Udayan Mukherjee: BJP win in UP elections to take Nifty past 9,000-9,100

Apart from the election, the US Federal Reserve meet would be a crucial event in the coming days, he said.

The market does not seem to be ruffled by the possibility of a rate hike as it has been discussed so many weeks in advance. "The real surprise would be if they don't hike."Below is the verbatim transcript of Udayan Mukherjee's interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: The Nifty has meandered between 8,850 and 8,950 for what looks like a very long time. What does this dithering mean? Does this mean we are just waiting for probably state elections or something to rush higher? A: I guess you would have to look at it that way because what has also happened in the interim is that some of the biggest weights or biggest stars in the Nifty have given very meaningful breakouts and despite that the Nifty is dithered around 9,000. So you have Reliance Industries, Bharti, HDFC Bank all doing these 10-15 percent kind of rallies but even that has not been sufficient to push the market beyond that 9,000-9,100 level which probably means that the market needs another trigger and not just leadership from largecap names, which will take it pass that hump. Day after tomorrow, we have the exit poll results maybe the domestic investors have paused before that you have seen the last few days the domestic numbers or the DII numbers have not been very strong though the FII numbers have picked up. So I guess the local investors want to see the event out of the way and if the BJP were to win or show signs of making it pass the poll day after tomorrow, that could be an event which takes the market beyond 9,000 or even 9,100. On the other hand, if that event does not deliver for the market, after this phase of consolidation, the market could easily breakdown in the near-term and maybe make a dart towards those 8,600-8,500 kind of levels as well. So I think the next seven days would be very crucial because you have two important events, local and global in the Fed meeting and the sum of these two events will determine whether the market makes a new high this month or it dips towards 8,500-8,600 before gathering energy for the next upmove. Sonia: On the Fed meeting, we have little more conviction on the possibility of a rate hike because we have got those comments from Janet Yellen last week. When that comes through, do you see any trepidation or do you think the markets will take it positively considering that all it means is that better data coming out from the US? A: I don’t think the market appears particularly ruffled only about the possibility of a rate hike. It has been discussed so many weeks in advance, the FOMC itself has signalled it this time around. So the surprise may well be if they do not move next week rather than moving. So that is almost a done deal. Why I mentioned the FOMC meeting is that it comes at a time when global market seem a little stretched on the way up. It has been a relentless rally from the start of the year. I think even the bulls will agree that the markets overseas seem a bit overbought and sometimes you need just a statement or a hint of rates progressing at a pace, which is faster than what the market might have priced in or simply the event which people were expecting to come about to precipitate a correction in an overbought market. It may be a temporary correction but a correction nevertheless. So the short point is markets have had a great run, 10-12 percent kind of a rally pretty much across markets, 10-15 percent in some cases and now because of the conjunction of events, it is possible that the markets give up a little bit of ground. It may not come to pass. The markets might just take the rate hike in their stride, might get emboldened by the UPA exit polls and you could see a new top being formed over the next few days. That also is clearly a possibility but the markets appear a bit overstretched. So, a correction will come whether it comes before the last flash on the way up or from hereon, that is the moot point. Latha: What is the broader canvas of global markets? There are tell-tale signs that the global economy is troughing out just about everyone is speaking about a slightly higher growth rate for the global economy inflation expectations globally have picked up, inflation itself has picked up, in such a global scenario, how does India normally perform? A: We are the best in class, like it or not. So if we have the tailwinds from global markets and discontinues -- the Chinese prediction of 6.5 percent is a minor wrinkle because they still don’t seem terribly confident and that might have some implications for the rally in commodities that we have seen and commodity have been one of the stars but that aside, you are right in pointing out that it does appear that there are more tailwinds from the global side now in terms of pure economic lift. I don’t know about the policy risks there because of the man who is running the United States. However, if that is the case and after next quarter of Indian growth also starts to get back to the pre-October kind of levels where we were all getting more confident about the earnings recovery, the case for the market grinding higher from here certainly exists. There are a few event risks down the way and we have our own GST to also weighed over during the course of the year but if global economies do well in 2017 and global markets continue to do well, I struggle to feel that India will underperform in that scenario because we have underperformed a lot of emerging markets over the last 12 months or so but that maybe a thing of the past once we start getting into a little bit of a higher gear ourselves with earnings. Sonia: Did I hear some sarcasm in your voice when you said we are best in class? That gross domestic product (GDP) figure of 7 percent was met with a lot of scepticism? Is the market wise enough to not put too much stock into such data? A: No sarcasm at all. We are consistently one of the top two-three highest growth economies in the world. There are wrinkles and we talk about those wrinkles but I don’t think it is anybody’s guess that India is a sluggish economy compared to what the rest of the world is going through. But to your point on what the market is more focused on, I don’t think the market believes that the GDP growth was 7 percent but the April numbers will be absolutely crucial and beyond the point, we can say that we don’t like this part of the data and that part of the data. If in the April quarter, it turns out that there is a glimmer of earnings recovery kicking in, it is debatable whether that will happen but if it does happen, the market will swiftly conclude that the addressable universe of stocks regardless of what has happened in the informal economy and the rural sector has not been affected very badly by demonetisation and it may move on from there. Sonia: Coming back to the way some of the data points have shaped up, how did you read into the auto sales this month because it seems like the demonetisation shock has receded especially in some key pockets like passenger vehicles, how did you look at that? A: You are right in pointing out that there is no great scar though two wheeler still remain very sluggish. However, what we also want to see is the pre-October or Pre-November kind of momentum coming back. I did not see that kind of momentum in the auto numbers. The commercial vehicles were okay, Maruti Suzuki may have fallen short of expectations from most analysts, two wheelers were a bit somber, expectedly so maybe, one or two, maybe Mahindra and Mahindra (M&M) was not bad, but Eicher was not special. So, now the market has come back to 9,000, the market is no longer at 7,900, auto stocks have also come up a lot, so, right now we have to look at these numbers with a different lens. We are not in that panic mode post demonetisation where stock prices had corrected 10-20 percent. Now we are almost closing on new highs, so, we should not look at the auto numbers and say but they are better than demonetisation fears. Now we have to see resurgence of momentum in these numbers which will convince to us that we will get near 20 percent earnings growth in FY18. I thought the auto numbers while they were not bad, they probably did not display that kind of momentum. So, I am keeping my fingers crossed and watching those April numbers – April quarterly result numbers because if those numbers turn out to be good, then I think even the skeptics will say the economy is fine, earnings are slowly getting back on track and we do not need to be so afraid about what happened in November. However, if they fall short, I think we will all have to go back to the drawing board and say okay, demonetisation did not hurt earnings so badly, but are we back to the September-October quarter 2016 kind of momentum where we were getting a glimpse of that 15-17 percent earnings growth once again. Latha: You did not get a glimpse of otherwise earnings growth in Q3? A: Q3 we were -- at least my fears were worse than what was delivered. So, the earnings were okay, there were some hits, there were some misses, but we may have feared worse and compared to the fears the numbers still seem sort of okay. However, I don’t think anybody came away from the Q3 numbers feeling that we are going to get 20 percent earnings growth in the next four quarters. I think we need to get that feeling now. Earnings growth not just delivered because of a recovery in commodity prices delivered some metal companies, a slightly more broad based kind of earnings growth of 15 percent plus in FY18. I think elections will come and go, Budget’s will come and go, that is the thing we need to be assured of or feel confident about at the end of the April quarter because once we do that, then these 9,100-9,200 kind of levels are merely academic. Then the market will move ahead because then the market will also not look so expensive as it is looking now stuck at this Rs 410-420 earnings per share for the last three to four years. Sonia: On the oil and gas space, it is really hotting up with so much talk about an impending merger, but how does the retail investor approach it? A: Steer clear of the news would be my sense. If people are talking about, you don’t know what to read into these news items, whether they are kites being flown to gauge how the street will react, we have not had any official comment as far as I have heard, so, is Oil and Natural Gas Corporation (ONGC) plus HPCL going to happen? I don’t know. Is there sound logic for it? Perhaps not. I think the government probably is better off letting these oil companies be and do what it trying to do with Dredging Corporation for example this morning or what it did with BEML a while back. There is so much to do with public sector units, why do you want to put two companies together. I don’t think HPCL management will particularly appreciate being lumped with ONGC. However, if this news item is true or is moving towards some kind of a deal, as a retail investor as you asked, I would look at the oil universe outside these two companies. Forget HPCL for the moment then, focus on BPCL and Indian Oil Corporation (IOC). Due to this news item and some other issues, BPCL has corrected from Rs 725 to Rs 625-630 kind of levels. There is no reason for that stock to have come off so much. It is an excellent oil marketing company. So, if I was worried about ONGC, HPCL, I would simply say, take use of that 10 percent correction in BPCL. IOC has probably the best of the lot now in terms of valuations but that has not corrected that much, it has corrected only a little bit. However, as retail investor, I would not look at upstream now. I would probably look at the downstream stocks other than HPCL till we get more clarity on the news because they have come to fairly attractive levels once again.