Macros improving on RBI moves; further rally likely: Kotak

Sheth believes the market can see a significant rally if the inflation numbers fall to manageable levels and some growth is seen in the GDP. On sectors he is bullish on, Shah is betting big on IT and private banking.

Below is the edited transcript of the interview to CNBC-TV18.

Q: Your call on the market now because we have seen mixed trend in terms of how the flows situation has been and how the macro data has been. How would you approach the market from current levels?

A: Taking slightly broader view, market over the past few months have risen largely because of the action taken by the government and the Reserve Bank of India (RBI) on rupee as well as the current account deficit.

There has also been some optimism because of the initiatives which have been taken by the government on the reforms front, be it State Electricity Board (SEBs) which are restructured or be it the CCI passing several projects. Furthermore, there is some optimism on the inflation front and now that inflation has peaked out and to that extent, maybe even interest rates could be peaking and might see lower levels ahead. And lastly, we have the foreign institutional investors (FIIs) flows, which have been robust till December.

So, now at current levels, if one looks at the market when valuations are at about 14.5 to about 15 times, which is the long-term average. We believe that for the valuations to move up further from the current levels, we need to get more confidence in growth as well as inflation and interest rate front. That is something which we are not seeing especially in the domestic market.

For example, when we speak to companies, they are seeing that the ground level realities have not yet changed; we have not seen any major new projects being announced. We have got a fiscal deficit which is almost at its targeted levels and now, the market is expecting some sort of cutback in the planned expenditure.So, growth rate over the next few months is something which we need to get greater confidence on and also on inflation front while we are seeing the consumer price index (CPI) come down, we are not seeing that much moderation on the core inflation.

We also need to keep in mind that we have got the subsidies on the oil and fertilizers which are yet to flow in. Another aspect is that if the economy has to recover slightly and if companies start passing on the raw material hikes which they are not passing on till now, then we can see that the CPI core or the core inflation might take a longer time to moderate.

Q: What is your general thrust? Are you saying that you won’t take a plunge till the Wholesale Price Index (WPI) numbers come? You would want to take a call only after that?

A: I think that is something which we would wait for, but broadly on the market what we believe is that the valuations can trend higher and the market can trend to higher levels once we get more confidence on the economy or on the growth front as well as on the inflation front.

Coming to your question once again, the WPI is coming in, the core was at 2.7 kind of level and if we see more increase in the core inflation as we had seen in the CPI then it will give the RBI Governor some fodder for thinking as far as the rate action is concerned.

Q: What is your call on Infosys after the numbers and the big rally that we have seen and the rest of the IT sector?

A: We have been positive on the IT sector over the past several quarters. As far as Infosys is concerned, the positive surprise on Infosys came in terms of margins which were better than expected and that is the single most important point. Infosys has got the lever which will allow it to improve margins or in fact prevent any deterioration of margins going ahead as it starts chasing growth. So, that is the positive which we see on Infosys. We do have a positive view on the stock.

As far as other companies are concerned in terms of pecking orders, we do like Tata Consultancy Services (TCS), Wipro and HCL Technologies. So, overall we do have a positive view on the largecap companies. On some of the midcaps, we also like few focused midcaps like NIIT Technologies and KPIT and a very small stock, which could be once again a beneficiary of the overall IT sector growth could be training company named NIIT where we see higher enrolments in the next year. Therefore, these are some of the picks which we like in the sector.

Q: Your take on any of the private sector bank?

A: Among the banking sector while we have an overall cautious view, we are positive on the private sector banks and our picks remain in that sector like ICICI Bank and HDFC Bank.

As far as HDFC Bank is concerned, the consistent growth over the past 40 odd quarters, the valuations are at 3-3.5 time book but consistent growth and high return on equity (RoEs) in excess of 20 percent, we believe that the stock will continue to attract higher valuations. So, within private sector banks, we do like ICICI Bank and HDFC Bank.

Q: In your note you said that you are selectively positive on capital goods and infrastructure, any names that you can give us?

A: Within capital goods and infrastructure we are very selective in the sense that we like companies which have got strong balance sheets and credible management. We also like some of the companies which are present in the export markets, for example a company like Voltas which has high revenue coming from the Middle East market or maybe some other themes like water theme which we are very positive on like VA Tech Wabag.

Therefore, within the capital goods sector, we are selective positive on strong balance sheet and good management companies. Companies like Cummins would qualify for that but apart from that, stocks like VA Tech Wabag or Voltas are the companies on which we are positive on, but largely are not seeing any major improvement in the ground level scenario. So, it’s largely a cautious view on the capital goods and infra segment with some select buy calls as I mentioned.