was up another 45-50 percent last year. Similarly, there are other markets which have done very well, Indonesia and so on and so forth. The US for example, is at new highs. But India obviously is in a much better situation with all the reforms happening and interest rates going down, obviously is getting more than the normal share that it would get. So that is why we would like to revise the target a little bit higher to 9,100-9,300 and on the lower side, probably 8,000-8,200 would be the level we would be looking at. There is only one caveat to that and that is the US presidential election. If in November, something goes wrong, as far as the elections are concerned. Sonia: What is that something wrong? Kapoor: To put it straight, if Trump wins, then you could really have serious problems not only in India, but everywhere across the world.

Anuj: That is what people said about Brexit as well and now the market has forgotten that so you don’t know the jury could be out on that. Kapoor: I agree but I think this would be a much more serious issue given the sort of statements which have been coming from him and the fact that people really don’t know what his policies are going to be. Sonia: Does it really matter to Indian investors because the theme that everyone is playing nowadays is the domestic consumption theme that is why I guess our markets have been very immune to all that happened globally, do you think that is one theme that will continue? Kapoor: I don’t think markets are ever immune, they don’t stand alone. Now we have global markets and if you notice the tops and bottoms, they almost form simultaneously everywhere. So, if you look at our market, it formed 6,800 in February and somewhere around that the US markets also formed a bottom. So, there might be a difference of a few weeks here and there and the extent may be different of the rise and fall. Here we really talking of liquidity so if something goes wrong in the US in terms of saying Trump comes in and then people start to withdraw the liquidity, it is going to have an impact on every market including India and particularly given the fact that because of the liquidity markets have gone up so much, when that liquidity tightens, you certainly will have an impact.

Anuj: Before the break we were discussing how the global liquidity is driving the market, but a lot of domestic consumption stocks are doing well, cements clearly stands out what a run it’s been for UltraTech and Ambuja, ACC, India Cements. Is this a space that you still want to back at these levels UltraTech at market cap of Rs 1.1 lakh crore now? Kapoor: Yes, it is difficult decision because even on FY18 basis, some of these stocks look a little expensive now. However, having said that if you are really banking on a 2-3 year timeframe and believes that finally the investment story will also begin to play out, infrastructure will start doing well, which I believe it will be. I think they could still give you some decent returns, but obviously your returns are going to be limited from these stocks from now onwards, so you are not going to double your money or something like that, but you could get 12-15 percent sort of annualised returns even from these levels. Sonia: Apart from cement even the agri space has done exceptionally well, all the monsoon related themes your tractors, your stocks like Jain Irrigation etc. Do you think there is more money to be made here? Kapoor: Yes, definitely because again the point here is, whatever sector you might talk about or whatever stock you might talk about, there is going to be some waiting period at some point of time and the market consolidate or when they correct and that is going to happen sooner than later. Probably for any of these companies it would be better to not to chase them and buy on a every day basis, but wait and buy on dips and on certain amounts of correction to happen, so that your risk reward ratio becomes better than it is today. Anuj: One space where there is some concern and at least some talk of bubble, exuberance is NBFCs 4-5 times price to book for some of these stocks Bharat Financial, Bajaj Finance. Are you invested in some of these stocks? Kapoor: We are in the housing finance companies, not so much in the other NBFCs and as you said some of them are trading at 7-8 times book value now, so obviously one need to avoid those and maybe even book profits if you have some of these companies. Because while the market is going up it look very good and you sell and they go up tomorrow and you wonder why I did I sell, but you have to be prudent as an investor and sooner or later these runs end and market comeback to the levels they should be at or stocks comeback to the level they should be. It is always good to get out while the going is good than wait too long. Sonia: What about the sector of the week or rather the stock of the week which was SBI. It really came out of the woodwork this week after that merger and the earnings that SBI reported. Is it still worth a buy, do you think there is lot more value there? Kapoor: Well, I am not going to about a single stock, but PSU banks as a sector if you say, I think what the market is doing is market is saying the worst is over and from here on things are going to improve gradually and lot of these stocks had been beaten down to really low level, but I would think that it is still a bit too early to really think that this sector is really out of the woods. There are still a lot of issues on asset quality and slippages are still high in many of these banks in the last quarter. Of course, some of them have shown lot of recoveries which have made their results look better. Treasuries have given them a lot of profits which might be there for another quarter, but after that I don’t know and prices have run up a lot. I would say one should be waiting to see maybe another quarter to two or at least let the stock correct very reasonably from here before you look at them again. I am still not in the camp which would say go all out and buy PSU bank stocks.

Anuj: The US presidential election is in November. We are in August right now. So, do you see a clean period of 2-2.5 months where the markets could rally non-stop if the liquidity continues and the market is going to all time highs and making much higher highs? Kapoor: Technically - because it is probably difficult to answer this question on a fundamental basis particularly when there is so much liquidity. So, normally I would say markets when they are like this they would go back to the previous top at the most and then stall there when a big event is coming. So, if the liquidity gush keeps on coming and globally markets keeps on going up nothing wrongs happens the best that you could hope for before the elections would be the previous top which you had which was 9100 or somewhere thereabouts. But as I said sooner than later we are due for a correction. Whether it happens at 8700 or 8900 it would be difficult to say but it is actually a matter of 2 percent points here or there. Sonia: So, apart from the US presidential elections is there any other risk that this market has now? Kapoor: That is actually the surprising part and that is that globally as well as in India right now the situation is sort of a goldilocks situation and nothing on the horizon seems to be going wrong. Sonia: Everything seems to be working too well. Kapoor: Yes, except for this one event which we are talking about. Interest rates are low, liquidity is high, there is negative interest rates all across the world and this on and off US increasing interest rate doesn't seem to be happening because US data is still very mediocre. US is not going into a recession, it is doing reasonably well. This is one of those unusual situations where everything seems to be going so well and nothing seems to be wrong and in fact that is reflected into the US VIX if see it is one of its lowest levels ever I believe at something of 11 or 11.5 which also does reflect that investors are becoming very complacent. So, it is time to get to be a bit guarded, but yes, nothing seems to be on the horizon which can really make markets tumble in a big way unless something comes out of nowhere. Anuj: That sometimes can be dangerous territory because bull markets climb wall of worries. Kapoor: It can be.

Anuj: What is your view on the index and which stocks would you back in the next week? Gujral: The Nifty hardly had a 100 point range this week and because of that more and more it appears likely that we should have some sort of a range expansion or a breakout next week. So, chances are that one way or the other Nifty will breakout and we should get towards 9,000-9,100. Similarly on the Bank Nifty which has had a breakout even this week, that is kind of leading the Nifty towards the upside. Out there over a period of time, maybe next one month or so, you should have targets about 20,000. As far as weekly calls are concerned, several stocks bottomed out this week. So, from a medium-term perspective they start looking attractive. First one is Cipla; that one bottomed out with its results. So, out there we should have about five to six month target of about Rs 750. Bharat Forge seems to have bottomed out. Out there a medium-term target of Rs 1,400 seems possible. Delta Corp after a long time has gone past Rs 125-130, maybe multi-year high. So, out there we should see a medium-term target of Rs 200.