There are too many uncertainties in too many areas, Rahul Arora, CEO (institutional equities) of Nirmal Bang, the retail broking house, tells Puneet Wadhwa. And, explains what seems likely to lie ahead and what to wait for. Edited excerpts:
Do you think the markets could move sideways now, as FY12 fourth-quarter earnings and the Reserve Bank of India’s (RBI) monetary policy review are being analysed? What are your financial year-end targets for the Sensex/Nifty?
Our year-end target for the Nifty is pegged at 4,800. There is a reasonable possibility it might come soon. Of late, the Nifty has consolidated in the range of 5,150–5,400. Till we get a clear directive from the earnings season, which should not be all that hot, and statements from RBI on its intent with rates, this range might hold.
One must note the current account deficit situation, the rupee depreciation, crude still holding well above $100, global news flow from the European Union (most recently Spain) and the US jobs data have not been too encouraging. To sum up, the concerns that persisted in December 2011 are still prevalent and have got worse.
Will foreign institutional investor (FII) inflows continue to pour in at the same pace in the current calendar year as seen in the first three months?
It is always very hard to predict FII flows. Most of the $9 billion that has come into the market is on account of long-term refinancing operations (LTRO) 1 and 2. If bouts of liquidity continue to be injected globally, then India, as well as other equity markets (including commodities), will be beneficiaries. But given the reluctance of the US to sound off on the third round of quantitative easing and the amount injected into the system via LTRO 1 & 2, incremental, sustainable liquidity will remain at this pace for the rest of the year.
Which sectors/themes are you bullish on at this juncture? What is your expectation from the upcoming results of India Inc for FY12?
We are positive on pharmaceuticals and fast-moving consumer goods. They would provide the margin of safety, being defensive by their nature if the Nifty heads to 4,800. Since our house call is for the rupee to slide further to 54 to the dollar, information technology would be a beneficiary, and we are selectively positive on infrastructure (more a valuation call) and select mid-caps.
Could you elaborate on your strategy for mid-caps?
It is more of a bottom-up approach, wherein we are trying to look at value for money stocks in this space. Some stocks we have recommended over the past six months include Bata India, IVRCL Infra and GMR Infra. At the current prices, we also like Torrent Pharma, Gujarat State Petronet, Petronet LNG, JBF Industries, Allcargo Logistics, Prestige Estates and Arvind Mills.
As a theme, have you changed your stance with respect to the power sector, given the recent developments on fuel supply agreements and losses of state electricity boards (SEBs)? Do you think the government is milking Coal India for the benefit of this sector?
There is too much uncertainty and policy risk to take a definitive call on the sector at this point. It remains to be seen how things play out for Coal India and the implications it has on the final cost to the buyer.
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One also needs to take into account the cost of importing coal from markets like Indonesia, the residual impact on coal buyers and viability of the projects. There is still uncertainty regarding the financial condition of SEBs and how their payouts are to be managed. So, we would be very cautious on the sector. There are other value plays available in other sectors.
Do you think RBI has enough room to tinker with key rates, given how crude oil prices and inflation are poised?
In contrast to the market view, we have not been in the rate-cut camp for months. Given where inflation has been, the recent government borrowing plan, doubts on how achievable the fiscal numbers stated in the Budget are and the way commodity prices are stacked up globally, the consensus estimates suggest there may be a 25-basis point cut in April.
However, we have our reservations and believe it is not the beginning of a structural reduction in rates at each policy meet from here on. There are too many factors that can prevent it from happening. Most important are crude oil prices and what it could mean for petrol price deregulation, which will also have a bearing on inflation.
