Mkt to stay rangebound until polls; Infy top IT bet: Kotak

Below is the verbatim transcript of Sandeep Bhatia’s interview on CNBC-TV18

Q: Infosys is continuing to rally, up 3 percent. What did you takeaway from the conference call in which Murthy also participated and what is your call on the stock now?

A: Narayana Murthy’s participation is a strong signal despite the churn that happened in senior management. There is a stable leader on the top and the entire business will still be driven strongly and firmly. So, that is essentially to dispel any kind of misgivings one may have about the churn happening in the senior ranks of the company.

As far as the entire sector is concerned, we have a constructive positive view on the stock. Infosys has been our top pick. There have been all kinds of noises that things will not do well. The numbers show that there is tailwind coming through in the business and we see margin expansion.

We like the stock and is currently our top pick and this kind of rally in a market which is still waiting for some bigger direction to emerge, I think technology is a safe place to be in and Infosys with its valuations, which are definitely much cheaper than other leaders is a good stock pick.

Q: What could be the direction of the market because the cues since the start of the year have been mixed?

A: This market will be range bound till April-May when election will give market a new direction. The other thing which we have been focusing on is the potential for the fact that in the oil and gas sector, there are moves that are expected in terms of price hikes and in terms of gas price hike that we have just seen in terms of hike in diesel prices which is continuing, so there are certain moves in large sector such as oil and gas which is not a sector people believe in, but a sector which trades at lower valuations and this is where structural opportunity for the market appears.

India needs to get its energy scenario under control, currently we have huge subsidies and are extremely vulnerable whenever there is spike in global energy prices. We have slowly started moving towards a place where we have stabilised, we are going to go into stable structure. If that happens then the entire oil and gas sector can have a huge re-rating. So the market is waiting for direction on the political front which I do not expect till April-May and in the meantime sectors such as energy, oil and gas, if we see continuation of the policy that we have just seen in the last week, will be good sectors to play in.

Q: Since the start of the year the market has been bipolar. It is only the IT and pharmaceutical which have done well and autos, we have seen capital goods and all these indices are down about 6-7 percent. Do you think that trend will continue till the election outcome because of the new uncertainty which has been added in terms of what might happen post the general elections?

A: The Indian election is difficult to predict, anyone who wants to look at it, knows there are multiple variables that keep impacting the eventual outcome. The elections are expected to start; the polling is expected to start by mid-April and so, everyone will be focused on that mid-April onwards. Until then, the focus has to be on the earning season that has just started.

We got off on a good note with Infosys results. I do not expect any major disappointments in sectors except in banking especially in public sector undertaking (PSU) banks where there is increased pressure to reduce non-performing assets (NPAs) and to start reflecting the real picture on asset quality.

Other than that the entire result will be fine and this is going to be a stock pickers market, it is not going to be one sector doing all the hard work all the way, there is no room for valuation expansion in most of the large sectors except the energy sector where there is huge room for multiple expansions. Other than that, it will be a range bound market which has been driven either by political announcements or events or certain sectors as we have seen the IT results or now with the energy sector changes or announcements happening that can drive those stock prices.

Q: I wanted you to dwell more into oil and gas sector, for someone who is looking to invest, which is the better opportunity now. Is it companies like Reliance Industries and Oil and Natural Gas Corporation (ONGC) or do you think oil marketing companies could be a better play because for Reliance, for the last one year it has been so rangebound, the tops being about Rs 900-915 or so. Do you see it breakout?

A: I think both ONGC and Reliance are interesting plays, probably in different timeframes. In the near-term Reliance’s earnings impact on gas price increases, is not going to be high. We have already built in the price increase in our numbers and so has the market. The real surprise in Reliance, if it has to come through is when volumes of gas produced start moving up, whether that happens in FY15 or whether that takes longer, we do not know and market needs to monitor that.

We have currently not build in a big volume pickup in FY15. If we see a volume pickup from the current 11-12 mcm per day range to 20 mcm per day then there is 4-5 percent earnings per share (EPS) hike that Reliance can give. So, Reliance will see a consolidation and then move up over the next 12-15 months as events starts unfolding in terms of volume increases.

ONGC on the other hand is a business which has always got marked down because of major exposure to the entire oil energy subsidy scenario. That scenario is also on the path of getting reformed.

We have to wait and see if the new government that comes in April-May continues that path of reform and if that happens then ONGC is a big re-rating candidate. Unless we reform prices, unless we control subsidies, all of these companies come under increasing cash flow strain.

Better sense is prevailing right now and we are seeing price hikes come through both in gas and also at the retail fuel pump level. So, if these things happen, ONGC after April-May, once the new government comes in play and announce its energy policy then ONGC, in the near-term can give stellar returns. However, Reliance on the other hand will require things to move on the volume front and that is when the stock will start performing. So, it is a question of timeframe. ONGC maybe by April-May we will get a much clear sense and Reliance over the course of next year.