Tarun Kataria, CEO, Religare Capital India says that Sensex would hit 23,000 in six months when inflation peaks and the FIIs will find India more attractive. However, investors should be prepared for a 8-10% correction before that.

Here are the excerpts from the interview :



Q: HSBC came out with a report which surprised lot of people which said that while we may have headwinds, we could look at 30,000 targets in 18 months from now. Speaking to someone from HSBC in Singapore, the person said that while 30,000 may not be impossible, we could certainly look at 23,000 - 25000 in 18 months. On which side do you stand?



Tarun Katari: There are two parts to this. If people are starting to predict 30,000 on the Sensex, I think we are getting into a bubble territory which we are not, so that is a little bit concern. Our view is that we put out our strategy piece early this year.

We had said that 23 – 24000 would be the Sensex target for the end of fiscal. We still stay with that. Obviously we are in a position or in a time where the USA is in transition, Europe is having its share of problems. India has got its own share of problems with headwinds, inflation, and nothing happening in the infrastructural fund. But despite that, our sense is that inflation probably peaks in Q3 calendar. Once that happens, the banks stock start to run, the auto stock start to run and therefore that drives the Sensex higher.

We also believe that as and when the inflation peaks, which is one of the macro headwind, will the FIIs too perceive they start to come into the market as well and that would perhaps drive the market higher. The FIIs really drive this market. So if people are of the view that inflation peaks then of course you certainly see in fiscal 4, those 6 months will move higher, so our target is 22,000 – 23,000.



Q: How much more pain could we see before that happens?

Tarun Katari: I think 8 -10% on the downside shouldn't surprise anybody. If you see 5,200-5,300 on the Nifty, 17,000 – 16,500 on the Sensex shouldn't be a surprise, because there is always that sort of that mini black swan event whether it is politically related or something else in India, it is always there and you are going to see enough of it in the headline these days. But I think otherwise the growth story is still there.

We have had a lousy earnings quarter but it is still decent earning numbers. So I think the negativity is generally all priced in. I think most of the bad news is out. So 8-10 % shouldn't come as a surprise.

Q: We had settled into a nice cozy little range which was 19,000 and we have corrected. I think one of the triggers for that was the RBI going very strongly in terms of raising rates and more importantly also paring down growth. 9% was the figure which everybody talked of but most experts did not believe it to happen, but now it is official, it is 8%. Yet there are many experts and who feel that there is still another 50- 75bps kind of an action coming. Are you of that same view?

Tarun Katari: Yes, we think at least 75 from here. The issue that we are all grappling with is the whole supply side constraint, which in itself is inflationary. And we have to find a way to deal with that. How much are you going to raise the rates? At some point you are going to kill the economy, which is something which you don't want to do. So it is a very hard balance to find. Unless something gets done in the infrastructure space; something gets done with reforms whether it is insurance, banks, or the capital markets. We are not necessarily seeing enough of that happen. And to continue to take rates up so you slow the economy down to 6-7%. It is not the right outcome for anybody. So execution of infra is the key.

Q: Do you still remain bullish? You have outlined you fairly legitimate scenario that could play out; that we could actually be just using the monetary tool to contain inflation?

Tarun Katari: It is relatively bullish. Look at what is happening in the US, in Europe, in Japan, so from a comparable stand point obviously 8% growth looks very interesting. But as it has been for three generations we were perennially under performing where we should be, should we not be growing at 14% if we had infrastructure and that's the problem. So we have to be very mindful of how much the RBI needs to do and will do such that it doesn't take the industry down with it and that's the issue.

Q: What about the QE2 ending on the global front? What kind of effect will that have on the markets? Will there be more money inflows coming from the US markets as well, especially with the FII driven market? What is that sort of an impact coming into our market?

Tarun Katari: We have been saying this for a longest time. Part of the volatility that we are seeing today is induced by the uncertainty around QE2. We have been saying since January that if there is any sanity in the Indian market, once June roll around, the uncertainty around whether they actually withdrawal liquidity or they leave liquidity and take rates up in itself will induce volatility.

My view is that they don't take liquidity out which generally means it is good for the global equity markets. But may be they take rates up by 25 - 50 basis points just so that the money is not free and you are not creating bubbles around the world. I think that will come through in the next few days, or in the next couple of months but until then there will be a sort of seesaw between whether it is happening or it is not happening and therefore the Sensex trades in that sort of a range.

But my view is that we are in this sort of a patch right now in the US, which is we are slowing down again. Because you had six months of sustainable numbers, industrial production up, employee generally on the right trajectory. I think it will pass because money is free and liquidity usually overrides in the intermediate term. But to answer your question may be Fed funds grows up a little bit but liquidity stays for a while.

Q: Coming back to Indian markets, what would you buy to be prepared for the 23,000?

Tarun Katari: As a firm, we are generally bullish on the banks, on IT and on auto. I think for the moment we are being slightly conservative on metals. They are the consumer lead theme stay and as I say if inflation peaks then banks start to look interesting.

Q: It has been a lousy earning season. Tell us two of the earnings that really rocked the market or shocked the marked lets put it that way was first Infosys and now the state bank of india results and both of them are a part of a bell weathers in the two sectors that you remain bullish on?

Tarun Katari: State Bank Of India has got a change in leadership. When you have got leadership and pave the way for the next 7-10 years this happens. So it shouldn't be a surprise to anybody. Infosys i think generally surprised us but we are extremely bullish on Infosys at these levels and have been out with our clients saying this is the right time for buying Infosys.

Q: There are headwinds, especially the political none of the policy measures that were promised to come and post monsoon session last year has still come in. So what are you telling clients to reassure them at this stage?

Tarun Katari: I think all of us forget that actually equity as an asset class is a 5-10 year asset class. We all caught up with should we be buying Infosys today and selling that 13 day from now, equities were not intended for that. So if you have a view that equity is something you hold for 5-10 years at these levels generally it's attractive because you are coming down to most 14 times earnings in a country that is growing seven and a half to eight percent. You are going to have 20-25% earnings growth that we hope and therefore of the long term equities make sense. But this is not a market to be saying to buy here today or tomorrow. No, that's not a long term buyers market. That's why we advise to our clients we are thinking nine months beyond which are also shortish. Our call is generally if you have to go long term horizon or a year beyond these are what should be buying.

Q: We have been seeing lot of consolidation or M&A activity happening in its own little space and some sector. Some are big ticket deals and some are fairly smaller but there seems to be vibrancy happening. Do you see that as strong trigger for a lot of companies or sectors going forward?
Tarun Katari: I don't know if it is really necessary further to take the markets up. But i think that there would be lot of consolidations. There are a lot of brokerages. There are a lot of pharma companies. There has to be consolidation because it is incredibly competitive.

So let us assume that there will be and what's driving it historically Indian promoters were net buyers of off shore assets and have been for the last decade. I think that skew were shift. There would be a lot of inbound M&A because as i say lot of mid sized companies at some point reach a cap where it becomes very difficult to grow because it is highly competitive. And let's just use generic pharma as a good example of that, there has to be consolidation. And there is a view actually if someone is paying 8-9 sales with 37 times EBDITA. I am actually happy to exit because by the way i can take that 1,000 crore, 2,000 crore, 10,000 crore, leverage it 5 times to earn become a real estate developer and get a phenomenal ROE better than i can get from my existing business. So that thought process is going on and therefore you will see inbound M&A

Q: What about the whole fund raising plan? We have seen some successes and some horrible failures. We have seen in one way the positive side as investors getting smatter. They are rejecting IPO which they think are not good enough. But at the same time all of this do you think that this whole disinvestment agenda that the government has 30,000-35,000 crores, lot of corporate lining up big ticket fund raising. Do you see that going through?

Tarun Katari: As I said, there are two parts. There is a sort of PSU thing and then there is private sector primary fund raising. The PSU sector we have seen power finance actually been completely rejected. It got done by some of the domestic institutions. So I think that's an issue therefore these have to be at deep discounts. But in theory, if the discounts are incredibly large, it will get done. The question is on the private industry side we are as we were in summer of 09 - important to bring good deals to the market and in our view what brings in our transaction where would global coordinator depending upon the markets are generally supporting or not. Probably in June, which I would liked to think like we did in 09 when we brought Mahindra Holidays to market which changed everything because brand, management and governance all that stuff took the market up. We would like this might be the trigger, so Ried & Taylor to our mind is a terrific India consumption story. It's a brand story. It is a good management story. If priced correctly it might just change the field just kind of like L&T did a little bit on Thursday.