Operation Twist will lower the borrowing cost at the longer end of the curve, says Chakri Lokapriya, CIO & MD, TCG AMC. Excerpts from an interview with ETNOW.
ET Now: Let us talk about your outlook for the market in terms of how you see valuations for midcaps. Do you think that things are looking lucrative from a valuation standpoint?
Chakri Lokapriya: If we step back and look at the year gone by. You know that it has largely been led by a handful of stocks. Now Nifty banking index is up around 20 per cent. Nifty is up about 12 per cent. The midcap index is down about 6-7 per cent. But once the corporate tax cut was made it clearly boosted the EPS for all companies, including midcaps, by about 10 per cent.
If you look at in the last couple of months midcaps have been recovering versus the broadcap market and also recovering versus the largecap. So in fact the midcap is probably up about 9-10 per cent slightly beating Nifty. So there is a recovery.
This recovery is also happening because of Operation Twist, which basically lowers down the borrowing cost at the longer end of the curve, where the majority of the borrowing in this country exists.
I think RBI needs to do a lot of Operation Twist in the coming weeks and months. But it is a good start and it has already moved down. So, midcaps will benefit more because their borrowing cost will come down and that is where more stress has been versus some of the well-run largecaps.
ET Now: Are there any other themes that you would be betting on, be it speciality chemicals, agri-based stocks or even names such as paper companies, tourism. Are there any of these niche spaces that you would like?
Chakri Lokapriya: We still like chemicals, yes, and within chemicals we like companies such as Aarti for instance, which is a combination of domestic and export revenue and have a fairly broad based products. So given the backdrop that export market is still looking fairly strong and against the backdrop of valuation, many of these chemical companies is still not really heated up and there is sufficient earnings growth. So that is the space that we will clearly look at.
Gujarat Gas is also looking good, as their prospects will only improve from here on and their valuations are not demanding yet.
ET Now: A bit of a focus on commodities. We have seen a bit of an upmove, but wondering really whether or not it will sustain given the outlook on the global front as we head into the New Year. What is your sense, which side of the fence would you be on?
Chakri Lokapriya: Even listening to all the policymakers at your conclave you know globally the GDP is expected to be revised for some of the developed countries, including emerging countries. So that is generally good news for commodities in general with metals on one side and oil on the other side.
Oil rangebound in $60-65 zone is a good news for India, but I think cyclically the companies have run their course that is the metal companies they are inexpensive. But I think it has been a very long cycle, so there is a kind of a low double-digit return that one can expect from some of the metal companies.
ET Now: On divestment of BPCL. Anil Agarwal is commenting quite profusely about a possible interest there. We are still waiting for the roadshows to start as well. Just to relook at that with you and get a sense of how attractive you feel it will be, how soon you think it will roll out?
Chakri Lokapriya: In terms of valuation, BPCL in anticipation of the stake sale or privatisation has actually run up a fair bit and its valuation today is close to some of the global majors that command non-regulated companies. So from that perspective I think the valuations catch up has already been largely done. There will be some amount of rerating once the deal actually happens. When the deal happens at this point in time looks like it is fairly unlikely that it can happen within the next one or two months given that some of the legal work, the paperwork is not yet not really where it ought to be. But against this backdrop companies like IOCL and the other refining companies which are trading at a significant discount to what a BPCL is trading at and therefore there can be some kind of a catch up in valuation whenever this deal or BPCL happens.
Source: Economic Times