Mkt may fall 2% on Greece vote; buy pvt banks, autos: Kotak

Below is the verbatim transcript of Sanjeev Prasad’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: Asia is showing deep cuts, do you think India should be preparing for some cuts especially because we were the ones who rallied the most in the last three weeks or so?

A: I won’t be surprised to see 1-2percent downside if we don’t see early start to the re-negotiations between the European Union (EU) and Greece. However, having said that this looks like this is going to be a pretty protracted affair it is not going to get sorted out anytime soon. Obviously the positions on both the sides have significantly hardened. More important politics will play a much bigger role in the resolution of this issue. Keep in mind the fact that the Tsipras government cannot go back to the Greek public with a deal which is any worse off than the last one which obviously they didn’t sign on.

On other side, I am not very sure those people are going to give any concession so I suspect this is going to be a pretty messy affair and will take a long time to resolve. Any side bending to the other side well, we construed negatively as far as politics is concerned in each of their respective geographies. So, it seems like it is a clash between democracy in Greece versus democracy in the rest of EU in a way. I think whenever politics mix with economics usually politics triumphs so that is a worry over here.

Now coming specifically to India so far the market has been ignoring some of the mild concerns which were there in the last rally. The first one to focus on is really the fact that the monsoons have not been great in the last two weeks and currently we are pretty much zero surplus deficits as of now, complete to pretty large surplus just a couple of weeks back so just keep an eye on that in next two weeks. The result season will start this week and looks like another weak quarter we are looking at 1 percent growth in the BSE 30 Index. Lastly let us see whether the government can do any -- push through any legislative agenda in forthcoming monsoon session parliament. Again looks like battle lines are drawn over there. Sonia: Talking about what the slightly medium-term implications could be on global markets because what this possible exit has done is question the mere notion of the European Union's irreversibility, so now there are talks of the possibility of further other countries exiting as well. Do you think that global markets will have to price in this sort of a redenomination risk?

A: Let us wait and see whether Greece itself exits in a first place. That is not a given as of now so let us not extrapolate into other countries taking equally hard line stances and getting out eventually. However, having said that do keep in mind the fact that we have elections coming in both Portugal and Spain which are the economies not in a best shape as of now and of course any political platform now running on an anti-austerity programme may have chances of coming to power in those countries. So that is what I was saying, the political risks out here is much more than the economic risk. Greece by itself hardly contributes 2 percent of European gross domestic product (GDP), they doesn’t matter in the scheme of things but let us see what is the domino effect if any. So I hope at some point of time this issue gets resolved favourably in the sense Greece still continues to be a part of the UN and we don’t see further negative impact as far as the euro zone is concerned. So let us wait and see. It is early days yet, I would say.

Latha: Are you expecting that until then we should continue to see the risk off in Asian markets as well till this clarity emerges about whether Greek is in or out?

A: For some time I would assume so and then local factors will start playing bigger roles in each of these markets as I was saying earlier in case of India you will have to focus on the domestic factors like monsoon, monsoon session of parliament, earnings so on and so forth. So Greece will have its ramifications but I don’t think it is going to be something which will be the talking point for the next six months or so, it will do its bit for this week and then it will be on a slow burner for some time.

Latha: Let me then come to the Indian level itself like we have been watching this practically three-week rally in the Indian markets, you think at 8,500 things have gotten priced enough and we may find a firm roof over there?

A: The market is not cheap. If you look at Nifty-50 or BSE-30 index, both of them are trading at about 18 times on a freefloat basis for March 2016 so clearly valuations are on the higher side. More importantly when you look at valuation by sector then most of this growth stocks that you want to own in India are very expensive. So that is where the problem comes that how much more rerating can happen in India at this point in time, it looks very difficult under whatever we are seeing as of now in terms of referendum not being a favourable outcome as far as global markets are concerned and on the local issues in India not being sufficiently supportive, I would sense. So in that case we are looking at a market which is probably going to face some resistance at current levels so we could see 1-3 percent correction quite easily.

Sonia: Talking about individual sectors, the sector of the year clearly has been the oil marketing companies (OMCs) space so all of those stocks are up above 30-40 percent and now with further fall in crude prices and of course the decontrol of diesel, things seems to be getting better for them. Do you still believe that there could be more gains in store in this sector?

A: Short-term yes, this quarter we will see pretty good numbers for all the companies because refining margins have been good, there would be some gains given the fact that you had increase in crude prices during the quarter and there is always some sort of a large effect between the time companies buy crude and they sell the refined products, you get some uplift in margins straightaway because of these gains. Having said that, one of the things which the street is probably not factoring in correctly is the level of marketing margins last year. If you look at normalised margins if you adjust reported EBITDA for all the one of items last year in terms of losses which we were there or inventory losses which were also there last year and forex related items whatever then it looks like reported EPS of these companies were well below the normalised EPS and which is what is exciting this market but if you do the math further, it looks like the marketing margins were very high last year which are clearly not sustainable so I think the street is probably extrapolating Q4 numbers or last year's full year numbers into sustaining forever. That is where there is at least we are somewhat more conservative on the level of marketing margin this company will earn eventually and to some extent, after Q1, results come out, I think it is time to book some profits over here because our strategy suggests that the normalised EPS of these companies are far lower than what the street is looking at currently. So be prepared for some disappointment after Q1 numbers.

Latha: The early June levels of 8,000 you think will be respected?

A: Hard to say about all these things, these are numbers only who knows -- when you look at this way there is nothing sacrosanct about 16 P/E or 18 P/E, as of now the market is trading at 18 P/E, it can very well go down to 16 P/E if things don’t work out globally or in India also in which case we are looking at 10 percent correction, which means the market could be somewhere in the region of around 7,500-7,600, so market has moved up over the last 20-25 days not on anything concrete, I would say there were initially some excitement about monsoons being better than whatever, where the forecast for the IMD. But beyond that there has been no trigger for this market to move up so much in the last two-three weeks.

Latha: I get the sense you are not buying now because you think valuations are tall. Will you buy at 8,000? If yes, what?

A: I don’t buy your base or indices, I buy for a three-five-ten year view. You buy good stocks whenever you can so the more important thing is to choose the right stocks rather than trying to time the market too acutely. So basically any investor has to look at a good quality compound stories -- if you get them at the right value, you pick them up. At this point of time the only compounding stories which I like are the private banks, if I look at the consumer names, they are very expansive and I would be a little bit concerned about some directing, which will eventually take place over there. Other than automobiles also look somewhat fairly valued. So among the good compounding stories, I think it is only private banks which excites me currently.