Stock Market

Bulls back in charge, indices flirt with record highs

After a see-saw ride for weeks in the Indian market, the bulls have finally gained dominance on the turf as benchmark indices Nifty and Sensex gain momentum and are again flirting with their respective record highs.

Due to Shivratri, the week ended early for the market on Thursday where Nifty touched its 52 week high and closed at 8939. After revisiting 29000 levels, BSE Sensex dipped a bit and ended the week at 28892.


– After ambling around for almost a decade, Reliance Industries led the market rally. The stock gained 10 percent this week after chairman Mukesh Ambani announced the monetisation of Reliance Jio’s services from April 1, 2017. The stock hit a eight year high this week.

-The week brought cheer for the long struggling telecom sector as BSE Telecom Index went up nearly 19 percent this week. Driven by news of its merger with Vodafone, Idea Cellular gained 13 percent this week. Since the start of the year the stock has rallied 61 percent.

Yesterday, after CNBC-TV18’s exclusive newsbreak that the merged entity between Idea and Vodafone might sell around 20 percent stake to private equity investors, Idea’s stock went up around 5 percent on Wednesday.

-Struggling for a few quarters and burdened by huge NPAs, Axis Bank stock rallied 7 percent this week after news broke suggesting that Kotak Bank has informally approached the government seeking a merger with Axis.

Outlook ahead

Dissecting the week’s rally and what can be expected going ahead, Navin Agarwal, MD at Motilal Oswal Financial Services said that the hope of a 20 percent growth is keeping the market buoyant and strong domestic flows will continue to hold it.

“Risk reward from near-term perspective not as attractive as before,” he said.

In the same interview, Rajat Rajgarhia, MD and CEO of Motilal Oswal Institutional Equities, said that market now has more legs to break this range on the upside. This breakout should take market higher from current levels, he said.

On the telecom space, Rajgarhia said that the last decade was one of ‘lost profitability’ for telecom companies. “There were earlier 9 telecom companies now it is down to 3,” he said.

He said that the pain is over for telcos and the industry might see its ‘mojo’ return, while earnings might take some time to recover.

Telecom is attractive for those looking for alpha in 2017, he added.

Below is the transcript of Navin Agarwal, Rajat Rajgarhia and Ashwani Gujral’s interview to CNBC-TV18’s Sonia Shenoy and Latha Venkatesh.

Latha: First up, this bull rally appears to have come out of nowhere. We are at 52-week highs, almost at all-time highs. Are you getting a sense now that the market is risky to buy, that the risk reward is not in the favour of buying?

Agarwal: The answer to that question is yes or no depending on your time horizon. If you look at the near-term, we have just seen a 12 percent cut in our earnings estimate between September, pre-demonetisation and now. On the other hand, we had the RBI credit policy which has changed its stance from accommodative to neutral and the debate has shifted from how much cut to whether the next move will be a cut or a raise. And on the third side, emerging markets continue to be out of favour, global protection continues to be a discourse and a rhetoric at least for now.

So, if you put all of these three things in conjunction with the move in the market from 8,000 Nifty to 9,000 Nifty and back to old highs, then clearly the risk reward from the near-term perspective is not looking that favourable. The number of stocks that you can find which are buys are not that many right now. The upside that you see in the stocks that you like is not very meaningful right now.

Sonia: What would your view be on how to approach the markets now because we are getting leadership from various quarters. First it was banks, then it was IT and now Reliance has started to participate as well. Do you see the market moving higher because so many legs are there to support it?

Rajgarhia: If you look at the markerts, even at 8,900 Nifty while it may have rallied from the lows of sub-8,000, over a two-year period in March, 2015 also we touched 9,100. So, during this period, the markets have just traded within a range of 1,000 and 1,500 Nifty points. This market is definitely getting more legs to break this range finally because somewhere the character of the last few days is quite positive. You have one Nifty stock almost everyday which is becoming a leader for the rally, whether one day you had HDFC Bank, then another day you had Reliance, third day you can have some other bank, then Tata Consultancy Services (TCS).

The markets are making serious attempt to break out of this range that it has held over the last two years and this break out should take markets higher from here.

Latha: Would you say at least the downside is protected?

Agarwal: As I was telling you, the answer could be yes and no, depending on the time horizon. If you look at some of the other factors which may have a more important bearing in your long-term thinking process, bear in mind that between FY08 and FY17 which is nine long years, we have had a nominal gross domestic product (GDP) growth of double digit and Indian corporate earnings have grown at 5 percent per annum. And in the process the corporate profit to GDP which used to be 7.8 percent in FY08 is down to 2.9 percent now. If our corporate earnings were to grow at 20 percent for the next three years, we would still be at sub-4 percent corporate profit to GDP versus our 10-year average of 5.2 percent. So, that is one thing that you should keep in mind.

The second is that you are seeing rising financial savings and falling physical savings within the household savings pool. And within the financial savings, you are seeing rising proportion of financial savings been directed to equities. In fact, FY17 will be the third consecutive year when domestic investors invest nearly 10 billion dollars.

Also bear in mind that the January Systematic Investment Plan (SIP) number of domestic flows into mutual funds is Rs 4,100 crore of SIP flows alone. If you were to just extrapolate this number. This number usually goes up gradually. If you were to extrapolate this trend, that alone works out to a Rs 50,000 crore SIP flow which is like a 401k like flow, more predictable, more sustainable and grows itself from that base year after year.

So, once upon a time, you had a USD 10-15 billion foreign institutional investor (FII) investment being considered as a big deal for the Indian markets and now, you are setting yourself of potential SIP flows of USD 7-8 billion and potential domestic flows of USD 10-12 billion and rising from there over the coming years. So, you are at the bottom corporate profitability and a hope of a 20 percent profit remains and the markets could deliver at least that much return. Strong domestic flows continue to be holding the market.

So, clearly the downside will be protected from expectations that margins will revert back to averages that domestic flows will continue to be robust and that changes the viewpoint if you look at the next 2-3 years\’ timeframe.

Sonia: Let us discuss some sectors because this week you had so many sectors that participated. The space to be in this week undoubtedly was telecom and it is interesting because last year, all of last year, metals rallied and almost nobody caught that rally. And this time telecom stocks are already up 30-50 percent this year and almost nobody caught that either. At Motilal Oswal, how have you guys reacted to the competition from Reliance Jio, the movement on Reliance and the merger and acquisition (M&A) activity, the consolidation that is happening with the other players?

Rajgarhia: Just a couple of months back we had released a very detailed report on telecom sector where our analyst had articulated very well that how the drivers for the sector are now changing towards pro-growth. I just want to highlight three points here. First, the last 10 years has been just a decade of lost profitability for the entire sector. Second, this industry had 7-9 players which is now getting limited to just serious three players in the making. And third, the capital expenditure (Capex) intensity is now behind.

Yesterday, when the markets got excited about Reliance and the stock was up by almost 10-11 percent, it just did not make a one-year high, it made a 10-year high. This 10 year period of flat Reliance stock price finally saw a breakout. Telecom as a sector is seeing that phenomena returning back. How long earnings will take, we will have to wait for a couple of more quarters before the pricing starts normalising for companies to earn decent profits. But markets are not going to wait for that.

One company consolidating, another following up, the third one leading to a pricing strategy, all in all, this is an under allocated space for investors and people are looking for alpha. So this can well be a sector to create alpha in 2017. While the sector has done well over the last one month or so, when you look over a 10-year period, this is a sector which has actually not created any value. This can be the beginning of the value creation in telecom.

Sonia: I wanted your thoughts on what is happening with the banks because Axis Bank was the big talking point all of last week with number of suitors increasing for Axis apparently. How would you deal with all this impending consolidation and what seems to be the potential opportunity here?

Agarwal: As far as Axis merger with any other bank is concerned, it is right now definitely very speculative with nobody really claiming anything, whether it is suitor or the target. So, this is something that is not very clear.

Having said that the big picture in the financial sector is pretty much the same that has played out over the last few years. We have had corporate lenders which are struggling with asset quality issues.

We still don’t have any credible plan to deal with the asset quality issues either from the government or from the banks themselves and in the process you have the private sector lenders, the private sector banks continuing to take market share year after year within the overall banking pie and they are very well capitalised, they have better managements in place and they have lesser legacy issues of asset quality problems.

I think all of this definitely continues into the future as well in our view. You have already seen the amount of allocation that the Budget has for PSU banks capitalisation and it is not very meaningful for these banks to be able to sustain growth rates even as much as the economic growth rates. In the mean time you have private sector banks which are sitting on very strong capitalisation, which have great management teams, which are looking at organic growth in a strong way.

Apart from evaluating inorganic opportunities as well, today you have the government holding a double digit stake through SUUTI in Axis Bank, you have LIC holding a double digit stake in Axis Bank as well.

I think that brings about an interest from nearly every other private sector bank because nearly half of their book is retail loans. As far as the legacy corporate loan book is concerned because of the asset quality review, because of the watch list, a lot of the recognition of the problem is already on the table, the elephant is on the table as far as lot of the asset quality issues are concerned.

I think that probably gives confidence to a potential suitor to bid for an asset like this which is currently valued cheaply because of the elevated credit costs and the depressed return ratios for the banks. Whether this is mere speculation and nothing will unfold or whether something will unfold in due course of time is a million dollar question.

Latha: When you sit at 52-week highs, what a retail investor will be wondering is, should I put in incremental money? So, from retail investor’s point of view the question is, where will the meltdown be less? Where is the retail investor less likely to lose and where are incremental gains most likely?

Rajgarhia: Retail investor has been putting money almost every month through SIP for the last two years. The bedrock of this bull rally in India over the last couple of years has been the domestic flows. I think that flow should continue irrespective of the rally that we have seen from here.

From specific sectors point of view, you have to still marry growth right now, wherever you see growth and wherever you see sustaining that growth rate, those stocks and sectors will continue to outperform from here.

Few things that we like a lot in particular, if you look at the whole housing finance space, it is almost like for the last 10-12 quarters, every quarter we keep seeing some positive catalyst coming in form of changed norms from either the government or the Reserve Bank of India, which keeps on making the business attractive from an HFC point of view.

There are enough number of players to play that. Second if you look at the private sector banks, people who are not in the top 3 from market share but the ones who are now budding to gain market share from the rest of the pack, there are enough of such names again. They will keep growing at 25-30 percent for the next 3-5 years. The stock returns will at least track that.

We also think that some of the domestic spaces whether be it cement or autos, pockets of opportunities exists in all of them. Then some of the laggards of last many years like telecom which have just started to start seeing some delivery can be another pad that investors can focus upon.

So, all in all while the overall markets may move in sync with the aggregate earnings growth, there are enough sectors and stocks where the earnings growth acceleration will be more than the market. That is the space that retail investors should be betting upon.

Latha: Sitting at 52 week highs, what would the Nifty trade be for next week and any stocks you would watch?

Gujral: Nifty closed at the highest levels of all time both on the daily and weekly basis. Now post some consolidation I believe in March we should move higher because at 8950-8960 the pressure of selling does not seem to be very high. So, with a stop say around 8800-8850, I think the Nifty should be able to get to finally 9150 – 9200 which was the previous high and then even move beyond that.

In terms of calls for next week, UPL seems to have broken out, so out there we can look for a target of about Rs 820.

Century Textiles has bottomed out, so that could move higher and that could have a target of about Rs 1020.

Kotak Mahindra Bank seems to be the strongest private sector bank and we should look for targets of about Rs 900 out there.

Disclosure: Reliance Industries, which owns Reliance Jio, also owns Network18, which publishes