Udayan Mukherjee says financial sector faces major risks and the market knows

The stock market's assessment of the government's corporate tax reforms is that the companies which are market leaders and have high return ratios will power ahead, while the rest of the pack will fall, observed CNBC-TV18's Udayan Mukherjee.

“The market has done exactly the right thing," said Mukherjee. "Over the course of the last week or 10 days since the announcement came in, the initial response was euphoric because it was a big move and it warranted a very optimistic reaction from the market. Now we have seen some of that ebb off."

The Nifty has given up half of it and the midcap and the smallcap indices have given up all of those gains. They are pretty much back to the pre-corporate tax cut kind of levels.

"That is the market assessment that some companies will benefit, maybe the strong will get stronger and the companies with high return ratios will power ahead, market leaders will power ahead and the rest of the pack – midcaps, smallcaps, companies which don’t have market leadership, don’t have very strong return ratios -will fall," he said.

Nifty's remaining 50 percent gains belong to the tribe of companies, which will benefit disproportionately from the corporate tax cut, said Mukherjee.

"For the rest, I don’t think it is such a material thing and the market has done exactly the right thing by taking the price off from the highs that we registered on the day of the corporate tax cut,” he said.

“We have arrived at a very interesting juncture which is 11,100-11,200 levels on the Nifty which should hold for the markets because this was a major support till it broke and we went down to those 10,600 levels and I think the bulls will put in a fight around this kind of levels and try and defend it because if this goes then we are staring down the barrel to the lows that we made before the tax cuts came in,” Mukherjee added.

Speaking about the crisis in the non-banking financial companies, Mukherjee said, “If we thought that the financial sector problems are behind us then we need to think once again."

NBFCs are not yet out of the way completely and each of the individual incidents is leading to or enhancing the trust problem that existed in the market maybe 4-5 months back, he noted.

The NBFC crisis has the potential of leading to another banking sector problem and the Bank Nifty is reflecting that over the last couple of weeks in its recent underperformance, he said. "So this is one major risk for the market from hereon.”

Mukherjee does not believe media as a great sector and that it has cash generation potential. "I don’t think there are too many investable ideas in the media space maybe one-two but otherwise, I don’t see this as a great sector," he said.

"There is a technical issue with Zee and I don’t know how it will resolve itself. Even if you had asked me a few months back, I would have told you that in my book, Zee falls in the same category of promoter quality," he said.

"I would say it falls in the same bracket as a Yes Bank or an Indiabulls Housing Finance. That should tell you where I stand on that company.”

If we have to look at the share price and management commentary to understand a financial stock, Mukherjee said he would go with the share price.

"It is not a smart thing to do, but right now given what conditions are, the market knows something," he added.

"Why would a market hammer down a stock of a particular bank? Look at HDFC Bank as if nothing has happened. Look at ICICI Bank, it is still holding Rs 425-430 as if nothing has happened. They are absolutely found as stock prices. Look at Kotak Mahindra Bank."

"Why would the market single out one IndusInd Bank and one RBL Bank to hammer it down when nothing is wrong with the banks. I don’t understand the logic of that."

"So I think something will happen, something the market knows and that is why the stock price is where it is and I would have some respect in this day and age for what the share price is telling you versus what the management is telling you,” Mukherjee said.