India Inc to scale down earnings estimates: Brics

 Excerpts from CNBC-TV18's exclusive interview with Anand Tandon:

Q: It is been a rough start to the week, where are we headed? Will it be much lower or will we cling on to 4,500 and get away with this damage?

A: In the near-term, it is a little difficult to guess. The mood yesterday was little sour; the fundamentals still dictate a slightly lower level than where we are. The fact that the fall has been very sharp in one day, the rest of the week may not be that bad. It is a purely a technical view on the fundamental basis, the risk reward is still not perhaps in favour.

Q: When you look at the large cap space, do you think valuations have corrected enough in certain spaces? Do you see potential for further scale down in valuations before things settle?

A: They are still in favour of the valuations. Fundamentally, we still have some more pain left. If the existing estimate of earnings is taken as the one sector that comes through, you have to see the scale down of estimates during the course of this year. On that basis, most of the companies’ secular growth stories are still trading at very high valuations. The kinds of sectors that we were looking at being bullish on were those, which were generating cash. So, the FMCG, Pharma, IT, all those have had a very strong run ups and consequently the valuations were way ahead of what the rest of the market is trading at. The ones that are guzzling and eating up the cash will find it difficult and are the ones that have fallen the most. But, if one looks at the valuations they are still not that much comforting. On the historic basis, they have fallen quite bit from their peak, but that is just because they went up too high, too far.

Q: The runs had been pretty well on some of the metal stocks as well particularly the non-ferrous lot, Sterlite Industries and Nalco. Would you go and look buys in that pocket?

A: On a momentum basis, it’s possible.  But with the commodity prices that we have, it seems uncomfortable. Therefore, there is likely to be a spike kind of move even in any of these counters. To that extent, one might want to play if one is a momentum player. But the risk reward is not in favour. One will find it difficult if one has large positions specially funds to actually try and exit before the market were to start correcting. By its very nature, commodity prices including oil have to be self correcting which is they will get to a stage where they have a severe impact on their own demand and consequently the price movement will be equally sharp on downside whenever it happens.

Q: What’s your sense of how long it will take in terms of time to clear out the fundamental problems and the macros that we are facing at this point in time?

A: The fundamental problems in the real market haven’t actually started. Take a case like real estate; we have seen a sharp correction in the real estate stock prices. But if one were to try and do a real estate deal, one would realise that there are still huge access there. Most builders have raised enough capital and have enough private equity chasing even now, prices have far from corrected.

One would actually have to see a similar correction in real estate prices as we have seen in the stock prices for the market to actually start clearing and till that happens many of the sectors will not be in a position to rebound. Real estate is a most glaring example but that is the case for most of the other sectors. We have seen the stock prices corrected; we haven’t seen impact of that on the real economy yet. 

Q: Would you say the same for banking because some analyses seems to throw up. Their growth is still clocking at about 20%. Is that such a bad situation or is it just that it’s going to worse for banks?

A: The real economy hasn’t shown the kind of slowdown that the market had. It’s all in our interest to assume that the real economy will not slowdown as much as the market is predicting it and therefore rebound. If it lasts only for a quarter, the rebound can be very sharp and all will be good with the world. More realistic situation unfortunately is that we have a situation where the current account deficit of the US, which was fuelling the rest of the world in terms of ample liquidity, is now beginning to dry up. That will take money out back from the emerging markets including India and interest rates will rise. Therefore, a whole lot of stuff which was going in low return ratios or where one was looking at returns coming in many years from now will find that money is more difficult to come by and therefore cash will be the king. So, cash itself is probably the safest heaven to be in.    

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