Sanjeev Prasad: Easy-money trade is over but no time to short

For several months now, noted analyst Sanjeev Prasad of Kotak Institutional Equities has maintained that the gush of liquidity globally has lifted stock prices to the point where fundamentals do not really matter.While he still maintains that it is difficult to say where the liquidity-driven rally stops, he says that the "easy-money trade" is over."It is clear that the Fed will hike rates at some point," he told CNBC-TV18 in an interview, even though he does not see a major correction in stocks. "It is just that the market will go back to focusing on fundamentals."In light of fundamentals, Kotak has tweaked its model portfolio, dropping TCS and adding to its weight on SBI.He also talked about his expectations from the RIL AGM scheduled today.Below is the verbatim transcript of Sanjeev Prasad’s interview to Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18.Anuj: You for years have tracked Reliance Industries and telecom companies. We have both these set of stocks in action today. What are your thoughts first on Reliance AGM and the Jio launch and what that would mean for the telecom space?A: Your correspondents already listed down whatever the market is expecting in terms of what is the company's plans with respect to commercialisation of a lot of investment which has happened in the petrochemical and refining side.Second thing is the market would like to see and hear what the company plans to do on the big investment in Reliance Jio, what kind of tariff plans it is going to offer, etc.Third thing is both on the fuel retail side as also on the normal retail what kind of expansion plans are there if any because so far the company has been relatively quiet on the fuel retailing side. Obviously it is doing very good stuff on the normal retailing side. So, these are the three or four things I assume the market would be focused on.Apart from that there will be the usual questions on the E&P business, which has been a big disappointment over the last several years. You had this development last night on the AP Shah Committee report, not that it is a very material development for a company, which has market cap of more than Rs 3 lakh crore now. So, those are the things which I guess the market would like to seek some clarity on.Latha: What is your price target on that stock?A: We have Rs 1,120 as the price target on a 12 month basis so we have been quite positive on the stock for the last two to three years. Now, it has done okay with respect to the market as also on an absolute basis. So, we continue to have a positive stance but the worry which over the last three or four months which we are seeing from an investment community is two things, one is on refining side. Refining margins have been quite weak and the second thing is on Jio.A lot of people have been asking questions as to when to do we see an end of the investment in Jio and what returns can we eventually expect from the big investment, which Reliance has made in Reliance Jio. So, I guess maybe this AGM gives some clarity in terms of investment as also the monetisation of the investment which is a lot more important.Sonia: What about the market as a whole, at 29,000 on the Sensex how does the risk reward look for the market now over the near-term?A: Not very good I would say but I must clarify that there are two things over here, one is the fundamentals and second thing is the stock price or the market levels which is based on large term global liquidity. So, at this point in time global liquidity plus the action of central bank are completely swamping all fundamentals. How long this continues honestly nobody has any idea.Now the issue is are they getting to an inflexion point on the biggest driver of stock prices or for that matter any asset class over the last few years. So, if you look at the policy actions which can come from central banks going forward, I would assume -- if you look at US Fed for example at some point in time US Fed will start raising rates. The economy has come to a situation where the labour market conditions are improved quite dramatically. Hourly wage numbers are looking up, so I don’t think we can make assumptions that the US Fed will continue to hold off on the rate increase for very long. If not in September, maybe by December you would start seeing the first signs of rate increase.On the other side you have other three large global banks, which is Bank of England (BoE), Bank of Japan (BoJ) and European Central Bank (ECB), they will continue with their QE policy which they have continued for last several years. Bank of England has started recently.Now the question is how effective have these policies off late in terms of reviving global GDP growth and there are a lot of papers and there is a lot of debate and discussion and total of all the discussion seems to be that we are effectively reaching an end in terms of real efficacy of the monetary policy, which the central banks have been following for a long time of long time. Anyway you don’t have much scope to reduce rates, in the sense we can keep going deeper into negative interest rate territory.However, it has serious implications and unintended consequences in other parts of the economy particularly for savers and savings entities such as insurance companies or pension funds etc. So, I think we are getting to a situation where the market will start realising that the monetary part of the story is getting to an end. Now, what more can the central banks and more important the government do to revive global GDP that is still up in the air, a lot of talks on fiscal expansion in various countries. So, let us see what happens over there.My sense is we are probably coming to a period where the easy money trade is over, in the sense this whole macro trade which was there, which was driven by large liquidity from central banks, that trade is probably coming to an end. I am not saying that the market will one day wake up and correct dramatically; that is not the point. The point is when do the markets start focusing on more relevant things which are earnings, fundamentals, economic growth and so and so forth.So, I don’t think anything changes in the short-term, the US Fed will probably raise rates at some point in time which is a well transparent event in that sense and on the other side the other three large central banks will continue to do whatever they have been doing for the last several years.Anuj: I am looking at your last strategy in your report and you have dropped Tata Consultancy Services (TCS) from your model portfolio and added some more weight to State Bank of India (SBI). What explains that call because we have seen quite a bit of outperformance of SBI versus TCS already over the last say three to six months?A: SBI we already had a reasonable position. We have just increased the weight a little bit more over there. The call over here is that on one side you have a lot of challenges as far as tech industry is concerned and TCS anyway we had a small position, like 3 percent weight in the model portfolio, which I ran so it is not as if we had a lot of weight on that stock to start with.The issue over there is that if you look at the retail valuation differential between TCS and Infosys, it has become quite large, in a sense Infosys has corrected quite significantly based on concerns about the revenue growth. If that concern is there for Infosys and some of the other IT companies have been talking about similar things and that extends to TCS also. If you look at the valuation differential TCS is still trading at 17 times on the March 2018 basis whereas Infosys has now come down below 15 times. So, at this point of time, I would prefer Infosys over TCS. So, that is the relative call over there between the two entities.As far as SBI is concerned, it is one of the few large banks I would say which is still trading at somewhat reasonable valuations. Most of the private banks, if you look at HDFC Bank, Yes Bank, IndusInd Bank, Kotak Mahindra Bank, most of them are trading at -- all of them are now trading at more than 3 times on a March 2018 book. So, clearly not a lot of upside left I would assume in some of the private banks, which do not have that level of NPL challenges.On the other side, you have ICICI Bank and SBI which is still trading at reasonable valuations. Obviously there is a huge amount of concern on NPL numbers over there. However, our call over the last three-four months in fact since March has been that NPL numbers would be very large but you would see a reasonable amount of recovery as far as bad loans are concerned. We are already seeing that to some extent in the sense you are still seeing a great deal of M&A transactions in many of the weaker assets are changing hands, now going to the stronger players.So, particularly in infrastructure side, power the government has done a very good job in addressing in some of the problems in the power sector. Steel also which was a big concern for us in terms of NPL problems, the way the anti-dumping duties has reduced that concern., so, I would think some of these small developments which have taken place sort of partly address the NPL problem, not that NPL problems is not going to be big but the big concern which was there which was reflecting in the stock prices is partly getting addressed to some extent.Also, SBI should benefit from lower interest rates given the fact that the bond market gains what will be there for this quarter as also next quarter that to some extent will lead to the book also getting inflated a little bit and it is a very cheap stock at the end of the day. It is trading at about 1.2 times March 2018 price to book. So, I guess that is fine.Latha: You have pointed out at several points that there is hardly any value left anywhere. But yes, the money is still flowing. So, where will you incrementally buy? Will it be in the midcap space? If it is in midcaps, which kind of stocks? After all, there is still the rural consumption and the Seventh Pay Commission themes that the market is looking at. Are there any themes left where value is still there?A: The problem is the themes are very well known and to a large extent, they are already discounted. If you look at the way some of the two-wheeler names have gone up over the last 4-5 months ever since the first indications of good monsoons came starting from early March, the stocks are up almost 53 percent now. Probably, Hero Motocorp is up about 40 percent, even Bajaj, which has not that much of an exposure, even that is up about 30-35 percent from the lows of mid-February. So, in a way, a lot of good news already discounted into stock prices.I am struggling now to find any decent idea at a decent valuation. So, we are sticking with the same names. We have a fair degree of autos, private banks, NBFCs, regulatory utilities. But, on a pure fundamental basis, it is very hard to find any decent idea now. If you use any normal cost of equity now to value stocks, in most cases you will see anywhere from 10 to even 40 percent valuation in some of the cases. Obviously, we are not living in normal times. The world has decided that the cost of money is very low. If that is the case, then you can justify any valuation at any price point and that is the whole problem at this point in time.Sonia: Let me ask you about two stocks in particular. I noticed in your model portfolio, you have included InterGlobe Aviation with a 200 basis points weigtage. You have also transferred Petronet LNG to your largecap list. Petronet LNG is a story of the growing LNG demand, but it is something that is already well documented. Do you still see a lot more value for both Petronet and for InterGlobe hereon?A: If I look at Petronet LNG, the stock has done very well over the last two years. So, obviously it has done fantastically well. But if you look at the volume growth of this company, it is going to be very strong over the next few years. Currently, the Dahej terminal 10 million tonne is getting expanded to 15 million tonnes and over the next three years, they have already started giving orders for the next 5 million tonne expansion, it will go to 20 million tonnes.As far as Kochi terminal is concerned, we are hardly taking volumes for the next several years now. If I remember correctly, they have taken something like 1.4 million tonnes from a 5 million tonne capacity for March, 2019, something like less than 35 percent capacity utilisation for March, 2019. And if I look at the EPS numbers, if I remember correctly, we are looking at somewhere about Rs 24-25 EPS in March, 2019 and somewhere about Rs 22-23 for March, 2018. So, from a valuation perspective, it still does not look that atrocious compared to many other names in the market.And this company can grow for the next several years given the fact that India will always be short on energy and specifically gas. We are quite positive on gas as one of the future energy sources in the country. And if the government is focused on clean air as one of the big things that I am talking about given the levels of air pollution then gas has to play a much more bigger role in the entire energy space going forward. So in that context, it fits into the longer-term P/E and even the micro story is very good in terms of volume growth, valuations are reasonable, so I am still okay with that stock.IndiGo, if you look at the stock, it has corrected quite significantly over the last one and half month or so after the first quarter results or concerns of low yields etc. If that is a thing, which is known and in a way we have already built that in our model, we are already building up in the like of 5 percent decline in yields for March, 2017. And if I remember correctly, March, 2016 yields came down about 9-10 percent. So, it is something which is already priced in hopefully.Other way to look at it is if yields continue to be low, then the other weaker players, IndiGo has 40 percent market share, the weaker players have no chance basically and this industry is already running at reasonably high capacity utilisation at 80-85 percent. So, there is no need for anybody to come and do something stupid in terms of price discounts, etc.So that is a call that things will normalise from where we are. Volume growth in this industry continues to be phenomenally strong. You have seen something like 20 percent plus, month after month, volume growth in terms of air passenger movement for the last several months now. So it is a good volume growth story, yields hopefully are probably at the lower level. I do not expect any nasty surprise on either Indian currency declining sharply or crude price going up sharply, which is always a big concern for the aviation companies because some of the costs, they do not have much of control on these two elements to that extent.Anuj: Last question and it ties in with what we have been saying in all the conversation. You are dropping your entire midcap portfolio. That is interesting because we have been hearing that this is still a bottom-up stock picker’s market. Not finding any ideas in the midcap universe?A: This argument is valid at every price point. That is the whole problem. The India bull story, Indian macro story, Indian demographics, great companies, it is valid at every price point.At some price point you have to take a call that is done. At 20 P/E a stock maybe made sense, but at 40 P/E to come and make the same arguments, that is not worth anybody’s trying to be honest with you. But I see a lot of people still talking that great companies, fine, there are great companies in India, who is denying that? But the great company need not be a great stock at every price point. And that is the problem I am facing now.We cover something like 100 midcaps by the way. Let us say a market cap of USD 3 billion, we cover something like 100 stocks. I am just struggling to find any decent company. Most of them are decent companies to be honest with you, but with any real upside, if you look at the last midcap portfolio which we had, we had 11 stocks over there. Out of that, six already reached out target price. And this is after replacing them three months back only. So, just the pace of movement of stock prices, stocks running 20-30 percent up in a matter of 2-3 months now. So, what do you do as an investor or a quasi investor, in my case? Somewhere you take a call that beyond certain levels, you cannot find ideas and just move on in life.