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Mkt very expensive; reduce weightage on cyclicals: ILFS

The reality of the market right now is that it is way ahead of itself, says Vibhav Kapoor of IL&FS.

In an interview to CNBC-TV18, Kapoor says the corporate earnings for Q3 have been disappointing and despite that stocks are seeing higher levels. He further adds that the market is extremely expensive with stocks trading at high valuations like cement companies that are trading 25 times FY16 earnings.

Furthermore, Kapoor is also wary of the market as he expects below 10 percent returns from equities in the next 12 months.

However, a 5-7 percent rally in the market will make a case for asset reallocation, he adds. Kapoor also investors to reduce the weightage to economy related cyclical stocks as the macros aren’t seen to be improving significantly.

Below is the transcript of Vibhav Kapoor’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: Does the bonhomie last or are we holding on just up until the Budget? Yesterday we had this big statement from Deepak Parekh saying that nine months have passed and not much has changed on the ground, are investors showing anything of that impatience?

A: So far no, that is how the market is doing so well. After the Budget one doesn’t know what will happen so we will have to wait for that day and see. However, what is happening is that one is the corporate results as we all know have not been good at all and so there is nothing being reflected in the corporate results so far. So, there is still a lot of hope that FY16 will be good. However, what I am a little more concerned about is the valuations.

Valuations are no longer cheap and there are sectors and stocks which are trading at expensive values. For example, I would not name a company but if you look at the cement sector, all the big guys are trading at 25-35 times FY16 earnings and that is something which for a cement sector which is cyclical in nature is certainly expensive. Then there are FMCG companies trading at 40-60 times.

Generally the market is now trading at about 18 times FY16 partly because the market has gone up but more because the earnings have not come through and there has been a downgrade. So, that is something one needs to be careful about.

Sonia: What is the sense you are getting not just up until the Budget but say for the next three to six months, do you think this market upside could be restricted because of the concerns that you mentioned?

A: Yes, but on the other hand you have the liquidity which is driving up the market. There is a lot of hope and there are a lot of positive sentiments so in one way it is becoming a momentum market and you don’t know where and when it will stop. However, one can certainly say two things; one that on a 12 month basis from here, the returns are not likely to be great.

You may get 10-12 percent returns but you are not going to great returns because when valuations are 17-18 times, you normally don’t get great returns. However, over a two year horizon maybe returns can still be pretty good but then you are hoping that everything will go well in the next two years.

Latha: For the year you will put your money in fixed income rather than equity?

A: If the market were to go up another 5-7 percent from here it would make a case for at least shifting some money into fixed income.

Latha: Hero Motocorp promoters shedding 5 percent and today we understand another 35 lakh shares have been sold probably by the promoter. What is it telling you about the two-wheeler space, would you now consider that a mature industry? Is that what an investor should take from the promoter?

A: I do not know we really need to get from the promoters themselves why they are doing this. It is probably a new industry is being opened up which is defence therefore the potential there is really great there is no doubt about that. They could be doing it because of that. I would not make out from this one issue that the two-wheeler industry does not have growth going forward. I do not think that is the case.

Sonia: Would you invest into the defence sector because there, there is so much thrust by the government as well?

A: It depends on companies; you have to see what exactly you are investing in.

Sonia: Sectorally what should the approach be now, you were talking about how some of these sectors like cement, FMCG look quite expensive, where is value in the market at this point?

A: I think value is there in certain companies rather than sectors. You have to look at those companies. There are still some companies which are available at reasonable valuations and should do well. However, because the cyclical sector has particularly gone up so much and there is always this risk of whether the economy actually grows according to what people are thinking, so, I think you need to reduce your weightage to the economy related sectors a little bit. Everybody has been overweight 80-90 percent of the portfolio, I think that needs to be brought down and you need to have a more balanced portfolio across sectors rather than being overweight on cyclicals.

Latha: How would you read the bidding for the coal blocks any investor takeaways from there to buy or not to buy certain sectors or stocks?

A: There is a lot of confusion right now whether it is good that companies are bidding so high or it is not so good because they are over bidding. We need to study all this, it will take sometime to get an idea. One thing is that why they are bidding so high is that today we are comparing with coal prices at USD 50 internationally. However that is not the average prices that is going to remain for 20 years. So probably they are at the low of the cycle. If you compare them with say USD 70-90 then they may not look so expensive.

Sonia: I just wanted to discuss some of these DVRs and the way they are moving up. Today we have the  Tata Motors DVR which is up almost 10 percent odd, Future Retail DVR as well, is there an opportunity here because of the S&P allowing DVRs in all BSE indices?

A: I think so because internationally if you see, non-voting shares trade at between 3 percent and 5 percent discount. Here the DVRs have been trading at 30-40 percent discount. So, if they come into the Nifty also then a lot of players will be forced to buy these and therefore the discount could narrow significantly.


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