UBS says good time to enter mkt, picks 9 favourites stocks

Not even political experts can predict the outcome of state elections, so investors looking to play the market now should be positioned for moves on either side, says Gautam Chhaochharia, Head of India Research, UBS Securities.

In an interview to CNBC-TV18, he said market is likely to remain subdued if election outcome is mixed. He feels political cues will impact the market only if the verdict is unilateral.

Also, election outcome will drive the market sentiment only for a short while. After next week, this noise related to elections will take a backseat and global cues like the QE taper talks and the US payroll data will come to the fore, he adds. He expects the US Federal Reserve to start withdrawing its monetary stimulus early next year.

Meanwhile, Chhaochharia believes that now is a good time to enter the market from a one-year horizon. Also, he sees attractive risk reward at 5500-5700 levels.

He has cherry picked array of stocks that deserve a place in investors’ portfolio. He is bullish on Voltas given its good business, attractive valuations and healthy balance sheet. He also likes Blue Star and Carborundum.

From the auto sector, Eicher Motors is one of his top picks, and from the midcap basket he is positive on players like Motherson Sumi and Kajaria Ceramics. Despite the recent run-up there is still value in agricultural companies like Coromandel International and Rallis India, feels Chhaochharia. 

He has a contra buy rating on BHEL. According to him, the recent rally seen in this stock was largely driven by uptick in sentiment. 

On the flipside, he is not overweight on industrials.

Also read: Mkt getting into risk-off mode; taper talks back to terrorise: Blackridge

Below is the verbatim transcript of his interview on CNBC-TV18

Q: Tactically what are you telling your trading clients. Should you tank up before the exit polls are out today or should you lie low?

A: It is a tough to always make a trading call specifically for more fundamental driven research like us but we are telling clients that they should be positioned for moves of the market either way. The market can react sharply to results on Monday. In terms of what we are hearing from investors, the most common thing is can a market spike up even from current levels on Monday and therefore how to position.

Over the last few days we have seen that investors trying to position both in terms of buying Puts and Calls, and that is one way they are trying to protect their existing positioning in the market. It is also reflected in the implied volatility going up for the market.

So since even big political expert cannot call what will happen on Monday and for investors to position around that is a tough call.

However, we are also telling our investors that this is just likely to be a one-off move early next week and beyond that market will again focus at least for the next two-three months back to more fundamental data points locally in the economy and what is happening in the global macro. One could see a backseat in terms of political noise dominating market for the next two-three months, post next week.

Q: For the next couple of months between the global cues and the political cues which one will change the trend of the market?

A: Political cues will matter if you see a very strong or a very clear direction coming out - either in the form of more opinion polls in the future or in the form of state election results on Monday, for example if the Bharatiya Janata Party (BJP) wins all four states and with good majority, vote share momentum etc then it will be interpreted by the market more positively. If it’s more a mixed result then it will largely become less of an issue for the market in terms of political noise flow.

Global macros always play a part because that ultimately drives the allocation and liquidity coming into emerging markets and India and around that the biggest data point would be tapering. So, tapering would derive the near term market moves specifically for India.

Q: We are downplaying the global cues for the moment. Do you think that the non-farm payroll numbers could be good and therefore December tapering mood might take over the market. Is there a temporary hiccup now from global markets?

A: That remains a possibility always but our house view is still for tapering to happen early next year not now but that could become the dominant sentiment for the markets near-term specifically these data points turnout. It does have a role to play in terms of Indian market sentiment. You could always argue how much fundamentally tapering will impact India specifically after the current around deficit improvement and the reserves accretion but in terms of near term market move sentiment; it will have some role to play.

Q: In that case if that dip does come our way, would you use it to tank up on anything?

A: From trading tactics proposition we are recommending investors that fundamentally these are not a great risk reward level to buy in into the market but from one year perspective this looks like a good time to start getting into market. In an absolute level, if the correction comes in, a good risk reward in our view is more like 5,500-5,700 levels.

One can always fine tune those levels in terms of investor comfort but around those levels one will see better risk reward and investors should come in there.

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Q: You were the first one to point out your penchant for capital goods, especially the one that ran up - Voltas. Do you still like Voltas and would you add Crompton Greaves or such others to that list?

A: We still have a sell on Crompton. The reason we like Voltas in terms of playing in this market momentum rally is because there are very few stocks in the capital goods industrial space which have a mix of quality business, strong balance sheet and more importantly supportive valuations. So there are quality companies which have the first two, but are not necessarily cheap or attractively valued. Voltas ticked all the right boxes for us.

Also, the order flow visibility which came in over last couple of weeks kind of acted as a catalyst. Even at these levels we do like Voltas. It is one of the safer ways to play any potential recovery in the investment cycle.

So Voltas, possibly even Blue Star, a slightly more illiquid name Carborundum - these are the names we have been recommending from the midcap basket in industrial space rather than chasing more expensive names or chasing names which have balance sheet issues.

Q: What about a space like autos where we have seen some serious outperformance from a couple of these names like Eicher Motor etc. Names like Tata Motors continue to hit new highs - anything there that you are still betting on?

A: Eicher has been one of our top picks within the auto space as well as midcaps. We continue to like the name. We still have a buy. You could argue that after the run specifically over the last months it is now reaching levels where definitely the valuation comfort is no longer there. So we have to relook at that name.

Tata Motors is still a buy. We still like the name, but we just removed it from our top buy list for India as a whole. Specifically, given where the valuations are and the rerating already done. However, we still like the name. I think there is still room for it to do well over the next 6-12 months.

Q: What about Bharat Heavy Electricals (BHEL)?

A: In BHEL we have been contrarian buyers from a sell side perspective and we still maintain our buy. The problem with a stock like BHEL, which you have seen even early last decade it is very difficult to time the bottom when the cycle turns. The stock is attractively valued, but it has been attractively valued for more than a year now.

Visibility on order flow improvement is not there. There is some progress on what is happening on the power sector mess and that would be the biggest driver for a stock like BHEL ultimately. The recent rally seen is more macro or broader market driven; in terms market is hoping for some kind of recovery, BHEL is again forced into the basket of being very attractively valued and a strong balance sheet. So it also participated in that rally, but for a sustainable big upmove over next three years we have to see visibility on power sector restructuring etc.

On that obviously the big point to be made is these kind of issues do not get resolved overnight or in a quarter. It takes two to three years to get resolved and we are only one year into it. So, over the next two years the trajectory will be volatile. We still have a buy on BHEL and like the name even at current levels.

Q: What is your sense on how important the Delhi polls are today to give you a clear indication of things to come and what is the market actually going in with in terms of expectations?

A: Talking to investors on state polls - Delhi is the one where the market is not hoping for a favourable response for the business-friendly party. That is where the market expectations are right now based on discussions with investors. However, you have to remember that from a national election point of view Delhi is not that big a state in terms of seats. So, whether you can read much from it either way, I do not think so.

Q: What in the sense you are getting in terms of foreign investors' approach to the mid-term polls? Will a return of the United Progressive Alliance (UPA) coalition or a third front coalition seriously disturb their confidence?

A: To begin with it will be a negative for the sentiment for those investors for sure. What we have been telling them and what we have been highlighting to them is two things. One, even the current UPA government despite our reservations from the market point of view over last few years has course corrected over last 3-4 quarters, which is being ignored right now in the market environment but they have course corrected.

Even the third front government based on past experience of 1996-1998 they did manage to do a lot of positive measures, reforms etc. for markets, for the economy and economy did reasonably well in that period. So purely from a fundamental economics point of view my view is that either of the three dispensations will continue to do the right things for the economy, because that is the need of the hour.

Sentiment will be different in these three formations and will get a knocking more in the case of a third front government, less so in case of a UPA government, specifically if they came out with a clearer agenda for policymaking and reforms etc. Obviously it will be much more positive if the NDA in some form comes to power.

Q: We have seen quite a bit of outperformance in the broader markets as we were discussing earlier as well - anything that you are incrementally recommending at this point in time from any pockets?

A: The pockets, which we are recommending to one is specific names in the industrial space. There are some names in the agri basket which still look interesting despite the run because that part of the economy is doing well and will continue to do well. So in that pocket we are recommending Coromandel International and Rallis India so that pocket will also do well.

Beyond that there will be bottom up names which should continue to do well both from business as well as valuation support point of view like Motherson Sumi, Emami, Kajaria, there are the names we are talking about in the midcap space.

Q: How are you reacting to the movement in Infosys because now we have seen that valuation gap between Tata Consultancy Services (TCS) narrow a bit, influential brokerages are increasing their target prices on the stock as well. What is your view on Infosys?

A: Infosys remains one of the top picks in the IT services space for us and even from India overall portfolio perspective; it is one of our most preferred picks from an overall market perspective.

Despite the valuation gap narrowing, I think there is scope for it to narrow more. In the good old days it also traded at a premium and it was the premium stock. So that can continue for a while, the key parameter would be whether they keep on delivering and surprising positively, which we believe they should be on track to.

Q: If you are positive on cyclicals like Voltas and BHEL, would stocks like IDFC also be your buys?

A: Just to clarify from a top-down perspective we are not overweight industrials at this stage. So this is more a tactical thing on individual stocks for investors wanting to play this from a near-term perspective.

It is still too early to bet big on big investment cycle recovery, I think that is six-nine months away before we start pushing for it more aggressively. So at this stage it is more tactical, more individual names. IDFC is a sell for us.