See Nifty at 10,300 in March 2018 with 2 caveats; like private banks: IL&FS

Speaking on large-caps, he sees no big correction in the space. However, in the months of April and May, they could see a fall if earnings are not good, which is likely to be the case given our current levels. Meanwhile, midcaps is driven largely by domestic money, he feels. “As long as that domestic money continues to flow into mutual funds, they will continue to do well,” Kapoor said. He remains more careful on midcaps than large-caps.

On sector-specific bets, he is positive on auto stocks based on waning impact of demonetisation. But, the eyes must also be on monsoon going forward, he told the channel.

In the banking space, he prefers private sector banks and NBFCs over PSU banks. The latter still have to grow through a lot of issues and the government needs to do a lot of work in that space. “Private banks continue to look good,” he said.

Similarly, he feels the risk rewards are better in the pharmaceuticals sector, but it still has many issues, including the US’ stance. Overall, he is cautious on the sector.

In terms of internationally exposed sectors, he is positive on metals. If the bets are placed on global recovery, metals look good. “Also, China is trying to control supply of metals like steel. So, demand-supply (situation) could be favourable for stock prices,” he said.

On the reforms front, he does not expect government to do revolutionary changes in labour and land laws.

Below is the verbatim transcript of Vibhav Kapoor's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.

Anuj: All-time highs, so time to celebrate or time to get a bit cautious now?

A: Both I think. I have expected the markets to reach 9,000 in March, which it has already done. Of course, it is now getting a bit expensive, there is no doubt about that but in spite of that I think since there are no real reasons for the markets to go down, just being expensive is no reason for it to correct in a big way. Minor corrections could happen.

The whole atmosphere for equities globally is very good at this point of time and interest rates are still pretty low everywhere in spite of the Fed increasing gradually and the growth is coming back in a lot of the economies and also in India. So, it is a very good overall environment for equities as a whole. Therefore, just being expensive is not going to cause equities or markets to go down in a big way.

Latha: Your point about global economy recovering was very clearly evident yesterday in the export numbers after a long gap -- our export growth up 17.5 percent. We have been meandering in negative or low single digits for 12 months now. Therefore, what will you play? If you are betting on a global economy as well, what kind of stocks?

A: The only additional sector there, I guess, would be global commodities which is metals maybe. For the rest part of it, I would still bet more on the domestic side of picture and the same old sectors. Fast moving consumer goods (FMCG) is one new sector, which one would probably be interested in now otherwise the story remains roughly the same.

Latha: Domestic would mean financials. In the broad space, which one and everybody has backed the private banks, do you continue to back that expensive horse or is it time to look at public sector undertakings (PSUs)?

A: Absolutely, you continue to back private sector banks although they are expensive but I think they will remain expensive, the PSU banks still have to go through a lot of issues. In fact, that is one sector and that is one area where the government still needs to do a lot more than it has done in terms of reforms and getting the picture better off. So I would still avoid PSU banks but non-banking financial companies (NBFCs), selectively and private sector banks still continue to look good.

Sonia. The Bharatiya Janata Party (BJP) now rules the highest number of states, so this will facilitate decision-making pertaining to a lot of issues, land, labour tax etc. From a markets perspective, what all can we expect or should we expect from the government going ahead? You spoke about banks but what else?

A: That is one main sector then the goods and services tax (GST) of course is there which should happen shortly. I do not expect the government to do any of the things which we are talking about in terms of revolutionary changes in labour or land etc. that is over. Maybe after 2019 elections but not right now.

Anuj: Autos have also made a huge come back. Maruti is at lifetime highs, we have seen Eicher make a move, almost there, two-wheelers -- a couple of them are also at lifetime highs, anything that you would want to buy here?

A: All of them. Last time when we talked when the whole demonetisation impact was supposedly so great, we were of the view that that is not the case and therefore these sectors should do well. So I think as time is passing, whatever little impact was there that is going away and the economy will start to recover. Of course we will have again the monsoons after two-three months, which will play very important role.

So while I am sounding so positive in everything, there are two caveats which I need to make which we should not forget. One is the recovery in earnings. That has not happened. Year after year we have had disappointments. Right now with the way the markets -- what levels it is and the valuations it is, it is very important that the earnings growth comes through. If that doesn’t happen, then you are going to have a serious problems.

Second of course is the US interest rates. The Fed yesterday did indicate that they will be gradual in rate hikes but that could change later on and if that changes, if the 10-year yield in the US goes up about 3 percent then you are going to have a lot of problem everywhere in the emerging markets and in equity as a whole. So these are two caveats which one needs to keep a track of.

Latha: Would you dabble in capital goods? That is the unspoken part, not really bleeding companies but the likes of Larsen and Toubro (L&T) and Bharat Heavy Electricals Ltd (BHEL)?

A: I do not see much. They are not cheap. So unless the capital investment comes back in a week. So maybe a bit later not right now.

Sonia: The market is climbing the walls of worry with full gusto at the moment. So 200 points higher on the Sensex and now we are just less than 400 points away from that psychological 30,000 mark on the Sensex. On the Nifty itself what would the markers be going ahead since its range has expanded both the downside and the upside over the next six months according to you?

A: It is a bull market and that correction which happened till 7,900 or whatever got over and the market started a new upmove from there onwards. In the last 12-13 weeks it has gone up about 15 percent. So beyond a point, the uptrend is going to slow down.

There will be some corrections. We would have a target of about 10,300 for March 2018 that is about a year from now. However, as I said earlier that target is very much subject to those two caveats which I have made.

Anuj: Sun Pharma or any other pharma stocks now, do you think the risk reward is now attractive?

A: It is getting a little better but there are still too many issues and unless we get to know what the US government also wants in relation to import dues etc, you need to be cautious there.

Latha: This midcap, largecap combination, what will spearhead, will it be a 50-50 sharing of onus this year?

A: Nothing is cheap particularly in the midcap. They are being driven by domestic money so as long as domestic money continues to flow in in mutual funds and the overall sentiment remains good, they will continue to do well but I would be a little more cautious on the midcaps than on the largecaps.

Latha: Nilesh Jasani yesterday told us that he would dance close to the door. He thinks valuations are scary. So at 9,200 now, is this a good idea, dancing close to the door?

A: For the midcaps, one should be more careful, largecaps I don’t think that you are going to have big fall for the time being but maybe in April and May, you could see a big correction or a reasonable correction if the earnings season is not that good and I would think given the level where we are in the market, it is not going to be that good. Therefore, you could have a reasonable corrections somewhere starting from mid-April.

Sonia: You said 10,300 on the Nifty by 2018, what could be the leaders of the rally that could take it there, will it be banks or are you expecting stocks like Reliance Industries etc?

A: I think the same old stocks ad sectors will continue.

Sonia: Like?

A: The private banks maybe Reliance to some extent, the NBFCs. So whatever has been leading the market maybe automobiles, Maruti, two-wheelers, FMCG stocks, these should be the sectors which should do well.

Anuj: You said Reliance to some extent. We have already seen a huge rally from the lows, how much more do you think?

A: I do not want to comment on a single stock but as one of the leaders of the market, it would participate.

Latha: You briefly touched on metals and you said that that is the internationally exposed sector you would be positive on. There were some resistance for commodity prices in the last three-four weeks, are they buys at current levels, the likes of Hindalco, Vedanta and Tata Steel?

A: If you bet on global growth recovery then obviously they are and the other positive factor there is that China is trying to control supply of some of these metals for example steel and therefore the demand-supply could be pretty favourable for stock prices.

Disclosure: Reliance Industries, which owns Reliance Jio, also owns Network18, which publishes Moneycontrol.