BNP Paribas Securities has cut the 2013 year end Sensex target to 17000 from 21300. Justifying the rationale behind it, Manishi Raychaudhuri says the market in all likelihood will experience one more correction before seeing a recovery.
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Raychaudhuri says the Sensex or Nifty earnings will face a significant downside in FY14 which may settle somewhere in single digits. According to him, if the economy is growing at 4 percent gross domestic product (GDP) amid liquidity tightening, it is difficult to imagine Sensex or Nifty earnings growing at 13-14 percent.
BNP Paribas had earlier cut the FY14 GDP growth forecast to 3.7 percent from 5.2 percent.
Below is the verbatim transcript of Manishi Raychaudhuri’s interview on CNBC-TV18
Q: Has the range moved up for the market or is 5,200 still on the radar?
A: If you look at either Sensex or Nifty, throughout this year, the market has moved in a very narrow range. It is approximately 10-12 percent possibly around 18,000 on the Sensex on the downside and somewhere close to 20,300-20,400 on the upper limit. As of now, there is no reason for the market to move beyond this range at least on the upper side.
Since the beginning of this year, when the market marked this range for itself, the major deterioration happened on the external side, which is currency depreciation. As a result, there has been some pressure on manufacturing companies who are either importers or who have large foreign currency debt on their books.
Earnings estimates that the analysts and the investment community has started with would have declined somewhat and is likely to decline further. So, this range could shift slightly down but possibly not up.
Q: A couple of weeks ago, the market participants were so certain that the range of this market was moving lower and we could see sub-18,000 levels and we briefly even moved to the zone of around 17,900 or so. Can we retest those levels on the downside?
A: One more correction is possibly due for this market. Over the last one week or so, the numbers that came out are slightly better. The currency has appreciated almost 7-8 percent. This led to the last round of steps by the Reserve Bank of India (RBI) seemed to be working in terms of stabilising the currency.
Trade deficit number has been benign for last three months and even the index of industrial production (IIP) growth number on Thursday was much better than expectation.
Some of these macroeconomic numbers have turned out to be much better but at the same time, the earnings estimates are still too high. If one looks at consensus estimates or our own earnings growth estimates over fiscal year 2014 and 2015, they are in the range of 13-14 percent growth.
Over the last seven years, right from the days that the global financial crisis, Indian earnings particularly Sensex or Nifty has grown somewhere around 7-10 percent and there are years when it was much lower, minus 4 percent in one year, about 3-4 percent in another year.
The only exception being fiscal 2011 which as a consequence of the massive QE1 rush showed about 27-28 percent growth. So, when we are struggling with about 4 percent real gross domestic product (GDP) growth, when liquidity is quite likely to remain tight for the foreseeable time horizon, it is difficult to imagine that Sensex or Nifty earnings growth would be around 13-14 percent. Therefore, there is significant downside to those earnings estimates, it will possibly settle somewhere in the single digits. While some of the economic numbers are turning out to be slightly better, I am still worried about the earning side.
Q: Thursday’s IIP number along with some potential for export stimulus is not adding up to anything, would you think that your 3.7 percent forecast is in danger of erring on the upside?
A: It could be possible. We had 4.4 percent in Q1 and to achieve 3.7 percent for the whole year, it has to be in the range of 3-3.5 percent for the remaining three quarters. There could be some bit of an upside on essentially on agriculture and rural incomes.
Also, we can see gold imports declining and exports in certain sectors improving slightly which could provide a positive surprise compared to what we are estimating right now. So, these two components could make that number move up slightly towards the end of the year though I don’t think it will be significant. I don’t think it will be much higher than 4-4.2 percent for this year.