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Domestic economy is improving, which will start trickling in the corporate earnings in the the next few quarters, and that the overall market is on a good trajectory, says Vikas Khemani, President & CEO of Edelweiss Securities.
Extreme pessimist environment that was seen in January and February has settled down owing to the coordinated actions taken by the global central bankers in March, says Vikas Khemani, President & CEO of Edelweiss Securities.
Khemani states that the main reason for India's underperformance in the last few quarters was the outflows from emerging market funds. He adds that as long as there is no major volatility in the global market, India is bound to do well.
Domestic economy is improving, which will start trickling in the corporate earnings in the the next few quarters, and that the overall market is on a good trajectory, maintains Khemani.
Khemani is positive on IT space, and believes that Infosys will continue to deliver for the next 3-4 quarters.
The asset quality review by the Reserve Bank of India has given a boost to the banking sector, and Khemani believes that the sector will deliver superior returns in next 6-8 months.
Khemani maintains that Edelweiss will look out for companies driven by volume-led growth even at the expense of a tad higher margins.
Below is the transcript of Vikas Khemani’s interview with Mangalam Maloo on CNBC-TV18.
Q: A couple of weeks ago, I spoke to your colleague, Nischal and he said that India has been benefitting from the global flows that have been coming into the emerging markets. We have retraced about 1,000 points from the lows. Do you think the risk on is still on or rather bulls getting tired? And secondly, what are the triggers for the market in the near-term?
A: The kind of extreme pessimism environment we saw in January and February has definitely settled down. In March, we saw coordinated action from the central bankers around the globe, I think has helped a lot. Emerging market currencies have corrected, that is a self correction mechanism. So, we have seen some sort of global environment settling down and that was the key problem for India. The reason why we saw a lot of outflows was because – India fell because there was a lot of global outflow from the emerging market funds. That has settled down. And we have seen in March, flows coming in, and that seems to have worked very well.
So, in my opinion, markets will consolidate here. Overall environment looks good. Now, we have some more global uncertainty coming in, in the next month like Brexit and again, we will start seeing how many rates Fed is going to increase over the course of next year. So, the global environment has settled down, but are the problems over? I do not think so. As long as there is no major volatility in the global markets, India will continue to do well. Domestically, we are seeing definitely green shoots, domestic economy is improving, demand is improving. So, all those things will start trickling down into corporate earnings in the next couple of quarters.
So, markets after having such a large rally, you might see some sort of consolidation, but overall markets are on a good trajectory.
Q: You did allude to the corporate earnings as well, so three IT majors have reported their numbers so far. Coming on Infosys as well as Tata Consultancy Services (TCS), one of them did indicate that they will have the industry leading growth, while the other said that they do not have further headwinds. So, from a valuation perspective, what should a portfolio strategy for both Infosys and TCS be right now?
A: We have been positive on the IT segment for some time and in particular Infosys over the last almost eight quarters and our hypothesis has been playing out and we do believe that going forward also, there are a lot of levers for Infosys to deliver bottomline growth and better topline growth as they have guided. So, our relative basis pick has been Infosys and we continue to believe that over the next three four quarters, it will continue to do well.
Q: Coming on the banks as well, yesterday we saw a lot of delivery based buying coming in public sector banks after the RBI did give the boost as far as the non-performing assets (NPA) recognition is concerned. Do you think, at these levels, there is some value buying opportunity in banks as well as in public sector banks as well as some private banks like ICICI bank?
A: Yesterday’s move was only one more move in the positive direction from a short-term pain point of view, but the banking sector key call has been after asset quality review (AQR), that how much of the pain is there in the system that is broadly known. And a lot of it was already factored into the prices of public sector banks as well as private sector banks. So, in my opinion, from here on, worst seems to be behind and now, the question is how the resolution of some of the assets happen, how the growth comes back, that will drive the future course of action.
But if you look at overlook next 6-8 months, in my opinion, banking sector will deliver significant returns, superior returns. We are seeing similar kind of situation panning out in 2002, 2003, 2004 and we have seen how public sector bank as well as the private sector banks have done well. So, in my opinion, we will continue to do well and funds which have this kind of conviction have a slightly longer term horizon, have been buying in the market and that is what has led to this kind of recovery in the entire pack in the last month.
Q: But recovery has come in by the public sector banks which not a lot of funds did hold. They were sanguine on the private sector banks. So, superior returns going forward in the banking space according to you will come from the public sector banks or the private sector banks?
A: It all depends. It is a risk adjusted concept you have to see. Private sector banks, structurally are very well placed, undoubtedly. If I were to play over 3-5 years, private sector obviously makes more sense. If I were to take a turn around kind of situation which might play out more in public sector bank, over the next 6-18 months, again, one has to take a call based on what is the risk appetite of someone who has a strategy of a fund manager. But we like both spaces and again, more than space, it is the individual names you have to focus on and that is how we kind of advise our clients.
Q: What is your sense on the metal stock now? The metal stocks have seen a lot of rally. Iron ore has gained about 60 percent from the start of this year. There are reports which indicate that the steel prices are likely to go up. So, do you think the rally in the metal stocks has some fundamental legs to it and one should be buying into them right now?
A: I do not have a very strong opinion on the commodities basket, but there are certain global experts who have been making a point that commodity is probably closer to the bottom and you might see some stock recovery coming in. If that were to happen, commodity stocks, the entire pack will do very well, but commodities being a global nature, and the global demand environment being a bit weak, I am not sure and I do not any strong view on the commodities pack.
Q: We are in the results season, so three top companies that you are looking out for in this results season and your strategy would be for them?
A: I would not like to comment on individual specific stock names. Since IT is a segment, we have been positive and that has surprised. We have to keep looking out for individual names and specifically banking sector as the results come out, people will get a lot more comfort. But one has to keep looking for which are the sectors where volume led growth is happening. Ultimately, that is the one which will be sustainable, that is the one which will deliver operating leverage to the companies in the time to come. So, we will watch out for the companies where the volume led growth is coming, even if it is at the cost of sluggish bottomline, but volume led growth is what we are kind of looking at. And in that, cement, auto, all these companies are very well placed.
Q: I know you are a marathon runner, so you are giving long-term perspective. But someone who is looking for a 100 metre dash on the markets, what is your call and what are the sector that one should focus on at least as far as the 100 metre dash is concerned?
A: I am not the right guy, so I do not know honestly what can happen tomorrow frankly speaking. I generally look at things in the medium-term to long-term, so I am sorry.
Q: Consolidation likely to continue in the near-term?
A: That is possible. After such a strong rally, it is very likely that you might see some sort of profit booking, some sort of correction, that is quite possible, but again, calling out in short-term is one of the most impossible tasks for me.
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