Rate cut no reason to buy realty; like autos, banks: Emkay

Below is the transcript of Krishna Kumar Karwa’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: It is been an extremely profitable months for the bulls January itself 8 percent higher on the Nifty. What is the sense you are getting there is no stopping the Nifty now, up until Budget at least we are going to see the gains coming in, the first meaningful dip may only come thereafter?   A: As you rightly said markets have been very strong in the last 10-15 days and the momentum is very strong. Primarily this started off with their expected rate cut on January 15 th and after that we have seen very robust foreign institutional investor (FII) inflow of almost Rs 7,000-8,000 crore. Now we have also had the event of the quantitative easing (QE) being more than expected as far as the European Central Bank (ECB) is concerned so again global liquidity is again expected to be very strong. The momentum seems to be strong today and it should continue at least till the Budget. The expectations are very strong and going forward also we believe that various steps that the government takes, has taken and is expected take should allow the momentum to continue. Having said that what we need to care of is that we have had a very strong 8-9 percent kind of a rally in the last 10 odd trading sessions. So, there could be some amount of volatility in the immediate. Latha: What about the year as a whole. We have not really seen the green shoots of growth as it were to use that cliche? Do you think this year we are going to generate fairly sizeable index level returns?A: This is a dilemma because yes we have already moved up by almost 8-9 percent in January itself. At the beginning of the year if you would have asked me, if you would have said that probably 15 percent kind of an uptake which should reflect the earnings growth should be the kind of the growth that the indices should perform with some amount of volatility. So if you look at from that perspective things are going to be back ended and that is where investor needs to be very careful about that it is not about 6-12 months but this is about three-five year kind of story that you should be looking at and then investing. So, overall returns we believe could be around 12-15 percent on a yearly basis.Sonia: What about the sectors because in this rally a sector that has performed the best by far is the private sector banks even as we speak financials like Axis Bank, HDFC etc touching new highs? Is this a sector that you continue to back or would you extend yourself now to PSU banks as well?A: The whole banking financial space is the place which we believe should be the outperformer. It is a concensive trade as of now, all investors have developed a kind of an overweight position in that sector and that sector has delivered good returns. However, within that yes, what you said that private banks have done very well. NBFCs, your housing finance NBFCs specifically have delivered very good returns versus that PSU banks have delivered returns but they have not been as robust as they are private sector counter part. I believe that the valuations of the public sector bank being what they are and with a falling interest rate environment and an improving economic environment where you would see major asset recoveries in their portfolio. Going forward if your base is low then obviously you expect that they should also be able to deliver excellent return over 18-24 months kind of a horizon. On a credit growth perspective probably the private sector banks will be able to grow much faster because of their good capital adequacy versus that PSU banks will be more a kind of asset recovery story than credit growth story to start with.   Sonia: What about some of the more off beat sector? I mean Prime Minister Modi has spoken about a thrust for sectors that have not got an enough attention railways, defense, infrastructure etc. Has the time come to increase allocation into these pockets as well? A: From a longer-term perspective yes there has been a limited amount of investment which has happened in those sectors and the thrust of the government is righty is showed to improve the investment in these sectors and it will have its own positive impact on the overall economy. However, having said that it will takes its time and also the number of talks that you can last, talks that you can play specifically for the defense or the railway exposure from a capital market perspective there are not too many opportunities. More it is all about having a broad basket of infrastructure investment opportunity and that is the way you can play this sector.   Latha: What are you factoring in by way of rate cuts, is there one on February 3 rd, how many this year and more importantly how do you play this? Surprise, surprise after a longtime today we got a research report actually recommending a buy on HDIL so, anything in the real estates space?A: On overall one year basis we believe that there should be at least 75-100 basis point kind of a rate cut happening so obviously 25 basis point is borne by and expectation building up now that maybe we could possibly see one more on the upcoming credit policy on February 3 rd. However, having said that the obvious play is on falling interest rate environment is the easier play I would say is going to be banks and NBFCs which are positively impacted on their earnings because of the immediate benefit of cost of fund. So, that is a better way to play a rate cut. As you economy improves than I would believe that your capital goods sector would be the one where capex cycle picks up than that should be the second sector that should deliver good returns but that should be more back ended. As far as real estate is concerned more than the rate cut, balance sheets of many real estate players are stressed out and they are struggling on the sales itself. So, that will be a very stock specific or region specific companies that you will have to look at. Rates itself should not be a reason to buy any real estate stocks. Rate cuts itself should not be a reason be buying into any of the real estate stocks. Latha: Would you believe that midcaps will be outperformers in 2015? The index hides a lot of very good boys and very underperforming companies so if you can point to where the investor should focus?  A: In the growing economy and obviously the country like India midcaps are the ones which are largecap for future. The larger midcap or the better managed midcap will graduate to largecap over a period of time. I would tend to believe that midcaps will out perform the largecap in the next two to three year kind of a timeframe. Investors rather than getting swayed by sectorial plays etc in midcaps should be focused on the size of the opportunity or the balance sheets and the management qualities. As the key question that helps in determining whether a upcoming midcap will graduate to a largecap it will be quality of the management in terms of corporate governance balance sheet and their focus on shareholders returns. That should be the key criteria to determine your investment as far as midcaps are concerned. Sonia: Specifically between midcaps on pocket that has done really well are midcap autos so even as we speak names like Ashok Leyland, TVS Motors continue to hit new highs. Is this a space that despite valuations you would still be bullish on?A: In midcap autos, autos and auto ancillaries should deliver good return. As far as Ashok Leyland is concerned is the direct or the only pure play as far as the recovery in the heavy commercial vehicle (HCV) cycle is concerned. TVS Motor they have had very good launches in the last few years and valuations been very reasonable so it has delivered a very good return. If it is able to improve on its margins profile in the next few years there is no reason why it cannot further get re-rated and deliver good returns. Lot of auto ancillaries should benefit in a recovery cycle and their valuations are also many of them are very reasonable so that also should be a sector within the auto midcaps which could deliver a good return to investors.