The India weightage of FIIs is increasing, Purushottam said. "India is still a relatively small portion of the global portfolio. So, there is an element of re-rating in markets." According to Purushottam, the Q2 earnings season is very relevant. She expects to see Q2 hold up trends seen in Q1. "Muted numbers are seen from auto and IT while realty and capital goods are expected to be good." On power, she feels that high expectations have been built into the power stocks. "Stock prices are reacting to news flows. Return on equity of power companies may be capped as excecution remains key risk." On IT, Purushottam expects to hear some announcements on how firms plan to adjust for the rupee appreciation. " Valuations leave room for a bounce in IT." She added that private sector banks will do better than their public sector counterparts in Q2.
Excerpts from CNBC-TV18’s exclusive interview with Sangeeta Purushottam: Q: How do you read it now, we seem to be completely in a momentum blowout stage? A: We have seen huge inflows come in. News flows have also been fairly positive, starting from the interest rate cuts to a lot of company specific news, which has been positive. The flow of money certainly helps a lot in terms of pushing prices up. We are trading at about 18 times 12 months forward earnings, which is at the higher end of the range. So, it has really been a combination of fundamentals and liquidity.
Q: What is your sense of what is going on now? With this kind of money coming in, do you think people are reweighing their weightage towards India after the initial underweight stance for the early part of 2007 or is this a lot of money chasing absolute return and the new price momentum in India? A: There is an element of reweighing going on because in terms of global portfolios, India is still a relatively small portion. As the India story gets more and more accepted, we are seeing a lot of that in terms of the news flows and coverage on India overseas. There could be an element of money chasing absolute returns and I think that we have seen a revival in markets across the globe. So, India is obviously participating in that and is participating better than most other markets because of its inherent growth story.
Q: You expect the market to now settle in a very different kind of a P/E band now or is this just a short-term momentum phase that you are in, what is your sense? A: We will now may be gradually see the market moving into a higher P/E band. If you actually look back at the market in terms of the P/E band that it has been trading at over the last four-five years, it has got gradually re-rated. It has not been a sharp re-rating but it has been a fairly gradual re-rating. In the last correction, when we touched about 14,000, the market was trading even then at about 16 times forward earnings as compared to its previous fall where it was at about 15 times. We are gradually seeing the P/E multiple go up as more confidence emerges in the economy followed by higher fund flows as we are seeing now.
Q: Do you think the earning season will hold up the confidence in stock prices or do you think it is not as relevant in the near-term given the mood and the momentum? A: The earnings are very much relevant. Although we have seen the markets go up by a fair amount, based on either momentum or liquidity flows coming in, on the whole there has been a strong element of rationality also underpinning the markets. You see stocks which disappoint have been punished and stocks that actually do well get rewarded post earnings. So, the earnings season is very much relevant. Our expectation is that we will see Q2 hold up trends pretty similar to what we have seen in Q1. Sectors like auto, IT etc will be the ones where you will have muted numbers and other which have been doing well like property and capital goods will all continue to do well. I think we are going to basically see a big trend change. You will have surprises from individual stocks, which happens all the time, but it is going to be pretty much on track.
Q: What is your sense of how this whole power sector has got completely re-rated over the last few weeks? A: There are obviously a lot of expectations, which are being built into these stocks now. It has been led by Reliance Energy and other stocks have followed. In terms of new projects coming in, funds are being raised and growth is going into a different trajectory altogether. The only word of caution here really is that this is a sector where ultimately your returns are capped in terms of return on equity and which is why it gets valued largely on price to book and that is something that investors need to keep in mind. This is also partly because news flows have been good overall and we are seeing a lot of money coming in. The market is actually behaving as if there is no execution risk in anything at all, so the stock prices are reacting to a lot of news flows without projects actually getting commissioned or scheduled. This remains a risk, as we don’t know how the execution will actually pan out. The positive is that we could possibly see growth for these companies getting into a new orbit but it is not going to happen immediately. These are long gestation businesses, so execution is something that one needs to watch out for.
Q: IT has had a bit of a pullback, do you think Q2 could actually finally hold out some confidence or optimism for the sector as results start pouring in next week? A: I think Q1 was obviously the one where the whole market needed to readjust to a new kind of growth outlook and stocks have been punished over there. If you look at individual valuations, most stocks are now trading actually at the lower end of their historical P/E band. One may say deservedly because the growth outlook is now impacted by what is going to happen to the rupee going forward. But the valuations have factored that in and there could be some announcements or something coming out from the sector in terms of how the companies plan to adjust. I don’t think that anyone can adjust to the headwinds of an appreciating rupee very quickly. It takes time for companies to rejig their approach and strategies and that is what we will see happening in the IT sector over the next couple of years. The valuations have corrected a lot and I think that leaves room for a bounce.
Q: We have had a phenomenal run up in banking stocks in the last one-month, do you think it will be a good quarter in terms of earnings for banks? A: Overall, earnings will be all right, we will see variations from bank to bank. I think the private sector pack would do better as it has done. If we look at banks as a play on the economy, which is growing, then yes there will be some impact if the results are really disappointing. To an extent, it is something that the market will live with. The slower credit growth that we have seen or any impact on a particular quarter is not going to be seen as necessarily that important in the longer run. I think we have a reasonable quarter with variations from bank to bank. Q: A lot of brokerages have estimates around that Rs 1,000 Sensex earnings mark for 2009. If this kind of appetite for India remains with some corrections, what are the chances that as we get into FY09 you may get up to something like a 20 P/E multiple which takes the index up to 20,000? Do you think it is likely that we can get to that stage? A: A lot depends on liquidity flows, so I would not really rule it out. It can happen if liquidity continues to be very strong. We have seen in the past that when you get in to a bull run, the market goes from being very cheap, to being reasonably priced, to being moderately priced, and then getting into a euphoric zone, where P/Es have actually in the past even touched 24-25, and everything seems to be good and no one is willing to listen to any possible downside. That’s a stage where we will eventually get into at some point provided news flows remains positive on the economy. Whether that is going to happen in the next few months or it is going to take a while one does not really know, it is hard to pinpoint the timing. It depends on how liquidity flows come in but that has been the general pattern in markets and therefore one should not be surprised if we see that. Disclosures: It is safe to assume that my clients and I may have an investment interest in the sectors discussed. |
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