Nomura pegs upper end December target for Sensex at 30,500

Latha: Therefore how are you approaching the market? Are the valuations scaring you or do you think that this market is going to move at least as much the earnings growth are indicating?

A: The market, if you take a one year view you still have upside, you take a six months view you probably have upside but the issue essentially is that if your earnings are going to grow at 15 percent over next one year your return profile could be 5 percent lower than that or if the market become more expensive than five percent higher than that but the point is that comfort with regard to when you are buying the market 14.5-15-17 times, obviously has diminished.

So, it is not a market which is going to scare you simply because of the fact that it is not trading at 20 times where the compression on account of multiples could eat away any earnings growth that you are going to show. So, you are going to get some returns but obviously the return could potentially be muted; the multiples to compress because they are at an elevated level, they are about 10 percent higher than long range average. So, that is the risk you sort of live with, maybe 8 percent now.Anuj: I am just looking at your overweight calls. The two top overweight calls have been the big legs of this bull market, financials and discretionary consumption. Your thoughts on whether hereon as well these spaces will continue to do well and importantly your overweight call on IT services and we have seen IT index trade closer to its 52 week lows than highs. Are you sensing a good entry opportunity here?

A: Let us start with financials. If financials are an expression of the fact that you are bullish on the market, it is the largest sector. It benefits from either a recovery in economy both on the industrial side or the consumption side because they fund the consumption as well. They are in a sweet spot because the rates are low and finally the translation is starting to happen in India. So, that frankly gives them lower liability costs. The non-performing asset (NPA) cycle is largely over. These stocks have raised a lot but they are still not very expensive compared to some of the other domestic sector. So, financials are still okay in terms of just expressing yourself, in terms of market and the fact is that there will always be growth here. Obviously the growth within various constituent of financial sector will be different. Clearly private sector banks especially the retail ones are doing much better in terms of growth and that sort of compounding will continue to happen. So, this is a sector which is looking pretty okay in the long-term.

Discretionary consumption which is autos, again that was not that difficult to call because you essentially had and you still have a falling interest rate environment, decent stimulus to incomes; you have got a goods and services tax (GST) coming up which will benefit this sector. So, you are eking out a decent growth again there and the raw material environment has been reasonably okay for these guys and it probably will remain like that and the stocks have run up a lot, so they could actually pause for a while and then start resuming their uptrend, just catching up the valuation. However, the fact is that fundamentally you have 15 percent growth in some of the companies in terms of volumes, so if you take a five year view you cannot go wrong or a three year view or a two year view actually. So, that has been the very basic story there.

Tech, actually we are sort of becoming increasingly concerned but the fact is that so far as defensive is concerned this is what defensive sector we have had for last four-five years. This year has been tougher simply because of the fact that growth has slowed down. But on a portfolio construction basis it is okay but to see that they will make huge amount of absolute return from here is unlikely because while the stocks have fallen, the growth has also sort of given off. So, sector challenges remain but part of that might be priced in.

And purely if you are looking at being overweight lot of domestic cyclical where do you sort of have your defensive hedges you have basically consumer, pharmaceutical and IT. I find consumer very expensive. Pharma has its own challenges. We have been underweight for a very long time. So, IT is sort of one place which rebalances the risk basically._PAGEBREAK_

Latha: We have lately seen kind of a breakout in Reliance Industries. When you say oil and gas to include that kind of a stock to give you some incremental gains?

A: We don't really comment but the fact remains that oil and gas expression was more on oil marketing companies (OMCs) because we were bullish on valuations there, we were bullish on the fact that there was obviously a huge amount of reform that has gone on, it is still going on. The government has done fantastic job there. So, there is clearly a structural improvement in profitability and these are great assets. We have been bullish on gas names. So, the thing is that oil and gas, we have been bullish basically on the downstream not so much in upstream because obviously the commodity prices are doing what they are doing.

So, that has been our sort of thrust on that and we see oil and gas has been basically the refiners and the gas companies.

Latha: When you spoke about financials you largely referred to examples in the private sector. Because you are saying the NPA cycle is over will at least the larger public sector banks become buys and separately Non-Banking Financial Companies (NBFCs)?

A: We have buys, if you remember our banking analysts had upgraded some of the large banks - I would say about six months ago. So, basically I think the thing is that public sector banks (PSBs) also have their own shades of asset problems and some of them have recognised more, have lesser than the others, NPA problem. So, it's stock specific but in general the larger banks. So if you are looking from asset perspective obviously we think some of the larger ones have lesser issues and therefore we have been positive on those names. The thing is that they also obviously benefit from the fact that rates have fallen. So, they have the bond books and they benefit. So, that has been again another positive.

NBFCs again actually benefit a lot more in a environment where liquidity is improving and cost of funding is falling and they have sort of - so we have again been positive on NBFCs largely because of the fact that we think that the net interest margin (NIM) environment for them is very good. So, financial space, the trick is to avoid basically very poor balance sheets where the capital issues still exist, but incrementally the news obviously on NPAs has been better.

Anuj: At Nomura what kind of Nifty or Sensex targets do you have if you have any for 2017 and you are expecting 15-25 percent returns. Is that for 2017? Do you expect the returns to be front ended, back ended or sort of universal through the year?

A: The 15-25 percent was for this calendar which is essentially if you translate into the target for Sensex for example it will come anywhere between -- and the average of that will be about 30,500 or closer to that. The lower end of that target is 29,000 which is where we actually were. So, that is why I am sort of a bit discomforted by the fact that we arrived there slightly early, but we are not sitting at 32,000 or 33,000 which will actually make me a bit uncomfortable and we are sticking with that simply because of the fact that we think that the earnings progress in India has definitely gotten better. If you look at last two years versus this year there has been no major cut in earnings while the growth has picked up slowly. It is a slow pick up and it is something to be expected. You will actually see strengthening over a period of time in this growth progression.

Latha: The current one when the earnings season starts on October 9 or 10. Will that be better than the first quarter?

A: If you look at the volume numbers in the economy, at the end of the day we know that autos, some parts have become patchy but in general the discretionary part of autos has done reasonably well. We know that the volume growth in some of the other sectors has been sort of steady. So, fact is if you look at the overall sort of growth profile, I don't think it changes materially. Therefore, what you have sort of seen in terms of delivery earnings in the last two quarters is something of that sort gets carried forward. However, one positive is that you could see some further relief in things like metals because prices have sort of moved up a bit in the recent past and that is a good thing for banks as well I guess and the stresses in the economy are continuing to reduce, so hopefully the banks earnings will also look better.

In general if you just look at it arithmetically, the sequential momentum is reasonable. Remember last year second half was very poor because of sudden fall in commodity prices and the fact that banks started declaring huge NPAs. So, purely from base effect perspective it will probably look very good from a year-on-year basis, but if you are looking at trajectory wise it sort of continues on the same trajectory sequentially that we have seen in the last two quarters.