Portfolios need to add bit of election beta: StanChart Sec

Below is the verbatim transcript of Rahul Singh's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: What is the feeling from hereon? We seem to have successfully bounced off that 5,950 mark several times now. Do you think that with pre-election cheer, the markets could even tear 6,400?

A: I think beyond looking at the index levels, which are obviously a sum total of what the stocks are doing, one thing is clear that the portfolio for a lot of the FIIs and a lot of the domestic investors also probably is not tailored for a favourable outcome in the elections. What we are seeing therefore is obviously apart from company specific positive newsflow like some times in pharmaceutical or some times in IT services, what we are seeing is a little bit of election beta rally which is picking up steam in the last three-four weeks. I think that is logical because if we look at the valuations in some of those segments and we can come to it later in the discussion, those valuations are effectively factoring in very low probability of a favourable election outcome. So what we are seeing is if some churn in the portfolios and logically so and that has been our view as well since December that the portfolios need to add a bit of an election beta and reasonably priced election beta, the investors don’t need to go out there and buy some high risk stuff but reasonably priced stocks and sectors have done pretty well in the last three months.

Latha: Any comments on Indian Oil Corporation (IOC) since you like oil and gas stocks?

A: I think it was a big overhang as to whether IOC will come to the market and whether OFS route will be taken. That was an excellent opportunity for example to buy the oil marketing companies (OMCs) stocks and I think it still is in spite the run up. So we like stocks like those where the price to books have gone down to multiple year lows or price earning multiples have gone down to multiple year lows, which effectively are saying that the oil and gas stocks or the public sector undertaking (PSU) stocks in the oil and gas space in general have been effectively factoring in extremely fractured mandate or even a third-front government. So the opportunity was there. These stocks have rerated a bit. We think there is some more distance to go for some of these stocks.

The other segment we like in the space are power utilities where the regulators have taken some steps towards helping out some of these standard assets in power. It is not as clear-cut as in oil and gas where the valuations are a function of what kind of tariffs they get and so on. But as a space, that is also looking very interesting from the point of view of adding election beta and we like Tata Power in that space.

Similarly, some of the industrials like cement - we recently upgraded it to a buy after having a neutral kind of a stance for last six-nine months. So cement is something which we like as a way to play the recovery if we do get a reasonable outcome of elections. Cement is not out of thin air - valuations there especially in the case of ACC is pretty much at a level where we think the downside support is very strong. So the idea has been to pick stocks where we have downside support and we get an election beta on top of it.

Some of the other stocks may not have a very strong downside support especially stocks or companies which have high corporate leverage or where valuations are not cheap.

Sonia: What do you think the average returns could be for this market by the end of this year taking into consideration any kind of mid-year election volatility that we get?

A: I think if you look at the market multiples today on an aggregate basis, Sensex is trading at about 13.5 times, it would have gone up a little bit but between 13.5 to 14 times which is little below mean maybe about 5-7 percent mean. So I think assuming we get a reasonable election result and even if we don’t get a very favourable election result, I think the mean reversion of P/E can definitely happen because next year we are forecasting earnings growth rate to be closer to 16-17 percent. I think consensus is closer to 20 percent even though there are some downgrades along the way especially in consumers or in financials or so on. The P/E multiple still looks pretty much close to mean. So what one can expect and one should expect reasonably is 10-15 percent return at the index level. That would probably be election agnostic with accounting for some volatility in the middle of the year if we do not get a good election result.