Not too many positives for mkt; like Maruti: Kotak

Sanjeev Prasad of Kotak Institutional Equities says the market doesn't have any positive triggers to give it a specific direction.

Speaking to CNBC-TV18, Prasad says the market has factored in the passing of the Goods and Services Tax (GST) and hence, is likely to be rangebound.

"However, it is not likely to be implemented before April 2016 and its benefits will be seen only in FY18," adds Prasad.

On sectoral picks, Prasad is bullish on Maruti Suzuki and Bajaj Auto among automotives, but says the cement sector can be avoided.Below is the verbatim transcript of Sanjeev Prasad’s interview with Reema Tendulkar and Sonia Shenoy on CNBC-TV18.Sonia: When we spoke with you last there was that conference going on but from here on what is the expectation as far as the index itself is concerned because we are seeing a slight amount of turbulence around the 7,900-8,000 mark on the Nifty. What do you think the trajectory could be? A: I guess in the short-term there are too many moving issues as of now to take a firm call. On the one side, if you look at the positive side, you are seeing some momentum on reforms. Government has done small reforms in several sectors in the last two to three weeks. Hopefully we will see some progress on goods and services tax (GST) legislation in the ongoing winter session of parliament. Beyond that honestly I can’t see too many positive triggers for this market. If you look at other side, clearly you will have this Fed event on 16th or 17th and most people are penciling in some increase in the Fed rate. If it is followed by a dovish commentary then you could see some rally in emerging markets (EM) based on some risk appetite coming back into the market but just with a normal increase which people have factored in, I don’t think things change too much. Beyond that if you look at earning numbers, I still one more quarter of earnings downgrades. So, now most of the street including us is penciling in somewhere about 20 percent growth for FY17 and I see some downside risk over there; about 3-4 percent cuts could be there. On the monetary policy side, I don’t see much scope at least for the next three to four months given inflation trajectory and stated policy objectives of the Reserve Bank of India (RBI). So, it is really a mixed bag in terms of what the market can do over the next three or four months. Some positive factors, some negative so I suspect it is going to be range bound in a narrow range for some time. Reema: Let us talk about the potential positive triggers. If the GST Bill is passed by the Rajya Sabha as well in the coming winter session, how much of an upside could we see on the markets?A: The way I would look at it is, it is something which is required to sustain this market at current levels. If you see anything negative happening on legislative side once again, what you saw in the last monsoon session of parliament, then this market will come off. On the other side, GST is something which is now getting priced in. People are recently hopeful based on the dialogue between the BJP, the central government as also the Congress party and hopefully things will move ahead over there. Clearly the thing which is required in this market is clearly earnings growth and that is still an issue in the sense you are still seeing earnings downgrades and that will continue for the next one quarter or so. GST is something which people will take in the stride, it is a sentiment positive but do keep in mind the fact that the implementation is probably not going to happen before April 2017. There is still a lot of process that needs to be gone through. So, if anything, the benefits will come earliest in FY18 I would think. Sonia: Let us talk about some sectors now, there is one theme that everyone is betting on, at least nine out of 10 people are, which is the revival in the urban consumption theme, so whether it is the auto stocks, whether it is the cement names, today we saw a positive report on the home improvement theme. How do you play this theme now, do you still continue to look at the ACCs, Ambuja’s, Maruti’s of the world or do you now start to look outside the index where more value can be found? A: As far as cement names are concerned, the valuations are way too expensive. Even if you build in a very strong improvement in profitability, the stocks are still trading at pretty expensive valuations. So, I am not really excited by the cement sector. Demand will pick up as we go along but as of now real estate/construction activity is still quite weak and I think that will continue for the next two to four quarters. I don’t see any great revival on the real estate market anytime soon. People have built in a very big improvement in profitability in the cement sector and we have been seeing that for the last two to three years now and invariably the numbers disappoint. So, let us see what happens on that one. As far as auto is concerned, we are slightly more constructive over there, more positive on stuff like Maruti Suzuki, Bajaj Auto, etc. which we have been positive for some time now. However, having said that, the volume growth will be quite decent in FY17 given the positive impact of the 7th pay commission recommendation which is probably going to be accepted by the government anytime now. However, beyond that if I look at the negative factors over there, one is the very high margins assumptions which have been built by the street in terms of EBITDA numbers and that is something which I worry about. If I look at Maruti for example, most people on the street are working with something like 16-17 percent EBITDA margins for the next two to three years. Now, if you look at historical EBITDA margins, they have been more in the range 10-13 percent. So, whether this kind of EBITDA margins sustains, which is on the back of lower commodity prices, or not that remains to be seen. So, you would see volume growth picking up, that is there in the numbers but on the other side whether the profitability assumptions which have been built in, sustain or not, I am not very sure. Sonia: Apart from lower commodity prices for Maruti, there is this other argument that now many of the newer products are high margin products, the more premium products like the Baleno, Ciaz, etc. so automatically their margin profile will increase. Wouldn’t you buy that argument?A: I am not very sure that is the correct way to look at it. Margin is more a function of what kind of volumes you are doing and in most cases these are not going to be very high volume products. These are also segments where Maruti is putting a lot of money in terms of investing and building the brand, etc so I am not very sure whether Baleno would kind of have the margins which Dzire and Swift have currently. Reema: When you last spoke to you on the auto sector, you also told us that Tata Motors valuations are very attractive but at that time it was trading at levels of Rs 350-360. Since then it has rallied 10-15 percent, is it still looking attractive at current levels? A: We are still okay with Tata Motors. I think the stock can probably go up to Rs 470-480 kind of numbers and then we will review the call. As of now we are still comfortable with the valuations.Reema: What about the pharmaceutical sector because stocks like Dr Reddys, Lupin, Sun Pharmaceutical had corrected anywhere between 15-25 percent in the last month, that is in November. Did you dabble in and buy any of the pharmaceutical stocks given the kind of correction that we have seen in frontline names? A: Not yet. The problem with these names is if we have negative news flow, it is not as if these are going to change immediately. Warning letter is a pretty serious thing which means this is going to take some time to resolve, probably year or so which means the company losses momentum. In terms of introduction of new products are concerned, clearly FDA approvals are not going to come through on time and whatever is the pipeline you could see a lot more competition now because the launch has delayed quite significantly and you could actually lose some of the opportunities which are out there. In terms of pricing, that also becomes quite critical because the moment you lose window there is pricing pressure which starts building up quite significantly because let us say in the next two-three period you were selling at Rs 100 to the unit, that number could come down to somewhere about Rs 10-20 once you lose that period. So, that is the real big issue for these companies.The second thing is to look at earnings numbers, obviously the street has doubled numbers now, still I am not very sure whether that thing is done for sure and based on whatever numbers we have, most of the companies are still trading at about 22-24 times on the March FY17 basis with clearly some more downside risk to earning numbers. So, I am still not very sure whether I want to revisit the likes of Reddys or a Sun very quickly. Sonia: The space that did very well last month surprisingly was the PSU banks. Now, there are some issues getting solved for the PSU banking space for example the Dabhol plant has started selling power again. So, many banks indicate that perhaps the worst of the asset quality problem is behind them. Would you put money in PSU banking names, the larger ones like State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB), etc?A: We already did that and we took a call in SBI about two to three months back and decided to put some money over there. So, if you look at the model portfolio, we have about 4 percent in SBI now and over the last two to three months we have increased the weight over there. The call was Rs 2.25 if you adjust for the value of subsidiaries which are doing reasonably well especially life insurance business, etc. You take out about Rs 50, the stock is available at sub Rs 200 levels, March 2017 adjusted book value would be about Rs 170 adjusting for the NPLs in which case the company stock was available at about 1.1 time which is not too bad I would think. So, if I want to play the PSU banking system cycle of improvement in NPL cycle I would probably do it through SBI; others have way too many problems as of now. So, I am just happy and I am keeping SBI in the portfolio.