Last Updated : May 08, 2017 12:27 PM IST | Source: CNBC-TV18

Market may be range bound; need concrete steps for NPA resolution: Udayan Mukherjee

We need a trigger now which is far more important to break us out of this valuation versus liquidity trading range, said Udayan Mukherjee of CNBC-TV18.

From a market perspective, globally things are looking good, domestically, money flows continue into Indian equity markets. So is this a Goldilocks scenario?

Udayan Mukherjee of CNBC-TV18 believes the market is stuck between valuations versus liquidity trading range. No doubt there is a lot of interest in the market because every time it corrects 100-150 points, the fall is bought into.

However, the market is not going past 9500 level, so that tells us that valuations are restrictive, he says.

He believes the market will continue to be in a trading range unless a bigger trigger manifests itself. The trigger could be in form of earnings upcycle. So far, the earnings reported haven’t been bad as such, but there haven’t been too many upgrades as well.

Talking about the ordinance for NPA resolution of banks, he says it is a step in right direction but it is just the first step. There also need to be concrete steps to resolve the NPA issues, only recognising the problem won’t be enough, he adds.

Below is part transcript of his interview on the channel

Anuj: I want to discuss the phrase that worries you, goldilocks scenario. Globally also things looking up and domestically we have seen the money flow continuing to equities. At current market valuations, is it time to step back a bit or participate with the flow?

A: Valuations are restrictive, which is why the market is not able to force this massive breakouts over the last few weeks. You can sense that there is a lot of interest in the market so it does not correct more than 100-150 points. Every time it goes towards 9,200 or below that, you are seeing a lot of money gobbling up that correction but you are not able to go past 9,500 with big thrust on the way up either.

You make it to 9,300 then you retrace, you go to 9,350 and you pull back again. That is a factor of valuations which are quite restrictive. So right now the market is getting stuck into a bit of a range and in a sense time correcting and the momentum is slowing down because on the higher end above 9,300-9,400 kind of levels, valuations are making people worry a little bit about committing more money but at lower levels, the wall of liquidity is preventing bigger corrections, which is why the market has got hemmed into a bit of a trading range and it may well continue to be slightly range bound kind of market till a bigger trigger manifests itself.

That trigger could be maybe the start of an earnings upcycle, one-quarter you will get a lot of upgrades and the market will get even more convinced or something will happen globally, but I think we need a trigger now which is far more important to break us out of this valuation versus liquidity trading range.

Latha: So clearly the earnings so far haven’t impressed you?

A: They are not bad but you are not seeing those many upgrades. I know that the private financials have excited the market this time, a couple of numbers have been better than expected but you look at the broad universe. Midcaps have been the toast of town over the last few months and some of these sectors, which have done so well from a stock perspective, look at the tyre stocks and then juxtapose them with the numbers that they have come out with, they are sort of not gelling. The numbers are weak but the stocks have doubled.

You look at non-banking financial companies (NBFCs), the kind of strong comeback, they came back in the post-demonetisation era and then compare it with the numbers which they reported, somehow it is not looking great. Real estate stocks have doubled and trebled but you look at the real estate reality on the ground, it is still not firing on all cylinders.

So I think in the earnings picture, there is still a lot of hope and maybe marginal reality at this point in time, and once the reality starts to kick in and people get to see the evidence of the uptick that they have been pricing in, that is the time when the market forges a massive breakout.

Right now, we are still in the realm of hope, with small glimmers of actual conviction popping up on the screen, so from the little bit that we have seen of the earnings this time around or the halfway through the mark, it is still not appearing like a quarter which is the blockbuster quarter of massive upgrades.

Latha: What do you think about this non-performing asset (NPA) resolution bunch of steps, basically an enabling provision for Reserve Bank of India (RBI), what are your thoughts on public sector undertaking (PSU) banks?

A: It is a step in the right direction. You cannot argue with that to get RBI on board in trying to nudge the banks towards the resolution of this NPAs. But we will have to see over the next few weeks, what are the next steps. I think it is a necessary step but certainly not a sufficient one. We still don’t have answers to how the banks will be capitalised, this one thing to recognise the problem is other thing to capitalise the haircut on which we have not seen any kind of answers yet. So I am not criticizing the RBI or the government, maybe this is a first step which will be followed up by more steps in the next few weeks as the RBI starts getting into the act.

We also need to find ways to nudge some of these defaulting 40-50 companies to arrive at some kind of a resolution mechanism on their part as well to start paying up and on that too, we have not heard anything concrete. So let us wait to see what the RBI does with the first few accounts that it takes up with some of these banks. It is still work in progress, I think the market had priced in quite a bit of it already and therefore it needs to pause still it sees more evidence of a bigger and more concrete blueprint of resolution. So as I said, it is probably one step but there are two more steps to be taken to make this a concrete plan.

For the entire interview, watch video
First Published on May 8, 2017 11:26 am
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