That Nifty was poised to touch 8000 levels post Budget was a given and most experts have been anticipating and expecting it to happen, though the Nifty hasn’t yet touch the 8000 mark, but is hovering close to it, says Sanju Verma, CEO at Violet Arc Global Managers.
She expects consolidation in the market to continue through November, but doesn’t expect it to correct in a big way.
According to Verma: “The reason for the bullishness is as an asset class equities are attracting far more risk-inflow related money.”
Also Read: Why earnings recovery will drive next leg of market rally
Sandeep Shenoy of Anand Rathi Financial Services says nobody can argue against the flow of money and the flow of money towards the Indian market has been unprecedented. He too doesn’t see the market correcting in a hurry, though he believes that it is a little ahead of fundamentals. He says that the debt market too is attracting a lot of fund flow.
“Even in the case of a 7-10% correction in the market, the bull run won’t be impacted adversely or otherwise,” Shenoy told CNBC-TV18.
Below is the verbatim transcript of Sanju Verma’s and Sandeep Shenoy’s interview with CNBC TV18’s Sonia Shenoy and Anuj Singhal.
Anuj: Where are you positioned in the market right now. You have been bullish but from hereon do you see incremental gains without any kind of correction continuing or do you see any decent correction in the market in the near future?
Verma: Last time I was on your channel I had mentioned that I expect the consolidation to continue for a few weeks right through to November. I still maintain that view. As far as breaching 8,000 goes, I had mentioned again on your channel that post Budget, Nifty breaching 8,000 is more or less a given. Of course it hasn’t happened yet but we are almost there.
I don’t think I expect the markets to correct in a big way. The consolidation of course may continue and the reason for my bullishness stems from the fact that the current resilience which the markets have shown notwithstanding sporadic news flow which may have been negative stems from the fact that equities as an asset class are attracting huge amounts of risk-inflow related money. Look at Argentina which has gone up more than 20 percent in the last two to three months coming back from the brink of a second default in less than 15 years. Look at Taiwan which has crossed its 2011 highs or Thailand which in the month of May had a bloodless coup where a democratically elected government was replaced by a military government and yet the market is just about five to six percent away from its all time high.
So the current rally in equities is non-discriminate, non-discerning in nature and as they say a rising tide lifts all boats and this is a classic example of the fact that both commodity exporters and commodity importers everyone seems to be partaking of the rally. So while Canada which has hit an all time high, the Brazilian market which has gone up 10 to 11 percent in one month alone, you also have commodity importers; countries such as ours which have rallied and how, from last August to now we have added something like Rs 30 lakh crore to market cap with the Nifty outperforming most other emerging market’s indices and going up by more than 36 percent in absolute terms.
So coming back to your query, the reason why I don’t expect any major correction on that downside stems from the fact that even volatility which is the best gauge of how markets will behave in the immediate to short term that is very benign. Don’t forget that if India Volatility Index (VIX) touched a low of 11.84 last week. Remember in May 2014 India VIX was at a high of 40 or thereabout.
After a long time, I have seen a situation where both when the India VIX was at an all-time high and when India VIX is low the market seemed to have simply been on an indifference curve because normally a high VIX is associated with fear and a low VIX is associated with confidence. So if the 11.84 that we touched last week is any precedent to go by, confidence and resilience are what are underpinning the market move. Therefore, I personally feel there will be no major correction, not to mention the fact that the rupee has been very resilient as well. From last August to now we are up about 13 percent odd against the dollar and also against the euro.
The euro had hit something like 92 to a rupee last August and now we are close to 79 or 78 or thereabout. So currency markets given that they are very nimble footed and are a precursor to what equity markets will do. Again if that is a gauge to go by and the way the rupee has held up my sense is that stock markets are in a sweet spot and after a period of consolidation November should be the beginning of a big up move.
Sonia: Do you concur with that view that 8,000 is just a matter of time before we scale that up and this market will move on an uptrend even in the month of September?
Shenoy: Well, you can’t argue against the flow of money and the flow of money towards our market has been unprecedented, forget about equity, look towards our debt market and I don’t think both debt and equity are attracting more than USD 12 million has not happened; so that is happening. So trying to put a figure would be more or less infructuous at the current juncture, but having said that on a fundamental basis are we a bit ahead of the justified levels, definitely. But that doesn’t mean the market is going to correct in a hurry.
Of course many a times we will tend to have people trying to put a higher expectation or higher earning expectation just to justify the current situation where the markets are instead of calling a bluff and saying that we have run ahead of fundamentals. But we always maintain that even if you have a 7-10 percent correction in the market the entire structure of the bull run is not going to be impacted anyway adversely otherwise.
So it is in that kind of a situation, so investors should be discerning, enjoy while the flow is good and the flow can take you to much higher levels but be mindful of the fact that the day the flow starts reversing we could have reverse movement which could be quite painful.
Anuj: Voltas is in fact one stock we have been discussing ad nauseam now for some time. It has been a big money spinner in the midcap basket, do you think the valuations now are looking stretched and it would correct or would you still bet your money on this fund?
Shenoy: Well, prima facie, this valuation may look stretched. It was a value stock few months back and now it is a growth stock. Double line of business, one has to look at it from that point that the poison in its entire order book system is more or less a thing of the past. The balance sheet has got realigned. Its consumer phasing business is doing well and it should become a clear market leader on perception basis in the next few quarters.
So when you have got two moving parts moving in sync, apparently not so cheap valuation metric may prove out to be cheap because it is a company which generally sits on somebody else’s money and negative working capital for its mainline MEP business has been the key valuation driver for this company for quite some time. Once that is coming in place at the current USD 1.2 or 1.3 billion market cap, it may look apparently costly but the traction is great and the best is still yet to come for the stock.
Sonia: Another stock that has defied gravity is Arvind , it has doubled in the last one year and you have picked that stock, you see further gains there?
Verma: Yes, we have been vouching for that stock for a while now. I think in the case of Arvind, it is easy to dismiss the story as something like Arvind being the jack of all trades given that they are present in retail, in brand, in real estate. But the way I look at it is this is perhaps the only integrated textile play available in India today because the company is basically doing both garment manufacturing right all the way up to fabric making.
I think the only reason why the stock was a laggard for the last couple of years was because there were management-related issues but now clearly there is a dichotomy between ownership and management, which I think bodes well for serious investors with a long-term perspective. My personal sense is that in FY16, they might easily do an EPS of Rs 23-24 maybe there needs to be an upward revision to that. If they do manage to do even an EPS of Rs 22 or Rs 23 for FY16, that will be more than 30 percent growth over FY15.
I remember at Rs 150, my analyst was telling me that the maximum the stock can do is Rs 215 or Rs 220 because at that price, it would trade at something like 6 times EV to EBITDA and its historical EV to EBITDA high has been 6.5 times. I think Arvind is a classic case. This stock today is at more than Rs 275 at which its EV to EBITDA multiple works out to be a steep more than 7.5 times.
That is the beauty of a bull market. Companies which are beginning to restructure and which are beginning to fundamentally tell you a different perspective and the different story, there will be P/E expansion, there will be multiple expansions, valuations parameters will get redefined and that is exactly the case with Arvind. So you cannot go with what the past has to present because Arvind is redefining a different territory for itself. Not to mention the fact that they are tied up with gas, the foray into e-commerce, all this bodes well for the company but the big driver will be the fact that the brands and retail business where the margins have been 5.5 percent, that should go up to about 12-12.5 percent over the next two-three years. So you are talking of more than 600 bps expansion in margins in less than three years, which is excellent.
Also the fact that it is in private labels and a branded apparel where you make margins to the tune of 40-50 percent and that constitutes just about 40 percent of their sales now, likely to go up all the way to 60-70 percent of their overall sales. If they do manage to do that which is what their target is then I think the story in Arvind is just about unfolding.
So this is a stock that one can still play for the long-term not to get carried away by the fact that yes, there has been a heady run but I think the best is still ahead of us. Though that sounds clichéd, the fundamentals still bear out a long-term story in the making.
Anuj: I am looking at some of your other stock picks, Finolex Cables , what makes you bullish on that and what is your price target on that one?
Shenoy: Finolex Cables has had a good run. It was a brand leader, had marque positioning, went through a misadventure on its balance sheet front because of exotic options but more or less it is a company, which took the hit right on its chin, expensed everything out and the balance sheet emerged clean.
It was again a value stock for quite some time, ruling on a par to book value and of course it has had a good run but looking at it, the free cash flow generation ability of this company is now just about coming to the fore, the brand monetisation is good, most of the capex is over and there is a good chance that revenue could double up in the next 2.5-3 years on the same asset block without much of a capex and maybe minor infusion on the working capital front, which again gives it unprecedented degree of operating leverage. Hence we feel on the longer-term basis, this stock despite having gone up 3X in the last 12-18 months, can still double up from the current level in the next two years because brand, cash flow and sheer size and skill would sit in a sweet spot.
Anuj: Autos have done remarkably well this month and a lot of people believe that autos are the best proxy to the economy, Maruti in particular has had decent times, keeps making new lifetime highs, how would you be positioned on that stock?
Verma: Like everybody else in the market, I believe Maruti is a great story. I think where I beg to differ from the rest of the market is that it is not just another four-wheeler play with strong fundamentals, strong cash flows, a margin expansion story, all that is a given and that is the reason the stock has gone up by more than 40 percent in the last 100 days.
I think the story is Maruti is far more systemic, what will play out going forward, I am not willing to put a number at it whether Maruti will be a Rs 4,000 stock going forward or Rs 5,000 stock because putting numbers at this point of time is blasphemous, given that car penetration is just about 15 to every 1000 people, vis-à-vis other markets where the numbers are far higher, I think the systemic story here is very strong and I think Maruti will also react to how the yen-rupee pair behaves. Don’t forget that it is not sheer coincidence that in the last one month, the rupee has appreciated almost 1.5 percent against the yen and low behold Maruti has outperformed the Nifty by almost 10 percent in standalone terms after today’s almost 1 percent move, Maruti is up in the last one month by 10-11 percent. So I think the yen-rupee pair is also playing out very well for this company.
My personal sense is that the 12 percent EBITDA margin should sustain going forward. The diesel deregulation should bode well for them because that will sort of even out some of the aberrations with respect to their diesel and petrol portfolio though of course the large part of their sales almost 60 percent still comes from the petrol platform. So I think Maruti is a classic case of a company, which has not been carried away unlike Bajaj by brand cannibalisation. They have managed this whole product differentiation strategy with different products at different price points very well.
Remember that in the auto space, there is a very thin line between clutter and clarity. In the case of Bajaj , it was clutter. The various variants of Pulsar have done them no good. No wonder that the company’s market share in the last 18 months has fallen from more than 23 percent to barely 18 percent and the reason why I compare Maruti with Bajaj is because seemingly they are two companies, which have been ahead of their game but somehow Bajaj has now fallen off the track and Maruti continues to be powering ahead.
So I think never take the brand extension and the line extension strategy too far. That is the gospel investors should watch out for and I think Maruti has played this brilliantly. So my sense is that this is a stock that is here to stay and it should certainly be part of somebody’s portfolio who is looking for a retail play, looking for an auto proxy and looking for even a company which will see event-driven triggers going forward.
Sonia: You have a buy on Century Textiles , take us through why?
Shenoy: I spoke about Century Ply. It is more or less a housing derivative or a proxy for a housing stock. Company has done great amount of capex. Capex is behind its back. It is probably at the top of the heap in both its line of business that is laminates as well as plywood and demand of that is not going to ebb. So you have got a scale and growth coming from the entire market itself.
The second trigger could be the shift from unorganised sector to the organised sector. That could give it position and ability to monetise its brand equity which is quite high at the current juncture. So when that happens, you are going to see EBITDA improving, you are going to see ROE improving and also ROC improving and the company could again turn out to be a free cash flow generating entity a year down the line. So it has had a good decent run up but I think the scalability of it leaves at least another 100 percent on the table in 18-24 months perspective.