There seems to be an air of profit-taking post the Budget. Is it to do with any specific disappointment or just profit taking because some of the big events have played themselves out?
In an interview to CNBC-TV18's Udayan Mukherjee, Bharat Rawla, Managing Director and Head of Macquarie Securities India, said he has seen clients who have piled into the market pre-election, pre-Budget and are now taking the current opportunity to book some profits.
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"I don't think structurally the view on India has changed… We had a hope rally, an election rally, now we got to wait for execution and it is a good time for them to take some money off the table," he said.
He doesn't see GAAR implementation having any major affect as "people are committed to Indian securities markets".
Rawla said the re-rating happened quickly because the execution story hasn't really played out. He thinks in many ways people were looking back at the last elections where the markets really made the big move pre-election, as oppose to post and people didn't want to miss out on that particular period.
"Which is why you saw a real rally pre-election and then post-election there was one because you had news you had an outcome that people were hoping for, so it's a function of being involved in the market to the extent that you don't play catch up and at the same time waiting to see results," he said.
Below is the verbatim transcript of Bharat Rawla interview with Udayan Mukherjee on CNBC-TV 18
Q: How you are you talking to your clients right now?
A: You as they say buy on the rumours and sell on the news, we have seen clients that have piled into the market pre-election, pre-Budget and they have taken this opportunity to book some profits. I don't think structurally the view on India has changed, but as you can imagine long on the funds they have Net Asset Value (NAV) they need to book monthly profits and this is a good opportunity for them. We had a hope rally we had an election rally now we got to wait for execution and it is a good time to them to take some money off the table.
Q: Any minor irritant or irritation caused by the General Anti Avoidance Rule (GAAR) or do you think that's not such a big issue as people are making it out to be in the eyes of some of your global clients?
A: No I don't think it is, structurally India remains a story that clients want to participate in. There will always be some hiccups along the way but people are generally committed to the market and news flow execution, top line growth, earnings growth, which is not just margin-driven, will keep people committed in the Indian securities markets.
Q: Do you see most Foreign Institutional Investor (FII) being patiently waiting for some of the news flow to come through the execution related news flow or do you see any dichotomy between the pace of execution and the pace of re-rating which is happening in stock prices?
A: The re-rating happened pretty quickly because the execution story hasn't really played out. In many ways people were looking back at the last set of elections or back to 2009 where the markets really made the big move pre-election, as oppose to post and people didn't want to miss out on that particular period. Which is why you saw a real rally pre-election and then post-election there was one because you had news you had an outcome that people were hoping for, so it's a function of being involved in the market to the extent that you don't play catch up and at the same time waiting to see results. You will probably see like with any good market it needs to consolidate a bit it cannot go up in a straight line. So profit-taking, down days are not bad things.
Q: Do you see this consolidation lasting for some more time because we had an extraordinary first half of this year from an equity performance point of view. Do you see a few months of consolidation ahead or just a short-lived one?
A: I would like to see a few months of consolidation ahead which basically helps the market builds on itself. It's a tough call in terms of where it is going to go, but the last few trading days in my view haven't been bad days. The market sold off a bit its come back, it's a stock picker's market so we have seen clients do their top down work but now they really looking at individual stocks. I would think that the market continues to consolidate I would be a bit disappointed if I saw it really selloff and at the same time I am quite happy that it's not going up in a straight line.
Q: Do you see most of your clients approaching these dips with a sense of opportunity?
A: I think so which is why you see names that selloff usually they come back pretty quickly, they probably are not going back to their sort of year highs yet, but you haven't seen quality names getting pummeled. You will see names where people have sort of got involved because they will re-rate with the rest of the sector those stock invariably selloff more than the others and it take some a bit of, sometimes they might not come back but those are the stocks that will remain laggards.
Q: What tops the list of risks at this point, when you speak to most of your global clients what do they worry about when they put in incremental money to work here?
A: In India the India-centric risk as of now is monsoons, it's inflation but geo-politics India is not immune to it either. So we have got mostly tailwinds but a few headwinds, so how the monsoons play out it is going to be important the co-inflation number which we saw on Monday was down which was a positive. So the eye really is on interest rates, inflation monsoons which are key India indicators but generally speaking the US environments, Fed easing tapering or not and geo-political risk they all sort of come into play, you cannot isolate India from rest of the world.
Q: Any of these powerful enough in your eyes to inject a 10 percent kind of correction in this market, sub 7000 kind of a Nifty level?
A: I think geopolitical risk might be the one key that might cause it. India specific monsoons could be a big factor but generally speaking I would be surprised to see if you see that kind of 10 percent correction on the market.
Q: So what kind of target do you guys have at Macquarie one year out?
A: One the Nifty we have got 8400 target. Our strategist and head of research in India is looking at 8400. He and the team feels that the market is currently trading on 15 times earnings and it could move up to historical average of about 17 times.
Q: From which quarter do you see this kind of acceleration in earnings happening because that has not been visible? Earnings growth has still been in the high single digits. At what point do you see earnings giving you the hope that we are on our way back to getting to somewhere between 15-20 percent earnings growth again?
A: Not Q3. I think we are looking at Q4 and early next year because you have got a new government in place, you have got a new Budget, you have got new capex plans. They all need time to translate into the bottom-line and into revenue growth. So as a house we think it is going to be Q4 onwards. This earning season has kicked off but right now the earnings are growing mostly because of margin expansion. But as a top line growth coming into the market we figure that it will be Q4 Q1 next year.
Q: Do you take any heart from the fact that the IIP number was a good one or do you think it is a one off, it is not such a pronounced industrial turnaround that we are staring at immediately?
A: I don't think it is a one-off but we do take heart. It is one of those things were a new government, a new Budget, all this is not going to play out instantly. So as investors we have to be patient and as people watching this market one has to be cognizant of the fact that there will be incremental positives that will all eventually add up and that is what we have got to focus on.
Q: Let me ask you about the sectors which dominated the market over the last couple of years which is IT, pharma and consumers. Do you think the sector rotation is complete where most of your clients have switched around to the extent that they would want to or do you see this churn from defensives to cyclicals continuing for the next few months?
A: From having spoken to our clients I think the churn from defensive to cyclicals actually started happening with the smart money guys back in February and March over this year. I don't think it is done. I think what happened was you saw selling in defensives to raise money to invest in cyclicals. But I don't think you will see people bailing out of defensives just to be in cyclicals because at the end of the day you have to have a balanced portfolio. So I don't think the defensive names have enough growth to keep people excited but at the same time if you have a portfolio of stocks, you want to be protected.
Q: So are you underweight as a house on some of these defensive sectors?
A: We are underweight. At the top of my head I don\\'t know what our exact ratings on the defensive are but if I look at our top 10 stocks in our portfolio, they are all cyclical names. But in our broader portfolio we are underweight defensives and overweight cyclicals. But our top 10 picks are mostly all cyclicals.
Q: So of the cyclical clusters which are your favorites between names like banking, infrastructure, auto, which ones are the highest conviction for you?
A: Financials and industrials are the highest conviction and on the financial side it is the private banks. Our financial analyst is quite clear that he is worried about public sector banks, capital. Private sector we like YES Bank , Axis Bank , ICICI Bank . Industrials we like L&T and on the commodities side Coal India is our top pick.
Q: Just one name in industrials, does that mean that you want to stick to quality at least for now in this space?
A: Quality is key in a market that is still getting its legs because you got to see execution. So the benefit of doubt might be with the companies but we have got to see them execute, we got to see the numbers come through. L&T is high quality, investors like the name, its market cap is big, its liquid. So people don't lose sleep when they invest in L&T and the stock is down.
Q: Do you have anything in the Public Sector Undertakings (PSU) banking space like State Bank of India (SBI) or steering clear of that?
A: If we were to discuss the PSUs I think SBI, Punjab National Bank are two names that we like.
Q: In the last 10 days we saw quite a big dip in many of the blue-chip large cap PSU names like Coal India, National Thermal Power Corporation Limited ( NTPC ), National Mineral Development Corporation ( NMDC ) did you get your clients to get into any of these?
A: Coal India yes we like that name a lot and that's one that we as a house push, the other names are not so much, we have got be careful in terms of how we sort of position ourselves with our clients. You as a house we also got to pick a few names that we like that we are willing to back that we have really done the work on, so that if there is a selloff we can stand behind our research and our numbers and be quite comfortable with the fact that we are long and we like those names.
Q: Do you have anything in the oil marketing space in that PSU lot because they have rallied quite a bit over the last three months?
A: No we don't have anything in the oil, Aban Offshore is a stock that we upgraded and we like and they had a Qualified Institutional Placement (QIP) recently. But a lot of clients couldn't participate in it because of their exposure to Iran but as a name we like that again it's a midcap name. Generally speaking it's more on the commodities which is coal which is where we are pushing our clients towards.
Q: This tremendous interest in midcaps and small caps, I imagine you would have heard from your clients as well and so many midcaps have outperformed the market quite a bit in the last four-five months. From the top of your head can you think of your preferred midcap list that you tell your clients when they ask for market caps which are slightly lower than the Nifty and Sensex stocks?
A: On midcaps we like IRB Infrastructure , Gujarat Pipavav , I don't know if you would qualify YES Bank in that space, but midcaps, small caps are important in a bull market, these are emerging leaders. It is important to really back management in midcaps you got to look at balance sheets and as foreign investors will often tell you India as they refer to it as Hotel California and a lot of people in my generation yours and maybe somewhere in between know that song extremely well and clients find that getting into stocks in India is very easy but getting out is almost impossible. With midcap you got to place your bets but you got to build a portfolio around how you play the midcap game.
Q: I didn't hear too many auto names in your top list do have any because that's a sector which has done extremely well autos and auto ancillaries?
A: Auto ancillaries we don't cover as yet, so there is nothing that I can speak of as a house. Motherson Sumi Systems is a stock that everybody sort of has on their radar, the stock has done extremely well, fantastic management I hear about it a lot from our clients. We like Maruti Suzuki , the June numbers were up 30 percent year-on-year (YoY). So of the autos Maruti Suzuki is the one that we like. Two wheelers we are a bit cautious of.
Q: Let me come down the ladder to the two sectors which give you spectacular returns when they rally but conviction in high quality names is not yet the greatest which is real estate and metals. How are you approaching these two names?
A: Real estate we like the sector and in fact one of the midcap names we like is Sobha Developers and our analyst has recently written a very good report on REITs in India. Metals I am going have to plead the fifth because we haven't really talked a lot about it internally and it is not something that we push but real-estate as a sector we like but again there is Prestige Estates and there is Sobha Developers and those are sort names. We are sticking to a couple of names within the sector.
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