However, he expects the July-September earnings and return on equities to be depressed, he told CNBC-TV18 in an interview. On specific stocks, he prefers private sector banks over public sector banks given the former's increasing market share.
Also read: Worst of earnings not behind us; IT safe haven: Geosphere
Below is the edited transcript of his interview to CNBC-TV18.
Q: We have seen a fairly hard rally in the face of terrible macros. This market still has legs because of the liquidity?
A: Yes, we have to look at where the market is from the earning cycle point of view. The earnings are pretty depressed. To that extent, the market doesn't appear as cheap as it is from a price to earnings view.
But, there is a good possibility that over the next two-three years, there can be a pick up in the earnings momentum. If that happens, then the market can have more legs.
Q: What is the advice to investors who have perhaps missed the bus up until this 20,000 level on the Sensex? Is it still wise to get into a market like this and if yes, what are the sectors to look at?
A: The market is definitely attractively valued for long-term investors. The normalized earning levels should be higher compared to current margins. If there is going to be economic growth pick up, it should also result in faster topline growth for many of the companies. So, I think the market is attractively valued for long-term investors. There is no reason why they should not be adequately allocated to the equity market.
Q: At the moment, we are grappling with fairly high levels of inflation and possibly couple of rate hikes. What are you factoring in by way of rate hikes and macros? How will you use that for your stock picking or not picking?
A: We have to look at what is going to be the inflation over a period of time. We cannot look at point to point inflation number. Long-term interest rates are not based on a single point inflation rate; it is based on inflation expectations over a period of time.
It is fair to assume that India will have 5-6 percent sustained inflation level for a period of time because of demographics and the deficits which might continue for quite sometime. The government bond yields have to be obviously more than that.
I don't think the current interest rates are totally out of the long-term reality. There will be some fluctuations around the current level. Sometimes, it is going to be little over or higher. The key thesis is that companies over a period of time should also earn return on equity which is reasonably good.
As return on equity improves, it should also improve the valuation. So I am not betting to say that the market is good for investors and not betting that interest rates are going to be substantially lower compared to the current levels.
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