Mkt may see new highs before H1 2015-end: Emkay

Latha: We are flirting with near all time highs. If you just deduct the Bank Nifty, the markets have been doing very well but, do they have the verve to go beyond 9,000 mark with élan. Is there enough encouragement in the earnings number?A: Broadly, there is not much of an expectation from most of the corporates in terms of Q4 earnings. The rally that we have been seeing off late, is more a function about expectations, about things improving in the second half of the year and in anticipation of that, there has been robust foreign institutional investor (FII) inflows and domestic inflows, which we have seen. So, to answer whether the rally can continue further because of earnings, I think it is a no, but more than that it is going to be the expectation and the positive sentiment which is important.

Sonia: On that note, the sentiment has been positive because of a lot of macro improvements and work done by the government on the ground, in the last couple of months. Purely based on that trigger, do you think this market can take out new highs before the first half of the year is out?A: Possible. You have to also look at it from the perspective that India is under-invested as far as equity investments are concerned and earlier the domestic investor specifically had alternate investment opportunities where they were making good returns whether it was gold, whether it was real estate or whether it was fixed income. Going forward, currently the way it stands, equity seems to be the best opportunity for investors to be invested in and the momentum has got created. No doubt ground realities take time to improve but Indian investors want a piece of the action as far as equities are concerned. So if you continue to see inflows, then there is no reason why we should not be able to make new highs, but to sustain that you obviously require good corporate performance to support the improving valuation. As far as FIIs are concerned, they are also very positive on India and amongst the emerging markets. Probably, we are in a sweet spot and most of the global markets also seems to be doing well. So, we are also benefiting from increased global liquidity.Latha: In your assessment, this global liquidity which is at least partly driving the rally is intact, shouldn’t one worry too much about that liquidity now?A: If the valuations part, which is most important from investors perspective and liquidity - yes. Currently, it is very strong and hopefully, it should continue to remain strong but investors need to balance out between liquidity driven rally and where you believe that maybe valuations are getting overstretched. So currently, I believe that we are being supported by global liquidity supporting us but, valuations are moving up. But are they in a stratospheric zone or are they totally out of whack? I don’t think so.Latha: Where do you still see pockets of undervaluation? Any specific sectors or anything that you can give us by way of hints since you won’t point out to specific stocks to us?A: If you look at financial services sector, which is almost 27-28 percent of Nifty weight, you have a total disconnect between the private sector banks and the public sector banks for obvious reasons. But having said that, if you believe that the economy is going to improve and the question of bad assets and other things will get revolved over a period of time, then public sector banks do offer you deep value for a long-term investor. So, that is one total segment which market currently is ignoring for obvious reasons. I don’t know whether it will take a few more quarters for things to improve or whether it could be a longer-timeframe but from an investor perspective there is a deep value over there.

For example: Look at the two-wheelers segment. There has been some slowdown in performance and that is the reason why valuations are where they are. But from a longer-term perspective, that whole segment possibly offers you a good investment opportunity. So I think there are opportunities like that, you have your oil marketing companies (OMCs) benefiting because of lower crude oil prices and absence for subsidies etc plus the improving gross refining margins (GRMs) but the valuation wise they still offer you opportunities for good appreciation from current levels. So there are pockets where investors will find opportunities to invest from a medium-term perspective. Momentum stock are obviously slightly overvalued and they continue to drive the momentum.

Sonia: You mentioned two-wheelers and OMCs, but what about some of these pure play oil and gas names, the likes of Reliance Industries Ltd (RIL), Oil and Natural Gas Corporation (ONGC) etc, which is expected to be a good quarter for some of these players. So would you increase your allocation into any of these names?A: I think I would agree to that broad segment. I should have added, apart from the OMCs, the names of companues you have mentioned. These quarterly numbers should be good and even from a medium-term perspective, these stocks offer good opportunity for investors. A lot of investment that RIL specificallyhave done over the last three-four years will start delivering returns in the next few years, Here, valuations are attractive which should give returns to investors.Latha: You spoke about financials but incrementally what would you go long on? While you spoke about one sector, generally if you have to go long incrementally, where would you place your bets sectorally?A: Incrementally financial services offer the best opportunity to put further money as far as an investment perspective is concerned. That is one segment that should deliver good returns. It is going to be in ngineering capital goods space, as capacity utilisation keeps on improving as economy picks up. That is one segment which should see improved order inflows and can give incremental good returns to investors. That is another segment -- there the number of companies in that segment is a big number as far as this smallcap, midcap segment is concerned. So individually, there could be opportunities for investors to be able to invest in that segment.Latha: Would you get into real estate? Today, probably responding to the news of HDFC and State Bank of India (SBI) cutting rates we have seen some decent moves. Parsvnath, for instance, is up about 3-4 percent, Ansal Housing is 3.5 percent up, HDIL also has been rising anyways but that is also reaching out. Realty is such a beaten sector. Is there still a place to make money in these stocks?A: In the real estate segment, what is important is to look at the quality of the balance sheets of the players that we are looking to invest in. So there are some names where the balance sheets are very robust and they are in segment for geographies where demand continues to be reasonably strong. Those stocks should continue to deliver returns but where the balance sheets are debt laiden and a lot of restructuring is required to be done are the kind of companies one should be very careful about. Also, there are companies which are more NCR focused, which seem to be struggling as far as sales itself is concerned. So maybe returns on those companies backended may take more time than normal. Real estate in terms of returns is lower in terms of the opportunities.Sonia: One more pocket that has been doing well despite problems in the rural economy are agriculture based companies likes of PI Industries etc. which your firm tracks very closely. What is your own view on the agricultural stocks and whether one should continue to buy it despite the slowdown in the rural economy?A: We have been very positive on the agrochemical and agri-input base for long and corporates have well delivered returns. Many of the corporates and their business models have evolved and a lot of contract manufacturing and custom manufacturing etc has become an important part in making of these companies. This adds a lot to the robustness of the earning of some of the corporates. Agrochemical is the need of the hour in terms for improving productivity. Even more and more new products are getting introduced by all the corproates. So from a medium-term perspective, we continue to be bullish on most of the agrochemical companies in that space.Latha: What are your views on two spaces where the Modi government appears to be on the front foot. Going by the budget, they sanctioned maximum money to railways and roads, how would you play this as a stock investor?A: As far as railways are concerned, the need of the hour was to improve the infrastructure, but the number of companies or corproates (amongst the listed space) whichcan play the railway capex cycle is not sure. So that is the challenge. On a top-down basis everything should be bullish on but the number of talks are kind of restrictive.However, on the road infrastructure and the construction space, there is a huge opportunity in terms of engineering-procurement-construction (EPC) companies or road build-operate-transfer (BOT) companies and they have appreciated. But the opportunity seems to be very big for most of the companies. Companies which had issues on their balance sheet have been able to raise equity money to some extent to provide for the growth. This is expected to be available in the next few years. Between two sectors, investors would have more opportunity than the road infrastructure and the EPC space to be able to play the story.