On the back of improving decision-making environment, investors are moving from defensives and exports-oriented sectors to domestic cyclicals and that is the real story, says Rahul Singh of Standard Chartered Securities.
He says, going ahead there will be corrections and some healthy correction is needed as this uptrend will continue for a couple of years more.
Also Read: Nifty at record high: How to gain if it hits 8000 by Budget
"Currency has stabilised, political risk has come down, so in the traditional sense, equity risk premium for India should have come down from what it was six-nine months back and that should support valuations, Singh told CNBC-TV18.
However, from a fundamental point of view, he says, a turnaround will happen slowly - visible uplift will be seen in FY16 earnings and not FY15.
The second half of FY15 will be determined by FII as well as domestic flows, Singh adds.
According to him, if the finance minister announces a plus minus 20-30 basis points fiscal deficit, it is not going to be that dangerous a signal for the market. He believes the market will be looking at specifics - sector wise, issue wise – issues such as goods and services tax (GST), subsidies where the government could come out with much more definitive statements and even in plan expenditure – will gain prominence. He says if there is clarity on some of these issues, the market will gain confidence and may be a little more forgiving on the fiscal front.
He likes large public sector undertaking (PSU) banks like State Bank of India (SBI), Bank of Baroda (BoB), Axis Bank . He is also bullish on ICICI Bank .
Below is the verbatim transcript of Rahul Singh's interview with Mitali Mukherjee & Udayan Mukherjee on CNBC-TV18.
Mitali: Very optimistic year end targets by all the brokerages, the most aggressive over there 28,000 for the Sensex. What is your target and do you get worried when all the opinion tends towards one side which is huge optimism right now?
A: In terms of targets one has to first look at valuations because earnings will start coming in, upgrades will start coming in only after maybe three months. Today the index is trading at about 15.5 times even after the rally one year forward which is above the mean but still well below the one standard deviation which was 17 times mean plus standard deviation.
There is still some elbowroom for the market to keep inching up but one has to take a step back and look at the real story here. The real story is the reverse churn as I call it, away from the defensives and exporters towards the domestic cyclical and that is the real thing to focus on and we have just started that process, there will be corrections on the way hopefully and we all want healthy corrections but this trend would continue probably for the next couple of years from whatever we have seen of the government so far and the vibes coming out are positive in terms of the decision making environment being improving.
Udayan: Oil and gas is a space which was not on the radar of most investors till a few months back, the public sector oil and gas space. Do you see scope of massive rerating even from here for these names which were ignored for the last five-six years?
A: Now it is a function of actual action which the market would want from the government. There are some stocks which are factoring in most of the positives which have happened so far and most of these positives started happening even under the earlier government's tenure. So, the market was ignoring it and now the market woke up to it about three-four months back and that affair has continued. So, I think what the market would now want is specifics on how we are going to reduce the liquefied petroleum gas (LPG), kerosene subsidy. I think diesel is taken care of and how that subsidy which is only LPG, kerosene now, about Rs 75,000-80,000 crore, how that will be shared between the government and the upstream. So, right now if the government were to still keep bearing part of that Rs 75,000-80,000 crore, the upstream companies might have some more upside but that is an event risk now and it is difficult to read what the government has in mind there. As far as oil marketing companies are concerned, we feel little bit of value is left in Bharat Petroleum Corporation (BPCL), where return on equity (RoE) is definitely superior compared to Hindustan Petroleum Corporation (HPCL) and Indian Oil Corporation (IOC) which are looking much closer to the fair value right now than BPCL.
Udayan: What is your prognosis for the second half of this year because at the start of the year the consensus was that the first half will be at best flat and the second half would be much better post elections? The opposite is probably happening, the first half has been a tear away for the market. Do you see this continuing in the second half or could the story reverse with volatility coming back after six months to the market?
A: I think fresh money allocations to India would decide and how the domestic retail inflows could decide what you are talking about. From a fundamental perspective things will turnaround only slowly and we are only talking about FY16 earnings where there could be a visible uplift and not FY15. So, to that extent the answer lies in the shape of the flow both from additional allocations to India by foreign institutional investors (FIIs) as well as domestic inflows.
So, at the margin I would tend to be more positive than negative even for the second half but one will have to take stock on what happens after Budget and where the valuations are. So, there will be healthy corrections on the way but the bias will be towards an upside because if you look at it – currency has stabilised, political risk has come down, so in traditional sense the equity risk premium for India should have come down from what it was six-nine months back and that should support valuations.
Mitali: What would you still be comfortable buying from the banks, the ones that have been the darling of the market and seen huge outperformance as well?
A: We would stick to the large public sector undertaking (PSU) banks like State Bank of India (SBI), Bank of Baroda (BoB), ICICI Bank and Axis Bank. In PSU banks there is potential dilution which will come, which will temper the excitement a little bit but I think banks should do well if you compare valuations with what the previous mid cycle or peak cycle valuations were and what the credit costs were there. There is still decent room – if you take a two year view there is still very decent room for these banks to continue to do well because what the banks would start factoring in and what the market would start factoring in for these banks is two things – sharper than expected recovery trajectory for gross domestic product (GDP) and also sharper than expected recovery in the investment cycle and that is where the inflection lies and if you take a one-and-a-half-two year view then there is still a lot of room in the names I mentioned.
Mitali: With reference to impending Budget - what to your mind would constitute a negative from the market's point of view on what the Budget holds forth? Right now signals are that the government's priority seems to be to reign in fiscal deficit first and then attack growth in a couple of years from now. How do you think the market is going to read that and what would be the headline negative for the market just to have that in place?
A: Fiscal deficit plus minus 20-30 bps is not going to be that dangerous a signal for the market in my view. I think what the market is looking for is specifics; sector wise, issue wise and in issues there are issues on taxation, there is visibility on goods and services tax (GST), there are subsidies where the government could come out with much more definitive statements and even in plan expenditure, one of the issues has been targeting of these plan expenditure and whether fruitful or not.
I think even if the fiscal deficit numbers are not what the market would want, I think if the specifics on some of these issues are there which give them the confidence that this government is all about execution, they would be little bit more forgiving on the fiscal front in my view and therefore one has to look at the nitty-gritty on each sector and each issue which the Budget would likely address.
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