Get into stocks with 12-18 mths perspective: UBS Sec

Suresh Mahadevan, Head of Research at UBS Securities expects things to recover by end of this fiscal year. He expects good numbers from sectors with high pricing power like Telecom, IT services and pharma.

 According to him, it is good time to get into good stocks with a 12-18 months perspective. He feels that the Sensex target of 19000, could change if the oil prices continue to rise. He also expects inflation to contain by year end.

Excerpts from CNBC-TV18’s exclusive interview with Suresh Mahadevan:

Q: How do you rate the situation right now by way of where the Sensex is trading and what do you expect to see by way of earnings over the next two quarters?

A: It is definitely difficult times for the market. From a medium-term perspective, this is a good time to get into quality names rather than look at the broad market as a whole. Clearly there are difficult times ahead for the economy and that might trickle down to the markets. People are worried about inflation and global commodity prices, there is also higher interest rates but having said all this there are still stocks which people should buy with a medium-term perspective of maybe 12-18 months.

The earning season will start fairly soon and we are still looking for good results from certain sectors for example IT services, telecom services and pharma.

Q: Over the last three years from the sell and broking side we saw a continuous series of upgrades happening, virtually every quarter earnings beat estimates and a continuous cycle of upgrades played out when the market moved up. What are the risks that while today everything seems okay that earnings are not at terrible risk that we are now entering a series of such downgrades, which you are not able to see today like the upgrades were not visible when the whole cycle started?

A: There are definitely risks to stocks and sectors; clearly as an economy and as a stock market we seem to be quite levered to oil. There are definitely risks ahead and we have not seen any huge slowdown in private consumption. The worries are that if inflation really continues to go up and we are in a situation where there is no pricing power, there is some risk. However, there are other sectors where the growth is still intact and there could be pricing power. Good examples of sectors with pricing power could be telecom services, IT services. We do not really see much issues with the topline and pharma sector. Sectors where they are probably more levered to interest rate, high inflation, low growth could be banks and real estate to a certain extent.

Our view of India is that while there are difficult times ahead, we are nowhere near any severe crisis or anything and by end of this fiscal year things could recover quite a bit. Inflation should be contained by then and interest should come back to the market.

Q: You track telecom quite closely, how do you see this whole RCOM-MTN deal play out and eventually concluding?

A: Indian companies are going abroad and looking for opportunities beyond India. As you may have seen Bharti tried to acquire MTN and we saw some synergies there because the Indian operators are good at trying to build a business around low affordability, high population. Some of the MTN markets have similar characteristics. MTN operates in around 21 countries primarily in Africa and Middle East. There is a case for an Indian company to go there and replicate the low cost business model.

Such a combination would make a lot of sense because some of the markets in which MTN operates are very high ARPU low usage kind of markets, which is almost the opposite of what we are seeing in India, which is very high usage and very low kind of ARPUs. Companies like Bharti, Idea and Reliance Communications have shown the world that there can be a very profitable business that can be built around low affordability. It is essentially economies of scale business and some of the MTN markets have those characteristics and those economies scaled have not been exploited.

Q: You have got a December end target of 19,000 on the Sensex are you holding that or is that under review?

A: 19,000 target could change depending on a couple of things. If oil prices continue to go up, the direct impact of that is on the fiscal deficit given we are still subsidizing oil domestically and there could be some downside to inflation number. If you are looking at India at a medium-tem kind of viewpoint, this is the time to really pick stocks. This is the time where if you pick selective stocks and sectors, there is a very good chance of outperformance, alpha creation as well as even absolute return creation with a 12-18 month perspective.