A 25 basis point cut by the Reserve Bank of India has been priced in by markets, and may even send the Nifty into a minor correction towards the lower end of its emerging 7,500-7,800 range, says Udayan Mukherjee, Consulting Editor of CNBC-TV18."A 50 basis point could send the Nifty higher by another couple of hundred points," he told CNBC-TV18 in an interview.The Reserve Bank is meeting tomorrow for its first monetary policy meeting of the fiscal.Globally, Mukherjee said the global outlook continues to remain clouded, the strong US jobs data notwithstanding, maintaining that we live in a time of "extraordinary monetary policies".As such, traders should stick to the trend and "not get cute". "You can have an accident at any point in time. So you do not get wedded to any investment philosophy," he said.Mukherjee also spoke about various stock and sectors, including on the IT deals that have taken place today (Blackstone-Mphasis) and on Friday (HCL-Geometric).Below is the verbatim transcript of Udayan Mukherjee's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Sonia: Your view on the prognosis of the April series. It has been a fairly strong run that we have seen in the month of March. Do you think this trend could continue?A: We have got an event tomorrow, which will partly determine what the next five or seven sessions could be like, at least the next three or four sessions. Therefore, it is difficult to make a prognosis just before an important event, so I will caveat the outlook with that event in mind. If we do get 50 bsp tomorrow then the market moves out of this congestion zone that it has been over the last four-five trading sessions. We have seen some kind of resistance kicking in above 7,700 on the Nifty but if we do get a breakout event tomorrow, which would be at least 50 bps then it is possible that the market moves out of this range and tries to get to 7,900 kind of level. It is possible that we do get there in the early part of April series if we get a good policy tomorrow. If we get only 25 bps tomorrow -- that is pretty much in the price and that might also hold the tinge of disappointment for the market which is expecting more and the market might get further pegged into this trading range which it has found itself in. Maybe there will be a bit of a correction and we will go down to test 7,500-7,550 kind of levels but essentially still remain in this trading range of 7,500 to 7750-7800. I think there are signs that the market is getting pegged into that consolidation range and that might get stronger if we do get only 25 bps tomorrow. The bigger outlook for the April series probably still depends on the global outlook. We have had a good run in March in global markets. It is unclear how things will move. Right now the wind is blowing in the right direction but April often has turned out to be tricky month for global markets. So that outlook remains clouded but locally the event tomorrow will determine whether we remain in a range or we strike out for another couple of 100 points here. Latha: 50 bps could also be hawkish to neutral in terms of guidance. A 25 bps could be a dovish cut. Will that bring home the bacon?
A: I don't know because 25 bps immediately will be -- that was already priced in -- kind of a sentiment. We do not get very dovish guidance from this Governor. He will probably couch it in language which mean on hindsight or on afterthought look like they are keeping the window open for more cuts later in the year but we will have to see. We should not pre-empt right now what he will do and what he will say. The headline numbers will be 25 or 50 and on that the market will predicate its reaction tomorrow and 25 will still come with some tinge of disappointment, might be assuage a bit if he says that I am doing only do much now and depending on data and circumstances and keeping the window open for later, which is probably the outcome that I am talking about that you might initially slip but still remain in the trading range.
Sonia: How high is the likelihood of this market moving higher because of global cues because we have seen a lot of positive trends over there, the jobs data looked good, the labour participation rate has picked up and things are stabilising in the Asian markets as well. How have you read into that bit?
A: It is correct to say that the recent data points from the US have been encouraging which is why the US market is not very far from all time highs. So that really remains one of the strongest markets in the world and a beacon of hope among other beleaguered markets. By the way the good data that you refer to is probably only from the US and not so much from other parts of the world. I still remain very concerned about what the world is looking like and that remains my worry number one at all points. You can talk about some green signals in India; you can talk about volatility cooling down but the world that we are living in now is a world of extraordinary monetary policies and that is giving rise to the kind of things and dynamics that we are not use to dealing with. It is an extraordinary situation, let nobody fool you. I was reading the last Greed & Fear report by Chris Woods and the complexity of what is going on, the kind of carry trades which are being unleashed because of what central banks are doing across the world, is mindboggling. So we should not fool ourselves to say that we have a grip on what is going on globally. These are absolutely unprecedented circumstances and times for global financial markets. It may, one of the possibilities is that the US actually does not go into recessionary kind of conditions as was feared earlier and global markets, central bankers are successful in sort of calming nerves through the course of this year. It is one outcome; another one is that another storm is coming and global markets and the kind of action that we are seeing from global central bankers blows up in our face.
I have no expertise. I do not think anybody has in pronouncing some kind of verdict on how this global situation will play out and how the cookie will eventually crumble, which is why I keep saying that this to my mind is a trading market. When the going is good, you stay with the tape and don't try and be too cute but understand that the way policies are being taken, you can have an accident at any point in time and you cannot get wedded to an investment view in such circumstances, at least not at this point in time.
Therefore, I would say if I am still long in the market, I do it as a trader's market and not as an investor's market yet._PAGEBREAK_
Latha: Does Geometric deal look like HCL Technologies has not got that good a deal. Geometric has got a better deal?
A: From an arbitrage point of view Geometric shareholders will be quite happy and Geometric's shares will do well. However, that part of it is obvious because for HCL Tech, it is probably they are adding 2-3 percent of revenues, so the needle does not move too much. I wouldn't worry too much about the deal being earnings per share (EPS) dilutive by 1 percent or so. It really doesn't matter so much. I think it is important to understand the reason why HCL Tech is doing this deal. These deals are always strategic in nature even if they give up a bit in terms of EPS dilution over one or two year period. I do not think the market should sweat a lot about it as long as the strategic intent is in place, but in any case HCL Tech probably does not move more than a couple of percentage points on the back of this deal, if that. It does not deserve to because it's too small.
Geometric on the other hand because of the arbitrage ratio, because of the preference share that you are getting, it's just a matter of how much discount the market will ascribe to their preference share because it is an unlisted preference share and therefore the market might say I will give it maybe 60 percent of the value, so you are getting 30-32 percent on the preference share above the current market price. If the market had to price it in entirely then Geometric would open at Rs 250-260 today. However, that will not happen because the market probably discounts it by 40 percent or so. So there is still a possibility that Geometric covers the distance almost to Rs 240 today which would still be 20 percent plus or around that. So my guess is Geometric will stabilise after this deal, somewhere between Rs 230 and Rs 250, which would be handsome gains for the shareholder.
Sonia: Do you see rerating in Mphasis on the strength of the Blackstone ownership?
A: I am not too clear because I heard the news this morning. I do not know where the management stands in this because the management was keen that they do not sell to a strategic partner but they wanted in on the deal. So is Blackstone-Marble combined also supported by Mphasis management in this and this discussion that you are having on whether HP has given them a commitment. I think it is less important because HP is not the strong contributor to revenues that it use to be even a year back, progressively getting diluted with every quarter and therefore I doubt whether they would have give great revenue assurances to Blackstone to get this deal done. Blackstone and Marble might have taken a call that even without HP, Mphasis is executing a lot of confidence about the near future and the deal might be predicated more on that. So I want to know what the management's stance is on this offer from Blackstone and on that might hinge whether it is a good bet, medium-term bet because valuations are not expensive for Mphasis any longer.
Sonia: Coming back to the spots to be in these days. The auto stocks are on a tier post good set of numbers we have seen in the month gone by. How much more steam do you see over there?
A: The monthly numbers have been good for the last couple of months and the only thing about autos right now is that some of these trades might be getting a little crowded. Ashok Leyland is a stock I have liked for some time but now everybody is piling on to it. So one of these days it will start knocking on the doors of 19-20 PE and you just want to let it cool off a bit. The numbers have been very good, no question about that but it is becoming a consensus trade now which should worry investors.
Last time we were speaking about Hero Motocorp, quite impressed with those numbers, have not been a big fan of that name but they are probably turning the corner, the new scooters are delivering. I think Hero Motocorp given its valuations and pedigree deserves a look out there. If you believe that the rural segment is beginning to pick up and we are seeing the first signs there already then the ignored Mahindra and Mahindra which has been out of play or not on the list of auto outperformers for a long time now - that also begins to look interesting, good pedigree management and also does not carry the baggage of great outperform in recent times - that also looks interesting.
TVS Motor Company's numbers are good but it already had a good run and trades at significant premium at least on PE multiples to larger players like Hero Motocorp though it might also continue to do well. So autos are doing well. You just want to shuffle the pack around a bit and maybe move some of the money outperformers to a few of the underperformers out there because we have a lot of valuation comfort going.
Sonia: Wanted your views on the foreign institutional investors (FIIs) activity that we have seen. There has been quite a bit of buying in the month of March almost about Rs 24,000 crore but now there is some amount of cautiousness that has crept in with FIIs increasing their short call positions etc, how should a layman read into all of this data?
A: It is difficult to take a call on that. I have read the same data. I know that they have bought some Puts and they have sold some Calls, so they could be hedging themselves because they have put a lot of money to work. Thousands of crore have come in in the month of March. It could be just portfolio protection from a downside given that the market has gone up already or it could be expressing of the view that the market has gone up and in the near term needs to correct and consolidate and therefore they are building some hedges out there or even expressing some short calls at this point in time. We need to watch over the next few days if FII cash market flows also begin to die down; the last reported number was not a very large number, if going into April series these numbers are no more than Rs 300-400 crore a day net then the market has a higher chance of consolidating here rather than moving much high because you are not getting fresh flows from DIIs. You are getting some flows from FIIs which is keeping the market at the higher end of the trading range but if those flows begin to diminish, chances are that you get into 7,500-7,800 kind of trading zone that we are talking about pending more news from global markets and also from the policy tomorrow.
So the policy has some importance in the light of what FIIs have been doing over the last few days and if there is some disappointment there, you could get some more of these hedges coming into play which will drive the market into this trading range. Right now there is no great, at best you can say that there is some loss of momentum from a trading perspective but there is no great bearish flag which has emerged and I still think that earnings and RBI policy not withstanding if there is to be a breakdown in this market, the source will be global and it will not be a local event which triggers it off.
Sonia: What about some of these two-wheeler makers like Bajaj Auto, in any case names like Hero Motocorp has been sitting at all time highs but Bajaj Auto too is seeing a recovery in its slowdown in the export piece. So there is a bit of a recovery there. Would that be a stock to look at as well?
A: If you are betting that things will pickup in rural consumption this year, as seems like the base case for a lot of people. I think these are excellent management, they struggle with market conditions for a year or two but over the longer term they have created wealth for shareholders. There is no getting away from that and that is a good thing about the auto sector that you can find a handful of managements and the moment the market starts picking up because of the good work that they have done with their margins over the last couple of years in difficult conditions, they will reap the benefits of that. So there is chance of making money from the auto space, there is just one small caveat. I think we should not get carried away with the percentage growth numbers because they are coming on two fairly flat to negative years. So percentages will look very high but that does not mean that the industry or the companies are growing at a rocket pace at this point in time. However, just to give a mathematical example, if you take the base of 100 in FY15 for M&M, the industry fell to 90 this year in FY16 and next year if it grows 20 percent, the industry, it will still go to 108. It will optically look like 20 percent growth which is magnificent but from FY15 to FY17, over two years the growth would just have been 8 percent and that is not very significant growth. So, looking at these percentages you must make allowances for the fact the last couple of years have been pedestrian for many parts of the auto industry and therefore automatically the percentage growth will look much magnified.
Latha: What is the likelihood that the stocks also were factoring in degrowth and contraction. Have they significantly discounted the swing from contraction to growth?
A: The PE multiples is the right thing to be guided by here and PE multiples usually on the auto sector are fairly reliable and if you look at the PE multiples of many of these companies, you will probably find that they are not terribly cheap or the cheapest that they could get. I do not think any two-wheeler company is trading less than 16-17 times or between 15 and 17 times which for an auto sector company, not the cheapest that you will find. Ashok Leyland is already at 17 times, TVS Motor is trading at 18-19 PE multiple. Therefore, with the market at around 16.5 PE most of these stocks are at market PE or slightly higher. So it is not like they are trading at 12-13 PE multiples at this point in time at all. So I see what you are saying but the gains for the auto stocks will come with getting more and more growth momentum back rather than seeing great valuation expansion from here on. They need to show what they have shown in the current month and the last couple of months for the next six-seven months to convince the market that their cycle has turned an the next couple of years will be one of growth and if that happens that growth in percentage terms as you can see will be quite good and their stocks may follow that but I do not see the room for huge PE expansion in the sector per se.
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