Macros factored in, not wise to think worst is over: Kotak

Sanjeev Prasad, Senior Executive Director & Co-Head at Kotak Institutional Equities says the despite the tick of green on screen, it is advisable to wait out for a definite solution to global situation. Hopefully, there will not be much impact whatever happens with Fed or Greece, Prasad says but cautions that the Indian market does not have any triggers for the mid-term.

He says the macro economic indicators look good, but those are already factored in. As of now there are some green shoots, and order book are improving, but that is not translating into bump up in revenues, Prasad noted.He says most of the good quality stocks are very very expensive, particularly in consumers and pharma sector. He likes Reliance Industries for its valuations. The stock is trading at P/E Of 10x FY17 which is reasonable.

Below is the transcript of Sanjeev Prasad’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: There is a bit of good cheer. Do you think that at least the slew of negatives have been adequately discounted by the market? The earnings downgrades, the monsoon likely to be delayed etc? Does it look like we have done enough of that, not too much of a downside is left, would you say? A: Possibly, but let us wait out for the global events because we do not know which way the Greek situation is going, most likely it is going to default. What repercussions it has on emerging markets? We will wait and see. But the thing has been going around for so long that presumably the markets have digested this. So, hopefully, there will not be too much of negative impact on emerging markets and also in India. If you look at the slightly more medium-term scenario, more like a six month outlook, then there is really no trigger for the market. So, yes, to some extent, maybe the negatives of earnings downgrades and weak monsoon, etc. have been factored in. But I do not know what will drive the market going forward because as of now, the markets look reasonably, fairly valued at about 17 times the March 2016 basis, both for the Nifty as also the Bombay Stock Exchange (BSE) 30 index. Chances of earnings upgrades look very remote. If anything, you will see some more earnings downgrades and clearly there is not much of support on the monetary side. So, look at the triggers; there are really no triggers for this market. So it probably just bounces around based on whatever is happening globally. Latha: I sat and wrote out some positives. I looked hard and did get some. The Index of Industrial Production (IIP) number has been positive since November. It is rising slowly and the last number was decent at 4.1. The commercial vehicles (CV) sales have picked up reasonably. Indirect taxes collection was 40 percent ex of fuel hikes, 17 percent. So, taxes and IIP and CVs are all quite solid numbers. They are not adding up to anything positive for you? A: There is some improvement from the bottoms as far as the market is concerned. But these are things which are already known and factored in presumably. But we are paying 17 times for this market. So if you do not have four percent IIP numbers to start with them, I do not think 17 time market is justified. Even four percent is too low to essentially justify 17 price-earnings ratio (P/E) kind of a market. But there are hopes that normal recovery will follow at some point of time. As of now, there seems to be some green shoots, at least on the order book side. At least for the last three four quarters we are seeing a pretty strong year-on-year growth in the booking for most of the larger companies. As Larsen and Toubro has reported fairly strong order booking numbers for the last three quarters. (But) if you look, industrial companies are declining on a year-on-year basis. So, yes, there is some improvement somewhere in the economy but it is not really translating into real revenues and earning numbers as yet. So, I guess still need to wait and watch for some more time as far as the market is concerned.

Sonia: I was just going through your revised model portfolio and you have some very interesting additions to your list. You have increased your weightage on Reliance Industries. That is the stock that everyone is expecting will breakout perhaps by the end of this year. What are your own triggers for increasing weightage on this stock? A: Just valuation and lack of any other ideas, to be honest at this point of time. Most of the good quality growth stocks are very expensive even though they have corrected about 15-20 percent from their respective peaks. All the consumer, pharmaceutical names are still very expensive. The only stocks which you can look at more positively is maybe private banks, but even there valuations are not in your favour. So you have to look at a broader range of stocks now and Reliance at least in terms of valuations actually looks quite okay. We are looking at somewhere about Rs 83-84 earnings per share (EPS) on a March 2017 basis. In Telecom business, everybody has a fairly negative view, at least based on what we hear from the market participants. We ourselves are ascribing zero value for the equity investment over there. So, if it turns out to be a good investment and you start seeing visibility on revenue numbers and not much of damage as far as earnings before interest, taxes, depreciation and amortization (EBITDA) numbers are concerned -- Who knows? You could see people start to ascribe positive value for the telecom business. So, you get some additional uplift from that. So, if you look at the fair value, it comes out to be somewhere about Rs 1,050 on March 2017 basis. So, it does not look too bad. You get about 15 percent return from where we are which is the maximum you can hope from the market also on a 12-15 month basis.