Why Udayan believes mkt may 'become boring' for few weeks

He is not upbeat on over owned stocks like TCS and Maruti Suzuki. There isn't a strong case for the largecap IT at least for one-two quarters more but midcap IT could be interesting, says Mukherjee. However, one could stick to largecap IT from a longer-term perspective.

He does not think the ‘UDAY’ scheme to be a big beneficiary for the power companies and recommends staying away from the sector because the space ‘See no powerful triggers for mkt; not upbeat on TCS, Maruti’

He advices staying with the best in the class amongst the private sector banks where valuations could have be expensive but there has never been a doubt on its pedigree, for example HDFC Bank.Below is the verbatim transcript of Udayan Mukherjee’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: It is green on the screen, how should one read the cues? We had the Fed perhaps moving closer to a rate hike, the Organization of the Petroleum Exporting Countries (OPEC) just rolling over its targets, not daring to cut them and of course some tentative moves on goods and services tax (GST). Are we in a sweet spot or will this be just taken by the markets unruffled from their current trading range? A: Market is stuck in a range. There is no point being excited every time the Nifty makes a small attempt to get to 8,000 or no point getting terribly despondent every time it goes towards the lower end of that range. As I have been saying for a few weeks now, chances are that the market will grind in maybe a 7,700-8,100 kind of a range. The triggers are not very powerful enough right now and in cases where the triggers might be conceived as powerful, they are very well known and well discussed and therefore probably discounted by the market; the Fed rate hike is a case in point, GST probably is another case in point. So, I don’t think there are surprises for the market right now. The general force of gravity given earnings backdrop and the general global mood of mild gloom, I think is working on the downside which is preventing the Nifty from breaking meaningfully above that 8,000-8,100 kind of level. So, I am sorry to say that the market probably runs the risk of becoming or being boring for a few more weeks if not longer and probably grind in a range. Now, that range could expand a little bit if the news turns slightly better or slightly worse. If GST were to come through, maybe 8,100 gets taken out or if something bad happens on the global front or there is a scare, maybe 7,700 gives and you go back to retest that 7,500 low. So, if you want to expand the range maybe 7,500 to 8,400 range on the Nifty but beyond that I don’t think the impulses are very strong at this point at least.

Sonia: A boring market has not deterred any of the domestic investors for sure because that has been the big theme of this year, Rs 61,000 crore in 2015 come in from the domestic institutions. What is keeping the retail investors so bullish and do you think these flows could continue? A: History is a good guide to the behaviour of domestic investors. It is not certain that every time domestic investors necessarily behave in the same fashion but if you just go back to recent history, I think that bull market of 2004 to 2007 has probably many instructive points for us about the behaviour of the domestic investors. What you can take away from that is not a very salutary kind of a analysis because if you look at the domestic investor inflow which came into the last bull market, the single largest inflow came in 2008 of Rs 73,000 crore on domestic mutual funds or domestic flows into equity and that came in a year when the market actually topped out and tanked 50 percent. However, the evidence of 2009, the year after the big 2008 crash, is that domestic investors continued to buy. So, they take a long time to switch on but when they do, they keep buying for a while despite fairly significant come offs in the market. It is only in 2010 onwards that the domestic investors seemed to be stung by the nature of the fall and the quantum of the fall and they started selling in a big way. So, the short point from the evidence of the last bull market is that domestic investors actually came into that party quite late and when they got disappointed, they deserted the asset class for about five to six years. I am not saying this will happen this time around again but one can look at the evidence this time around too. If you want to call it a bull market, when did this one start? 2011, 2013 and 2014 the market has gone up 80 percent, on all those three years, domestic investors have been sellers and in the year 2015 when the market is down 5 percent, you have seen Rs 60,000 crore come in which is why 2016 assumes a lot of importance because if for some reason there is even a mild accident with stock prices, you could have history repeating itself quite easily. I think that is the nightmare scenario for the market and the stakes are so high for 2016 to be a bounce back year for the market otherwise you might have the same pattern playing out. Latha: It is the midcap stocks that have been actually doing much better, I think index level we may have underperformed but several midcaps have allowed domestic investors to keep the faith. Let me start with some of them, for instance the ADAG group, there has been genuine deleveraging, would you want to pick on any of those stocks and speak whether one should keep the faith? A: I could pick on them but I don’t know whether I would pick them because they have just not been wealth creators. I do not like groups which do not create wealth for shareholders over a significant period of time. We are just looking at the ADAG group stocks over the last three years because 2012 onwards is when this run started. The market has gone up 80 percent and if you look at the ADAG group stocks in terms of returns then Reliance Capital is flat, zero returns over this period. It has been flat for three years relative to a market which has gone up 80 percent. Reliance Power is down 20 percent CAGR from 2012, Reliance Infrastructure is down 4 percent. These are negative returns in a context of a Nifty going up 70-80 percent and Reliance Communication is down about 3 percent or up 3 percent. These are very poor returns. So, I am not enamored by the group at all because they have just not created any kind of wealth in a rising market. So, I would give it a wide berth. In any case, the excitement around Reliance Communication, about the deleveraging is a sign of desperation. It is good that they are doing it but even if they knock off Rs 20,000-25,000 crore after selling off whatever assets they want to sell, if you look at how much of the EBITDA goes out after the sale of the businesses and how much of the debt goes out, I think they will still be trading at close to six times EV/EBITDA. For that price you could buy Bharti Airtel today. Bharti itself is not covering itself with glory with the kind of very aggressive capex plan they are lining up and which generally do not bring great returns for shareholders. So, telecom as a sector is mired with problems. If you had to pick one, I think despite the price you would have to go with Idea Cellular because Bharti probably has a looming balance sheet problem, Reliance Communication has a track record problem, a balance sheet problem and a core business problem. Telecom is not my favourite sector right now and ADAG is certainly not my favourite group in the market. Sonia: Since telecom is not a favoured sector for you, what is? A: I don’t have favourites but in many sectors there are interesting stocks. This is increasingly such a bottom-up market. I think that time to pick a sector and make a lot of money, that might have been there in 2012 but three years have passed and now that kind of style of investing will probably not do very well. You look at each sector, the same story, whether it is autos or banks. We were talking about banks and just look at the divergence in performance inside the private sector banking space. One stock is down 35 percent, Axis Bank year-to-date (YTD) or from the 52 week highs and Kotak Mahindra Bank is probably down 5 percent. They are in the same business, one is down 35 percent and one is down 5 percent. A 30 percent variance inside a private sector bank or a good private sector bank universe tells you that this becoming such a stock specific market now and you just cannot adopt a sectoral approach to buying stocks. What you have been seeing for the last one month is this flavor based investing which happens at times when the market goes range bound so one day textiles, the next day tea, the other day fertilizers. All that might happen but that is just a hip-hop musical chairs kind of a trend which burns itself out in 30-40 days. Those are not durable trends so you need to do a lot of hard work and get back to individual stocks. Within sectors there are interesting stocks like in auto the sector that you cover, I think there are some good stocks and some not very good stocks so the ones which are doing well right now after looking at those monthly numbers as well. Latha: Therefore is the advice really to stay with mutual funds and do a lot of research on mutual funds because it would be so difficult for a retail investor to be able to do this kind of a bottom-up stock picking? A: I defer a little bit because mutual funds are also heard investors and I would not be very enamored by a largecap mutual fund right now or diversified equity fund. You look at the top 10 and it is an instructive exercise to do right now, if you look at the top 10 holdings of most of the diversified large equity funds, you will find almost the same stocks there. Two private banks, two pharmaceuticals, one consumer, one IT, couple of auto stocks – it is the same. I think there is almost a 60 percent overlap in the top 10 holdings of most of the diversified equity funds and they belong largely to the index universe. I think they are following each other, they just don’t want to get a step wrong, it doesn’t matter whether they outperform, they just don’t want to fall off the performance chart on the NAVs. So, you have got a much better chance – what you are referring to might hold true of a midcap mutual fund. However, for a largecap diversified equity fund, I am not sure, they are still going with the winners of the last three or four years and I don’t think they have made significant adjustments which is why when big sectors like pharmaceutical and private banks get hit, NAVs take a big knock as well. So, I am not very impressed with diversified equity fund portfolios right now. I think they are following the market right now rather than being ahead of the curve; not so with some of the midcap funds which seem to own quite a few jewels in their portfolio.  Sonia: It has come as a jolt to many, the kind of correction that Tata Consultancy Services (TCS) has seen this year; how do you approach it now?A: I think most of the damage has been done. This is the problem which I keep talking about with over owned stocks. They go through a good patch of 3-4 years and everybody just tanks up on them and then the gloss comes off a little bit and everybody is heading for the exit door. Or at every rally they are heading for the exit door which is what worries me about a good stock like Maruti Suzuki as well. They are doing very well, but it has the same problem as TCS is facing right now, which is that everybody owns a lot of it, and the recalibration between TCS and Infosys started a few months back and that process is well underway. Will TCS fall off a lot in terms of absolute prices? I do not know, but right now it has got people scared and even for long term holders of TCS, they probably want to lighten up on that stock and probably veer closer towards the Infosys name. Just look at how relative valuations have closed between TCS and Infosys. I think both now trade at almost the same kind of valuation; one is at 16 and one is a 16.5 price to earnings (PE). So the valuation gap which was at once 20-22 percent, has come down to three-four percent now, and that is has been the seriousness of valuation compression between the two leading names in the sector. In my eyes TCS probably has a downside of about 4-5 percent which might take it to Rs 2,200 kind of levels. Below that it starts trading at 15 times current year, or kind of multiple. I think bellow that is difficult to say, because it is such a pedigreed, classy stock, it had such a great run for six-seven years and now it just had a year of underperformance, so as they say class is permanent and I think long term holders will not ditch it that easily or use dips to buy it. So as I said last time when we were discussing, Infosys probably has that mean valuation of about 15 odd times and is gravitating around Rs 1,050, for me that mean for TCS is around Rs 2,200. Anything substantially below that frankly will be an opportunity for a long term investor, but in the near term, I see the stocks struggling to find any meaningful upside, because I think there is disenchantment with the recent quarterly performances. Latha: Would IT be a flavour in 2016 you think and TCS as well?A: It depends on a lot of things. Right now it is difficult to make a great case for IT; the world is in a bit of a mess, commentary from the top management over the last couple of quarters has not been table thumping, so I think it is kind of a holding pattern. IT will not fall off 20-25 percent from here, IT will not rally significantly in the next six months. So it is a boring kind of sector if you will for the next couple of quarters in my eyes. You could pick mid caps there because there is some valuation comfort in some of those names. We are talking about Infosys and TCS at about 16-16.5 times, Tech Mahindra is available at 12-12.5 times and that makes it an interesting proposition even in the difficult IT scenario. So IT for me is not top of the heap right now. You could be in it for longer term investors, but right now I think it is shorn of excitement. But you were asking me about GMR, so let me just touch on that. I think run for the hills would be the great advice on GMR and Lanco kind of names. You just do not want to be there. These asset sales are signs of desperation, by that logic you should by buying JP Associates which is selling everything in its larder for the last one year, and look at where the stock is. These companies have absolutely tattered balance sheet, and they have two options, either they will go on selling the family silver, eventually you will find the business is just a pale shadow of what it used to be, or they will dilute to an extent that finally equity share holders will never be able to make money. And I think GMR's recent foreign currency convertible bonds (FCCB) plan is hinting that they might take the latter route which is dilute, sell equity at practically any price; even a Re 1 share, it is still money coming in into an absolutely tattered balance sheet. I would not have any time of the day for these kind of names. They really have to do a lot of repair work before people can, or serious investors can start looking at them.Sonia:  Coming back to the point you were making about sticking to quality, if you need to stay away from all of these leveraged names, stay away from these guys who were selling their assets, what do you do with some of the credible names who are giving you good levels now? Say for example, ICICI Bank, SBI, if these guys go to Rs 200-220 levels, then do you think these are good buying opportunities or as you pointed out, the leadership is now changing in the market?A: That is what scares me that there might be some kind of change in leadership, because there are too many people who own the names that you mentioned, not State Bank of India (SBI) necessarily, but the private banks. And that is causing an intense amount of discomfort in the market. The pain trade in the market is the fall in pharmaceuticals and private banking stocks. I do not think investors bargain for 30-40 percent fall in some of these marquee names and even today, they are on top of the list for almost every brokerage and they form among the top five names in every mutual fund holding which is causing a lot of distress which is why people say repeatedly that you must go out and buy.Latha will know better about this one, but I am frankly a little worried about what the private sector actually holds in terms of future disclosures. I hope it is not, it is becoming like a US Food and Drug Administration (FDA) kind of a thing for pharmaceuticals. All seems well, stocks at premium valuations, and then one day, suddenly the world changes because they make a certain disclosure. And that risk is gnawing at the pit of most investors’ stomach. We thought these were blue chip managements, that nothing could go wrong overnight. But that confidence does not seem to be there. But to answer your question, the kind of level that you are talking about, if ICICI Bank indeed were to go down to Rs 220-225, it is not an easy call to say that it will fall Rs 40-50 more from here, but if it does, you would probably be getting it at something close to 1.6 times book or on 1.5 times book. Longer term, India’s largest private sector bank at 1.5 times book, wow! Seems like a tempting kind of an opportunity.But I would look at it differently. I would say why ICICI Bank, where you have questions about the asset quality or Axis Bank, which has induced some question marks on the asset quality. Why not look at some of these names which have never given you any kind of trouble with sleep at night? And HDFC Bank, the problem with that was always its valuations. Never its pedigree and never its performance. And HDFC Bank is down 20 percent from its 52-week high. Save for the day when ICICI Bank, if it ever goes to Rs 225. You may find HDFC Bank trading at Rs 950-960. And I would say pay that extra price to book multiple and own the best in class because that has never given you reason to worry. So, the way I would approach the banking space is, just look at the best in class and then say if I get an opportunity to buy the best in class at a valuation which I have never seen on the screen for the last 3-4 years, let me plump for that, at least these are long-term wealth creators.Latha: I just a couple of things to add to this to be fair to the Indian banking space. That huge dumping from China and the fall in emerging markets and in China really came out of nowhere. When it was just looking like things were probably plaeauing, troughing, perhaps, and only the odd Zoom Developers like of or Winsome Diamonds will come at us. You saw the entire steel sector and the metal sector taking such a huge beating. I mean, USD 270 for HRC, people did not budget for that 52 weeks ago. So, perhaps, some of it is because the world is an uglier place than one budgeted for. So, we still do not know whether such nasty things will not come out. And then the governor spoke very emphatically about working towards March, 2017, by when everything will be provided for. He did not say that the worse will be over, but he is working to a plan where everything will be provided for. So, perhaps at a later date, that would be.But do you want to add to that? A: You made an excellent point. And I just want to come in for 10 seconds on this point, because it is a very important point to labour. The environment which has created this stress for banks, and at such points, it is when the wheat gets separated from the chaff. The last square which happened was JP Associates which was going belly-up at that point of Amtek Auto, and you guys were flashing plates saying whose exposure to JP Associate was what and whose exposure to Amtek Auto. And I was looking at that very closely. There was one private bank which had an exposure of about Rs 2,000 crore and HDFC Bank had an exposure of about Rs 75 crore. Banks are in the business of forecasting these kind of scenarios and assessing probabilities and therefore taking exposure or not. And it is no coincidence that one bank chooses to have a Rs 2,000 crore exposure and one bank chooses to have Rs 75 crore exposure and therefore, one bank trades at 3.5 times price to book and the other trades at 1.75 times price to book. They are doing what they are doing with eyes open and the market is pricing them in exactly the fashion in which they have chosen to do their lending.