'See choppy mkt till earnings weak, be stock-specific'

Below is the transcript of the interview on CNBC-TV18.

Sonia: It has been slightly rocky terrain for our markets we have been consolidating in this range of around 8,300-8,500 what is the sense you are getting about how the next couple of months could shape up?

A: We are in for a period of an interesting time in the markets, as always I guess. For two reasons. One is that the earnings season so far has been fairly mixed. There doesn’t seem to be any consensus whether the economy is definitely turned or not. There have been pockets of very indifferent performance and there have been pretty significant surprises on the upside as well so that is not really giving any unidirectional movement or momentum to the markets so far.

So, till we see some more news coming by, till we see some earnings coming by the end of the next quarter and way beyond that and see some of the other risks that we are expecting externally to kind of either appear them to be -- like way of either an interest rate hike in the US or whatever it is, all of these things are very critical for where the markets will move. So, I guess in the interim for the next two months as you mentioned it is going to be pretty choppy.

Reema: Globally what is the sense about the India versus China debate? China is up nearly 45-50 percent so far in 2015. It continues to outperform; while India’s performance in 2015 has been lagging. It is only up close to about 2 percent odd. Will this trade in favour of China continue and at what point do you think India will relatively start looking attractive?

A: It has been a reversal of sorts, so what we are seeing on a year to date so far in 2015 has been a reversal of the trend that we have seen in the past couple of years where China has been very insipid. There has been a lot of impatience with international investors in China because for a long time China just did not respond. The stock markets were pretty tepid; which was also the case in India if you go back more than a couple of years ago.

So, I guess these are rotational in nature I don’t think there is any link between the two of us. However, I must mention that the Chinese markets appear to be pretty volatile for now because there seems to be a significant amount of supply which is likely to come into the Chinese market.

Generally, markets also trade on demand and supply. And if I look at the IPO pipeline it appears that China will face some headwind going forward. On the other hand, it is difficult to say whether that will reverse in favour of India. This year is as I mentioned earlier going to be a slightly volatile one for India, without a lack of any significant earnings up move coming through.

We are not going to see a very significant up move in the markets. However, it is a matter of time. FY16 and FY17 look very strong from my point of view. So, this reversal is likely to happen between China and India what we are seeing so far in 2015, but that may not be immediate and that may take may be 6-8 months before that happens.

Sonia: Which were the pockets that delivered a good set of earnings in your mind where there could be incremental money put in?

A: It is difficult to pinpoint again because it is not sectoral. There have been companies within a sector which have not reported that much. Take banking for example, there were certain banks which reported very significantly surprisingly positive earnings when the rest of the industries seem to be reeling under asset pressure. If you look at capital goods there were couple of companies which came out surprisingly much higher than expected while most of the industries looks to be tepid.

If you take cement, it is the same case. So, what we want to emphasis is that this is not a unilateral market. I don’t think you should look at the average of the market to think whether India is going to go up and down. It is becoming much more stock specific at least for this year. As the economy turns there is going to be a lot more unilateralness to the move going forward. For now we have a, what we call, a classic stock picker's market.

Reema: ITC is a stock which most of the institutions domestic investors institution (DIIs) as well as foreign investors institution (FIIs) hold and they have been fairly consistent in their holding in ITC despite the various volatile times that the stock has gone through. Now that we have seen back to back disappointments from ITC and the outlook for FY16 is also not looking very rosy do you see institutions off loading their stake in ITC which could put significant pressure on the stock?

A: It depends on what kind of institution you are, if you look at longer term long only as we call it institutional investors they look at very long-term trends in companies. ITC is a very much rock in the middle of very long-term trend in consumer consumption trends. If you look at valuations compared to its own history, if you look at the potential for the business going forward I don’t think there is any reason to kind of say that there is never going to be an interest in the stock.

However, I am not making a very stock specific comment, all I am saying is that there will be periods of non popularity for a certain stock versus others given some sort of regulatory change for in this case there has been a significant hike in excise duties and that has caused consumption to drop below much of the expectations across most analyst.

However, that is at best function of what is immediate. In the long run clearly some of these FMCG companies ride on India demographic. I don’t think there is any reason to believe that India demographic scene is changing very dramatically. So it is just a matter of relative valuations. I am again not making any specific comment; all I am just saying is that it may not be a very hasty decision which might go in your favour if you decide to keep ITC out of your portfolio right now.

Sonia: Your thoughts on PSU banking space as well until State Bank of India (SBI’s) numbers we thought that perhaps the asset quality situation is improving but post SBI’s numbers now there is no consensus that the worst is over for the PSU banking space. What is your own assessment?

A: IF you look at the entire space one conclusion id very clear that there is stress. If you look at the interest rate scenario, if you look at the inventory situation with most companies it is all pointing to the fact that there is a severe erosion of liquidity and unless demands comes back and again I will say it is not that much of an asset issue by way of purely and ability to payback. It is just an issue depending on capacity utilisation.

If you have invested significant amount of capital and capacity you are not seeing the kind of demand that you expected to see post that expansion, you are not going to see the margins, you are not going to see the cash flow. Till that time the asset will remain stressed. Doesn’t really mean that the business is in trouble, it just means that it is waiting for an uptick in the economy. So the asset issues that we see have to necessarily understood in the way of when they have to report.

For example over a quarter given the Reserve Bank of India (RBI) rules the banks will have a certain norm in terms of either identifying it as an non performing assets (NPA) for the time being. However, being in the industry that long and being in the banking industry also it lets me to believe that bankers don’t really view quarter end results as the be-all-and-end-all of everything. There is significant strength in the ability of these companies to turn back once the economy moves around.

So it is not that much of an issue of an ability to pay or unwillingness to pay. It is really something to do with business dynamics and these are tough times these are lows in the cycle and the banking industry is displaying that. So I am not overly worried about the fact that we are seeing this kind of asset experience. There is significant capital available to be invested in these businesses. As long as the business environment improves this will a thing of the past within year’s time or so.

Reema: Investors are a bit concerned because the last time when we got a rate cut by the RBI in March the markets had topped out. Now this time around what is your expectation are we likely to see a rate cut in the June second policy and how will the markets react to the outcome?

A: Difficult to predict for various reasons. One is of course the fact the economic parameters that you look at are turning pretty positive. So if you take inflation as one of the biggest indicators of what the RBI is likely to do, that is significantly down. If you look at growth which is the other reason to kind of hold back on a rate drop that is not very evident so far. So the index of industrial production (IIP) numbers while they are slightly higher than the expectations also it is not really shooting the stars out to say that the growth is back so you have got to rein in capital cost.

On the other hand there are significant negatives yet left in the economy as we mentioned the quality of the assets problem so that will also remain a little uncertain from RBI’s perspective. Most importantly the RBI is looking externally the biggest event which the entire financial market world is waiting for this year is the rate hike in US and these are fairly contradictory trends. If the US actually hikes and we are near a rate hike than it is difficult to imagine that the central bank in any countries likely to drop rates at that environment because the cost of capital across the world does go up.

In that sense difficult to call; but domestically the trends are indicating that it may appear that it might be one window that the RBI can do to ease rates for a little while because lower interest rates are necessary for growth. RBI is well in control all those facts so that is something that they will look to do.

Sonia: What kind of returns do you think India could give by the end of this year? We have hardly managed about 2 percent so far?

A: 2 percent so far is good; almost a week ago we were flat. I am not too concerned about year-on-year (YoY) returns in that sense because if you take calendar year they don’t mean much. All I am trying to say is that investor should focus on the long run. They should focus on equities as an asset class which delivers higher than normal returns across all asset classes over long periods of time.

I don’t think there is anything which has changed that picture. If a year goes by where you may have flat returns, negative returns I don’t think there is any reason to write it off at the moment. If you are looking at it from a real near term view I still remain positive that what we have to see is a turn around in economy.

The market doesn’t wait for the economic numbers to come in before it starts to price that in. So if we expect that the economy is pushed a lot ahead than what we were expecting it to be the recovery in the economy, then the market will start to discount that recovery 6-8 months prior to that. So, which means the second half of this year if the markets senses that the economy is turning around and we should see a little bit of bounce back in the market itself and this 2 percent now could be a much higher number by the end of the year. However, as I mentioned there are so many other variables that we don’t know that this time.