Nifty ending Thursday trade at a 3-month high is a confirmation that bulls have taken firm hold of Dalal Street. Sensex stands at a kissing distance of 29000 and bank Nifty picking up after a prolonged slump. Are Indian market ready to take a big leap from here?
Vibhav Kapoor of IL&FS issues a warning to very optimistic traders/ investors. He agrees that with global headwinds out of the way, Nifty has made higher bottom above 8000 levels. Apart from global positivity, other macros, including low commodity prices, too have been aiding sentiment. There are signs of improvement even in the country's micro environment, particularly with the government taking gradual actions, he said. However, poor earnings remain a concern but the biggest negative is that of stretched valuations, Kapoor said. Most consumer companies' valuations are steep even at FY17 levels. Nifty too is stretched. He thinks one cannot make too much money from here and the market must consolidate at some point. But he thinks 9000 on the Nifty is a tall order.
Among the lot, he believes IT stocks are faily valued. But that does not make him a buyer of the sector. The sector is seeing a lot of changes in technology and companies will take time to adjust. "We will not see 20-25 percent grwoth any longer and I doubt the sector will outperform the market," he said.
The private sector banks will continue to do well, though some banks here too are showing stressed-asset concerns. Talking about the composite cap on foreignn investments, he said it is not clear if the new rule is applicable to banking sectors.
Below is the transcript of Vibhav Kapoor’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: Have you pondered over this foreign institutional investor (FII) foreign direct investment (FDI) cap and consulted any of your legal teams? How should we understand, are Axis Bank and Yes Bank going to benefit from this composite cap? A: It is difficult to say. There is a lot of confusion it seems as per press reports whether this new rule is applicable for banking or not. We need clarification on that to be sure of what is happening in that sector. Sonia: At this point in time it doesn’t look like the market is concerned about anything. All the global worries are behind us, no one seems to be worried about the slowdown in earnings or even the slowdown in the monsoon situation. Do you think that this market will continue to run up despite the lack of any positive trigger? A: Market has these short-term phases when they sort of lose sight of valuations and fundamentals. As you rightly said because of the global cues suddenly turned positive or at least the headwinds went away, so, the market have been ignoring a lot of other things. However, that is also largely true for global markets, it is not only India but a lot of other markets have been doing well in the last few days. I think there are a lot of positives, the macros definitely are very good, oil prices again are coming down and probably will come down further because of Iran, commodity prices generally have really come down so all these are very positive cues for the Indian macro. I think the micros are beginning to improve a little bit, the orders on roads for example have gone up substantially and government is taking action gradually on a lot of other sectors. However, having said that, improvement in earnings is still couple of quarters away and the market has run up fairly well in advance. So, I think the big negative if you can call it a negative is that valuations are now getting stretched. In most of the consumer companies they are 35-40 times, sometimes FY17 also. In a lot of other sectors also valuations are looking a bit steep. I think the Nifty itself is trading at more than 17 times FY16 and maybe 14.5-15 times FY17. So, our experience is that when valuations are at these levels, you don’t make too much money from there onwards. So, the market has to stop somewhere in this region of 8,600-8,700 and then maybe consolidate for some time.
Latha: We got some incremental good news, in the sense, the CMIE said projects which were stuck got unstuck at the fastest pace in the April-June quarter and year-on-year (YoY) they said about 2 percentage points of the gross domestic product (GDP) worth of projects have become unstuck, are back on track. We also are getting some like you said positive news from roads. We were just reading out the results of FAG Bearings, a classic capital goods company and that has reported 10 percent revenues and 20 percent profit growth. Is it possible that the earnings turning a quarter has gotten advanced? A: As I said things are definitely improving. There are signs, both in the capital goods sector orders given out, as you said roads. However, I think that even with this improvement it is still going to be a couple of quarters before you get some signs of an improvement in the earnings trajectory. So, 2016 market is already assuming a 20-23 percent improvement in earnings, that is the consensus, so, I doubt if it is going to be easy to beat that. You probably will still have some downgrades on that consensus as we go forward. FY17 definitely hopefully would be a much better year. However, as I said a lot of it is getting factored in particularly for the next few months and therefore a further run up from here would definitely be a cause or be a reason to may be trim your positions and book some profits.
Sonia: Interestingly the IT space has suddenly seen quite a bit of a re-bound. This is despite Tata Consultancy Service (TCS’s) not so impressive numbers. Is this a space that you would advise buying into fresh or do you think that you should trim your positions if at all? A: IT stocks are about fairly priced at this point of time. There is a definite reduction in the growth rate of the IT sector over the next two - three years. Earlier it used to be 25 percent then 20 percent, maybe now it is down to 14-15 percent. Valuations are roughly in line with that. So IT would be just a market performer from here. Of course in the last few days as we said the market is sort of ignoring a lot of things and because of global cues being positive. However, it is always good to keep valuations in mind. Sonia: The banking space is another sector. Yesterday a lot of the banking stocks moved because of the government simplifying the rules for foreign investment. However, in general how are you positioned on private banks? Do you expect them to continue moving upwards despite expensive valuations? A: Yes, because the public sector banks are in a very difficult situation right now. As we all know and we have discussed that several times so the only option that market has is and even fundamentally it is the private sector banks which will continue to do well. Of course the issue is that if they also start showing signs of deterioration in asset quality as we saw in one or two banks in the last quarter then market might become a little bit cautious. Overall I think that sector will still continue to perform well.
Latha: What is your thought on the IT space, we have got so much of contradictory news on that sector – Mindtree did well, Tata Consultancy Services (TCS) maybe you could call it inline, will that be a larger part of your portfolio, smaller part of your portfolio going forward in the next one year? A: I think it would be a smaller part definitely. As I said a lot of changes are taking place in the IT sector – the digitisation, cloud, new technologies. So, companies are going to take time to adjust to all these new developments which are happening; that is one. Secondly, the growth rates particularly in the larger companies because of the size which is there now, is also going to have an impact. So, we are not going to see those 20-25 percent growth rates any longer and I think growth rates are going to settle in the 12-15 percent region. Therefore, I would find it difficult for these companies to outperform the market. Secondly, if we are looking at an improvement in the domestic situation and in the economy over the next say 15-18 months, I would definitely favour the domestic economy stocks relative to IT.
Latha: In the domestic economy would you be brave enough to buy any of the public sector banks? A: Not yet, definitely not, because I think there is still a lot of pain. There are may be at least two more quarters where we need to watch what happens to the asset quality? Regulations have changed from April 1st 2015 in terms of restructuring nonperforming assets (NPAs). Some of the old NPAs are sort of seasoning so provisions will be higher. There is still a capital which is not there and I don’t think there is any solution yet visible as to how banks are going to get all this capital so it is still an underperforming sector. Latha: The former Mauritian Finance Minister let the cat out of the bag in a radio interview and we are only quoting from that and he seem to say that Mauritius has signed away its right to impose capital gains tax. If the rules were indeed to change in such a way that the Mauritian advantage is not available are we going to see some major instability selling off in Indian shares? A: I don’t think so of course obviously it is going to depend on what finally comes out in that treaty and these are legal issues and we will need to see the fine print of that. Sometime the fine print can be very different. Having said that overall there is a move amongst foreign asset management companies to move towards places like Singapore for example which also has almost an equivalent treaty, equivalent to Mauritius. I see that move continuing and may be gaining pace over the next few years.
Sonia: Now in a couple of months time, everyone will start talking about the possibility of that Fed lift off. When it does happen because Janet Yellen has alluded to the fact that it would happen in 2015 itself, when it happens what kind of impact do you expect on emerging markets including markets like India? A: I think there will be some impact and if you read global commentary, you do get an impression that probably we are not as worried about it or not as concerned about it as probably the impact that it can have. It will depend on how fast those increases in interest rates happen there but I think there will be some impact. It might be temporary, it might not be too much and hopefully it will not be but to think that it will not have any impact I think is probably not correct either. Latha: Does this market go to 8,000 before it goes to 9,000? A: The market as I said, things are seen to be improving. Monsoons are still an issue; it is a concern so maybe hopefully we will not see 8,000 again. You could make higher bottoms – 8,200, 8,300, 8,400 something like that but 9,000 is definitely is a bit expensive at this point of time.
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