After the Reserve Bank of India slashed interest rates for the second time this year, the Sensex scaled the 30,000 level in the week for the first time ever before heading lower.
In an interview with CNBC-TV18’s Sonia Shenoy and Anuj Singhal, Kotak Institutional Equities’ Sanjeev Prasad spoke about his outlook for the market as a whole and discussed stocks and sector picks.
At the technical level, Sudarshan Sukhani of s2analytics.com outlined trading strategies going forward, including three Holi picks that could rally this year.
Below is the transcript of the interview on CNBC-TV18.
Sonia: When the market hit that psychological level of 30000, 10 out of 10 people we interviewed believed that the market has more legs to go on the upside. What is the feeling that you are getting and what is the advice that you are giving to retail investors now?
Prasad: It depends on what time frame you are looking at. However 30,000 is just one more number in my view. The market can go up a lot higher over the next two years assuming we see earnings growth. So, I won’t be too bothered about 30,000 or any such number. The way you look at it is can this market grow about 15-16 percent earnings growth for the next couple of years?
If the investment cycle kicks off over the next 2-3 quarters based on whatever efforts the government is putting in terms of direct investment and trying to address all the other challenges in terms of land, labour, policies etc, I see no reason why we can’t get to let’s say about 15 percent earnings growth for FY16. As of now we have 18 percent [two-year earnings growth forecast] for the BSE 30 but even if let’s say it is cut, we could still get about 15 percent growth.
If that is the case let’s say by March 2017 you could have a Sensex EPS of about Rs 2000. You give about 17 times multiple you are looking at about 34,000. Whenever March 2017 gets discounted obviously do keep in mind the fact that it is not getting discounted today, that would be too much to expect. However over the next 12 or 15 months I am sure March 2017 numbers as and when they start getting discounted you could see a Sensex number well above 30,000 number.
So, don’t worry about a number, it is just one more number in several more such numbers you will see over the next few years. As long as India does well I think the market will do well. So, why worry about one particular number?
Anuj: You said 17 times [PE], do you think that is the rerating number for the market or do you think it can get overheated like it did and like it normally does in bull markets and go to 18 or 19 times as well and becomes really overheated?
Prasad: You never know but as of now I am just trying to give a rational number. If you see historically the market has more traded in the range of 12-16 times. Obviously in the frenzy of the second half of 2007 you saw the market going up to as much as 23 times on a 12-month rolling forward PE basis.
However these days the cost of money is very low globally. People are willing to pay a very high multiple for the same set of earning numbers, growth is at a huge premium everywhere. So, I won’t be surprised if for the same set of cash flows, whatever multiple we would ascribe to year back now people are willing to give a much higher multiple. Do keep in mind the fact that you have global deflation in many parts of the world. Then you have low inflation in several parts of the world, based on that whichever market is offering some growth, whichever economy is showing some growth will naturally tend to get rerated.
So, when I say 17 don’t assume it is going to be some sort of an outer limit. If the global liquidity conditions continue to be fairly supportive which I assume they would be over the next 2 years given the fact that both Bank of Japan and European Central Bank will continue with their QE programmes.
Hopefully oil prices don’t go up too much from current levels, so the macro environment also remains fairly supportive for India. At the same time we see some benefits of economic reforms which the government has started coming through. There is no reason why you should see something like 17 times should be a sacrosanct number in the context of whatever I was talking about.
Next page: Prasad’s stock and sector views.