The stellar performance by the Indian market on Thursday is not a big cheer for Sanjeev Prasad, Kotak Institutional Equities as he believes the valuations are too expensive now and there hardly any quality ideas at reasonable valuations. He does not see any stock-specific upgrades at current valuations.
According to him, a lot of good news has already been factored in and there is very little scope for another major rally. He believes further rate cuts is the only trigger for the market now as translation of improving macros into better company performance is still few quarters away.
Benchmark indices Thursday gained more than 2 percent since May 9, 2014 on the back of surprise rate cut by the Reserve Bank of India. Prasad, however, believes the rate cut was in-line with expectations though the timing came as a surprise.
Among specific sectors and stocks, Prasad is bullish on IT stocks like TCS and Infosys led by positive management commentary. The two IT giants have already reported their Q3 earnings for FY15.
He is also bullish on financials with a longer-term perspective. Prasad believes government’s economic reform push will be beneficial for the sector.
He, however, is underweight on oil and gas sector due to severe correction in crude prices. Prasad expects downgrades in this sector if crude remains at the current levels of USD 48 per barrel.
Below is verbatim transcript of the interview:
Q: What do you think the rate cut has done, has it unleashed a big fury of buying or is it just that because of the surprise element a lot of buying came in but now we will linger back to some choppy but ranged trading?
A: Our analysis suggests that this buying, a lot of it has come from the cash portion of arbitrage trading and from ETFs. Looking at the way the market ran up yesterday it looks like there was a lot of basket buying.
However, it is a good thing that Reserve Bank of India (RBI) has cut rates finally. It was around the corner, if it would have not happened yesterday, it would have happened on February 3. So, that was a bit in advance but the extent of rate cut was pretty much inline with expectations.
The timing was a bit of a surprise, hopefully this sets a stage for further rate cuts as we go forward but that has to coincide with a lot more fiscal consultation at one side and investment reforms which addresses the supply side reforms.
Those are the triggers which are still left in the market given the fact that valuations have become pretty expensive across the board and we are not seeing any earnings upgrade. So, the only trigger which I see on horizon for this market is a lot more rate cuts than what we have assumed at this point in time.