See Nifty at 8000-level in a year; close to bottom: Amit Rathi

He believes midcaps look attractive and will recover once overall sentiment improves, since midcap companies are more focussed on urban consumption while large caps are geared towards rural consumption side, which has been down due to poor monsoon.Below is the verbatim transcript of Amit Rathi’s interview with Nigel D'Souza on CNBC-TV18.Q: We have seen a good bounce after a long while. At least on Friday and we are looking at a gain of around 2.50 percent for the week. What is your sense on the floor? Are we seeing some incremental flows or suggest the shorts were covering out because last Friday around we were below that 6,900 mark?A: What we are probably seeing is more shorts getting covered. General sentiment is still fairly negative and if you see over the last six-eight months it has been the domestic flows that have been supporting the market which also seemed to have slowed. However, once you see more stability on the global side, b) some clarity in the Budget on the banking sector in terms of the government’s recapitalistion plan, domestic flows will start to come in. Our bigger call there is also driven by what is happening with real estate. If we look at local investors that was one asset class where you saw significant flows going in the last five-six years that started to turn because clearly that market is in a significant bear market. For investors, the choice is, can I beat debt at 8 percent.Q: You mentioned a couple of sectors, banking space, PSU banking stocks; everyone is asking where exactly is the bottom over there? You mentioned real estate as well where is the bottom over there? So, let me give you three picks, we have real estate, we have metals and we have PSU banking space all of them valuation wise fairly decent. Would you nibble into anyone of them?A: If at all it would be the PSU banking space because the non-performing assets (NPAs) problem there is lot of uncertainty there. If you go back and see what happened to US, once the asset quality review takes place lot of the uncertainty is behind us. Then you will start seeing bank specific stocks starting to probably do well. Real Estate, our personal house view is that we are looking one of the longest bear markets in few generations coming through in real estate, supply, affordability etc.Metals, again we are looking at a sort of a bear markets situation. You could see trading pullbacks but that is a trading call and something which is very difficult for us to call. Q: We have the Budget session that is going to take place, expectations very low. In my five, six-eight years that I have been tracking the market the expectations are at the lowest levels. Can it be a blessing in hindsight and also what is that recap number you are looking forward to for the banks?A: Like you said expectations are very low and it has also got to do with the sentiments in the markets. So, the chances of negative surprises are low. What we are looking at, people are focused on the fiscal deficit number. To us it is more about the quality of the fiscal deficit, where is the spending going, is it supporting infrastructure spending and filling up the investment gap that is missing from the private sectors spending. In terms of PSU recap, government simply doesn’t have enough of money. What people are looking at is saying is the government serious, is there a credibly plan. What are the investors going after, have they started creating a bank holding structure, going to sovereign funds because the amount of money that is needed is significant. What the market wants to see is, is there a credible plan and not just talks. If we see something that is credible and steps towards that over the next 12-18 months is a serious plan, markets will like that. Q: All of us the research team at CNBC-TV18, every conference we go for everyone is searching for those midcaps. You all as a house you all have been pushing a lot of midcaps, a lot of them in fact have corrected close to 20-25 percent approximately from there. What is your outlook on midcap space? I was looking a few stocks something like a Granules India, may be a Bajaj Electric, DFM Foods all of them, there are various midcap stocks that are been bobbing around. What is your sense is the midcap rally over or do you think in fact the party is going to be restarted in a couple of months after we get out of this painful session? A: Midcaps are far more attractive in our view but midcaps cannot perform in isolation off the broader market. So, the broader market needs to stabilise after which you will start seeing sort of bottom up stock picking in midcaps. Reason midcaps are looking attractive is – one they are less geared to the global cycle compared to last year. Second, they are sort of you can get more focused on urban consumption place. Whereas, for the largecaps on the consumption side lot of them are highly geared to the rural consumption side which is being struggling because of the two bad monsoon that we have had. So, in midcap you will find opportunities across both consumption and urban infrastructure as well.Q: Also we are looking at the defensives stocks. People are talking about the rupee going to Rs 70-72 per dollar. There are estimates even of around Rs 80 per dollar. Defensive stocks, I mean in the last 10 years they have given you good numbers. We have IT as well as pharmaceutical stocks; currently they are trading at pretty low valuations. IT stock trading at around 12-16 times, fairly low. Would you be nibbling into these defensive stocks because at times you have seen that the markets fall and even these defensives stocks have been falling? So, is it good time to get into some of these defensives stocks? Maybe there won’t be wonders like how they have done in the last few years but still it is quite steady returns what is your take on that?A: I think, very attractive. As you put it these are stocks that over the three to five year period for you to get 15 percent to 20 percent annualise returns very possible. Given the risk profile those are risk adjusted, those are fantastic numbers. I think valuations have created a great buying opportunity for investors because just a year – year and a half back lot of these stocks were trading at expensive valuations. So, they have come off quite a bit and it is a great entry point for investors. Q: Historically, the Nifty has traded around 11.50 to around 16.50-17 times. We are currently trading roughly around 14-14.50 times. What exactly is the fair value on the Nifty and also give us some targets where is the bottom? What is the yearend target for the Nifty?A: The Nifty is an animal that is not really well understood when people talk what price to earnings (PE) multiples in general. One really needs to look at constitution of the Nifty and where the profits are coming from. So, if you go back let us say to previous peak of the bull market 2008 you saw that 60-70 percent earnings were coming from global cyclical and generally cyclical industries.Today the numbers flip, 60-70 percent earnings are coming from IT, pharmaceutical, consumer, private sector banks which are far more defensives in nature and sort of more predictable and only 30 percent from global cyclical. Now clearly this set of earnings deserves in our view a higher multiple than what 2008 multiple was. So, valuations are very well attractive.Difficult to put a target on where numbers are, given what is the kind of sell-off you have seen our sense is that we are close to the bottom if not at the bottom. Over the next one year we could look at a 10-15 percent upside because markets will take a while to recover from what has happened.Q: So, Nifty at 8,000?A: Very likely.