Don’t try to time market; OMCs, paint cos to benefit: Emkay

It is time for retail investors to increase exposure to equities as the economy is likely to see a structural improvement over the next 2-3 years, feels Krishna Kumar Karwa, Managing Director, Emkay Global.

In an interview to CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, he says investors should invest regularly and not try to time the market. Karwa is bullish on financial services stocks and sees this space yielding good returns for investors.

He sees falling crude prices as being a key positive for the Indian economy, and expects oil marketing companies and paint companies to be the major beneficiaries of this trend. He expects the RBI to hold rates at next week’s policy review meeting and says the market is not hopeful of the central bank cutting rates anytime soon.

Latha: At these nearly stratospheric levels are you getting an uneasy feeling of buying more?

A: If you look at it, we have had a run of almost 700-800 points on the Nifty in the last 40-45 days and at 8500 odd levels you feel that the markets should be more in kind of a consolidation kind of phase before it starts moving up next. So, the markets are looking for the next round of triggers post the diesel price deregulation.

Hopefully if there are some triggers either from the ongoing parliament session, etc then things could further move up. Otherwise, we are headed for a period of consolidation before we start looking towards the upcoming Budget.

Latha: There seems to be a bit of a divergence with reality in the sense that the second quarter earnings were nothing to write home about, the macro data are not turning the corner, auto sales continues to be damp. Do you think the markets will look for an excuse to correct and would an absence of a rate cut on December 2nd be that excuse to correct?

A: I believe that as far as the December 2nd Reserve Bank of India (RBI) policy – as markets are not looking at a rate cut in that meeting in fact if you look at the consensus poll of various experts, etc and even including our internal understanding we believe that status quo would be maintained as far as December 2 is concerned. That should not be a trigger for correction in the market.

Markets as you can see now also they feel to be more in a consolidation mode and they will consolidate on their own steam and finally will be individual stocks which will have their own correction based on the results they have given and what kind of the outlook that they have. So, I don’t believe that this could be a trigger for a market correction.

Sonia: You did mention that you are expecting to see a consolidation but is this still a buy on dips market for a retail investor and if yes, what are the pockets of value that still exists in this market now?

A: What we need to understand is that we are expecting recovery both in the gross domestic product (GDP) and the earnings etc and this is not just six months story, what we are looking forward even two-three years kind of a structural improvement in the economy and accordingly stock prices. So from that perspective, investor should be looking to steadily, regularly invest rather than trying to time the market and it is very difficult for any investor to be able to do that. So if there are corrections, it is good enough because that is an opportunity for you to invest and otherwise also Indian investors are underinvested in to financial assets and specifically equity and so it is time to increase their exposure to the asset class which is expected to do well in the next three-five years.

Latha: Let us take the Nifty, everyone is gung-ho in the long run and much of the gung-ho is already come. Now, what would be a 12 month target for the Nifty?

A: Nifty will finally track how the earnings grow. So, to put a number to that will be a function of various factors. However, I would say that within the Nifty also there would be a huge segment which I believe the financials is a segment that should give you very good returns from the current levels itself. So, that is one segment that we are bullish on. Otherwise, on the Nifty who would have expected that we would be at 8500? 45 days ago we were around 7500-7600, so, that is a function of too many things.

Latha: What I am asking is that do you therefore expect that earnings will grow in a year? I am not asking you for a near-term or a March target, I am asking you for a 12 months target assuming that you are expecting growth to kick-in by then. So, another 10-15 percent a year down the line looks safe for the Nifty?

A: It should possibly be there. However, having said that let us look at it this way that we have had a very good run in anticipation of improved earnings. So, it could possibly happen that your earnings will improve and your stock market will possibly be in a consolidation phase. So, investors should be prepared for that also. Having said that, a 10-15 percent uptick on the indices in the next 12 months, is a distinct possibility.

Sonia: As we speak the big positive for Indian markets is the way crude has been falling; now Brent is below USD 77 a barrel. Which are the sectors or companies that one can buy now to play this falling crude theme so say the paint sector, the tyre sector; which are the pockets that you would be interested in now?

A: Falling crude prices because India is a large importer, it is across the board very comfortable and positive for India the falling crude prices. So, the way to look at rather than trying to do a direct correlation better way to look at it is overall what kind of an uptick on the gross domestic product (GDP) is possible because of falling crude prices; that is the primary premise that we would be looking at.

However, if you want to zero-in then with diesel deregulation, etc then you have your oil marketing companies (OMCs) they will be relieved a lot of subsidy burden and there could be a structural opportunity in those kind of companies because valuations are reasonable. So, that is one segment.

As you rightly said the paint segment, they are a beneficiary not only from falling raw material prices but also we have seen that they are basically price maker. If there is improvement in domestic consumption as well as in automobile segment then paint companies will be a primary beneficiary in the immediate term.

Latha: When you started of about the Nifty you said that you would bet on financials? Which part of the financials, would you go ahead with the private sector banks which have run up significantly or now do you think you are closer to a turnaround in the public sector banks?

A: There are two ways to play, if you are looking to play growth then with the kind of capital adequacy that the new generation private sector banks and may be some of the old generation private sector banks have their ability to grow is much better than the public sector bank because they have their own challenges in terms of their capital adequacy. So, you have your new generation private sector bank which offers you good opportunities for growth.

Having said that your public sector banks, the valuations are very reasonable there is a reason for that. However if you believe that from a 12-18 month perspective your interest rates are going to come off and your economy is expected to improve and that will help a lot in their non performing assets recovery (NPA) then form a valuation perspective you have pockets in public sector banks also which could also give equally good returns.

Sonia: The interesting part this month has been that both defensives and cyclical have seen an upmove. So, technology names like Infosys have also moved and public sector undertakings (PSU) banks like  State Bank of India (SBI) have also moved. However say for the next 6 to 12 months do you think that defensives will overtake cyclical? How would you play this argument now?

A: Honestly speaking it is a challenge to keep on moving between various segments of the market. I believe that the best thing to do is that as long as the quality of your portfolio is balanced that is the best way to move ahead. Infosys, the valuation were at a discount and for obvious reasons to the market leaders but the sentiments has turned positive into favor of the stock and the expectations with the change in the top management is that the things going forward will be much more superior. So, that is the reason why Infosys has outperformed.

However, I would believe that investor should be invested in financials and pharma and in IT. You should have a balanced portfolio other than trying to keep on moving from segment to segment based on short-term thought process.

Latha: Your views on midcap and do you expect the midcap index itself to be a major out performer in a 12 month period and more importantly identify specific stocks, sectorally all of logistics has gone up, all of auto ancillaries have gone up. Do values look stretched? Tell us where values lie according to you in the midcap space?

A: From a one – two year perspective it seems that the midcaps have run up sharply and have outperformed the largecap indices. However if you look at the midcap indices from a five year perspective still there is a lot of catching up that the midcap as a whole versus the largecap index. So primarily from a short-term perspective you may feel that they have run up sharply but I believe that still in a growing economy it is the midcap stock which will tend to give you out size returns versus the largecap stock. That is the basic premise that we work on.

Having said that you can not brush all midcap with the same brush you will have to be bottom up in terms of identifying and investing in them. Rather than trying to do sectorial attempts in terms of which are the sectors and then I would like to look at which midcap to invest, it is primarily based on bottom-up kind of approach where valuations and individual growth opportunity should be the key theme.

About auto ancillaries, there is recovery in the commercial vehicle (CV) cycle. Then many of the auto ancillaries which have been struggling for want of growth and also many of them have been developing good export opportunity. So, they should do well and they also are reflected in the valuations that many of the tops have gone through. We are bullish on auto ancillaries we have seen the kind of growth which an  Amara Raja has had and we still believe that despite it having run up so much it will still give you good returns.

Other stock that we like in agro-chemicals, we like  Tata Chemicals that is again a large midcap again where we believe that the balance sheet tries correction in terms of debt reduction which is happening should add to the enterprise value and to the market cap of the company. We are again bullish on  United Phosphorus (UPL) where we believe that versus peers the valuations are much lower. It is a global company available at very reasonable valuation.

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