If the Reserve Bank of India (RBI) cuts 25 bps today, which is largely priced in, Nifty may gain may be 100 points on the upside close with 8,500 being the level where one see resistance happening, believes Vibhav Kapoor of IL&FS. However, in case of no rate cut, market will take it negatively and heavy sell off is likely, he said.
Speaking to CNBC-TV18, Kapoor said if Governor Rajan cuts rate but his with a hawkish tone, market may see a short-term upside for a day or two but after that there could be a lot of selling happening.
“The market has bounced from 8,000 level and is in a rebound stage at this point of time. Even good news like 25 bps could lead to selling after an initial rally. So the chances would be more that you would see the downside resuming after this,” he elaborated.Below is verbatim transcript of the interview:
Q: If there is no rate cut, what will the market’s reaction be and even if we get 25 basis points (bps) cut, do you think the market may not be very enthused?
A: If there is no rate cut then there is only one way to go, market will take it negatively and you could see a fair amount of selling happening. If there is a 25 bps cut, it is largely priced in but you could get maybe 100 points in the Nifty from here. So around 8,500 would be a level where you see resistance happening in that case.
Q: What happens in the event, we do get a 25 bps rate cut but the governor sounds hawkish and the sense the market takes away is that we are going to be in an extended period of pause. In that case, a rate cut but hawkish commentary, how do you think the market will react?
A: You might see a short-term upside for a day or so but after that you could see a lot of selling happening in that case. The market has bounced from 8,000 level and is in a rebound stage at this point of time. Even good news like 25 bps could lead to selling after an initial rally. So the chances would be more that you would see the downside resuming after this.
Q: What is happening with market sentiment, why has it been corroded so much, is it purely because earnings has been slightly worse-than-expected or is the market now starting to worry about other issues global?
A: The sentiment is still not that bad. For example, Larsen and Toubro (L&T) didn’t have that good result. It was quite disappointing yet the stock was up 5 percent and so, sentiment is still reasonable. Of course that bubbly type of sentiment, which was there a few months ago is now evaporating but that is largely because corporate results have not been as good as expected and you have seen so much of downgrades happening.
About 3-4 months ago, the consensus on Nifty for FY16 – Nifty earnings – was close to Rs 600 six months ago and that has gradually come down to Rs 540 then Rs 520, Rs 500 and now I see some people talking about Rs 480. So that has definitely caused some impairment on the sentiment.
Q: Do you still see more downside in the earnings expectations after the big reset that we have already seen and everyone has been talking about how the market is likely to consolidate, we get the sense that maybe the upside is limited. There are no triggers, but what would be the potential downside for the market?
A: Largely the downgrades are in place now. We were at about Rs 500 so maybe Rs 480-500 would what we would be looking for. I think the last quarter was probably one of the worst. For FY16, you might get another. The next quarter also is not going to be all that good and then a lot is going to depend on the monsoon and if you have bad monsoons, then you could get to see this getting extended to maybe another quarter or two that is the earnings downgrades.
You would have more downside to the market. I would say if you have a bad monsoon, you could probably go down to something like 7,600. Otherwise, I think the market is going to trade in a range of 8,000 to 8,500-8,600 in the short-term and maybe, 8,000 to 9,000 for the rest of this financial year.
Q: So Rs 500 in terms of an EPS, that would mean that the market is trading somewhere around 17-18 times now. Do you think our market deserve to trade at such valuation?
A: If you see more downgrades or if you see a bad monsoon, then you could come to 7,600 which would be about 15 times earnings.
Q: In terms of sectors, how are you placing yourself now? Has the time come to get a little more aggressive and get into the cyclilcal names or do you think that because there is no recovery, yet you should stay away?
A: I think we argued for a more balanced portfolio about three-four months ago prior to that we were very overweight on cyclicals. One would like to continue with that balanced portfolio for some more time. Watch how the monsoons are going or if the markets come down to 7,600-7,700, one of these two things. In that case, you could again start becoming overweight on cyclicals.
Q: Many blue-chip companies disappointed in the Nifty space – Tata Consultancy Services (TCS) and Infosys in the IT pack, Tata Motors, ITC, Sun Pharma, even a couple of banking names like ICICI Bank. Considering these are blue-chips, did you recommend any of these to investors accumulate on dips?
A: I am not going to talk about individual stocks, but as I said if you see further fall in the market or you see a better monsoon then it would be better to go overweight on cyclicals, banking stocks, engineering stocks, infrastructure stocks all those which get impacted by the upturn in the cycle of the economy.
Q: What do you do with the auto names now? This month has been very patchy, so certain pockets are still looking good. The likes of Maruti, but the two-wheeler space is just not pulling up. How do you approach it?
A: It is pretty simple. The rural economy is in a bit of a stress right now and that is why you see two-wheelers not doing so well, tractors not doing so well whereas the urban segment is doing reasonably well. Again the issue is if you have a bad monsoon the rural economy is going to come under more stress. Therefore, you need to be a bit careful.
Q: On the two-wheeler space particularly, it is interesting that many stocks like Bajaj Auto and Hero MotoCorp have seen a good rebound after a fall they have had last month. So the month of May was not too bad for them, in fact, 10-15 percent rebound in these stocks. Would you advise accumulate it?
A: A lot is going to depend on the next three or four months. Maybe the two wheelers generally are bottoming out in terms of their sales volume, not in terms of stock price necessarily. However, one would like to wait for a couple of months and see how this trend goes.
Q: IT stocks took a big hit post the Q4 earnings. Of late, we have seen at least the currency turn a little more benign or in favour of these IT companies. Is IT looking attractive in this period of consolidation for the markets?
A: IT is undergoing a big change. A real transformation in its whole business model and this will take about three or four years to pan out and show what is actually happening. This whole thing about robotics and cloud technology, etc is going to put pressure on the traditional model which the Indian IT companies have followed. You will need to look at those companies which are life to this transformation and which can take this change.
For example, Infosys Chairman gave a statement a few days ago that they are really transforming the company to meet the challenges. So, over the medium-term, those companies which are able to meet this challenge and transform themselves and transform the model business model will do well. The other companies may find it quite difficult.
Q: Overall what is that one big positive trigger that could take the markets out of this range of 8,000-8,500?
A: Ultimately good corporate results. Valuations are a very important part of the market and as you said, 17 times is not all that cheap. We have been having downgrades in earnings all this while. So, you need to see an up turn in the cycle of earnings and the growth rate of earnings improving significantly.
Q: In your assessment how long could that take?
A: Again, as I said, we expect that second half of this financial year will be good. However, if the monsoons are bad, it would be extended to FY17.
Q: Anything in the midcap space; any particular sector which caught your fancy because there were pockets of good earnings in the midcap space?
A: I think some of the engineering companies have been doing well. They have sort of started turning around. So, you would need to look at those. However, again, I think valuations are very important because at very high valuations you sell them; get good returns.
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