Kotak's Nifty Trade: Buy at 8000, sell at 9000

Below is the transcript of the interview on CNBC-TV18.

Latha: A lot of voices are telling us that 8,400 is as good as it gets for now. What is your sense?

A: In all our previous conversations, I have been saying that market should trend down and since the last time I was on your channel, one positive development which has come through and continues to come through is a good monsoon. So, not only as Mumbai got more than its fair share, but across the country [it has been good]. It is still early days, I would probably think end July would be a better time to take a view of how this will be. So, that is one positive development which is in the works. I generally hope and pray that this continues, the monsoon continues the way it has been across India. If that happens, I think we have some room set up for rate cuts.

People, at least our economists, have been saying that we do not have room for rate cuts till the end of December. So, I would think if we see a good outcome on the monsoon, we could see a rate cut happening in July or August. So, we will see where this takes us.

I think in the near-term, we are in the waiting room for the train of growth pick-up to arrive and to that extent this market essentially goes sideways. It could easily go to 8,000 and that could be a good entry point.

Reema: Up until now, the earnings recovery has been delayed. The street is now pegging its expectations for an earnings recovery in the second half of this fiscal year. What is your sense of how earnings are likely to be for FY16 as well as FY17?

A: Earnings recovery has to be predicated on some other thing changing in the economy. The earnings recovery can be driven by maybe a margin expansion. I think a margin expansion story has mostly played out in terms of commodity cycle. We just have to hope and pray that commodities cycle remains soft.

And to that extent the margin expansion story comes through the real and sustainable earnings story is always driven by volume growth, demand uptake, capital expenditure (capex) cycle and this is something which is a combination of factors which has to come through and sustain over a longer period of time, like how we saw in the 2003-2007 phase. We are still waiting for that to arrive.

I think the earnings recovery story is not for this year. I would think that earnings recovery if it comes through, would come through in the calendar year 2016 or maybe in the first half of the financial year 2017, which is the real challenge for this market. Everyone was talking about earnings recovery post elections, then people started talking about earnings recovery in the second half which is what your question is.

I do not think that we will have a quick turnaround on that story right now. There is no reason to believe that. Domestic consumption is broadly muted. The Capex cycle will take some time to come around. The only recovery that can take place is if there is strong government spending. There is definitely room for that in the fisc. But we have to see when that happens But even when that starts it would take 6-12 months.

So, I think the earnings recovery story is logically not right now in the second half. Maybe it is in the first half of the next year, next calendar year.

Latha: But, you nevertheless do not expect the Nifty to go much below 8,000 or is it that you will start buying at 8,000? It could undershoot much more?

A: If there are one-off events in the world, the Nifty could undershoot. It is impossible for anyone to call these factors and it is not a basis for any investment case that one should ever make. The reality is that good work is getting done. Policy formulation environment is solid, both in terms of thought process and also solid as much as politically feasible given the constraints in Parliament in terms of legislation.

We have to work with some of the constraints which are there still in the political system and in Parliament. So, this government needs to work on that and try and create majorities in its favour for the legislation it needs to pass.

This is the real political challenge for this government more than anything else and to that extent this market could go lower but I would not be betting on it, I would be a buyer at 8,000.

Latha: But, what about the outperforming stories? Where will you not lose capital and where will you definitely outperform you think?

A: The easy place and terms of outperformance and protection of capital is always the private banking space. So, we know that these are good banks. There is market share gains for the price sector which happens.

The banking system unfortunately is still lopsided, there are large kind of non-performing loans (NPL) coming in the public sector (PSU) banks and retail and all kind of cleaner lending happens in the private bank space. And also we could see some kind of rate cuts which I highlighted in the first half of this conversation.

So, that is the easy call. You could look at HDFC Bank, you could look at Axis, IndusInd Bank, these are good 15-20 percent compounding stories over three to four years and that is a good safe bet to play.

But the real story of this market is that do we see other than selected stories in auto, selected stories in banks? In Nifty stocks, do you have conviction of around 35-40 stocks? Do you have broader conviction of the total gross domestic product (GDP) growth accelerating in the next couple of years? So, that kind of story, unfortunately still, as I said, we are in the waiting room for the growth uptake train to arrive. We will wait for that.

So, the safe stories right now would be the private sector banking space and to some extent the IT sector. But these are well-known stories and nothing new to add. Maybe we could look at L&T if there is any announcements in the earnings which are disappointing, I expect some sort of corrections to happen in the capex space and probably L&T is a good bet from these levels and slightly lower levels. That is one name one could look at.

_PAGEBREAK_ 

Reema: Any thoughts on Reliance Industries, because it has generated a lot of interest ever since its annual general meeting (AGM) and the fact that most of the capex is not behind it and the company will start enjoying the fruits of its investment. At Rs 1,000, is it attractive?

A: [We have seen] a 10 percent upside on this, we were big buyers at lower levels. We put out a big buy on the name. It has done well recently and right now, while capex will be behind, we have to see what comes from the capex in terms of earnings and revenues. From the big telecom and retail capex over the last five to seven years and so on.

So, we need that revenue pick up to come through. So, I would think that this is a trading stock from these levels on.

Latha: Aside from the private banks, is there anything in the midcaps space that catches your eye? Say some outstanding consumer stories or just really anything, even for that matter pharma, IT?

A: We like Petronet LNG; it is an interesting story. Some of the bottlenecks at the Kochi terminal are finally going away, the state government is moving. We see volume growth coming through. We see 5 percent rate increases. So, we see a strong earnings growth story build up over the next few years. So, Petronet LNG is a good midcap play that one can look at.

Otherwise on the consumer side, we like Marico. That is a steady compounder story as such.

The real challenge I think is to look at some other stocks such as Honeywell or Schneider and when the Capex cycle of India starts coming through which is, as I said, 2016 calendar year onwards. So, if we see that coming through, then these are some of the midcap names, they may be highly priced in the bearing space, we have Timken.

So, these are names which look very interesting. They have good products, they have good parentage and that is something which is always valued by the market. Clean set of balance sheets. So, all these names should be on one’s radar and you can look at them in any direction in the market.

Reema: Is the structural story of telecom stocks attractive because we have the Rel Jio and that could be fairly disruptive?

A: The structural story of the sector is of course attractive. This is the largest population which still remains under-connected or unconnected so to say, but will that be an earnings story and if it is an earnings story, who will get the earnings pie? How it will be? It is like saying whether the telecom handset is an attractive sector.

Of course, telecom handset is an attractive sector. But probably Samsung makes more money than the rest of the sector combined and actually the service provider such as Apple makes even more money.

So, to say that something is attractive on a top-down basis is different from saying who is going to make money and for how long. That is what the real question is for the telecom sector, who is going to make money and for how long.

We like Idea in that space. We continue to like that. It will gain market share on the data side. It shows higher than market sector growth. So, that is one name that we have always liked and continue to bet on.

Reema: Two broad sectors you indicated that you like are private sector banks as well as IT where one could make money or at least preserve their capital. What about on the downside, any particular sectors or stocks which appear risky to you at current levels and perhaps one should take a cautious view?

A: Look, if one has to take downside protection in some sector, then one should know what the downside trigger is. Is the downside trigger a complete collapse of the capex cycle then it is obvious that the capital goods [should be avoided]. But I do not think that is happening. So, it is difficult to answer this question until one knows what is the trigger for the risk.

The risk that I have see in the domestic economy are very little. We continue in a good space. We continue to be in a good space. We continue to be in a good space since last year’s 2014 elections. We have been in a good space as far as the macro is concerned. The risk is probably coming from rate rises in the US and even there the rate rise story is actually more talked about than in reality. I think it would be a very gradual pace of rate increases in the US.

The other risk to the market could be unforeseen accident in the Eurozone. The security and high politic stakes of a Greek exit are very high. I do not think the European leadership wants a problem child at its doorstep in Greece. So, in the end, there will be a last minute compromise, I would think because the stakes, not on economics, but on politics are very high as far as the Greece exit is concerned.

So, these are some of the external risks and depending upon that, it is basically the export stories get hit and that is where the downsides could be. But, even those negative events I would give very little probabilities of them really playing out. The leaderships in the West will basically try and manage that better.

Reema: How do you expect the markets to do because on one hand your base case is that we do not have much by way of domestic risks and even global risk the probability is very low? But on the upside, you still do not have the benefit of earnings recovery. So, what happens to the market in the next six to nine months?

A: As I said, we are in the waiting in the room. So, when we are in the waiting room, we have to wait for the things to change and something better to arrive. So, the markets are sideways right now. There is no reason to get worked up. When one is in the waiting room, one basically always imagines disaster scenarios playing out in one’s head.

And that is what is happening with a lot of players which are getting impatient. The reality is that there has been a lot of structural challenges which have been left behind in the last 10 years that have been created and will take some time for these to get sorted out. As far as the private sector balance sheets are concerned. There is really no improvement, major improvement that we have seen.

The public sector banks need to get recapitalised. We need to see better operations of some of these PSU banks and these stories need to come all together. So, we have to wait in the waiting room and the markets will go sideways. At 8,000 the market is a buy and at 9,000, if nothing changes from here on, it is a sell.

Latha: It is just that the money from the global liquidity does not seem to be drying up. So, if there is money in the system and the domestic institutional investor (DII) money also has been increasing. Where does it go? The bottom seems to be getting protected simply because there is liquidity both globally and domestically. So, will you see some out-sized gains in say pharma stocks or IT stocks where the visibility is of course a little better than cyclicals?

A: To answer your question, it is a question in two parts. Yes, I agree with you. The global liquidity, the situation will not turn adverse. I think Europe needs liquidity, China needs liquidity, US is in a better position than these two large economic regions, but it will also want liquidity not to be a big question mark. So, given that the three large economic blocks of this world are creating liquidity, we are fine as far as liquidity concerns and markets will therefore get their fair share of floats.

As far as India is concerned, interest rates are still high, they need to get cut over a period of time. But we have a very conservative Central Bank. He is data driven, he needs to see the data come through and then he will do all the right things. So, we will wait for that to happen.

As far as the market is concerned, do we see outside gains? Outside gains, very big gains cannot happen until there is a real cyclical pick up. Fundamentally that is my argument. So, yes, there could be, we have seen the market shoot below 8,000 for sometime. I have said that below 8,000 it is a good attractive entry point.

But, over 8,800-9,000 in the given fundamentals in exactly the same scenario as we are right now which actually never happens because something or the other changes even between my last interview and this interview, the monsoon has been a positive factor which has changed positively. So, if things remain all the same, this is a rangebound market of 10-12 percent kind of gains.

But I hope over the next three to four months, more positive developments will be seen on the legislative side. And we will come closer to the point where we will see the uptake happening. There is fiscal space and to that extent the government needs to do a stronger spending and if that all happens then we will see the uptake happen.