Liquidity-driven rallies not good for Indian markets: Anand Rathi Financial Services

In an interview with ET Now, AK Prabhakar, Senior Vice-President Equity Research, Anand Rathi Financial Services, shares his views on the stock markets and RIL’s AGM. Excerpts:

ET Now: Before we take you through the broader markets, a word on Reliance Industries on the stock price. You did have Mukesh Ambani who detail that they are going to invest Rs 1 lakh crore across the businesses over the next four years. They are setting a target of doubling the operating profit over the next four years and a little bit of announcements with respect to the buyback. What did you make of the AGM? Were there more expectations that you believe one told out this time around?

AK Prabhakar: When the AGM give promises, they are for very long term, that is three to five years, and there is nothing in the short term. The company has not been able to improve its ROE, which is 13 in the last three-four years, and if you check all the global oil and gas companies, the ROE is around 18 to 19 and we have a cash rich company which is not able to increase the ROE. Going forward, there are no plans for the next one to two years to boost up the revenue.

This is going to be a problem for the prices of Reliance. Last time when we had the results, we mentioned the target of 650 on the downside and we have seen 673 as a low for the stock and we feel still those targets can be breached and we see a level below that, even 620 is possible because almost 22% of the buyback is over now and as per SEBI norms, 25 is a minimum criteria.

So, somewhere the company would take a break, where the stock prices can correct lower. That will be an opportunity for investors to buy into the stock. 600 to 750 will be the range for the stock in the next six months to eight months.

ET Now: Just looking at the broader market now every one seems agreed that the majority of the problems that India faces are domestic in nature and not so much global. Even within the domestic problems most people argue that the domestic problems are in large part driven by policy initiatives at the government level. Yesterday you had the Prime Minister’s meeting addressing the infrastructure sector and admitting that a lot needs to be done and sort of displaying intent in terms of getting things moving. Today, there has been a buzz about pension reforms coming, FDI in pension, possible FDI level in insurance being raised. Would you say that if we see meaningful movement on the part of the government in terms of getting things done, we can expect that the worst levels that the market saw over the course of the last few weeks are for certain behind us?

AK Prabhakar: Policy initiative whatever is taken today it will take at least three-four years to materialise and be in the system. For example, whatever was done in the previous regime has benefited after many years, and after that we are facing a crisis where everybody talks about policy inaction and everything. So, when you start something today, it takes at least two-three years for this to get into the system and to benefit the GDP and other growth numbers. But for short term, I feel nothing is going to happen. Yesterday also after the big bang, it was the admission that yes we are lacking, but what is a road forward was not mentioned. That is where we need more clarity. Ther government has to say that we will do reforms in every micro and macro level. Naming only few reforms is not going to be enough. We have to see the implementation and how fast we can implement is more important.

ET Now: Though the Indian markets of late have firmed up after that continuous losing streak that we have seen, what continues to remain a worry is that the foreign institutional investors do continue to shy away from the domestic market. Are you worried that this is likely to continue?

AK Prabhakar: Yes, yesterday’s rally was back on talks today on quantitative easing. We have seen previously liquidity-driven rallies which have made very good gains for the market, but later when the rallies fizzle out, we have seen more damage than what it is actually.

Now, we have seen crude also moving up with the global markets. Even raw material costs are rising. India needs lower crude prices, which is not happening because of liquidity-driven rallies. This is going to be a very long-term negative for the markets. We need to have crude below $80. This is not happening. And till this liquidity-driven rally happens, crude also is going to rally.

So, we need to have a situation where growth comes because of lower crude and not because of liquidity which is pumped in from western countries.

ET Now: If you look at the IT pack in greater detail, it is obviously the cross currency movement which seems to affect most of these counters and as the rupee is firming up against the US dollar. You can see some of these counters are a bit subdued. What is the view on the IT pack as a whole and how do you tactically approach it?

AK Prabhakar: We still like TCS, Tech Mahindra, Hexaware and KPIT. They have been growing consistently quarter on quarter basis and year on year basis. These are companies which can sustain in any turbulent global environment also. So, one has to be invested in a few IT stocks and these are best stocks that we have picked for our clients.

ET Now: What would you make of the kind of announcements that we can expect from the RBI? Do you think that a rate cut has already been factored into the markets?

AK Prabhakar: Our economists feel that the CRR cut is a possibility, but rate cut we are thinking that RBI can defer by another three to six months because liquidity is easing. So the next 10 days is very crucial to see how the liquidity pans out. If the liquidity situation remains tight, the CRR cut is what economists are expecting and that is our view.

ET Now: A quick word on the banking pack?

AK Prabhakar: Selectively private banks are looking good. We are not very comfortable with PSU banks. CDR issue is becoming a major problem and two days before also we have seen a few companies coming into CDR with Rs 3500 crore. So, we would avoid the PSU banking space while we like the private banking space. ICICI Bank and IndusInd Bank are our top picks.