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BNP Paribas says rupee vulnerable to rising crude oil prices

Updated : September 25, 2018 21:40:24 IST

BNP Paribas on Tuesday said rupee is vulnerable to rising oil prices after Brent crude - the international benchmark for crude oil - touched $82.20 a barrel during today's session.

In an interview to CNBC-TV18, Manishi Raychaudhuri, Asian equity strategist, Equity Cash Asia Pacific, said, "Our global commodity strategist point of view is that oil is possibly closed to its peak. It may go up slightly higher from now, but not much higher. We have a target of about 82-85 per barrel on Brent by the first quarter of 2019."

Raychaudhuri said, "In the near term, I think both from the RBI and from the government, it's difficult to expect any drastic measure."

Edited excerpts:

Q: Your thoughts on everything that we have seen, this credit market tightening, the kind of clarifications that are coming in, is the worst over or is there more to come?

A: India has suffered from a confluence of international and domestic issues. The international issues obviously relate to the currency and the oil prices, the commodity prices in general. The domestic issues relate to these liquidity concerns in the non-banking finance universe. We think that the current level of volatility might actually continue for some more time, because the factors that are contributing to the currency volatility would possibly last a while longer.

We are already seeing the Brent crude at about 81.4 or so, and we think that in the near term, maybe till the first quarter of 2019, oil prices could remain elevated, because of the various geo-political concerns that we are seeing. Consequently, we think that even the pressure on the Indian currency might continue in the short term. Now, obviously, there will be some short covering, some knee-jerk reactions along the way. But I don't think there would be any respite from the level of volatility that we have seen recently.

Q: Speaking of oil, can it go to as high as 90 per barrel as some of your peers have been projecting?

A: Our global commodity strategist point of view is that oil is possibly closed to its peak. It may go up slightly higher from now, but not much higher. We have a target of about 82-85 per barrel on Brent by the first quarter of 2019, that is when we would feel the full impact of the various geo-political concerns like the Iranian sanctions and everything else or and many other supply side disruptions. From the second quarter of 2019 and particularly in this second half, we actually expect the supply side response to US shale production to kick in. So, that level of 82-85 per barrel in the first quarter of 2019 is likely to be the near term peak in our opinion.

Q: I just want to get back to the credit market issues, because that is what really brought the equity market down on its knees last few days. What is your view of the current credit landscape? Is there still a risk of spill overs though, we have had certain confidence building statements come in this afternoon, how do you view this risk aversion?

A: In the near term, I think both from the central bank and from the government, it's difficult to expect any drastic measure. The Reserve Bank of India has already talked about inducing liquidity through open market operations (OMOs). I think that could have some degree of soothing effect on the liquidity situation as and when it actually gets conducted. We have also had similar statements about lending to the NBFCs from some of the largest public sector banks.

Having said this, the current concern that the banks have about lending to the NBFCs and which stems from the non-performing assets (NPA) related concerns, and also the asset-liability management (ALM) related concerns that we think would likely continue in the near term. So, this short-term liquidity concern that we are seeing in this market, I think we have to sort of brace and grin and bear it for the time being.

Q: What is the call on NBFCs now. We were just talking about it through the day and for last many days now? Bajaj Finance already in your focus list, are you buying more names?

A: In general, the way to kind of swift through the NBFCs and select the relatively safer ones is perhaps to look at their ALM profile or asset-liability management profile. So, I think there are some concerns on the housing finance companies in this regard. But, if we are able to find relatively safe ALM and relatively safe asset quality in terms of the potential non-performing loans (NPLs), which I think would be relatively safer for the retail lenders, those I think would be a sub set of NBFCs which investors can look at.

Obviously, there has to be valuation overlays, because over past one year or maybe about 8-10 months, these NBFCs have reached almost stratospheric valuations. So, the ones that have corrected the most and fit those fundamental risk criterion that we talked about, they would possibly fit into that basket the best.

Q: The market has given an 8 percent dip from the top. So, what is the portfolio stance? What would you like to buy in this decline? For instance, I do notice that you like stocks like Maruti and Eicher, they have corrected quite a bit in this current round of correction.

A: As far as India is concerned, the most obvious trade is to go long on the exporters, the US dollar earners. They have a strong tailwind not just from the global trade friction, which actually opens up some degree of market share gain possibility for them, but also because the US dollar appreciation itself is a strong tailwind for their revenues and margins. So, we are talking about IT and pharmaceutical's here and among these, IT is right on top of our preference list.

The second basket that I would talk about are the çonsumer discretionary's and autos would be an important part of that. Like you pointed out, some of these large front line auto companies, they have declined to such an extent that they are trading at close to 52 week lows, those are the kind of good quality at low valuation or reasonable valuation opportunities that we are looking at. Autos definitely is the second basket that we would look at - both four wheelers and two wheelers.

The third basket are the oil companies, particularly the refining and marketing companies and also some of the large front line operations and chemicals and refiners. This universe has done reasonably well, but at the same time, we have seen some correction in the near term. We think that refining margins are likely to stay reasonably strong in the foreseeable time. So, those are the three main universes that we are looking at right now.

There could be a select few consumer staples companies as well, which cater to rural demand which would also fit the bill.

Q: Are you reworking the Sensex target at all? In your last not the Sensex target that you have is 37500. So, given the plethora of fresh challenges - international and local, are you looking at cutting that target at all?

A: As far as calendar year 2018 is concerned, we are not really looking at reworking the Sensex target at this point of time. We only just have about a quarter anyway. We downgraded India to a neutral to about a quarter ago. Initially, it did not work, but about last 3 weeks or so, that call has been working. We think that this current volatility would possibly continue for some more time.

Having said that, even the rally that we had seen in India for the first 8 months, that was extremely lopsided. The top 5 stocks in Nifty had generated almost 70-75 percent of the return, the next 5 had generated about 30 percent returns. So, the top 10 stocks generated more than 100 percent of the return in the broader indices that we have seen, which obviously had opened up the possibility that there are a large universe of stocks, which had not performed. So, in a sense the buoyancy of the frontline indices was bit of an illusion. We think investors would do well to look at those relative underperformers. There are good quality stocks among them as well. If one can come out with a list of strong excess return generators, strong free cash flow generators, companies with decent balance sheets, with under leveraged balance sheets and which are trading at reasonable valuations at this point, that would constitute a long term winner list in our opinion.
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