'Nifty to hit 8750 soon; advise 60% exposure in cyclicals'

While others can allocate 60 percent of their portfolio exposure skewed towards cyclicals and 30 percent in quality IT & FMCG stocks, he said.

Below is the verbatim transcript of Vibhav Kapoor’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Sonia: We have seen huge opening to the market today. What is the sense you are getting about how the year end will shape up. Do you see a fresh leg of this rally purely because of how crude has shaped up?

A: I think that is definitely a big positive. It also means that not only today oil prices have fallen but I think they are going to stay pretty low and the downtrend is going to continue for quite some time to come and that is a big positive for an economy like India. This is definitely going to give some new fillip to the market which we can see today.

Also, this probably opens up little chance of a rate cut sooner than we had been talking about earlier because the RBI should now be looking at the fact that inflation is not going to go up so quickly at least the oil related inflation and the secondary benefits that it will have and that could lead to rate cut sooner than what the market had been expecting and that would be a big positive.

Latha: What is your own expectation from the policy on December 2nd and how is the market poised, will a lack of a rate cut be seen as a negative because it perhaps just postpones it by one more policy?

A: To be honest, previously we had not been expecting before April. My view was that the Reserve Bank of India (RBI) would like to see the Budget; it would like to see how inflation is behaving for the next two to three months and then take a call in the April policy. However, with this development happening overnight as I said rate cut could come earlier and there are at least some chances now that you could see a rate cut on the December 2nd.

If the rate cut doesn’t happen I don’t think it is going to be a big negative. Probably you might see a very mild reaction in the market but the hope is always now going to be there that you are going to have a series of rate cut sooner than we had expected earlier. So, I don’t think it is going to cause panic in the market.

Sonia: We are expecting a big boost in the macros both in the form of inflation and the lower import bill. How much do you think the range of this market will now move higher to factor in the positive macro trends?

A: In the immediate term say for December we would be looking at a possibility of something like 8750 on the upper side and then one would have to look at how things develop later on as the Budget approaches. One of the bigger advantages which today the market has is not only the Indian situation which is benefitting from this but the fact that the global markets are conducive for equity.

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You have very low interest rates everywhere; US yields are still at 2.2 percent showing no signs of going up, the US economy is doing moderately well and there is a lot of liquidity being infused by Japan, Europe and now China is cutting interest rates. So, it is an ideal situation for equity as a whole globally and more so for India.

Latha: Now what is your sectoral mix with bond prices likely to give a big fillip to public sector bank balance sheets? I was just checking, the low was in August of about Rs 98, today the 10-year is at Rs 102; almost Rs 101.96 and this is still at an 8.1 kind of yield for the 10-year. If we are looking at a fairly decent rate cut in the months to come what is the 10-year yield you are looking at say June or nine months down the line and therefore where do public sector banks or non-banking financials (NBFCs) stand in your portfolio?

A: I think we would be looking at 10-year yield of about 7.5 percent over the next 9-12 months which means a big positive for PSU banks particularly. However, having said that, that is going to help them temporarily or over one or two quarters as they book profits on their bond portfolios. Therefore, will set off some of the increase in NPAs and restructured assets that they are going to have because they can provide more for them through the profit they have in the bond portfolio.

However, the overall structural issues for the PSUs banks will still remain and these relate to the asset quality as well as the requirement of capital over the next two or three years. So, you could have some improvement in PSU bank stocks but you won’t have big bull market in these stocks unless and until these two issues begin to get resolved.

Sonia: What about private banks, would it still be a good time to invest into some of these names despite the run up that we have seen and if yes what would you look at in private?

A: The private sector banks are anyway doing well both in terms of their performance fundamentally as well as in terms of stock prices. They have been doing exceedingly well. The bond yield gains will add a little bit to their profitability and it will help them a little bit but again that doesn’t change the structure but their structure is anyway good. Their business is doing well and if the economy picks up then their growth rates are going to go up further.

Private sector banks by and large are buy and hold stocks at this point of time. Some of them may look expensive and therefore you may have correction from time-to-time but if you are investing with a 12-24 month timeframe they still look to be pretty good.

Latha: What is a Rs 100 split across sectors or across Nifty stocks for you now?

A: A lot of that has to be in the cyclicals; there is no doubt about that. That I think has been our position for a long time. In financials let us say banks, private sector banks, PSUs, NBFCs should occupy a fairly reasonable proportion, maybe 25 percent of your portfolio. Then you have the automobiles, cement which can benefit from an uptick in the economy, maybe some engineering should occupy another 30-35 percent.

You would probably have at least 60-70 percent in cyclicals and spread out the balance 20-30 percent in IT which still continues to look pretty good and also maybe in some of the FMCG stocks, the consumers rather.

Sonia: You spoke about levels of 8750 that one could see in the course of the next couple of months. However, what about the base for this market, how much has it moved up by?

A: I think the base is roughly about 8000 for the time being and that is just because of the fact that when markets go up like this you can get some 10 percent corrections at any point of time. So, 8000 would be a reasonably safe base given the current conditions.

Latha: We have seen the big indices, Sensex and Nifty gain about 40 percent. However, now the midcap index has actually caught up. So, do you think that from hereon there is still more gains in the midcap then in the heavies?

A: You have to divide the midcap sectors and some of them will definitely gain. As a whole the midcap starts to outperform in a big way when the economy starts to improve. We haven’t seen any signs of that so far. So, once the market senses that the economy is starting to improve in a dramatic way that is the time when you will have big outperformance from the midcaps.