Apr 10, 2013 07:18 PM IST | Source: CNBC-TV18

Buy below 5200; see auto, metal downgrades in Q4: Edelweiss

Nischal Maheshwari of Edelweiss believes the market will see good support at 5200.

Nischal Maheshwari, head of research, Edelweiss believes the market will see good support at 5200. He believes there will not be much downside from that level, discounting a remote possibility of market correction based on some newsflow.

However, if the market dips lower from the support level, Maheshwari recommends investors to start accumulating.

"With Nifty at 5,200, Sensex will definitely be equivalent to around 16,000-16,500 and it makes sense to start accumulating around these levels," says Maheshwari in an interview to CNBC-TV18.

On the upcoming earnings season, Maheshwari is of the view that IT sector could be the only one to see an upgrade whereas banks, autos and metals will be downgraded.

Also read:
FY13 car sales fall 7%; SIAM sees 3-5% growth in FY14

Below is the edited transcript of Maheshwari's interview to CNBC-TV18.

Q: What are you telling your clients? There must be a lot of people who perhaps were buying every time the index went to 5,700 in the hope that support would have held? Now, what are you telling your clients? Are you expecting much lower lows even for investors?

A: Yes. The tide seems to have changed. Politics is overwriting things. So, I believe economic outlook, economic reforms or government actions will definitely take a backseat in this kind of a scenario.

We are telling clients that earlier what used to be 'every dip is a buy', now has become 'every rise is a sell' and then, move to defensives. After analyzing the last four-five elections, it is the defensives, which are worked very well.

Typically, in the six months run-up to the elections, defensives do well and post six months, the cyclicals do well. This is very true given that the volatility increases and there is uncertainty upto the elections. Post the elections, as the certainty comes and there is clarity, since cyclicals have done badly over the last period, cyclicals start doing well.

The same trend is going to be followed. I am not sure about the timeline of the elections but from what I have gathered, there would not be an early election and most likely it is going to be in May. So, we have still sometime to go but this is definitely going to be a range bound market now.

Q: What have you made of the foreign institutional investors (FIIs) sell figure that we have got in the cash markets over the last few days?

A: It is very small number as yet given that they have bought in close to around Rs 50,000 crore during the first two-three months. So, we have not seen any significant move out as yet. So, it is only a Rs 1,000-1,500 crore kind of a number, which is very small given they have brought in such large amount of money. So, we do not see as yet any significant negative from the FII side. These are largely market or ETF funds which go on the flows of the market basically and I think that is what is pulling out the money. So we do not see any serious investor pulling out of India as yet.

Q: What kind of lows are you looking at? The month of September saw the market going from 5,200 to 6,000 in anticipation that a lot will change on the policy terrain. Is 5,200 therefore a good bottom to work with or is this also just a line in the sand and things could get worse before we get to that May and possible certainty thereafter?

A: 5,200 is a good number to hold on to if you look at it fundamentally. I do not see much downside from there. If it happens also, it will be more of a flash. It would basically be somebody who is keen on selling and getting out of it or if there is a panic or some news.

Below 5,200, I will definitely recommend people to start accumulating on India. It is a good number. Even if around 8-10 percent kind of a growth in FY14 over FY13 is taken one will hit around Rs 1,300 of earning for FY14. If one gives it somewhere around 14-14.5 times, which is a long-term average, one still ends up with the Sensex of close to around more than 18,500. So at 5,200 definitely Sensex will be equivalent to around 16,000-16,500. It definitely makes sense to start accumulating. So, 5,200 is a good number to hold on below that it is definitely a buying opportunity.

Q: In which sectors are you expecting downgrades or which sectors are you expecting upgrades in the coming Q4 season?

A: Upgrades may not be much but there are downgrades definitely. I see downgrade in autos, metals and banks. There is a possible upgrade on IT where people do have after their last announcement by Infosys, already upgraded.


Q: Are you expecting that the steep fall in the earnings or earnings growth might start recovering atleast because most of Indian corporates have started deleveraging in a big way. Selling of non-core assets is almost becoming a tidal wave now with even big groups like the Anil Dhirubhai Ambani Group (ADAG) resorting to it. Do you think therefore accumulation would be a good strategy maybe after this Q4 atleast because the balance sheets are getting less weak?

A: Everybody is trying out. If one looks at any of the infrastructure companies, asset owners, everybody is trying to lighten up but still people are holding onto valuations. That is why one is not hearing many deals happening on the ground. There are few deals, which have been reported. DLF has done it, GMR Infrastructure has done a few deals but there is no serious deleveraging that has happened. I do not see Jaiprakash Associates deleveraging as yet. I do not see GVK Power & Infrastructure, Lanco Infratech deleveraging yet.  These are the big guys who have still not been able to deleverage much. So, the hope still remains that the interest rate fall happens for these guys and that is going to be positive for their balance sheets. Q4 number is going to be disappointing.

Q: What are you on an average expecting by way of earnings growth and sales growth in Q4 and more importantly FY14?

A: We are expecting around 4 percent degrowth to happen. That is around 75 percent of the market weightage. That is a pretty significant.

Q: Is this an earning degrowth or revenue degrowth?

A: Earnings degrowth.

Q: Could you provide earnings degrowth in the three sectors- autos, metals and banks?  Are the stock prices accurately reflecting this weakness?

A: In case of autos, it is still not reflecting but in case of metals, it has already started reflecting there. The earnings downgrade will happen in FY14 but the earnings degrowth will happen in FY13’s last quarter for these two sectors. Autos is yet to be downgraded and in case of metals, it has already happened.

Q: You said you expect a 4 percent earnings degrowth in Q4, what are the FY14 expectations?

A: For FY14 earnings, we are still at around 15 percent growth. That number has blown up for the reason because FY13 is getting downgraded. So, we were earlier at around Rs 1,250 for Sensex and it has now gone down to Rs 1,183. I see there the downgrade is definitely being pretty strong in case of FY14.

Q: What could be the potential extent of downgrade in FY14 if we end FY13 at Rs 1,180-1,185?  Where do you see FY14 Sensex earnings?

A: I think it should be closer to Rs 1,300 around 8-9 percent kind of a growth.

Q: We have seen some of the FMCG stocks still holding on to value. For that matter, IT stocks have not got smashed. Do you think that if the index itself starts going towards 5,200 we may probably even see earnings downgrades coming for FY14? Are we going to see valuations give away in even the FMCG sector?

A: No, I do not think so. I think valuations will hold on for FMCG, IT and pharmaceutical sectors because that is where one wants to be in defensives. These are the stocks, which even on a rising market become market performers. So, people who want to necessarily hold equities in their portfolio would tend to shift to these sectors. That is why I do not see valuation correction happening in any of these sectors.

Q: On Infosys, the street is a bit confused whether or not they will continue to give annual guidance. How do you think the market will read if they decide to not give an annual guidance from hereon?

A: It will be negative because it sets a tone in the market and everybody looks forward to the annual guidance coming from Infosys. Historically, they have been pretty accurate in guiding the street and they are pretty conservative in their guidance. So, the street looks forward to it. However, I think it will be disappointing.

Q: If they give guidance, what is your expectation?

A: I think they would indicate anywhere between 3 percent and 4 percent for the quarter.

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