Risk-on rally to continue; Nifty to trade in range: IL&FS

Vibhav Kapoor of IL&FS is of the view that Indian equity market is likely to remain in a range of 8000-8400 unless we get some good news to propel the market on the upside.

The 9-10 percent rally seen in our market was due to a risk-on trade in emerging markets led by the status-quo decision of the US Federal Reserve, says Vibhav Kapoor of ILandFS in an interview to CNBC-TV18's Latha Venkatesh and Sonia Shenoy.

According to him downside for the market to the levels of 7500 is also unlikely because Fed may not hike in the near-term.However, the macro picture hasn't yet improved as per expectations, says Kapoor. The earnings growth has not yet picked up and for the first half it is likely to be only around 3 percent. For earnings to end the year with a 7-8 percent growth in FY16, the earnigns in the second  half need to be robust. Therefore, downgrades could come through and till then it would be difficult for the Nifty to move up significantly.

So he is cuatiously optimistic on market from a 12-18 months perspective.Incrementally, he would invest 80 percent of his portfolio money into equities and within that about 60 percent into cyclicals and domestic-linked sectors. The rest of the 20 percent would go into bond market, he adds.Below is the verbatim transcript of Vibhav Kapoor’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What is the sense, the market has moved a good 9-10 percent from the recent lows? Is there enough steam; is there enough good news in terms of earnings or macro data for this rally to continue? A: I think it is largely been a risk-on towards the emerging markets (EM) over the past few weeks after the US did not increase interest rates. So, that is what has caused this rally largely. I think we are approaching a level where there is a lot of resistance over 8,300-8,400 levels. So, you will need some more good news for the market to cross these levels. Sonia: What about the downside? Is it still open and do you think we could get back to those 7,500 levels? A: Unlikely because I don’t think that the US will increase rates very soon now. So, that risk-off may not happen. So, that risk of 7,500-7,600 is there only if again there is a lot of panic in the global markets which could happen only if the US again were to think of increasing interest rates very shortly. So, for the time being we are in a range, maybe 8,000 to 8,400 and then we will have to take it after that.Latha: Couple of people repeatedly have been telling us markets will do well but Indices may not do well. Is that the sense that there are lots of bottom-up stories? A: There are some bottom-up stories there is no doubt about that. They have done well, but you will have to be careful. We have seen many number of times that when the midcaps do well people just get in to them without looking at valuations and other things and then they suffer later on. So, definitely I think it is a bottom-up market to some extent but you need to be careful. Sonia: Would you buy any of these two-wheelers companies now because although the operating performance of Hero Motocorp has been good the problem continues to be the kind of competition that it is getting hit with? A: As far as two-wheelers are concerned the entry of Honda two years ago has really made a lot of difference. That has taken away a big lot of market share. However, the rural economy has not being doing so well. Going forward if you are positive on the economy then over the 12 to 18 months period I think rural demand will start to pick and therefore some of these could be good buys over a 12-18 months timeframe.Latha: Our macro has improved considerably, the IIP data while it tends to be a slightly eccentric number, volatile number, if you looked at it in a three month rolling basis as well or even year-to-date (YTD) April-August, it was a good 4.5 percent higher. Are you seeing it anywhere in the earnings season itself that things are recovering? A: That is not happening so far. I think that is one of the main reasons why you are not seeing the Nifty move up in a big way because earnings are not picking up the way they should have or the way the market expected them. If you see this year, in FY16 I think first quarter the Nifty had about -2 percent earnings growth; it will probably have about 5 percent in the second quarter. So, in the first half year we are only having about 3 percent earnings growth. So, there is still going to be downgrades for the full year. Where people are expecting 15 percent or 12 percent for the full year I don’t think that is going to happen. So, it will probably be in the region of 7-8 percent and even for that you need a very strong second half. Of course there is some base effect there. Going into FY17 again I think the consensus estimates are still 20-22 percent. I doubt whether you are going to reach that number so there would be some downgrades happening for FY17 also. Unless the earnings growth picks up meaningfully, the Nifty is going to find it difficult to move up in a very big way. However, having said that, I think over the next 12-18 months you will see the reflection of these macro improvements in earnings at some point of time although they may not be as strong as what the market is expecting now. Sonia: What about some of these sectors like the smaller private sector banks? We have seen some causalities this time around whether it was Federal Bank, DCB Bank, how do you approach that space now?A: We still need to wait for the larger private sector banks to report and see what sort of earnings quality and the asset quality picture is there to really be able to make out what is happening in the sector. However, the whole thing is that the banking sector as a whole is I think a very important issue and that needs to be resolved. This whole thing about asset quality, the bankruptcy law all these things need to happen in the next say six to eight months for the banking sector to improve in a big way.Latha: At least the discom knot is getting de-knotted you think? A: I think so. I think the government is trying a lot of things there. Previous two times it hasn’t succeeded but the government is trying a different approach this time. So, that is a very positive thing that is happening and if it were to go through, it should definitely help the banking sector. _PAGEBREAK_Latha: What about your overall view of the banking sector? This is a sector where 46 banks to date, private and public, that is going to increase to 67 in the next one year or 18 months. A 50 percent increase in competition should debilitate everyone? A: I think it will take time for that happen because the new banks will take time to setup their branches, setup their systems. So, if we are talking of over a five year timeframe then that could have an impact.Latha: But these guys come with networks Idea Cellular comes with a network, Bharti Airtel comes with a network.A: Yes they do but I still think it takes time for that percolate and for them to market their products, etc. Latha: You don’t have Paytm on your phone? A: No, I am not a very technology savvy person. However, that is a good point that over a five year timeframe not only banks in India, I think the whole concept of banking is going to change over a five to 10 year timeframe with this payment banks coming in and so many other technology shifts happening there. So, over a 5-10 year timeframe I think things are going to be very different and you need to be really very watchful of what is happening there.Sonia: You did mention that from a 12-18 month time horizon the two wheeler space looks like it could offer good value. Any other sectors where you see value now? A: It is going to depend a lot. If you look at the multiples overall, there is no great value as you would call it anywhere. When I say value as you would call it anywhere. When I say value I mean prices are well below fair value. So, it is not that sort of a market. Wherever companies are doing well, valuations are pretty high or they are well priced and where PEs are low, it is because the companies are not doing so well. Yet over a 12-18 month timeframe because we expect economy to improve reasonably and therefore demand to pick up, a lot of the sectors which are related to the economy should do well. However, having said that, I think there is an important point here that today what is happening is topline growth is not that good because demand is not there. However, a lot of companies are doing well because margins are expanding because of lower commodity prices, etc and the macros of the country have been helped by fall in commodity prices, fall in oil prices and now maybe fall in interest rates. So if you look down 12 months from now, a lot of these benefits are going to give away, are not going to be there to that extent because I don’t think you will see a bigger fall in commodity prices from here. I don’t think you are going to see a big fall in oil prices from here and interest rates may go down by another 50 basis points. So, by this time next year, most of these benefits would have gone away and you would need a lot of improvement in topline through demand to volume and pricing for companies to be able to grow well. Latha: Some companies, consumer durables were telling us that demand has picked up, in particular air conditioner companies told us that there is a 15-20 percent demand. You don’t see the famed urban discretionary demand returning, I thought the ACs indicated that? A: I think it will. Cars are also showing that for that matter. So, what I am saying is we do see definitely these IIP numbers improvement, interest rates coming down and the various steps which the government is taking, these will lead to an improvement in demand in FY17 and that is what would help companies in doing well. All I am saying is that this whole thing about expansion of margins is a story for only the next maybe six months. After that it is not going to happen and therefore after that what is really going to be important is that demand picks up which I think it will and that is why we are cautiously optimistic on the market going forward over the next say 18 month timeframe. Sonia: We have discussed this in the past but what do you do if you own a bank like this, do you move out of it or do you still keep the faith and play for the long haul? A: I think again the issue is if you are talking about any individual bank, individual company, you have to see how bad the fundamentals are, what are the valuations and that brings me to an important point – generally is that a lot of investors I feel and even analysts they tend to ignore valuations. However, valuation is really what is important. Even if a company is doing really well, if the valuations are high you will still make money but you are not going to make big money.I remember when the market was close 9,000 we had said that in one of the interviews that maybe the market will go above over a period of time but you are not going to make big money at 9,000 at that point of time. So, similarly to answer your question about individual banks etc you have to really be very sensitive to whether there is value there. Latha: An incremental Rs 100 that I give you, where would you put it? A: I would still put it mostly in equity if you are talking of asset classes say 80 percent equity and 20 percent bonds because there could be still be some gains to be made in the bond market and bond funds. Within the equity probably I would say at least 60-70 percent of that would have to be in cyclicals and domestic economy related sectors.